Streetwise Professor

Last week the Arizona Republic released a story detailing the fate of Kayla Mueller, an ISIS prisoner whose death was announced a few days earlier. The most novel part of the story (and the reasons for my choice that word will become evident shortly) is that her Syrian boyfriend, who had been abducted with her in Aleppo on 4 August, 2013 before being released, attempted to secure her freedom by returning to an ISIS camp and pretending to be her husband. The ruse was uncovered, and she was not liberated. The boyfriend was detained for a time, before being released again.

The Republic withheld the boyfriend’s name:

The Arizona Republic is withholding the name of Mueller’s boyfriend out of caution for his safety. At least one friend says the name is an identity he assumed to lessen the risk of reporting in Syria.

This is rather odd, because said boyfriend was quite voluble in an interview with the Daily Mail. He goes by the pseudonym Omar Alkhani (or al Khani). And he tells a rather dramatic story:

It was the moment Omar Alkhani believed he was about to secure the release of his girlfriend, the last American hostage held by Islamic State.

Kayla Mueller stood before him in her dimly lit cell dressed in a traditional long black abaya cloak, her face covered.

At great personal risk, Omar had ventured into the heart of the terror group’s power base in Syria to try to bring her home.

Naively, perhaps, he was convinced that all Kayla had to do was confirm their cover story that they were man and wife to the IS ‘judge’ standing between them.

He spent two months there before being freed.

In the five months after his release, Western hostages including Britons David Haines, 44, and Alan Henning, 47, would become victims of the British executioner known as Jihadi John, whose voice Omar heard every morning interrogating Western prisoners.

Speaking for the first time about his four-year relationship with Kayla, 26, and the events that led to her capture and his own incarceration, Omar told MailOnline and the Mail on Sunday: ‘To this day I don’t know why she didn’t go along with the story.

‘Because I am Syrian and not a spy, and she was my wife, they would have let her go. I came to get Kayla out but that was the last time I saw her.’ 

He added: ‘She once asked how much I loved her and I said that I would risk my life for her. And I did. I tried for her. She was the most beautiful thing that happened to my life. We were planning our future together.’

Quite dramatic, no? Quite romantic, no? Quite touching, no?

Adding to all this is his farewell Facebook post to her.

Dear Kayla…
I’m not writing her to say goodbye, this is a thank you. Thank you for coming into my life and giving me joy, thank you for loving me and receiving my love in return.
You were everything I wanted. You were so beautiful and charming, and you supported me in everything I did, even if it was extremely stupid.
You came into my dream nights ago, with that charming smile, All l remember from the dream is a feeling of peace. l woke up with that feeling , and tried to keep it in my mind as long as l could. l’m writing to tell you l’m sorry about so many things. I’m sorry l didn’t ‘t take better care of you , ”I’m sorry I didn’t try harder to find the words , to tell you what I was feeling. And how much I loved you.
I’m sorry for all our nonsense fight and argue we ever had before , I just wanted to love you for ever , I’m sorry I didn’t hold on to you with so much strength. That even God couldn’t take you away. ”
Koki habibi
You Left our world for a bigger and better place now . . .
You were the shining light that gets me through my darkest hours, you were the most beautiful thing that happened to me once, and you ll always be…
Always & Forever. . .

For all of this, we have the uncorroborated word of al Khani. Period. Color me skeptical.

Why? For one thing, how many people does ISIS release not once, but twice? And it’s not as if al Khani was some random Syrian guy who was getting it on with a kafir (which is not exactly something that ISIS condones). As I will detail below, he was a very well-known Syrian in opposiiton circles. Further, I have not been able to find any statement by ISIS hostages that were ransomed, and who gave interviews about hostages including Sotloff, Foley, and Mueller, mention al Khani, who claims he was held in the same place at the same time.

For another, despite his expression of undying love last week, he said precious little about her on Facebook while she was in ISIS’s hands. His Facebook page is replete with images from Syria and Istanbul taken as a Reuters photographer, mentions of publication of his photos in Vanity Fair, and touts of his film. He does have one post that alludes to her on 21 September, 2013, about 3 weeks after he posted a statement that he had been released from ISIS captivity. (Since he had been captured on 3 or 4 August, the Daily Mail claim that he had been imprisoned for 2 months is obviously wrong.) Then nothing. He says nothing about her after his purported rescue effort in November, 2013-January, 2014. This hardly screams undying love.

(It is also somewhat odd that the story of this trip is treated now as a revelation, as it was reported in the region at the time-again based on what al Khani said.)

Something also doesn’t ring true about his account of how he met Mueller. He claims she answered an ad for a roommate in Cairo, where he’d moved after spending several years in Sudan working as “events marketing” executive, and where she’d traveled on a short vacation. (Who knew there was a market for event planning in Sudan?) The Sudan connection jumps out, because at home in Arizona Mueller had been actively engaged in Darfur-related protests. Maybe the story in the Mail is accurate, but it is also plausible that they had been in contact online regarding Sudan before, and that’s why she went to visit him in Cairo.

Al Khani was in Cairo when the Arab Spring broke out. Soon the ferment spread to Syria, and he went back there to participate in the anti-Assad movement. He soon became a “coordinator” of a “Facebook battalion of revolutionaries” that facilitated communications among anti-Assad forces. He claims the title of “Secretary General of the Syrian Revolution Coordinators.” Before long, he was a go-to guy for western media, being quoted about Syrian events in the Telegraph, Financial Times, Die Welt, Public Radio International, and other publications. He also worked as a photographer for Reuters, and his photos were run by Vanity Fair, AFP, and other media. He was regularly traveling to rebel-held areas of Syria as a photographer.

Most bizarrely, he wrote a profile of ISIS leader Al Baghdadi while Kayla Mueller was in ISIS captivity. (The article was originally written by al Khani, and Maya Gebeily, but their names were not on the byline of the piece as it ran in Newsweek. Another odd thing.)

In other words, al Khani was pretty much a celebrity in Syrian revolutionary circles, with considerable familiarity with ISIS. It is almost inconceivable that ISIS did not know who he was. But in the Daily Mail interview he presents himself as just some Syrian guy, and plays down his activism: indeed, that isn’t mentioned at all. Why so shy all of a sudden about describing his work? He was General Secretary, after all, and had been quite assiduous in promoting his role as an activist in print and film. Now all of a sudden he hides his light under a bushel basket.

