Streetwise Professor

July 11, 2013

Doctors Warren and McCain: Screwing Up the Diagnosis and the Prescription

Filed under: Economics,Financial crisis,Financial Crisis II,Politics,Regulation — The Professor @ 6:39 pm

Today Elizabeth Warren and John McCain unveiled the “21st Century Glass-Steagall Act” that would restore the separation of investment banking and commercial banking, along with a few new restrictions on the things commercial banks with access to deposit insurance can invest in.

I really don’t get the nostalgia for Glass-Steagall.  I really don’t.  What’s next?  High Button Shoes for the 21st Century?  Radio tubes for the 21st Century?

Smarter people than McCain and Warren (a bar that a snail could jump, I admit) have pumped for the restoration of Glass-Steagall.  Luigi Zingales is a prominent example. I expressed my criticisms of Zingales’s advocacy of Glass-Steagall a little more than a year ago, and nothing I’ve seen since changes my mind.  Certainly the bloviations of Warren and McCain don’t.

The essence of the argument for a restoration of Glass-Steagall, as well as “ring fencing” regulations in Europe, appears to be that deposit insurance creates a moral hazard: banks with access to insured deposits take on too much risk.  Preventing such banks from engaging in risky investment banking activities supposedly improves the safety of the banking system, and limits taxpayer exposure, by reducing that moral hazard.

There are only two problems with that.

First, access to deposit insurance is obviously not a necessary condition to induce risk taking.  None of the stand-alone IBs that took on leverage out the wazoo in the 2000s, and took exposures to highly risky real-estate related securities-Bear, Lehman, Merrill, Morgan Stanley and even, yes, Goldman-had access to deposit insurance.  And that was in  fact the problem.  Nor did they have statutory access to Fed support in the same way banks do.  They all relied on very fragile wholesale funding that ran like Usain Bolt when things started to look dodgy.

Second, Glass-Steagall-like restrictions on permitted activities/investments are not sufficient, by a long shot, to prevent commercial banks from taking on risks that threaten their solvency, and the stability of the financial system.  Look at all the banking problems in the 70s, 80s, and 90s that occurred despite Glass-Steagall.  Sovereign lending to Latin America.  The S&L crisis.  Lending to Asia before its 1997-1998 crisis.  Commercial lending to the energy industry.  Need I remind everyone that the phrase “too big to fail” was coined to describe Continental Bank, which became insolvent the old fashioned way: engaging in high risk commercial lending in the era of Glass-Steagall?

The “quiet period” of US banking the 50s and 60s was the result of a dense nexus of costly restrictions on banking activity.  Glass-Steagall was a part of that, but not the entire story by a long shot.  It just gets the most press, and the best press.  The complex web of restrictions on banks and financial intermediation during that period-restrictions that imposed substantial costs-is too hard to explain.  So Glass-Steagall has become the poster child for that era. People like Warren and McCain think that Golden Age can be restored by reviving Glass-Steagall.  As if.

I am deeply skeptical of restrictions on the activities of financial intermediaries; I am also skeptical of mandated impositions of market structure (e.g., clearing mandates).  The underlying incentives remain the same, and these Byzantine restrictions induce attempts to circumvent them.  It is better to operate at the level of incentives, through capital requirements, for instance.  Yes, there will be attempts to circumvent these too, but at least they provide some incentive for those with the information to internalize the risk-return trade-offs.  Structural restrictions, not so much.  At all.

Yes, moral hazard induced by deposit insurance matters.  But it matters a lot less than other things.   Breaking up universal banks will still leave large investment banks reliant on wholesale funding with incentives to lever up, and large commercial banks who can blow themselves up just fine, thank you, by making loans.  So the revivification of Glass-Steagall won’t materially reduce systemic risk, but it will induce costly efforts to circumvent the separation, and will sacrifice the synergies between investment and commercial banking activities.

When your diagnosis is wrong, the prescription is likely to be wrong too.  And with financial doctors like Warren and McCain, we should have no illusions that they’ve screwed up both.

July 9, 2013

Transparency For Thee, But Not For GiGi

Filed under: Clearing,Derivatives,Economics,Energy,Regulation — The Professor @ 1:41 pm

Gary Gensler has been an evangelist for transparency in derivatives markets.  He has tirelessly argued that increasing transparency, especially in the OTC markets, will go a long way to making them more competitive and more efficient.

But Gensler apparently believes transparency works no such miracles for the operations of the CFTC.  Energy traders (including the industry and the banks) are completely at a loss to explain the CFTC’s ominous special call for information about exchange of futures for swaps (and other related positions (Risk subscription required-unless you know the trick.)  (I expressed my amazement at this ex post facto scrutiny when the story first broke.)   Why is the CFTC giving EFS the stink eye after years of not merely acquiescing to them, but actively encouraging them as a way of putting energy trading back on its feet after the merchant energy meltdown of 2002-2003?  Who knows?  The CFTC isn’t saying.  Hell, the CFTC isn’t even admitting that it is conducting an inquiry:

The notices contain no information about the CFTC’s motives – and a spokesman for the agency declines even to confirm the existence of the special calls – leaving dealers and their lawyers to guess why the regulator has sud-denly decided to probe a market that it helped set up over a decade ago. Part of the answer is that, however it may appear, this is not a sudden change of heart.

