Streetwise Professor

Stephen Lubben passed along this paper on central clearing mandates to me. It would only be a modest overstatement to say that it is primarily a rebuttal to me. At the very least, I am the representative agent of the anti-clearing mandate crowd (and a very small crowd it is!) in Steven McNamara’s critique of opposition to clearing mandates.

McNamara’s arguments are fair, and respectfully presented. He criticizes my work, but in an oddly complimentary way.

I consider it something of a victory that he feels that it’s necessary to go outside of economics, and to appeal to Rawlsian Political Theory and Rawls’s Theory of Justice to counter my criticisms of clearing mandates.

There are actually some points of commonality between McNamara and me, which he fairly acknowledges. Specifically, we both emphasize the incredible complexity of the financial markets generally, and the derivatives markets in particular. Despite this commonality, we reach diametrically opposed conclusions.

Where I think McNamara is off-base is that he thinks I don’t pay adequate attention to the costs of financial crises and systemic risk. I firmly disagree. I definitely am very cognizant of these costs, and support measures to control them. My position is that CCPs do not necessarily reduce systemic risk, and may increase it. I’ve written several papers on that very issue. The fact that I believe that freely chosen clearing arrangements are more efficient than mandated ones in “peacetime” (i.e., normal, non-crisis periods) (something McNamara focuses on) only strengthens my doubts about the prudence of mandates.

McNamara addresses some of the arguments I make about systemic risk  in his paper, but it does not cite my most recent article that sets them out in a more comprehensive way.  (Here’s an ungated working paper version: the final version is only slightly different.) Consequently, he does not address some of my arguments, and gets some wrong: at least, in my opinion, he doesn’t come close to rebutting them.

Consider, for instance, my argument about multilateral netting. Netting gives derivatives priority in bankruptcy. This means that derivatives counterparties are less likely to run and thereby bring down a major financial institution. McNamara emphasizes this, and claims that this is actually a point in favor of mandating clearing (and the consequent multilateral netting). My take is far more equivocal: the reordering of priorities makes other claimants more likely to run, and on balance, it’s not clear whether multilateral netting  reduces systemic risk. I point to the example of money market funds that invested in Lehman corporate paper. There were runs on MMFs when they broke the buck. Multilateral netting of derivatives would make such runs more likely by reducing the value of this corporate paper (due to its lower position in the bankruptcy queue). Not at all clear how this cuts.

McNamara mentions my concerns about collateral transformation services, and gives them some credence, but not quite enough in my view.

He views mutualization of risk as a good thing, and doesn’t address my mutualization is like CDO trenching point (which means that default funds load up on systemic/systematic risk). Given his emphasis on the risks associated with interconnections, I don’t think he pays sufficient concern to the fact that default funds are a source of interconnection, especially during times of crisis.

Most importantly, although he does discuss some of my analysis of margins, he doesn’t address my biggest systemic risk concern: the tight coupling and liquidity strains that variation margining creates during crises. This is also an important source of interconnection in financial markets.

I have long acknowledged-and McNamara acknowledges my acknowledgement-that we can’t have any great certainty about how whether clearing mandates will increase or reduce systemic risk. I have argued that the arguments that it will reduce it are unpersuasive, and often flatly wrong, but are made confidently nonetheless: hence the “bill of goods” title of my clearing and systemic risk paper (which the editor of JFMI found provocative/tendentious, but which I insisted on retaining).

From this “radical” uncertainty, arguing in a Rawlsian vein, McNamara argues that regulation is the right approach, given the huge costs of a systemic crisis, and especially their devastating impact on the least among us. But this presumes that the clearing mandate will have its intended effect of reducing this risk. My point is that this presumption is wholly unfounded, and that on balance, systemic risks are likely to increase as the result of a mandate, especially (and perhaps paradoxically) given the widespread confidence among regulators that clearing will reduce it.

McNamara identifies me has a hard core utilitarian, but that’s not quite right. Yes, I think I have decent formal economics chops, but I bring a Hayekian eye to this problem. Specifically, I believe that in a complex, emergent system like the financial markets (and derivatives are just a piece of that complex emergent system), top down, engineered, one-size-fits-all solutions are the true sources of system risk. (In fairness, I have made this argument most frequently here on the blog, rather than my more formal writings, so I understand if McNamara isn’t aware of it.) Attempts to design such systems usually result in major unintended consequences, many of them quite nasty. In some of my first remarks on clearing mandates at a public forum (a Columbia Law School event in 2009), I quoted Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

I’ve used the analogy of the Sorcerer’s Apprentice to make this point before, and I think it is apt. Those intending to “fix” something can unleash forces they don’t understand, with devastating consequences.