And of course Syrian revolutionary circles are rife with Islamists of all stripes, from the Muslim Brotherhood to numerous varieties of Salafists. Al Khani navigated in those circles for years. He did not mention much about religion from what I’ve seen, though an acknowledgement of receiving funds from Muslim Brotherhood members and  an expression of gratitude to people in Turkey for help are tantalizing clues.

That all raises questions about his relationship with ISIS, and their treatment of him. He obviously had deep connections in the Syrian opposition. That had to have mattered.

Again, his word is the sole basis for reports that ISIS held him captive and tortured him, and then freed him. Twice. Maybe it happened, but maybe it didn’t.

The story of the reason for his fateful trip with Mueller in August, 2013 also strains credulity. He supposedly made the trip to one of the most dangerous cities on earth to fix the wifi at the Medicins Sans Frontiers office in Aleppo. Events marketing executive, photographer, activist, filmmaker, and . . . wifi repairman? Quite the Renaissance Man.

The Daily Mail story also suggests that Mueller insisted that al Khani take her to Syria with him on this trip, and insinuates she hadn’t been there before. But she posted pictures from “Souria” (a tell that she had been radicalized) she had taken earlier, so why the suggestion that she had to pester al Khani to take her along?

Finally, I don’t find the story of Mueller ruining her chance at freedom by refusing to acknowledge that she was his wife to be credible. Stockholm Syndrome? Maybe. But it sounds like a convenient tale to explain why he could not bring her out. Again, we have only his word that he tried.

I can’t but conclude that there is much more to the story of Omar al Khani that what is being breathlessly repeated today. There are many loose ends, which no one wants to pull, apparently being content with the romantic tale of tragic love. Many questions, but nobody is asking him to answer them. His story is being taken as gospel.

What makes this particularly infuriating is that despite the fact that al Khani was widely known among western media for his activism, this is not being mentioned at all today. It appears that even the media that used him as a source on the revolutionary movement is conspiring to support the tragic love narrative.

Finally, this all sheds some light on Kayla Mueller. She cannot have been unaware of al Khani’s opposition activities. Her biography suggests that those activities would have been a great attraction to her. Her short video (linked in the Daily Mail story) expresses solidarity with the struggle of the Syrian people, and that is a piece with her involvement with the International Solidarity Movement which unabashedly supports the Palestinian “struggle” against Israel: Rachel Corrie was an earlier American in ISM, and Mueller seems to have much in common with Corrie. And like Corrie, she put herself in harms way in connection with an opposition movement. And like Corrie, she paid for this with her life.

On one level, this was Kayla Mueller’s decision. She ran the risk, she paid the price. You can admire her or question her as you will. But there are broader issues involved. Policy issues.

What got me chasing this rabbit was a story in the Washington Post describing the extreme risks the US ran to mount a rescue raid for Mueller and the other hostages. This means that the decisions of people like Mueller and Foley and Sotloff did not just affect them. They put other Americans at mortal risk. They also put the lives of Syrians (whom they professed to want to help) at risk. Fortunately, there were no serious injuries or fatalities in the US special operations direct action to attempt to release them. But that wasn’t inevitable. It was training, planning, skill, and luck.  Sometimes bad luck can undo the best training, planning and skill in the world.

Given the pronounced narcissism and romanticism that characterizes all of those Americans who have been kidnapped and killed by ISIS, I wonder about the prudence of a policy that risks American soldiers, sailors, and airmen to rescue the reckless. People should be on warning: swim at your own risk. No lifeguard on duty. If you want to engage in entrepreneurial activism in very dangerous places, without the official sanction of the US government or any credible NGO, more power to you, but you are on your own. Risking lives to rescue American military captives, or those seized while engaged in official aid missions, is one thing. Risking lives to retrieve romantic free-lancers (including love struck ones who may have fallen in with the company of questionable characters) is something else altogether.

Note: h/t to @libertylynx for all of the links and research.

Igor Sechin, he of the ape drape, has taken to the pages of the Financial Times to diagnose the causes of the recent collapse in oil prices. I am sure you will be  shocked to learn that it is those damned speculators:

In today’s distorted oil markets, prices do not reflect reality. They are driven instead by financial speculation, which outweighs the real-life factors of supply and demand. Financial markets tend to produce economic bubbles, and those bubbles tend to burst. Remember the dotcom bust and the subprime mortgage crisis? Furthermore, they are prone to manipulation. We have not forgotten the rigging of the Libor interest rate benchmark and the gold price.

. . . .

Financial bubbles, market manipulations, excessive regulation, regional disparities — so grotesque are these distortions that you might question whether there is any such thing as an oil “market” at all. There is the semblance of a market: buyers and sellers and prices. But they are performing a charade.

What is to be done? First, financial players should no longer be allowed to have such a big influence on the price of oil. In the US, Senators Carl Levin and John McCain have called for steps to prevent price manipulation, though whether they will be implemented, and when, remains an open question.

In any case, the authorities should go further, ensuring that at least 10 or 15 per cent of oil trades involve actually delivering some physical oil. At present almost all “oil trades” are conducted by financial traders, who exchange nothing but electronic tokens or pieces of paper.

No, condemnations of speculation are not the last refuge of scoundrels attempting to assign blame for sharp movements in commodity prices: they are the first and only refuge. Prices going up? Speculators! Prices going down? Speculators! Poor, poor little companies like doughty Rosneft and even international cartels like OPEC are mere straws at the tossed before the speculative gales.

Sechin’s broadside is refreshingly untainted by anything resembling actual evidence. The closest he comes is to invoke long run considerations, relating to the costs of drilling new wells. But supply and demand are both very inelastic in the short run, meaning that even modest demand or supply shocks can have large price impacts that cause prices to deviate substantially from long run equilibrium values driven by long run average costs.

It is also hard to discern a credible mechanism whereby diffuse and numerous financial speculators could cause prices to be artificially low for a considerable period of time. (It is straightforward to construct models of how a local market can be manipulated downwards, but these are implausible for a global market. Moreover as I showed years ago, markets that are vulnerable to upward manipulation by longs are relatively invulnerable to downward manipulation by shorts.)