How’s that for transparency?!?

The Risk article does provide some interesting background on previous Commission attempts to crack down on certain kinds of EFS transactions.  Failed attempts, I should emphasize, because the proposal could not get a majority of the commissioners to vote for it.

To me, EFS seem like a tremendous example of financial innovation that solved a serious problem in the energy markets and facilitated an objective that Gensler otherwise embraces enthusiastically: moving OTC transactions into clearing.  The market success of this innovation speaks volumes about its value.  It’s rather hard for me to see what’s objectionable about it.

But maybe I’m wrong.  I’d be more than willing to entertain these objections.  But in order to do that, I’d have to, you know, know what they are.  Which would require some transparency from the Apostle of Transparency.

July 8, 2013

Igor Sechin, Russia’s Arthur Laffer

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:04 pm

Say what you will about Mullet Man Igor Sechin, but don’t say he lacks chutzpah.  He’s proposing a substantial tax cut for oil companies.  You know, like Rosneft:

The head of Russia’s state-owned energy giant Rosneft has called for a large reduction in the tax burden on the oil industry, Vedomosti newspaper reported Monday, in a move that could increase friction with the government.

According to Vedomosti, Kremlin heavyweight and Rosneft CEO Igor Sechin said in a presentation that oil companies’ tax base should be cut from 55 percent to 35 percent to stimulate new investment and generate a windfall of up to 6 trillion rubles ($180 billion) for the state budget by 2030.

I’d be very interested to see Igor’s math.  Who knew he was a supply sider?

Russia is facing increasing budget stringency, caught between a slowing economy and Putin’s lavish pre-election promises to increase social spending.  (As one indication of increasing nervousness about Russia’s fiscal situation, Moody’s cut the ratings on the major Russian banks including Sberbank and VTB because of increasing doubts about whether the state could support them in a crunch.)Even if his math is impeccable, 2030 is a long way away.   Putin needs the money here and now. Which means that Sechin’s proposal is likely a non-starter.

But you have to give him points for brass.

The SWP Worldwide Personified Clearing Tour: Greatest Hits

Dealer banks and the CME squared off in the pages of the FT today, arguing over the systemic risks of CCPs.  Each made some good points; each whiffed on a few; both overlooked the real sources of systemic risk arising from clearing mandates.

First, the banks:

“We are losing track of the nominal risk,” warned Jean-Pierre Mustier, head of investment banking at UniCredit and a former board member at London-based LCH.Clearnet. “We’re moving from a set-up where banks were interconnected, because they had transactions between them, to a system where very lowly capitalised entities, the clearing houses, are supposed to protect the banks from a problem.”

. . . .

Banks have voiced concerns to regulators in Europe and the US that central clearing houses are providing insufficient data on their own risks and demanding lower-quality collateral for swaps transactions. They argue the risks are too opaque, and getting riskier.

“It’s going in the wrong direction,” said the head of credit trading at a large US bank. “The race to the bottom is on.” He and other executives were critical of the CME’s decision to accept corporate bonds as collateral, a step down from the safer instruments usually required for margin.

There are reasons to be concerned about the expansion of the collateral pool to include more risky assets.  This is especially true inasmuch as these assets are likely to become less liquid precisely when a CCP needs to liquidate them: during a systemic even that causes the failure of a large, or several large, clearing members.  This problem could be mitigated by giving CCPs access to central bank liquidity, collateralized by the corporate bonds, etc., they take in as initial margin.  But the fundamental driver here is that clearing mandates have dramatically increased the need for initial margin, and it was inevitable that this would result in expansion of eligible collateral.  It’s not a competitive race to the bottom, it’s facing reality: indeed, CCPs in individual product spaces face relatively little competition.

Concern about initial margin methodology is also reasonable.  Under-margining leads to the mutualization of risk in excess of what CMs had anticipated: over-margining leads to inflated trading costs.  But the crucial problem with any CCP methodology is that it takes into account position risk only, and doesn’t vary margin with the balance sheet risk of the member firms.  This tends to lead to excessive trading by weaker clearing members, as they don’t have to post higher collateral, as their poorer credit would suggest they should.  This is pretty much an inherent feature of clearing, for informational and governance reasons, as I’ve discussed frequently here on SWP in the past.

Now to CME,  as represented by Chairman Terry Duffy:

Terry Duffy, executive chairman of CME Group, said the shift in moving more OTC derivatives transactions was more profound than just transferring the risk and exposure to a counterparty default from banks to clearing houses. “The difference is with a clearing house we do market-to-market [risk management], either twice daily or have the ability to do it much more often,” he said on a visit to London.

“What’s important is making certain the pays and collects are done on a risk basis and not a mark-to-myth or anything else. Because of that, we have a much easier time doing the pays and collects than the banks do if it was a bilateral transaction. In turn, I think some of the banks are just not used to the model of clearing.”