At the end of his piece, McNamara makes another Rawlsian argument, a political one. Derivatives dealer banks are too big, to politically influential, corrupt the regulatory process, and exacerbate income inequality. Anything that reduces their size and influence is therefore beneficial. As McNamara puts it: clearing mandates are “therefore a roundabout way to achieve a reduction in their status as ‘Too Big to Fail,’ and also their economic and political influence.”

But as I’ve written often on the blog, this hope is chimerical. Regulation tends to create large fixed costs, which tends to increase scale economies and therefore lead to greater concentration. That clearly appears to be the case with clearing members, and post-Frankendodd there’s little evidence that the regulations have reduced the dominance of big banks and TBTF. Moreover, more expansive regulation actually increases the incentive to exercise political influence, so color me skeptical that Dodd-Frank will contribute anything to the cleaning of the Augean Stables of the American political system. I would bet the exact opposite, actually.

So to sum up, I am flattered but unpersuaded by Steven McNamara’s serious, evenhanded, and thorough effort to rebut my arguments against clearing mandates, and to justify them on the merits. Whether it is on “utilitarian” (i.e., economic) or Rawlsian grounds, I continue to believe that arguments and evidence weigh heavily against clearing mandates as prudent policy.  But I am game to continue the debate, and Steve McNamara has proved himself to be a worthy opponent, and a gentleman to boot.

The US Navy’s most advanced destroyer, the USS Elmo Zumwalt, will begin sea trials next month:

The ship is plainly visible from Front Street, across the Route 1 bridge in downtown Bath. Nothing like this angular, almost hulking giant has ever been seen here, even after well over a century of shipbuilding at Bath Iron Works.

Here’s a picture of the EZ:

But I wouldn’t be so hasty as to say that the ship’s shape is unprecedented. Here’s an image of the CSS Stonewall, a ram built for the Confederacy in France (and which almost caused a major diplomatic incident between the US and Napoleon III’s France):

The Stonewall had the same basic “tumblehome” hull design as the Zumwalt does today: Who knew the French were building stealth ships in the 1860s?

A Yankee ironclad, the USS Dunderberg, also had a bit of a Zumwalt look about her:

The Dunderberg’s superstructure is more Zumwalt-like than the Stonewall’s.

Of course the purposes of the hull designs were different in the 1860s and the 2010s. The Stonewall and the Dunderberg (I can’t get over that name, by the way) were built as rams, hence their sharply angled prows. But it is interesting to see the echoes and rhymes in designs a century and a half apart.

Yesterday on 60 Minutes, Obama blamed the intelligence community for underestimating ISIS. That’s leadership for you. I guess the principle of presidential infallibility is now official doctrine even without the issuance of a bull. The daily bullshit proves it, though.

Let’s overlook the fact that at the time Obama made the “JV” remark, you didn’t need to be in intelligence analyst to evaluate ISIS’s growing threat. You just had to read the effing paper or follow Twitter. By that time, ISIS had irrupted into Fallujah and Ramadi, and had for months been in the news for its battles in Syria. You might recall that in late-2013 and early-2014, the rest of the Syrian opposition united in a failed attempt to throw back ISIS.

Obama’s channeling of Chuck Berry’s “It wasn’t me!” followed by a few days Director of National Intelligence James Clapper’s admission that US intelligence had underestimated ISIS. I wonder what Obama threatened Clapper with to get him to throw himself under the bus a few days before Obama’s 60 Minutes appearance.

Other presidents have paid a price for attempting to dump blame onto the intel community. Such attempts  typically  result in a deluge of damaging leaks: the IC fights back, and fights back hard and dirty, usually.

I wonder if that typical script will play out this time. I suspect it will, because what’s already in the public domain makes Obama’s statement risible. One early example, from an ex-Pentagon official: “Either the president doesn’t read the intelligence he’s getting or he’s bullshitting.”

I disagree with that assessment. The “either/or” is misplaced, most likely. I’m putting my money on “both”, i.e., “the president doesn’t read the intelligence and he’s bullshitting.” Because that’s what he does.