And the empirical implications of any such artificiality are sharply inconsistent with what we observe now. Artificially low prices would induce excessive consumption, which would in turn result in a drawdown in inventories. This is the exact opposite of what we see now. Inventories are growing rapidly in the US in particular (where we have the best data). There are projections that Cushing storage capacity will be filled by May. Internationally, traders are leasing supertankers to store oil. These are classic effects of demand declines or supply increases or both that are expected to be transient.

Insofar as requiring some percentage of oil contracts (by which I presume he means futures and swaps) be satisfied by delivery, the mere threat of delivery ties futures prices to physical market fundamentals at contract expiration. What’s more, the fact that paper traders are largely out of the market when contracts go spot means that they cannot directly affect the supply or demand for the physical commodity.

Sechin’s FT piece is based on a presentation he gave at International Petroleum Week. Rosneft thoughtfully, though rather stupidly given the content, posted Sechin’s remarks and slides on its website. It makes for some rather amusing reading. Apparently shale oil companies are like dotcoms, and shale oil was a bubble. According to Igor, US shale producers are overvalued. His evidence? A comparison of EOG and Hess to Lukoil. The market cap of the EOG is substantially higher than Lukoil’s, despite its lower reserves and production, and lack of refining operations. Therefore: Bubble! Overvaluation!

Gee, I wonder if the fact that Lukoil is a Russian company, and that Russian company valuations are substantially below those of international competitors, regardless of the industry, has anything to do with it? In fact, it has everything to do with it. Sechin’s comparison of a US company with a Russian one points out vividly the baleful consequences of Russia’s lawless business climate. It’s not that EOG and other shale producers are bubbles: it’s that Lukoil (and other Russian companies) are black holes.  (It was the very fact that Russia’s lack of property rights, the rule of law, and other institutional supports of a market economy that got me interested in looking at the country in detail in the first place almost a decade ago.)

I was also amused by Sechin’s ringing call for greater transparency in the energy industry. This coming from the CEO of one of the most opaque companies in the most opaque countries in the world.

Reading anything by Sechin purporting to be an objective analysis of markets or market conditions is always good for a chuckle. His FT oped and IPW remarks are no exception. As a market analyst, he makes a better KGB operative. Enjoy!

Einstein famously defined insanity as doing the same thing over and over again expecting different results.

By that definition, there were two insane participants in the “negotiations”over the war in Ukraine held in Minsk, and two sane ones.

The insane ones were the Euro “leaders”, Merkel and Hollande. They went to Minsk to negotiate a new deal with the man who flagrant violated the last deal then lied shamelessly about it, apparently in the hope that he’ll adhere to a new deal. Only the insane would expect that.

The man on the other side of the round table, Putin, is clearly not insane. He did the same thing as he did last time, but very much expected the same result. And he got it. That’s not quite true: he got a better deal this time.

Ukrainian president Poroshenko clearly went into the meetings with no illusions. He could see that Putin was implacable, and that his erstwhile benefactors were intent on playing the roles of Chamberlain and Daladier in a reprise of Munich!, and that he was cast in the role of Eduard Benes, watching his capitulation being negotiated over his head.  He gamely dragged things out, but in reality it was three against one, and that one was in dire straits with a crumbling economy and a desperate military situation. He did the same thing he did in September, out of necessity, but I am sure he expects the same outcome.

The cease fire does not begin until Sunday, and therefore it is inevitable that there will be a flurry of fighting in the next days, especially around Debaltselvo. Putin made it plain today that he expects the 8000 or so Ukrainian soldiers in the pocket to surrender. The implicit threat is that they will be crushed if they do not.

Even if a cease fire takes hold after Sunday, it will not last. Putin has learned that violations have no adverse consequence, and that after some interval the fighting will start again and he will take another slice of Ukraine. And Merkel and Hollande will harrumph and express grave concern but when push comes to shove they will scurry back to Minsk to do it all over again. Insane.

Wash, rinse, repeat. The low, dishonest decade grinds on.

The shaping of the battlefield in northern Iraq that I have discussed over the past several months continues. Most notably, the peshmerga are moving to isolate Mosul:

U.S. and allied warplanes conducted airstrikes in support of Kurdish Peshmerga fighters in Iraq who retook main routes into Mosul from Islamic State forces, officials with the international coalition said Monday.

Coalition officials said the Peshmerga forces seized three strategic corridors that defense officials called bridgeheads north of Mosul along the Tigris River in territory formerly controlled by extremist forces with Islamic State, also known as ISIS, ISIL and its Arabic acronym Daesh, military officials said.

This puts them in position to cut off the roads connecting Mosul to Syria.

ISIS is clearly transitioning from an offensive posture to a defensive one. It has vacated Kobane, and is retreating from the surrounding villages as the Syrian Kurds advance. It has withdrawn from its more distant outputs east of Aleppo. It is digging a trench line surrounding Mosul, though it is unlikely that it has the manpower to fill all of it, which makes it rather useless in the face of an enemy that can see every unmanned section. It has undertaken some offensive operations, in Anbar and Kirkuk, but these seem to be spoiling attacks meant to prevent the peshmerga and the Iraqi army from concentrating. In Kirkuk in particular, it was pounded hard from the air when it came out to play. They had bee able to make some progress when attacking in a fog, but when that cleared they were hammered.

This is their fundamental problem. They cannot maneuver. They would have been similarly vulnerable last summer, but that opportunity passed.

The Kurds are anxious to increase the pace, but the US is counseling patience while elements of the Iraqi army are trained up enough to undertake offensive operations. While that happens, I would anticipate further local attacks by the peshmerga in the north, the cumulative effect of which will be to cut off Mosul from supply and reinforcement. After that, a grind it out battle in the city, most likely. The gradient is apparent, but it is not steep.

Obama is on a roll. A roll. It’s hard to keep up!

Last night he delivered an anti-sexual assault bit at the Grammys. Is anybody pro-sexual assault?