This relates to variation margin, which was/is often collected in OTC transactions (once exposure exceeds negotiated credit limits between the parties.)  Several points to make here.  First, variation margin is basically a way of keeping initial margin levels current.  This doesn’t really address the issue raised by the banks of whether initial margin levels are adequate, banks can determine that, and the quality of the collateral posted as initial margin (and whether the haircuts applied against this collateral are commensurate with the risks).  Second, you can go through the process of marking to market, but the protection provided by that process depends crucially on the quality of the prices.  That depends on market liquidity, trading activity, etc.  You need a market to mark to, and for many products that will be brought into clearing there are serious doubts about the reliability of the prices used for markets.  If there’s a liquid market, the prices it generates more accurate MTM in both bilateral and cleared trades: if there isn’t, both cleared and bilateral MTMs are dodgy.  Third, as I’ll discuss more in detail, the mechanical process of marking to market can actually create systemic risks.

The FT reporter, Phillip Stafford, also mentions that banks complain about the inadequacy of CCP capital, but notes that CCPs also have default/guarantee funds that they can call on to prevent a CCP default. But that’s exactly what the big banks are worried about.  Their exposure to CCPs comes first and foremost through their participation in these funds.   There’s only a thin layer of CCP capital separating a defaulter’s margin (and default fund contribution) from the non-defaulters’ contributions.  If the CCP under margins, that capital can be blown through very quickly, and expose banks to substantial losses.  These losses are most likely to occur, moreover, during stressed market conditions when banks are least able to afford the hit.  This wrong way risk is precisely what banks are complaining about.

Truth be told, although both the banks and the CCPs (to the extent Duffy is representing the clearing industry perspective) have some valid points, they miss the big systemic risks associated with clearing and clearing mandates.  I’m sort of in the middle of my Streetwise Professor Worldwide Personified Clearing Tour, in which I’ve given talks on the systemic risks of clearing in Chicago, Frankfurt, Osaka, Istanbul, DC, and the UK (London and Oxford), and will give another in Paris in September.  (Rough duty, I know, but somebody has to do it.)  Here are some of the greatest hits I play at each stop.

  • Clearing, and in particular multilateral netting, basically redistributes credit risk from derivatives counterparties to other creditors of defaulting CCP members.  These other creditors may be as systemically important and vulnerable, or even more systemically important and vulnerable, than CCP members.  For instance, moving to clearing is likely to make runs on money market funds more likely even if it makes runs on dealer banks less likely.  It is not evident that this is a desirable trade-off.
  • The variation margining mechanism in clearing is particularly rigid, and can create substantial demand for liquidity precisely when funding liquidity dries up.  This is what almost brought down the CME clearinghouse on the Day After Black Monday in 1987.  This is why rigid marking-to-market and variation margining can be a systemically destabilizing bug, not a stabilizing feature.
  • Clearing does not eliminate interconnections between big financial firms: it reconfigures the network of connections.  Moreover, it does so in a way that is rife with wrong way risk.  As noted before, CCP members-mainly big banks-are connected via CCP default funds, and are most likely to incur losses during periods of market stress, when they are least able to afford it.

Regulators are becoming increasingly aware of these problems, and are responding by attempting to make CCPs virtually immune to failure.  But this brings me to another of my greatest hits: beware the fallacy of composition.  Yes, failure of a CCP would be catastrophic, but making one part of the financial system stronger-a CCP, for instance-does not necessarily make the system stronger.  One of the main effects of increasing the financial resources of a CCP is to redistribute credit losses from derivatives counterparties to other creditors of defaulting firms, and to redistribute scarce liquidity.   It is not necessarily the case that this redistribution makes the system stronger.

The analogy that I’ve made here, and that I make on tour, is that of the levee.  Building up the levee around a CCP reduces the likelihood that it will be inundated, but forces the financial flood elsewhere.  Again, it is not evident that it’s better for systemic stability to redistribute the water from CCP members to other parts of the financial system.

My closing number is that CCPs have been vastly oversold as a means of reducing systemic risk.  It’s virtually impossible to know what the net effects are, but it’s likely that CCP mandates reduce systemic risk under some scenarios, but increase it under others.  What’s more, the main systemic risk is not necessarily the failure of a CCP, as bad as that would be, but the spillover effects from clearing to other parts of the financial system.

That is, it’s necessary to analyze the systemic risks of clearing by analyzing the financial system as a whole.  Regulators haven’t done that, for the most part, and the debate between the banks and Terry Duffy doesn’t really do that either.  Their’s is a CCP-centric debate, and although that’s not irrelevant, it doesn’t get at the nub of the matter.  Meaning that the show must go on.