Igor Sechin has made a breathless announcement of a discovery of oil in the Kara Sea:

Exxon Mobil Corp. and Russia’s OAO Rosneft have found major amounts of oil and natural gas at their first well in the Arctic, Rosneft said Saturday, offering a glimpse of the potential buried beneath the ice-studded waters north of Siberia.

. . . .

“This is an outstanding result of the first exploratory drilling on a completely new offshore field,” Igor Sechin, Rosneft’s chief executive, said in a statement. Rosneft praised other western partners including Schlumberger Ltd., Halliburton Co. and Weatherford International PLC.

Sechin said the field would become the Arctic equivalent of Saudi Arabia, in terms of reserves.

To which I say: not so fast. First, this is the first well and the full analysis of the results has barely begun, let alone been completed. Second, the area is huge, and a single well cannot provide more than a rough estimate of the productivity of the entire field. Third, ExxonMobil was far more circumspect:

“We have encountered hydrocarbons but it is premature to speculate on any potential outcome regarding the University-1 exploration well,” Alan Jeffers, an Exxon spokesman, said Saturday

Fifth, even if the size of the reserves is similar to those in Saudi, the cost of getting at them, and the technological and logistical challenges of exploiting them, are far greater: even with such assistance, Arctic drilling is a fraught enterprise (just as Shell). Development and production will require the assistance of the “western partners” that Sechin praised, and that assistance is on hold for who knows how long as a result of sanctions. No doubt Perfidious Exxon will be pulling out all the stops to get the sanctions lifted, but betting on that is even more dicey than Arctic oil exploration, at the present political juncture.

But most importantly, one must heavily discount Sechin’s happy talk due to these very same political circumstances. He needs to put on a bold front to counter negative news about the company and its prospects in the aftermath of sanctions. Further, to the extent that he can convince the west that a bonanza awaits only if sanctions are eased he can increase the odds of a lifting of the sanctions. He thus has an even greater incentive to exaggerate than would normally be the case, and note that he is not operating under the same legal restrictions on making forward looking statements as a US CEO would (which could explain Exxon’s reticence, despite the fact it also would like to advance arguments that would undermine the sanctions regime).  Exaggerations therefore are basically costless, and could have a big positive payoff to the extent they are believed. All the more reason not to believe him.

Exxon’s complicity here is disturbing. Understandable, but disturbing. It is dealing with the devil, and although the deal benefits shareholders, these benefits pale with the costs resulting from bolstering a revisionist, revanchist, and expansionist gangster state, and the capos who benefit directly from it. This is a case where state action is warranted on public goods grounds.

Indeed, the more Rex Tillerson squeals, the stronger my conviction that the sanctions are a good idea. Exxon will reap only a fraction of the benefits of cooperation with Rosneft: the larger fraction will accrue to Rosneft and the Russian state, and thereby fuel its predations, and those in the power structure that are the residual claimants. In this case, what’s good for Exxon is good for Putinistan, which given the malign consequences of the latter is precisely why the former should have to suck it up.

Russia is mounting a full-spectrum offensive to grind Ukraine into the dust. Military, paramilitary, diplomatic, political, and economic.

The centerpiece of the economic campaign is, of course, gas. Today Russia’s energy minister threatened a gas cutoff to any country that resold gas to Ukraine, in violation of Gazprom’s sales contracts. Hungary immediately knuckled under.

Energy Minister Alexander Novak asserted that the re-export to Ukraine of gas Europe buys from Russia was illegal and could see some of its nations go without fuel shipments from state energy giant Gazprom for the first time since 2009.

“We hope that our European partners will stick to the agreements. That is the only way to ensure there are no interruptions in gas deliveries to European consumers,” Novak told Friday’s edition of Germany’s Handelsblatt business daily.

Novak’s comments were published only hours after Ukraine’s state energy firm Naftogaz reported an interruption of gas supplies it receives through Hungary.

Naftogaz noted that the apparent cut “came only a few days after a visit to Hungary by representatives from (Russian state gas firm) Gazprom”.

Hungarian Prime Minister Viktor Orban conceded that his country could not risk losing access to Russian gas — responsible for about 60 percent of the country’s supplies — over Ukraine.

“Hungary can not get into a situation in which, due to the Russian-Ukrainian conflict, it cannot access its required supply of energy,” Orban said on state radio.