Then, in a Vox (!) interview released today, he continued his Terrorism: It Ain’t No Thang tour:

“It is entirely legitimate for the American people to be deeply concerned when you’ve got a bunch of violent, vicious zealots who behead people or randomly shoot a bunch of folks in a deli in Paris,” Obama said. “We devote enormous resources to that, and it is right and appropriate for us to be vigilant and aggressive in trying to deal with that — the same way a big city mayor’s got to cut the crime rate down if he wants that city to thrive.”

But, he added, “we also have to attend to a lot of other issues, and we’ve got to make sure we’re right-sizing our approach so that what we do isn’t counterproductive.”

Um, the people shot in the “deli” in Paris weren’t randomly selected. Well, randomly selected Jews, maybe, which means it wasn’t random. And that is about the most extreme statement of terrorism is a law enforcement issue I’ve ever seen. Let’s get Mayor Quimby on it!

Then there was today’s Merkel-Obama presser. Where to begin?

When asked about arming Ukraine, he said he hadn’t quite made up his mind:

“It is true that if, in fact, diplomacy fails, what I’ve asked my team to do is to look at all options,” Obama said. “But I have not made a decision about that yet.”

Sure! Take your time. It’s not like this situation hasn’t been metastasizing since the Minsk accords were signed in September. Why haven’t the options been explored long ago, and contingent decisions been made?

And about that diplomacy thing and contingent decisions. First, negotiation and diplomacy depend on threat points. Bolstering-or even threatening to bolster-Ukraine’s military capacity affects the outcome of negotiations by changing substantially the threat point. This idea that diplomacy floats in a world of its own is just cracked, and in fact dooms diplomacy to failure.

Second, Merkel and Hollande scurried to Moscow because Putin had flagrantly violated the Minsk accords. So now they are going to  . . . Minsk, to negotiate new accords. With the guy who broke the last ones. Have I got that right? Am I missing anything?

Obama emphasized the unity of the allies on the Ukraine issue. Recall that earlier he has said he did not want to get ahead of the Europeans. Translation re unity: leading from behind, and deferring to the least common denominator, which in Europe is very low indeed. Germany is bad enough, let alone France, Hungary, Austria, or Greece.

(Sorry. “Leading From Behind” has been rebranded: It’s now called “Strategic Patience.” Same dog food, different label.)

He praised Russia for its constructive role on talks with Iran, and said he looked forward to their future cooperation. As if Putin has the slightest inclination to help out the US. Well, since the deal Obama is panting for will likely harm US interests, maybe Putin will pitch in on that one.

He said that the Ukrainian people knew that America stood behind them. Really. He said that. He didn’t say how far behind. All Obama is providing is warm blankets and hot air, and I am sure that Ukrainians can muster only a bitter laugh at his claim of support.

Obama reiterated his view that Russia’s isolation would bring Putin to heel:

“Even as we continue to work for a diplomatic solution we are making it clear again today that if Russia continues on its current course, which is ruining the Russia economy and hurting the Russian people, as well as having such a terrible effect on Ukraine, Russia’s isolation will only worsen both politically and economically,” he told a joint news conference after meeting with German Chancellor Angela Merkel.

Yes, Putin is so, so isolated. He’s a hero on the European right. Several nations in the EU are far more sympathetic to Russia than the US. And he was welcomed like a conquering hero in Cairo today: check out the photo here (h/t @libertylynx). Sisi greeted him at the airport-a first. The Egyptians did everything but treat Putin like Pharaoh, complete with a procession down the Nile on a royal barge.

By giving such a lavish reception for Putin, Sisi was also giving Obama the middle finger. Or two middle fingers. If Obama were to visit, Sisi would probably have him picked up in a cab and driven to the nearest Cairo slum.

Obama’s obvious affinity for Morsi and the Muslim Brotherhood is going over very badly in Egypt, and not just among the military and the government. Sisi and many Egyptians believe themselves to be in an existential struggle with the Brotherhood, and Obama’s meddling and continued support for it angers them deeply. (What, mayors can’t handle them?)

So glad he made that Cairo speech. It surely changed the world didn’t it? Really built a bridge between the US and the Muslim world, and healed all those wounds dating from the Crusades down to the evil Bush.

And speaking of the Muslim Brotherhood. Remember that supersecret meeting with Muslim “leaders” I wrote about last week? So yeah, among the “leaders” were ranking members of Muslim Brotherhood-linked organizations, including one that was named as an unindicted co-conspirator in a terrorism case. (But I forget: terrorism ain’t no thang.) No wonder he wanted to keep the guest listees and the subject matter secret.

What a week. The man is on a roll. On. A. Roll. And we’re the ones getting rolled.

The Bank for International Settlements  is creating some waves with a teaser about a forthcoming report that claims to show that financialization is largely responsible for the recent fall in oil prices. Even by the standards of argument usually seen criticizing financializaton, this one is particularly lame.

BIS notes that the upstream business is heavily leveraged: “The greater debt burden of the oil sector may have influenced the recent dynamics of the oil market by exposing producers to solvency and liquidity risks.” The BIS summarizes the well-known fact that yields on oil company bonds have skyrocketed, and claims that this has contributed to the price decline. But it is plainly obvious that cause and effect overwhelmingly goes the other way: it is the sharp decline in prices that damaged the financial conditions of E&P firms. The closest that BIS can come to showing the direction of causation going from debt to price is this: “Debt service requirements may induce continued physical production of oil to maintain cash flows, delaying the reduction in supply in the market.”

At most, this means that future output may be higher in the future than it would have been had these firms been less leveraged, thereby weighing on future prices and through inter temporal linkages (e.g., storage) on current prices. It is difficult indeed to attribute the earlier price declines that caused the financial distress to this effect. Moreover, the BIS suggests that oil output from existing wells can be turned off like a water faucet. Given that the costs of capping a well are not trivial, this is not true: except under rather extreme circumstances, producers will continue to operate wells (which flow at an exogenously determined rate) even when prices fall substantially. Thus, this channel is not a plausible contributor to an appreciable fraction of the 50 percent decline in prices since July.

Then BIS turns its attention to hedging:

Since 2010, oil producers have increasingly relied on swap dealers as counterparties for their hedging transactions. In turn, swap dealers have laid off their exposures on the futures market as suggested by the trend increase in the CFTC short futures positions of swap dealers over the 2009-13 period.