July 7, 2013

Fighting the War on the War on Terrorism

Filed under: Military,Politics — The Professor @ 8:38 pm

It was only a matter of time.  Today Der Spiegel announced an upcoming interview with Snowden, conducted by Laura Poitras and . . . Jacob Appelbaum.  The Der Spiegel article states that the interview took place via encrypted email: that would be Appelbaum’s specialty.  Although the article merely states that the interview took place while Snowden was in Hawaii, before he decamped to Hong Kong, the most reasonable inference is that Appelbaum has been in on this from the beginning, in January, before Snowden joined Booz Allen Hamilton with the specific intent of gaining access to, and stealing, highly classified NSA information.

Several facts support this inference.  First, Appelbaum and Poitras have a longstanding relationship.  Both were in Iraq in the 2004-2005 time period, where they were in contact with terrorist elements.  They appear together regularly at events where they criticize the US surveillance state, and use their personal experiences as human interest illustrations.  Second, Appelbaum is expert in secure and encrypted internet communication.  So they know one another, they share an agenda, Snowden helps them advance that agenda, and Appelbaum can provide the communications security that Snowden (and probably Poitras) certainly would have insisted on from the beginning.

Making Appelbaum another accessory/accomplice in an elaborate, pre-planned endeavor to steal the classified NSA information.  I also wonder if Appelbaum provided assistance or advice to Snowden in hacking the NSA computers.

The Appelbaum-Poitras connection sheds considerable understanding on their real agenda.  Both tell of how they are routinely stopped whenever trying to enter the US, and subjected to questioning and seizure of their computers, cameras, etc.  They portray themselves as victims of the metastasizing security state, and their story is quite exceptional.  And that’s the point: it is exceptional, which raises the question of why they are singled out for such treatment?  Could it be their time in Iraq, when both inserted themselves at the center of an ongoing insurgent campaign against US forces?  Recall the link from my earlier post, which described how US soldiers are convinced that Poitras had foreknowledge of an ambush on an American patrol, didn’t warn the US military, and witnessed the ambush from a roof overlooking the street where it occurred. These were not innocents abroad.  Anything but.

The presence of hard core activists like Greenwald, Poitras and Appelbaum should raise huge red flags.  They have been on a campaign to undermine US intelligence and foreign policy for years.  They are inveterate opponents of the military and intelligence operations against terrorism.  They are not disinterested, objective, critical observers.  They are combatants in lawfare and information warfare waging, an asymmetric campaign against the US and its allies.

Yet they get bylines in mainstream publications, and other mainstream publications repeat their stories uncritically, without any mention of their clear agenda.

In some cases, it is possible to see why.  The allegations in the Der Spiegel article state that German intelligence cooperates closely with the NSA.  This is highly damaging to Merkel, who is up for election in September, and whom Der Spiegel opposes.  This story is therefore a convenient cudgel for bashing Merkel, and Der Spiegel may therefore be perfectly willing not to look too closely at the source, and their agenda.  Not that that’s right, just that it’s a plausible explanation.  It’s actually more disturbing that other outlets seem to be willfully avoiding directing any scrutiny at who is pushing this story and why.

They are a big part of the story, but they are being allowed to tell it in bylined pieces, no questions asked.

And the story is matastasizing.  In addition to the Der Speigel teaser, Greenwald wrote a story for the Brazilian O Globo detailing “indiscriminate” NSA spying on Brazilians.  He then wrote about it on the Guardian blog.

Remember how this story started.  The initial breathless reporting was that the NSA, which is charged with collecting foreign signals intelligence, was collecting electronic data on Americans.  It has now evolved to how the NSA is collecting signals intelligence and electronic data on . . . foreigners.  A spy agency spies.  Go figure.

Here’s what Greenwald says:

There are many more populations of non-adversarial countries which have been subjected to the same type of mass surveillance net by the NSA: indeed, the list of those which haven’t been are shorter than those which have. The claim that any other nation is engaging in anything remotely approaching indiscriminate worldwide surveillance of this sort is baseless.

As those two articles detail, all of this bulk, indiscriminate surveillance aimed at populations of friendly foreign nations is part of the NSA’s “FAIRVIEW” program.

Note: “non-adversarial” and “friendly” nations.  The implication is that this is somehow illegitimate, because such nations cannot pose a threat.

But a big portion of what NSA does is look for terrorists, not affiliated with a state, but who may be located in friendly/non-adversarial nations.  Like Brazil.  Indeed, the lawless Tri-Border region of Brazil, Paraguay, and Argentina has been a major source of terrorism-related concern since almost immediately after 9-11.  Indeed, terrorists can be-and are-in pretty much every nation of the world.  Consider US interest in Germany.  9-11 hijackers lived in Germany for years prior to their attack.

In other words: if you want to fight terrorism, you have to cast a wide net, encompassing every nation in the world, including ones whose governments are friendly.  Indeed, this is exactly why many of these nations cooperate with our efforts: why they are “in bed with” the NSA, as Snowden says of Germany.  They would like to eliminate terrorist threats on their territories.  These are cooperative efforts at self-defense. (I would hardly be surprised if there is cooperation between, and information sharing among, US and Brazilian intelligence.)

But in Greenwaldworld, terrorism is just a word used to demonize Muslims fighting back against a war being waged on them by the US.