For its part, the EU disputes Russia’s interpretation of contracts:

The European Union rapped Hungary over the supply interruption.

“There is nothing preventing EU companies to dispose freely of gas they have purchased from Gazprom, and this includes selling this gas to customers both within the EU as well as to third countries such as Ukraine,” Commission spokeswoman Helene Banner said in Brussels.

Any such contractual terms would be, literally, agreements in restraint of trade. They restrain trade between first buyers of Russian gas and others.

Sometimes  restraints enhance efficiency. That is definitely not the case here. The restrictions have one purpose, and one purpose only. To facilitate price discrimination (and hence the exercise of market power) by Gazprom and Russia. This map provides a fascinating visual demonstration of how Gazprom discriminates by price. Adjacent countries can pay dramatically different prices. More distant countries pay lower prices than ones nearer to Russia.

Much of the discrimination is purely economic. Countries with access to few alternative suppliers or few alternative energy sources pay higher prices. But much of the discrimination is political. Note that Belarus and Armenia, reliable Russian clients, pay very low prices, but Ukraine and Lithuania, which bracket Belarus, pay very high ones.

Destination clauses are necessary to maintain these big price differentials. Hence eliminating them would reduce Gazprom’s market power and profitability (though the welfare effects of 3d degree price discrimination are ambiguous) and also reduce Russia’s political leverage. With the ability to resell, those buying at a favored price could resell to those whom Gazprom wants to charge a high price. Gazprom would have to charge pretty much the same price to everyone (though since diversions are not costless it would retain some ability to discriminate, but not nearly as much, especially in the longer run as new infrastructure could be created).

Which makes it all the more bizarre that Europe, and Germany in particular, hyperventilate over far more dubious and abstract theories of market abuse by Google and Microsoft, but meekly let Gazprom run roughshod with textbook monopolist tactics. The lack of a unified energy policy, and unified energy purchasing (Europe could act as a monopsonist) allows Gazprom to play its usual divide and conquer games, of which price discrimination is one obvious result. Expediting the antitrust action against Gazprom would be another way of combating Gazprom’s malign influence.

In the current dispute the stakes are both economic and political/geopolitical. Despite the high stakes, Europe will doubtless limit its response to theoretical objections like those delivered by Helene Banner.

One (bitterly) amusing sidelight to this is despite its market power (the result of Russian law which gives it a monopoly over gas exports and of European acquiescence) Gazprom is still a horrible performer by all conventional metrics. It’s price-earnings ratio is about 3. Contrast that to Shell, Chevron, and Exxon, which have ratios of 10, 11, and 12, respectively. Performance metrics, such as value added per employee or earnings as related to reserves, are horrible.

This is a testament in large part to appalling corporate governance and the insecurity of profits and property in Russia. Speaking of which, there were several developments in the Yevtushenkov/Sistema/Bashneft story today. Yevtushenkov’s house arrest was confirmed and extended, and the Russian government seized Sistema’s Bashneft shares.

I’m never going to run out of material. Never.

Putin keeps ratcheting up the pressure on Ukraine-and the EU. In response to his earlier threats to retaliate against the beleaguered neighbor and the Europeans if they proceeded with a trade association agreement, they agreed to defer implementation of parts of the agreement for 15 months. In particular, though Europe agreed to proceed with lowering barriers on Ukrainian imports, the parties deferred lowering Ukrainian restrictions on imports from the EU to assuage Vlad.

But Vlad was not assuaged. He pocketed that concession-which the parties stated explicitly was made in response to Russian concerns-and is now demanding more:

Vladimir Putin has demanded a reopening of the EU’s recently-ratified trade pact with Ukraine and has threatened “immediate and appropriate retaliatory measures” if Kiev moves to implement any parts of the deal.

. . . .

“We still believe that only systemic adjustments of the association agreement, which take into account the full range of risks to Russian-Ukrainian economic ties and to the whole Russian economy arising from implementation of the agreement, will allow [us] to retain existing trade and economic considerations between the Russian Federation and Ukraine,” Mr Putin says in his letter.

In other words, if Ukraine lowers barriers on European goods, Russia will raise barriers on Ukrainian ones.

The ostensible Russian concern is that better and cheaper European goods will flow to Ukraine, and then on to Russia, undercutting its inefficient producers.