However, at times of heightened volatility and balance sheet strain for leveraged entities, swap dealers may become less willing to sell protection to oil producers. The co-movement in the dealers’ positions and bouts of volatility suggests that dealers may have behaved procyclically – cutting back positions whenever financial conditions become more turbulent. In Graph 2, three such episodes can be seen: the onset of the Great Recession in 2008, the euro area crisis combined with the war in Libya in 2011, and the recent price slump. In response to greater reluctance by dealers to take the other side of sales, producers wishing to hedge their falling revenues may have turned to the derivatives markets directly, without going through an intermediary. This shift in the liquidity of hedging markets could have played a role in recent price dynamics.

BIS’s conjecture regarding producers hedging directly can be tested directly. The CFTC Commitment of Traders data, which BIS relies on, also includes a “Producers, Merchants, Processors and Users” category. If BIS is correct and producers have gone to the futures market directly rather than hedged through dealers, PMPU short interest should have ticked up. So why they are guessing rather than looking at the data is beyond me.

What’s more, using declines in swap dealer futures positions to infer pro-cyclicality seems rather odd. Swap dealer futures hedges of swap positions means that they are not taking on a lot of risk to the balance sheet. That is the risk that is being passed on to the futures market, not the risk that is being kept on the balance sheet.

The decline in swap dealer short futures positions more likely reflects a reduced hedging demand by producers. For instance, at present we are seeing a sharp drop in drilling activity in the US, which means that there is less future production to hedge and hence less hedging activity. The fact that the decline in swap dealer short futures is much more pronounced now than in 2008-2009 is consistent with that, as is the big rise in these positions during the shale boom starting in 2009. This is exactly what you’d expect if hedging demand is driven primarily by E&P companies in the US. Regardless, the BIS release does not disclose any rigorous analysis of what drives swap dealer positions or hedging positions overall, so the “reluctance of dealers” argument is at best an untested hypothesis, and more likely a wild-assed guess. Using drilling activity, or capex, or E&P company borrowing as control variables would help quantify what is really driving hedging activity.

And the conclusion is totally inane: “This [unproven] shift in the liquidity of hedging markets could have played a role in recent price dynamics.” Well, maybe. But maybe the fact that the moon will be in the seventh house on Valentine’s Day could have played a role too. Seriously: what is the mechanism by which this (unproven) shift in liquidity in hedging markets affected price dynamics?

Further, if E&P company balance sheet woes are making it harder for them to find hedge counterparties, this would impair their ability to fund new drilling, and tend to support prices. This would offset the alleged we’ve-got-to-keep-pumping-to-pay-the-bills effect.

BIS also offers this pearl of wisdom:

Rather, the steepness of the price decline and very large day-to-day price changes are reminiscent of a financial asset. As with other financial assets, movements in the price of oil are driven by changes in expectations about future market conditions.

What, commodities have not previously been subject to large price moves and high volatility? Who knew? I’ll bet if I dug for a while I could find BIS studies casting doubt on the prudence of bank participation commodity markets because the things are so damned volatile. And what accounts for the extremely low volatility in the first half of 2014, something BIS itself documented? Is financialization that fickle?

Moreover, why shouldn’t oil prices be driven by changes in expectations about future market conditions? It’s a storable commodity (both above and below ground), and storage links the present with the future. Furthermore, investments today affect future production. Current decisions and hence current prices should reflect expected future conditions precisely because of the inter-temporal nature of production and consumption decisions.

In fact, oil is not a financial asset, properly understood. The fact that the oil market goes into backwardation is sufficient to demonstrate that point. But it is hardly a sign of inefficiency, or of a lamentable corruption of the oil markets by the presence of financial players, that expectations of future conditions affect current prices. In fact, it would be inefficient if expectations did not affect current prices.

I understand that what the BIS just put out is only a synopsis of a more complete analysis that will be released next month. Maybe the complete paper will be an improvement on what they’ve released so far. (It would have to be.) But that just raises another problem.

Research by press release is a lamentable practice, but one that is increasingly common. Release the entire paper along with the synopsis, or just shut up until you do. BIS is getting a big splash with its selective disclosure of its purported results, while making it impossible to evaluate the quality of the research. The impression has been created, and by the time March rolls around and the paper is released it will be much harder to challenge that established impression by pointing out flaws in the analysis: that’s much more easily done at the time of the initial announcement when minds are open. This is the wrong way to conduct research, especially on policy-relevant issues.

Update: I had a moment to review the CFTC COT data. It does not support the BIS’s claim of a shift from dealer-intermediated hedging to direct hedging. From its peak on 1 July, 2014 to the end of 2014, Open interest in the NYMEX WTI contract fell from 1.78 million contracts to 1.46 million, or 18 percent. PMPU short positions fell from 352K to 270K contracts, or about 24 percent. Swap dealer shorts fell from 502K to 326K, or about 36 percent. Thus, it appears that the fall in short commercial positions were broad-based. Given that PMPU positions include merchants hedging inventories (which have been rising as prices have been falling) not too much can be made of the smaller proportional decline in PMPU positions vs. swap dealer positions. Similarly, dealer shorts include are hedges of swaps done with hedge funds, index funds, and others, and hence are not a clean measure of the amount of hedging done by producers via swaps.

I am also skeptical whether producers who can no longer find a bank to sell them a swap can readily switch to direct hedging. One of the advantages of entering into a swap is that it often has less stringent margining than futures. How can cash-flow stressed producers fund the margins and potential margin calls?

Last week the Chairman of the Federal Communications System announced that the FCC will pursue net neutrality regulation by subjecting the Internet to Title II of the Federal Cable and Telecommunications Act. This will essentially treat the Internet as a utility, rather than as an information service as has been the case since 1996. Like telecoms, Internet Service Providers would effectively become common carriers subject to a panopoly of restrictions on the prices they can charge and their ability to control access to their infrastructures.

The issue is an extremely complex one, and moreover, one that has been subjected to a barrage of simplistic, propagandistic, rhetoric. To cut through the rhetoric to see the economics, I recommend this article by Gary Becker, Dennis Carlton, and Hal Sider.