And that’s the point behind Greenwald’s and Appelbaum’s and Poitras’s agenda.  They are fighting The War on the War On Terrorism.

Dontcha think that deserves a mention?  Shouldn’t the publications that give them a platform have reservations about relying upon them?  Even if everything they report is true, selective disclosure of facts is one of the most effective ways of deceiving and manipulating.  Those with an agenda have an incentive to manipulate and deceive.

One last thing.  Check out the last paragraph in the Greenwald piece:

This has been a Guardian story from the start and will continue to be. Snowden came to us before coming to any other media outlet, and I’ll continue to write virtually all NSA stories right in this very space.

Sounds like there’s a little hostility brewing between Greenwald and Poitras.  He’s probably catching heat from the Guardian.  Did he promise them that they would have an exclusive on Snowden?  Asssange already burned them on the Manning material, promising them an exclusive and then releasing the information.

But that’s all part of this story, because this story is really, in an important way, all about them.  Not that you’ll know that reading any major news source.

The More Things Change, the More They Stay the Same: The Putin Purgatory Drags On

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:20 am

In St. Petersburg a couple of weeks ago, Putin surprised some by coming out in favor of a law to give amnesty to biznessmen convicted of economic crimes:

While not the headline measure in Mr. Putin’s plan, the amnesty proposal was by far the most surprising item. It was the brainchild of Mr. Putin’s business ombudsman, Boris Titov, who has championed it as a means to improve the business climate.

“The period that just passed was not the best for defenders of property rights,” Mr. Titov said last week in an interview.

. . . .

The intention of the amnesty plan is to free thousands of run-of-the-mill businessmen caught up in this turmoil, while avoiding the high-profile and politically tinged cases, like those of Mr. Khodorkovsky, who is not expected to be freed.

Mr. Titov said that 110,000 people were serving prison time for economic crimes, and that 2,500 others were in pretrial detention. The draft of the amnesty bill, Mr. Titov said, covers 13,000 of them.

“This initiative will on the whole strengthen the trust of citizens” in the business community, Mr. Putin said in his speech. “I am certain the development of the state is possible only under conditions of respect for private property, to the values of economic freedom and the work and success of entrepreneurs.”

More broadly, though, the intention of Mr. Putin’s amnesty, Mr. Titov said, is to signal to the business community an easing police pressure. It is, he said, “a very positive, a very good signal for Russia, and that is important as in Russia. We don’t often have good signals.”

Well, don’t get too excited there, Boris, because while Putin was publicizing the idea, the Duma was working quite assiduously to neuter it:

The Duma subsequently reduced the number of criminal code provisions subject to the amnesty from 53 to 27 — in part to ensure that Putin’s most prominent critics, including Mikhail Khodorkovsky and Alexei Navalny, would not fall under any official pardon.  Fraud, the most misused criminal statute, was only partially included in the list of crimes subject to the amnesty. The draft legislation also included the demand that before one could be released, the accused had to make the victim whole and pay any outstanding expenses or damages.

As a result, Titov’s blanket amnesty has been watered down to a conditional release — and it remains unclear who is, or is not, covered. What happens to those convicted on multiple counts, one commentator asked, when only some are covered by the amnesty?

In addition, the requirement to compensate victims for any alleged losses essentially means that all entrepreneurs must concede their guilt before they can be released.  Such an admission runs counter to the primary justification for the amnesty — that charges were fabricated in an overwhelming number of cases.

With the Duma’s revisions, the estimated numbers of entrepreneurs covered by the proposed amnesty dropped from 100,000 to 10,000 — to potentially as low as 5,000.  Instead of boosting Russia’s small- and medium-sized businesses, the sector will most likely continue to contract. A sharp increase in the social tax last year has already driven hundreds of thousands of small companies out of business or into the shadow economy.

. . . .

As a result, the legal harassment of Russian entrepreneurs looks likely to continue long after any amnesty has come and gone. The amnesty also does not ease concerns of foreign investors, whose negative perception of the Russian legal system is unlikely to change because a few entrepreneurs are released from jail early.

The debate over the amnesty raises a more basic question: Does Putin want to solve this problem?  Though he talks about the need to diversify the economy — with small business playing a critical role — he overwhelmingly continues to bet on state capitalism as the path forward. Moreover, as he learned during his re-election campaign, it is the emerging middle class that is most likely to come out and demonstrate against his policies.

The amnesty partially disarms the opposition, since on paper Putin has now provided some relief to Russia’s struggling entrepreneurs. Yet this reprieve comes with considerable strings attached and does not address any of the fundamental legal and institutional deficiencies that created the problem in the first place.

Amnesty provides the appearance of a solution without getting to the root causes. This may be exactly what Putin wants right now.

That last paragraph nails it.  Putin wants to create a Potemkin simulacrum of a reform, while leaving the system fundamentally unchanged.

Which means that the Putin Hamster Wheel From Hell will just keep spinning away.

In other news related to the state-business nexus in Russia, Medvedev amazingly has taken on an ally of Igor Sechin:

Russian Prime Minister Dmitry Medvedev on Friday sacked a senior resources official, believed to be a close ally of Igor Sechin, the boss of state oil firm Rosneft, in a move analysts said was a sign of growing confrontation between the two men.