I have to doubt that the concerns are serious, because of country of origin provisions in Russian customs laws. Yes, it is probably true that less restricted import of European goods into Ukraine will make it easier to evade country-of-origin rules, but this hardly seems to be enough of a concern to justify Putin’s ballistic reaction.

And if the concerns are serious, it just goes to demonstrate something I’ve mentioned before: Putin’s recognition of the fundamental inferiority, greater cost, and general non-competitiveness of Russian producers.

This is probably more a political statement than an economic one. Mr. Sovereignty, who Raised Russia From Its Knees, cannot countenance Ukraine being a sovereign entity, and wants to drive it to its knees, and perhaps face down in the dirt. He cannot countenance Ukraine engaging in an independent policy that moves it closer to Europe-and civilization-and further from Russia-and Muscovite barbarism. Knowing that Russia offers nothing positive that can attract friends and allies, it has to coerce vassals.

And note the continued pattern. Putin pockets every concession intended to appease him, and then escalates. He has done that repeatedly militarily in Ukraine, and is now doing it with respect to diplomatic-economic matters involving Ukraine.

You’d think the Europeans would have figured this out by now. Hell, rats in a Skinner Box learn patterns faster than the Euroweenies. But they are so craven and clueless that they make concession after concession. And in response, smart rat that he is, Putin just keeps pushing the lever that delivers the food pellet, and is feasting away.

If the Ukrainians and Europeans cave on this latest demand, Putin will just demand more. They have to draw the line somewhere, and it might as well be here, over the Association Agreement. If they don’t, eventually the line will lie slightly east of Przemsyl.

Some months ago, Morgan Stanley agreed to sell its oil trading business to Rosneft. Now the deal is at risk of unraveling, due to the effect of sanctions on the Russian company:

Rosneft has enough cash to buy the Morgan Stanley unit, which sources said carries a price tag of between $300 million to $400 million. But to operate day-to-day, the business requires billions of dollars of bank lines of credit, funding that is difficult to secure given the sanctions.

Reuters could not learn the precise size of these credit lines, but trading houses that compete with Morgan Stanley such as Vitol, [VITOLV.UL] Mercuria and Trafigura [TRAFGF.UL] each have $30 billion to $40 billion worth of credit lines with dozens of banks.

“This deal just cannot go through. It is not an issue of finding $300 million to buy the business. Rosneft has the money. But it won’t be able to operate it,” one Russian-based source with direct knowledge of the matter said.

Trading is an extremely working capital intensive business. Depending on its size, a supertanker can carry oil worth $50 million-$300 million, and this has to be financed during the period of the voyage. A decent-sized trading operation can have several tankers on the water, plus additional oil in storage, all of which needs to be financed. A major trading operation needs access to billions in funding on a continuous basis.

Typically, traders finance this with bank credit, with the bigger ones using open lines with banks (which offer considerable flexibility). (I discuss commodity trade financing in my white paper, The Economics of Commodity Trading Firms-bonus video!) You cannot compete efficiently in this business without access to such credit/credit lines. Loss of access to credit is a death sentence to a trading firm, and one that can’t get access in the first place will never be born. That’s where Rosneft finds itself now.

This is another blow to Sechin’s (and Putin’s) aspirations to make Rosneft into a peer super major like BP or Shell or Total that have  robust trading operations. The firm’s longer term ambitions have been seriously dented by the withdrawal of western firms from deepwater and unconventional onshore drilling projects in response to sanctions.

This is also a pain for Morgan Stanley, which is under government pressure to exit the physical trading business: it’s not clear that there’s anyone with enough appetite to pay what Rosneft agreed to. But its pain is nothing compared to Rosneft’s, which will remain dependent on traders to market its oil for the foreseeable future.

Breaks me all up.

Earlier this week, Russian authorities arrested billionaire Vladimir Yevtushenkov, 64 percent owner of the Sistema conglomerates, whose holdings include the mobile operator MTS, retail interests, and . . . the independent oil company Bashneft.

Yevtushenkov was put under house arrest for alleged money laundering related to the acquisition of Bashneft. The company has its roots in the Republic of Bashkortostan, and its privatization was a dodgy affair, even by Russian standards. The company ended up under control of the son of the president of the republic, Murtaza Rakhimov. The son-Ural-is now a fugitive in the west.