Becker, Carlton, and Hal characterize the goals of net neutrality as follows:

In the FCC’s view,

its proposed net neutrality rules would “prohibit a broadband Internet access provider from discriminating against, or in favor of, any content, application or service.” Broadband access providers would be prohibited from: (1) prioritizing traffic and charging differential prices based on the priority status; (2) imposing congestion-related charges; (3) adopting business models that offer exclusive content or that establish exclu- sive relationships with particular content providers; and (4) charging content providers to access the Internet based on factors other than the bandwidth supplied. [References omitted.]

In a nutshell, NN rules and Title II would limit the pricing policies of ISPs, limit their ability to regulate access to their networks, and limit their ability to vertically integrate upstream or downstream (e.g., by purchasing content providers).

The motivation for all of this is a belief that the broadband industry is not competitive, and that price discrimination, access limitations, and vertical integration are means of exercising market power to the detriment of consumers downstream and suppliers of content upstream.

As Becker et al point out, however, evidence that competition is weak is lacking. Most consumers have choices of broadband providers, and the development of wireless services such as 4G is increasing consumer choice.  (Personally, I would estimate that I have gone from relying 100 percent on wired access to 50 percent wired-50 percent wireless. The focus of Facebook and other social media and content suppliers on mobile indicates how important wireless is becoming.) Moreover, there is considerable switching of suppliers, which is further indication of competition.

Further, as a general matter, price discrimination is often-one might say usually-welfare enhancing when there products are differentiated and the costs of these products differ. Different forms of content utilize different amounts of bandwidth. Services vary in their need for speed (e.g., streaming vs. ordinary web-browsing vs. email). It is more costly to deliver bandwidth-intensive services. Limiting the ability to charge prices that reflect differences in cost and value lead to misallocations in the use of existing bandwidth capacity, and tend to reduce incentives to invest in capacity. Moreover, the “two-sided” nature of the Internet tends to make price discrimination welfare-improving. (This paper by Weismen and Kulick makes the very useful distinction between “differential pricing” and “price discrimination.” The former is based on differences in cost, the latter on differences in demand elasticity across customers.) In addition, when there are strong economies of scale, price discrimination (e.g., Ramsey pricing) can be a first-best or second-best way of allowing producers to cover fixed costs.

Put differently, net neutrality/common carrier access treats the internet as a commons which limits the use of prices to allocate scarce resources. Yes there can be cases in which this is beneficial (as in a textbook natural monopoly, but sometimes not even then), but suppressing the price system and price signals is usually a horrible idea. The rebuttable presumption should be that we rely more, not less, on prices to allocate scarce resources and provide incentives to consume, produce, and invest. Net neutrality betrays a strong animus to the price system and the use of prices to allocate resources.

Vertical arrangements are also frequently looked on with deep suspicion. I wrote about this a lot in the context of exchange ownership of clearing some years ago. But usually vertical arrangements, including restrictive contracts and vertical integration, are contractual means to address inefficiencies in price competition. They are typically ways of internalizing externalities or constraining opportunistic behavior. Moreover, they are often particularly important in information-intensive goods, because of the difficulties of enforcing property rights in information and the pervasiveness of free riding on information goods.

Some of the horror stories NN advocates tell involve an ISP denying access to a service or content downstream consumers value high: usually the story involves a small startup proving a bandwidth intensive service that can’t afford to pay premium access charges. But in a world where venture capital and other forms of funding is constantly on the lookout for the next big thing, these concerns seem vastly overblown. Moreover, permitting ISPs to own content providers is one way of addressing this issue. The demand for ISP services is derived from the value customers get from the content and services an ISP delivers. It is self-defeating for them to exclude truly valuable content because it reduces demand, and they have incentives to structure pricing and terms of access and vertical arrangements with content providers to maximize value. If there are gains from trade, in a reasonably competitive market there are strong forces pushing entities at all segments of the value chain to reap those gains.

Suppressing price signals and limiting the ability to craft creative arrangements to capture gains from trade are bad ideas, except under exceptional circumstances. So color me deeply skeptical on NN. Other features inherent in intrusive regulatory systems like Title II due to public choice considerations only deepen that skepticism. Such systems are extremely conducive to rent seeking. Though usually sold as ways to enhance competition, in practice they are typically exploited by incumbents to restrict competition. They tend to be strongly biased against innovation-precisely because much innovation of the creative destruction variety is intensely threatening to incumbents who have an advantage in influencing regulators. Classical Peltzman-Becker models of regulation show that regulators have an incentive to suppress cost-justified price differentials in order to redistribute rents, thereby creating distortions.

Other than that, NN and Title II are great.

If the substance isn’t bad enough, the process is even worse. FCC Chairman Tom Wheeler was originally leaning towards a less intrusive approach to net neutrality that would avoid dropping the Title II bomb. But Obama orchestrated a campaign behind the scenes to pressure an ostensibly independent agency to go all medieval (or at least all New Deal) on the Internet. Obama added to the backstage pressure with a very public call for intrusive regulation that put Wheeler and the other two Democrats on the Commission in an impossible position. (Another illustration of the consequences of Presidential elections: it’s not just the commander that matters, but the anonymous foot soldiers and the camp followers too.)

Yes, part of Obama’s insistence reflected his beliefs: after all, he is a big government control freak. And yes, part reflects the fact that some of his biggest supporters and donors are rabid NN supporters-primarily because they will benefit if they don’t have to pay the full cost that they impose.

But what convinced Obama to make this a priority was his personal vanity and his determination to engage in political warfare by pursuing initiatives that he can implement unilaterally without Congressional involvement. Read this and weep:

While Obama administration officials were warming to the idea of calling for tougher rules, it took the November elections to sway Mr. Obama into action.

After Republicans gained their Senate majority, Mr. Obama took a number of actions to go around Congress, including a unilateral move to ease immigration rules. Senior aides also began looking for issues that would help define the president’s legacy. Net neutrality seemed like a good fit.

Soon, Mr. Zients paid his visit to the FCC to let Mr. Wheeler know the president would make a statement on high-speed Internet regulation. Messrs. Zients and Wheeler didn’t discuss the details, according to Mr. Wheeler.

Mr. Obama made them clear in a 1,062-word statement and two-minute video. He told the FCC to regulate mobile and fixed broadband providers more strictly and enact strong rules to prevent those providers from altering download speeds for specific websites or services.