In an order published on Friday Medvedev dismissed Alexander Popov, the head of Rosnedra, an agency responsible for granting licences to develop natural resources.

Popov was an aide to Sechin when Sechin oversaw Russia’s energy sector as deputy prime minister.

. . . .

Sechin’s confrontation with Medvedev’s team has grown since then as Sechin has embarked on an aggressive consolidation of assets under Rosneft’s control. Medvedev’s deputy for energy, Arkady Dvorkovich, has pushed for more privatisation and lower state interference in the strategic industry.

A more recent spat came over a decision by Rosnedra to awarded Rosneft and state gas major Gazprom licenses to tap oil and gas fields in the Arctic, which Dvorkovich has criticised.

I’m actually shocked that Medvedev screwed up his courage enough to do this, as indirect a shot at Sechin as it is.  I wonder if he listened to “American Boy” to get himself psyched up for it.

Methinks this is at most a rear guard action against Sechin’s-and Rosneft’s-growing influence.  Privatization keeps receding over the horizon, like a mirage.  Rosneft is accumulating access to an increasing portfolio of resources, and is now essentially the gatekeeper to foreign access to Russian oil.   This action is probably the most that Medvedev can do to stop that development, which he rightly perceives as malign (whether that’s because he believes that a more competitive Russian oil sector is desirable for economic reasons, or just because Sechin is a political foe, I don’t know).  And that tells you all you need to know.

These stories are illustrations of superficial attempts to address Russia’s serious institutional deficit.  But at most, they demonstrate an acknowledgement of the problem, but no real determination to fix it.  Small changes that keep things pretty much the same.  The wheel keeps spinning.  The Putin Purgatory drags on.

July 6, 2013

The Road to Hell, Enviro Edition

Filed under: Climate Change,Economics,Politics,Regulation — The Professor @ 7:29 pm

The road to hell is paved with good intentions.  A couple of examples from environmentalist attempts to mitigate climate change.

The first relates to ethanol.  In its infinite wisdom, in 2010 Congress mandated the use of renewable fuels with lower CO2 content than corn ethanol to meet the renewable fuel standard it created in 2005.  Sugar ethanol from Brazil fits the bill.  But given the blend wall and other limits on ethanol usage, this created an excess of corn ethanol in the US, and created an incentive to export excess corn ethanol from the US to Brazil, and import sugar ethanol from Brazil.

The problem being, of course that all the fuel burned to ship ethanol from the US to Brazil, and from Brazil to the US, pours CO2 into the atmosphere.  And the net result: more CO2 emissions than would have occurred absent the mandate to meet the renewable fuel standards with low CO2 producing fuels:

As a result, since the start of 2011, the United States and Brazil have shipped over 1 billion gallons of ethanol back and forth – more than 500 million gallons each way. The emissions generated by the shipping have worsened the carbon footprint of both fuels.

Thomson Reuters Foundation found that this overseas trade has produced more than 312,000 tonnes of carbon dioxide (CO2) since the start of 2011, based on an industry method used to calculate greenhouse gas emissions from shipping. This equals a ratio of one tonne of CO2 emitted for every 10 tonnes of ethanol transported between the two countries.

Not to mention its just wasteful and stupid to expend real resources-fuel, labor, capital-to swap ethanol between hemispheres.

Not to mention that corn-based ethanol is a monstrosity.

The second example: electric cars.  Yes: No noxious fumes or CO2 come out of the (nonexistent tailpipe) of an electric vehicle.  But if you take into account emissions over the lifetime of the vehicle-including the CO2 emitted to generate the electricity that charges the batteries of electric cars-and the other environmental impacts of their construction-including battery disposal and the environmental costs of mining rare earth metals, etc.-it’s likely that electric cars have as bad or worse environmental effects as fossil-fuel powered ones.

Government policies have substantially encouraged the use of renewable fuels, and the development of electric cars, for the purpose of improving the environment.  But the actual effects of these policies often fall far short of the intended effects, and quite frequently  have the exact opposite effect, or unintended consequences that are more costly than the intended environmental benefits.

This illustrates several points.  First, policies frequently create perverse incentives that induce market participants to undertake actions contrary to the intent of the policy: this is what is going on in the ethanol trade.  Second, we live in a second best world.  The theory of the second best implies that when there are multiple “market failures” (i.e., multiple unpriced harms), mitigating one of them (e.g., reducing CO2 emissions) is not necessarily a good thing, because it can exacerbate the other market failures.  That’s the lesson in the case of electric vehicles.

It’s my sense that these problems are most likely to occur when legislators and regulators attempt to dictate technologies, rather than affect incentives through taxes on harms (e.g., CO2 taxes).   That seems to be particularly true of the first problem.  It’s less clear that’s true of the second problem.  For instance, a monomaniacal focus on CO2, whether implemented through taxes or cap and trade or dictating technology, tends to have substantial perverse effects because there are other unpriced harms and benefits.  The encouragement of wind power, for example, results in environmental damage in the form of massive bird kills and abandoned wind turbines.