But all of this is old news. The company was privatized in 2003, and Sistema acquired it in 2009. Litigation over the privatization has been going on since. So why now? Something new must have resulted in the green-lighting of the escalation of an investigation of old news.

As is always the case with Russia, there are numerous competing hypotheses, and the outcome is probably overdetermined. A leading explanation is that Sechin covets Bashneft, and made Yevtushenkov an offer he couldn’t refuse . . . which he promptly did, leading to his current predicament.

Just exactly what that predicament is is obscure, again in a typically Russian way. After a couple of days in which Yevtushenkov was supposedly unable to communicate with anyone by phone or use the internet, Sistema claimed in a press release that the house arrest had been lifted, and Yevtushenkov supposedly spoke to a journalist by phone. But the Investigative Committee denied that the house arrest had been lifted.

Sistema lawyers filed an appeal of the Investigative Committee’s actions agains the company (though apparently not Yevtushenkov) with the Prosecutor General’s Office. This is interesting-and again typically Russian-because the Investigative Committee and Prosecutor General’s Office are sworn enemies answering to different clans within the siloviki. So maybe there is a bulldogs under the carpet clan war component to this as well.

Sistema’s stock price cratered by 35 percent on news of the arrest, and the affair has sent huge shock waves through the Russian business community. Khodorkovsky flashbacks are epidemic, and many are making dire warnings about how this will accelerate capital flight, further demolish Russia’s investment climate, and worsen the already fraught economic conditions.

Which is probably all true. And Putin is perfectly aware of this, yet has permitted this to escalate nonetheless. Either because he’s especially fond of Sechin, or believes that Rosneft’s condition is sufficiently dire in the aftermath of sanctions that it needs a fillip in the form of the acquisition of a relatively progressive, technologically advanced oil producer at a knock-down price, or because he has another, more political agenda. (Note, that once Rosneft acquires it, it will cease to become a progressive, technologically advanced oil producer.) Or all the above. Plus other things.

Don’t discount the political agenda. One of the alleged purposes of the sanctions is to create an uprising of the oligarchs against Putin and the siloviki. In his paranoia, Putin almost certainly believes that’s true: he, and most of those around him, believe that the US is hell-bent on regime change in Russia.

Putin is therefore likely to interpret any disagreement by an oligarch as a challenge to his power. He may not even believe that Yevtushenkov is challenging him politically, but is afraid that a refusal to knuckle under to Sechin can be interpreted by others as an act of insubordination, which would encourage further acts of destabilizing independence unless it is punished ruthlessly. Thus, Yevtushenkov has to pay the price, pour encourager les autres.

The FT quotes many in Russia, some on the record, some anonymously, who claim that this is an indication of how sanctions are actually having the perverse effect of empowering the siloviki and destroying those who would be “friends of the West.” I think the cause and effect is mixed up here. The sanctions are the result of Crimea and Donbas, which could only happen because Putin and the siloviki reigned supreme. Putin attacked each precisely because he and the siloviki were unchecked within Russia: the “liberal” elements in the Russian elite, such as they were, had been kicked to the curb long ago. One can date the definitive decline of the moderate, economy-oriented elements in the elite to Putin’s decision to resume the presidency. Since then the trajectory of repression, revanchism, paranoia, and statism within Russia has been unmistakable. At most, sanctions have accelerated what was an unmistakable and inexorable trend.

I still shake my head at the silly commentaries that were so common at the time of the Putin restoration to the effect that he would have to-have to!-reform and adopt moderate policies in order to rejuvenate Russia’s sputtering economy. Talk about projection and mirror imaging. Nothing of the sort was ever in prospect.

Even overlooking the fact that aging leopards don’t change their spots, Putin’s mental model of the economy does not associate moderate liberal or “neoliberal” actions with economic progress. He is a statist enamored of national champions controlled from the center.  He also distrusts biznessmen outside of his control who could get uppity and pose a political challenge: why do you think that one of his first priorities upon assuming the presidency the first time was to liquidate the oligarchs as a class, and why would you think that he would countenance their renaissance? Thus, both economic and political reasons compelled Putin to move in the exact opposite direction that fuzzy headed, mirror-gazing commentators recommended in 2012-2013. That was happening before the sanctions, and would have continued even if sanctions had never been imposed.