In the video, Mr. Obama said his stance was confirmation of a long-standing commitment to net neutrality. The statement boxed in Mr. Wheeler by giving the FCC’s two other Democratic commissioners cover to vote against anything falling short of Mr. Obama’s position.

That essentially killed the compromise proposed by Mr. Wheeler, leaving him no choice but to follow the path outlined by the president.

Read this again: “Senior aides also began looking for issues that would help define the president’s legacy. Net neutrality seemed like a good fit.” So to achieve a legacy, the Narcissist in Chief decides to interfere with the most successful, innovative industry of the past half-century, and perhaps ever.

What, screwing up the health care industry isn’t enough of a legacy?

I guess not. No price is to high to pay to stick it to the evil Republicans. And if you get stuck too, well, omelet, eggs, and all that. You are expendable when there’s a legacy at stake.

What comes out of the FCC as a result of Obama’s arm-twisting will be a beginning, not an end. It will no doubt set off a flurry of legal challenges.(Among lawyers and lobbyists, as always in such things, there is much rejoicing.)  Congress may get involved, and although Obama can block anything for the next two years, it  may take longer than that to finalize the rules (look at how long it is taking to get a simple-by-comparison position limit rule through the CFTC), and a new president in 2017 might not be so enamored with burnishing Barry’s legacy. Well, one can hope, can’t one? Looking for silver linings here.

I had thought that old school Progressive and New Deal style regulation had been largely discredited in the 70s and 80s. Indeed, Democrats (including Carter and Ted Kennedy) played vital roles in dismantling regulations in transportation in particular. But Obama is going all back to the future, and attempting to impose a regulatory paradigm that was all the rage when men all wore fedoras to what is arguably the most dynamic and innovative industry ever. Because, legacy.

On Wednesday, 4 February, 2015, ISIS released a film that ended with the immolation of a Jordanian pilot, Muath al-Kaseasbeh, whom it had captured after he bailed out from his malfunctioning F-16 in December. The production is a bizarre and disturbing mix of snuff porn and slick, special-effects laden filmmaking. It is beyond vile. The product of twisted minds inflamed by a monstrous ideology.

There are likely multiple audiences for this depravity. The first, and probably most important, is young Muslims especially in Europe whom ISIS wants to recruit. ISIS is being attrited at a rather rapid pace, and needs new bodies to feed into the meat grinder. The sense of power and control that the these depraved videos convey is no doubt intoxicating to aimless youths seeking to fill empty lives and to transcend their tedious existence. But such people get bored easily. Beheadings had no doubt have become routine. Something new was needed to rejuvenate excitement. ISIS had to outdo itself: burning a man alive certainly did that.

But then of course there will have to be a succession of new and more horrible ways of killing people. I shudder to think at what their sick imaginations will turn to next.

The other audience was the outside world. Outraging the world is a way of demonstrating power, and sadly, since the world appeared to becoming inured to beheadings, something novel was necessary. Moreover, ISIS actually wants to provoke a confrontation with the world. Note that its slick online publication is named Dabiq, a city in Syria that will supposedly be the scene of an apocalyptic confrontation between the “Romans” (i.e., the West) and the Muslims, that will result in the triumph of the latter (who will be aided by the Mahdi). In their twisted minds, such vile acts serve a higher purpose.

This is what the world has come to.

Disturbing in a different way has been Obama’s reaction to this. Jordan’s King Abdullah happened to be in DC when the video was released. He met with Congressional leaders and vowed revenge. He had not been scheduled to meet with Obama, but a meeting was hastily arranged. Obama’s remarks after the meeting were perfunctory, diffident and oddly detached.

Obama also met with a group of 15 Muslim-American “leaders”, who are actually better described as activists. The main topic of discussion was not the crime committed in Syria, or the threat posed by Islamism, but an entirely fictitious, or at least heavily exaggerated, wave of Islamaphobia:

My next comment echoed the sentiment we heard often in the meeting. In fact, it was clearly the No. 1 issue raised: The alarming rise in anti-Muslim bigotry in America.

If you want to find bigotry in a country of 316 million people, you can find it. Against any identifiable group you can think of. But this is hardly issue No. 1. Indeed, it should hardly make the top 100.

But Obama outdid himself at a prayer breakfast attended by the Dalai Lama. He said some of the right things about ISIS, and about the depraved killing of the Jordanian pilot: specifically he referred to ISIS as a “death cult”, which it is. But then he completely undermined this with a bizarre turn of whataboutism that insinuated that Americans must temper their criticism of Islamist barbarism because of the sins of our forefathers. Our forefathers going way, way back. Like to the Crusades:

And lest we get on our high horse and think this is unique to some other place, remember that during the Crusades and the Inquisition, people committed terrible deeds in the name of Christ.  In our home country, slavery and Jim Crow all too often was justified in the name of Christ.  Michelle and I returned from India — an incredible, beautiful country, full of magnificent diversity — but a place where, in past years, religious faiths of all types have, on occasion, been targeted by other peoples of faith, simply due to their heritage and their beliefs — acts of intolerance that would have shocked Gandhiji, the person who helped to liberate that nation.

So this is not unique to one group or one religion.

The  invocation of the Crusades is a pitch perfect imitation of the narrative spun by Islamists and their enablers, notably the Muslim Brotherhood, who bring it up any time Westerners criticize anything in the Arab world, no matter how depraved: like all whataboutism, it is intended to silence critics. What’s more, the invocation of Jim Crow in this context is almost a parody of the classic Soviet whataboutism: “And in America you are lynching Negroes.” (And although there were definitely appalling religious justifications of slavery in the South, I’m hard pressed to recall it being even a minor theme in the justification of Jim Crow.)

Obama’s exegesis is profoundly ahistorical. But even overlooking that unsurprising fact, of what relevance are Godfrey of Bouillon or Richard Plantagenet or Louis VII or Gregory IX or Bull Conner to a serious discussion of or response to the mass slaughter that is plaguing Syria and Iraq today? Of what relevance are these people and events to the thoughts or actions of any living American? About as relevant as the Trojan War. So religion-inspired violence isn’t historically unique. So what? How does that matter when trying to confront a particular outbreak religion-inspired violence that is raging today? The fact that it isn’t reveals Obama’s true motivation: he is trying to avoid confronting it.