Economics is sometimes called the dismal science, originally because of the Malthusian connection.  But the name has stuck long after economists have left Malthus far behind.  And for good reason.  We’re killjoys, with a habit of pointing out that things people do with the best of intentions often fail to realize those goals, or worse, are actually counterproductive.

July 5, 2013

Mystery, Riddle, Enigma: Edward Snowden & Sarah Harrison Edition

Filed under: Politics,Russia — The Professor @ 1:03 pm

Some of the bizarre aspects of the Snowden Moscow story:

Snowden and Harrison have allegedly been in the transit terminal at Sheremetyevo airport for almost two weeks now, and despite the presence of many prying eyes, neither has been seen.  How is that possible?  They were reported to have flown from Hong Kong to Moscow, but in this age of cellphone and iPad cameras, there is not one piece of photographic evidence that they were on the flight, or got off it.  Snowden is allegedly in communication with his legal team, but Julian Assange is the source of that information, and the intermediary in communications between Snowden and the outside world.  His father wants to contact him, but can’t do so directly.  Harrison’s parents haven’t heard a word from her.

One of the reasons that Snowden left Hong Kong was the fear that he would be jailed pending extradition hearings, and would lose access to the Internet.  He was obviously not publicity shy while in Hong Kong.  Being silent and offline are obviously not his MO.

So why is he incommunicado now-except for the alleged communications with Wikileaks/Assange, and we know how reliable they are/he is? How is he communicating with Assange, and why can’t he use the same means to communicate with anyone else in the world, including his family?  Did he not think there was a risk that he would be cut off from the Internet in Russia? (If so, the question arises: Is he on crack?)

If he is under Russian control, and they are restricting his ability to communicate-and Harrison’s ability to communicate-why would they permit him to connect with Assange, of all people?  Why would they hold him incommunicado, even preventing him from contacting his father?  If they really want him to go, you’d think that maybe they’d give dad a shot at talking him to coming back to face justice.  They could obviously choose whatever level of outside contact he could have with the world: why choose zero, except for possibly Assange?  Has he been in contact with Greenwald? Poitras?

How did Harrison deliver the 20 requests for asylum?  Interestingly, some of the most likely candidates-notably, Bolivia-claim not to have received any such request.  Did she deliver them by hand to embassies in Moscow?  How could she have done this without being seen?  Did she email them or fax them?  If so, how come she can’t use those means to communicate with anyone else?  Or did Wikileaks/Assange disseminate them?

Did Harrison have a visa?  If not, how could she leave the transit terminal, and why would the Russians allow her to stay there indefinitely?

Is Assange/Wikileaks just making sh*t up about communication with Snowden, and knowledge of his condition?  Are the bulletins about him and his alleged missive made up out of the whole cloth?  (The grammar-“United States have”-and using European convention to date his statement are consistent with that.)

Consider some possibilities.  Snowden and Harrison are actually in SVO: I consider this highly doubtful.  They are in Russia, in accommodations that could range from a comfy FSB safe house to a not-so-comfy cell in Lubyanka.  They aren’t in Russia at all, or they aren’t in a condition to be seen in public.

The middle option seems most likely: perhaps the Russians are keeping him incommunicado because they are engaged in negotiations with the Americans, or with countries that might offer asylum.

The last option seems crazy, but things are so crazy that it can’t be ruled out.

But it’s clear the standard story that he’s reenacting The Terminal makes no sense whatsoever.  In particular, it would require considerable cooperation between Russia and Assange: given his track record of screwing over anyone who cooperates with him, would the Russians really rely on this guy at all?  And no, having a lame RT interview show doesn’t show the Russians trust him in the least.  They don’t trust anybody, particularly the likes of him.

My current hypothesis: he’s in Russia; the Russians are squeezing him for information and negotiating with governments-including the US-to get him off their hands; and Assange is  engaged in a massive disinformation operation.

In one bit of actual news, Snowden’s asylum of choice-Iceland-has frozen him out.  The country’s parliament rejected his asylum application, despite the efforts of Wikileaks fellow traveler Birgitta Jónsdóttir, and six Pirate Party whackjob legislators.  Tough luck. Tough luck.

He has also allegedly applied for asylum in six unnamed countries.  But again, the source of this information is Wikileaks, which says that it won’t disclose the countries to protect them from US pressure.  Well, the Norks and Iranians have proved pretty resistance to US pressure, so maybe they’re not on the list.

The Russians are the key here.  They could answer a lot of the questions, but quite pointedly aren’t doing that.  Playing to form, in other words.  Mystery, Riddle, Enigma is a cliche, but cliches become so because they are true.

July 4, 2013

Take Care to See That the Laws Be Faithfully Executed

Filed under: Economics,Politics — The Professor @ 7:21 pm

The Obama administration has announced the delay of the implementation of the Obamacare employer mandate.  There are at least three aspects of this that deserve comment.