Those of a dialectical turn of mind, or who believe in “the worse, the better”*, might find reasons to welcome any acceleration of the perfection of Putinism, and therefore welcome any tailwinds provided by sanctions. The sooner this happens, the more rapidly the internal contradictions of his economic and political models will become manifest, and lead to his demise. Not that what will replace Putin and Putinism are likely to be anything that would bring a smile to Adam Smith’s face. The Who-meet the new boss, same as the old boss-is likely to be the best guide to a post-Putin Russia. If we ever get there.

That is, the Yevtushenkov affair is just another day in Putinistan. A continuation, not a change in course. If you’re surprised, it only means that you haven’t been paying attention or were too busy projecting.

*This phrase is widely attributed to Lenin, but there is no definitive citation. The concept is found in a novel by Nikolay Chernyshevsky which allegedly influenced Lenin.

At the outset of intense American involvement in the Viet Nam War, the US military devised a robust bombing campaign to be deployed against the North. The campaign focused on petroleum, oil and lubricants (“POL”) facilities and ports. The objective was to deal a decisive blow to Hanoi’s war making capability. It was a military plan focused on military objectives.

President Lyndon Baines Johnson rejected the military’s plan. He viewed bombing as a political instrument to be calibrated to achieve negotiated outcomes:

I saw our bombs as my political resources for negotiating a peace. On the one hand, our planes and our bombs could be used as carrots for the South, strengthening the morale of the South Vietnamese and pushing them to clean up their corrupt house, by demonstrating the depth of our commitment to the war. On the other hand, our bombs could be used as sticks against the North, pressuring North Vietnam to stop its aggression against the South. By keeping a lid on all the designated targets, I knew I could keep the control of the war in my own hands. If China reacted to our slow escalation by threatening to retaliate, we’d have plenty of time to ease off the bombing. But this control—so essential for preventing World War III—would be lost the moment we unleashed a total assault on the North—for that would be rape rather than seduction—and then there would be no turning back. The Chinese reaction would be instant and total.

LBJ micromanaged the bombing campaign. Often hunching over maps, he chose individual targets, mainly at a lunch every Tuesday with his national security team. He famously said that the military couldn’t bomb an outhouse without his permission.

It is almost universally recognized that LBJ’s micromanagement was an unmitigated disaster. The North Vietnamese interpreted the relatively diffident bombing campaign as an indicator of LBJ’s lack of commitment and resolve: they weren’t deterred, but were encouraged. The campaign inflicted little military damage on the North, and the NVA used the respite to bolster their air defenses.

In brief, the LBJ “Rolling Thunder” campaign, and his meddlesome control over it, is widely held up as an example of how not to wage a military campaign, and especially an air campaign.

Fast forward exactly 50 years, from 1964 to 2014. Then read this, and weep:

The U.S. military campaign against Islamist militants in Syria is being designed to allow President Barack Obama to exert a high degree of personal control, going so far as to require that the military obtain presidential signoff for strikes in Syrian territory, officials said.

The requirements for strikes in Syria against the extremist group Islamic State will be far more stringent than those targeting it in Iraq, at least at first. U.S. officials say it is an attempt to limit the threat the U.S. could be dragged more deeply into the Syrian civil war.

. . . .

Through tight control over airstrikes in Syria and limits on U.S. action in Iraq, Mr. Obama is closely managing the new war in the Middle East in a way he hasn’t done with previous conflicts, such as the troop surge in Afghanistan announced in 2009 or the last years of the Iraq war before the 2011 U.S. pullout.

LBJ redux, to the last jot and tittle. Repeating the exact same errors. It will not end up any better. Probably worse, given that the situation in Syria is worse (as bad as it was in SVN in 1964). Talk about forgetting the past and being condemned to repeat it.

Just what during a career of community organizing and voting “present” in the (notoriously corrupt) Illinois Senate qualified Barack Obama to be generalissimo, making tactical (and operational) decisions in a military campaign waged in an extremely complex environment? There is no greater testament to his overweening (and almost totally unjustified) sense of superiority than this decision to run a bombing campaign out of the Oval Office.

The WSJ article says that Obama is hellbent on making sure operations in Syria and Iraq are a glorified counterterrorism (not even counterinsurgency) operation at best. His model is the <sarcasm> wildly successful </sarcasm> operations in Yemen and Somalia.

Anybody read about Yemen and Somalia lately? Yeah. If those are successes, I’d hate to see what failure will look like. But I’m pretty sure we’re going to find out.