First, the practical impact.  Some have argued that this will undermine the other part of Obamacare-namely, the individual mandate and insurance “exchanges”.  Namely, it will induce firms to dump their corporate coverage, and force people onto the exchanges.  This will happen only because of other provisions of Obamacare that increase the cost of employer coverage. Firms that currently provide insurance without the mandate cannot be constrained by it, so relaxing this constraint will not induce them to change their behavior except to the extent that other aspects of Obamacare increase the cost of providing employer coverage.  That is, it would be the selective enforcement of various provisions of Obamacare that will lead to these perverse effects.  Obamacare is barely coherent, but mandates are an important part of maintaining that coherence that it possesses.  The law is rife with cross-subsidies and taxes, and mandates to purchase coverage are necessary to force the net payers to remain in the system and thereby subsidize the net recipients.

Second, the political impact.  This is obviously intended to push the implementation of a big part of Obamacare past the midterm elections.  Some firms would likely have responded to the mandate, with its various restrictions, by dropping coverage.  Especially given the unpreparedness of the exchanges, and the high costs that the young and healthy will incur buying coverage on exchanges, this would have been a major source of anger.

Third, there is the Constitutional issue.  Article II, Section 3 of the Constitution directs the President to “take care that the laws be faithfully executed.”  For worse or worst, Obamacare is law-at Obama’s insistence.  It is his Constitutional duty to execute the law.   He should not be able to walk away from this duty, just because it is politically expedient to do so.  That would be true if he hadn’t pushed the measure into law, but it is all the more necessary because he did, to hold him accountable for the consequences of his political choices.

Obama is the Chief Executive.  He needs to perform his Constitutional duty.  His black letter Constitutional duty.  His duty to execute the laws faithfully.  To fail to do so is to undermine the Constitutional order, in particular by respecting the separation of powers between the legislative and executive branches.  The blending of such responsibilities is a recipe for tyranny.

July 3, 2013

Consider the Source

Filed under: Military,Politics — The Professor @ 8:50 pm

Der Speigel has unleashed much self-righteous Euroshrieking with its revelations that the NSA intercepted EU communications and the communications of European governments.

Much of this has the Shocked! Shocked! tone of Claude Rains collecting his winnings at Ricks.  Come on.  Governments spy on other governments, friend or foe.  It has always been so.  If total trust between allies was the rule, why would they hold secrets that had to be ferreted out in the first place?

Note too how the Snowden story has morphed, from allegations about data on individual Americans collected by the NSA (which is really old news, having been reported on by USA Today in 2006 and the WSJ in 2008, and the subject of extensive debate in Congress in 2008) to the more recent disclosures about espionage carried out against governments.

And I thought Henry Stimson  was naive.

But the most interesting thing about the story is the byline: Laura Poitros. And lo and behold, Monday Der Speigel ran another Poitras-bylined article, this one labeled “Commentary.” So we observe a blurring of the line between reporting, ostensibly objective and independent, and opinion writing.

But it gets better.  Or worse, actually.  For Poitras is a well-known anti-US advocate and ideologue, closely aligned with Wikileaks, Assange, Appelbaum, and Greenwald, all of whom are quite open about their agenda to undermine the US government, and US intelligence in particular.

And it gets worse still.  For Poitras is a principal in the Snowden drama.  She was in communication with Snowden in January, 2013, before he took the Booz Allen Hamilton job with the (admitted) intent of gaining access to highly classified information for the purpose of stealing it.  A reasonable inference is that she conspired with Snowden to carry out his espionage.  Further, she was waiting in Hong Kong with a film crew when Snowden arrived there.  All this suggests that she was an accessory before, during, and after the fact.

Laura Poitras is not an independent, objective journalist, even by the rather lax application of those words to most working news reporters.  She has an agenda, and a mission.  That mission is to undermine governments, namely western governments, and particularly the US government.  Her anti-US animus is such that according to credible sources, she had foreknowledge of an attack by Iraqi “insurgents” on US troops, but failed to provide a warning.  She is an adherent to Assange’s view that the best way to undermine the ability of governments to operate-and perform their legitimate functions-is to deprive them of their ability to communicate, strategize, plan, and operate by revealing all their internal deliberations, communications, and operations.

So why are ostensibly objective journalistic outlets like the Washington Post and Der Speigel giving a principal in the Snowden story the byline to write about it?  Given her clear slant, how can they be sure that she is not being selective-or deceptive-in what she covers in her pieces?   How can they possibly believe that she will be skeptical and questioning, as a proper journalist should be?   How can they be sure that they are not being played by her, and her coterie?  She is, in many respects, “reporting”-I should just say writing-about herself. Would we all have such an ability to control our own press.

Der Speigel’s motives are somewhat easier to understand.  Snowden is wildly popular in Germany, primarily because Germans have long tried to assuage their, um, historical issues, by moralizing about purported American flaws.  Often, as in this case, with little effort to consider real world choices or dilemmas.   Costless preening.  Just what the BND does gets much less attention.

Bottom line. When reading these stories, consider the source.  Don’t trust, and attempt to verify.

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