The military is already off the reservation, with Joint Chiefs Chairman Dempsey and the retired Marine general assigned to coordinate operations with the Iraqi and Syrian forces, James Mattis, openly (though implicitly) criticizing Obama’s steadfast refusal even to countenance the use of ground forces. Usually it takes a military disaster to spark such open questioning of presidential policy by military commanders. Here we have it before the operation has even fairly started. That speaks volumes, and bodes very ill for the future.

Obama is a control freak with no military competence or background or experience, and is also terminally afflicted with the Jupiter Complex. He is beyond loath to get involved in the bloody, dirty business of combat on the ground, but feels obliged to do something: he is therefore tremendously attracted to the idea that he can be, in the words of historian Paul Johnson, a Jupiter, a “righteous god, raining retributive thunderbolts on his wicked enemies.” It seems clean and detached and bloodless. So it may seem from the delivering, rather than the receiving, end of the thunderbolts. But it is also strategically vacuous and ultimately tactically and operationally indecisive. It also tends to breed resentment and hostility among those it is intended to help.

(As an aside, I consider it beyond ironic to remember that during Viet Nam, and the years after, the left routinely criticized the morality of the US air war, pointing out that war looked so sanitized from the cockpit of a B-52 at 30,000 feet. Now that they command the B-52s-and F-15s, F/A-18s, F-16s, B-1s, etc.-they are entranced by the allure of waging war at such distance from the blood and chaos on the ground.)

As I wrote the other day, I do not support a vigorous military operation in Syria. But if we are going to get involved, it must be done the right way, in a militarily sensible way. What Obama is hell-bent on doing is the exact wrong thing. He is repeating the LBJ mistakes, and adding some of his very own making. This is why, even overlooking the meager security stakes and the daunting obstacles involved in Syria and the Middle East generally, I blanche at the idea of a military campaign conducted by Obama, especially when he stubbornly insists on maintaining tight control over it.

Not too long after LBJ got involved in Viet Nam, and bungled it royally, he was routinely taunted by a chant: “Hey, hey, LBJ, how many kids did you kill today?” It is probably one of the things most strongly associated with Johnson’s sad legacy. I am not by nature a protest poet, so I can’t fill in the rest, but I know someone will: “Ho, Ho, BHO . . . ” The jingle will not end well for Obama, but the real tragedy is that what is about to unfold will not end well for the US, or the world.

This is so amusing, because it is so typical:

Russian Energy Minister Alexander Novak will meet OPEC officials on Tuesday in Vienna, his spokeswoman said, as oil’s price fall piled pressure on Moscow’s budget.

The annual meeting had been planned long before oil fell below the $100 per barrel level critical for Russia’s oil sales which account for 40 percent of state budget revenues.

Russia suffered from a decline of oil production and prices this year and has cut its outlook for oil output as core western Siberian fields become more depleted.

The spokeswoman said that Novak and the officials from the Organization of the Petroleum Exporting Countries had not planned to discuss the prices of oil, which hit 26-month low for Brent crude on Monday.

However, a government source said the measures to prop up the prices have long been discussed at the ministry.

“The talk of closer cooperation with OPEC on prices have long been there,” he said.

So far, Russia, the world’s top producer of conventional oil, has ruled out coordinated action with OPEC to halt the price decline.

Yeah. Novak is scurrying to Vienna, but he’s not going to talk prices. Sure. Tell me another one, but not so funny as I just busted a gut reading that and can’t take too much more.

Putin, Inc. is no doubt in a mild-to-moderate panic at present because Brent has breached $100, and Urals is below that, in the low $90s. Russia needs Urals in the $104 range to meet budget targets, and that’s not counting Crimea or especially a war that doesn’t officially exist but which costs real money to fight.

So off Novak runs to Vienna, in an attempt to get OPEC to prop up the price. Not that Russia will do anything to help, mind you. It’s MO has long been to demand, beg, cajole OPEC to cut output to support prices, while Russia produces to capacity. That’s what Russia did in 2009 when prices cratered into the $30s. OPEC was not amused then, and they won’t be amused now.

If anything, geopolitical considerations, namely Russia’s support of Assad and cooperation with Iran, will make the Saudis in particular even less generously inclined towards Russia.

Meaning that Novak’s mission to Vienna will accomplish nothing, except to provide an entertaining example of Russian all take, no give negotiating style.