Further, the apparent need to reach back centuries, and almost a millennium, to find reasons to knock “us” off our “high horse” actually cuts the other way. For it demonstrates that the Christian West has transcended bloody religious struggles and religiously justified violations of human freedom: indeed, the very fact that Christianity is hardly the West’s distinguishing characteristic in 2015 makes these historic comparisons utterly irrelevant straw men.

The contrast with Islam could not be more stark, as the rampages of warriors clinging to their guns (and knives and torches) and religion from the Philippines to Syria to Nigeria attests. Even slavery (of the most brutal and demeaning kind) can be filed under current events in parts of the Muslim world, including notably in the areas controlled by ISIS, and its practice is vehemently defended by Islamists who cite Koranic authority. The problem is not that religion motivated war and conquest in the West in the historical past: it is that it does today in the Middle East, Africa, the Subcontinent, and Asia. The problem in the Muslim world today is that the past isn’t even past: in the present it is still mired in its medieval pathologies. Dealing with the orgy of violence of which the immolation of Lt.  al-Kaseasbeh is only the most recent lurid example requires facing that reality head on.

But the “high horse” slur, and the stubborn refusal to acknowledge the undeniable religious roots of ISIS , Boko Haram, Al Qaeda and numerous other groups and movements wreaking havoc from Tripoli to Thailand (a denial repeated in the prayer breakfast remarks), demonstrate that Obama is dead set against such an honest reckoning. In fact, he wants to stifle any such discussion because, you know, Crusades.

The tragic irony of this is that by so doing, Obama empowers the most retrograde forces in Islam, and that the primary victims of their ascendance are Muslims. Obama’s moral equivalence kills Muslims. Pace Orwell, that is an objective reality, regardless of Obama’s subjective motivations. His exquisite sensitivity to Muslim feelings costs Muslim lives.

Obama’s remarks provide yet another example of his superciliousness towards his fellow citizens whom he believes need to be knocked off their high horse, because of misguided belief in their exceptionalism makes them unfit to judge others. They spring from the same place as the slap about bitter clingers and their guns and religion. In a weird way, this actually contributes to the rather disturbing tendency of those who belong to that maligned demographic to admire Putin: at least he praises his folk, rather than disdains them.

In sum, Obama’s behavior and words in the days after one of the most horrific and obscene acts in an era of them reveal a great deal about his beliefs and thinking. And what they reveal is disturbing indeed.

What party, you ask? The one with the mosh pit at LaSalle and Jackson in Chicago.  The one held in the building that’s in the background image of this page.

That’s right. Today the CME Group announced it was ending floor trading of futures (with the exception of the S&P 500) in Chicago and New York. Floor trading of options will continue.

As a Chicagoan who knew the floor in its glory days, this is a sad day. The floor was an amazing place. (Even though the floors will remain open until July, the past tense is appropriate in that sentence.)  A seemingly chaotic place full of shouting and gesticulating men (and yes, it was an overwhelmingly male place). Despite the chaos, it was an extraordinarily efficient way to buy and sell futures. In the bond pit in the 80s and 90s, $100,000,000 notional could be bought in sold with a shout and a wave. Over and over and over.

The economics of the pits were fascinating, but the sociology was as well. They were truly little societies. There were the exchange rules that were in the book, and there were the rules not written in any book that you adhered to, or else. Face-to-face interactions day after day over periods of years created a unique dynamic and a unique culture with its own norms and hierarchies and rituals. And soon it will be but a memory.

Even though I am wistful at the passing of this remarkable institution, I was ahead of the curve in predicting its eventual demise. I worked at an FCM in 1986, when the CME, CBT, and Reuters announced the initial Globex initiative. This got me interested in electronic trading, and when I became an academic a few years later, I researched the subject. In 1994 I wrote one of the early papers documenting that electronic markets could be as liquid and deep as floor-based markets, and I conjectured that parity in liquidity and superiority in speed and cost of access would result in the ultimate victory of computers over the floor. The collective response in the industry was scorn: everyone knew the floor was more liquid, and always would be. The information environment on the floor could never be duplicated on the screen, they said. This view was epitomized by the CEO of LIFFE, Daniel Hodgson, who ridiculed me in the FT as an ivory tower academic.

The first sign that the floor’s days were numbered occurred in 1998, when computerized Eurex wrested the Bund futures contract from LIFFE. (Eurex used my research as part of its marketing push.) LIFFE suffered a near death experience, barely surviving by shutting the floor and going fully electronic. (Mr. Hodgson was shown the door, and I resisted the temptation of sending him a certain FT clipping.)

Computerized trading was only slowly making inroads in the US at the time, in part because the incumbent exchanges resisted its operation during regular floor trading hours. But the fear of the machines was palpable by the mid-1990s. The CBT built its massive trading floor in 1997 in part because the members believed that if it spent so much on a new building the exchange couldn’t afford to render it useless by going electronic. Ironic that a group of traders who lived and breathed real world economics would fall victim to the sunk cost fallacy, and be blind to the gales of competition and creative destruction.

The floor continued to thrive, but inexorably the machines gained on it. By the early-2000s electronic volumes exceeded floor volumes for most contracts, especially in the financials. By the end of the first decade of the millennium, the floors were almost vacant. I remember going to the crude oil pit in NY in early-2009, and where once well over 100 traders stood, engaged in frenzied buying and selling, now a handful of guys sat on the steps of the pit, reading the Post and the Daily News.

When the CME demutualized, and when it acquired CBT and NYMEX, it made commitments to keep the floors open for some period of time. But the commitments were not in perpetuity, and declining floor volumes made it evident that eventually the day would come that the CME would shut down the floors.

Today was that day.

This was inevitable, but in the 80s and 90s the floor trading community, and the futures business generally, couldn’t possibly imagine that machines could ever do what they did. But the technology of the floor was essentially static. Yes, the technology of getting orders to the pit evolved along with telecommunications, but once the orders got there, they were executed in the same way that they had been since 1864 or so.* That execution technology was highly evolved and efficient, but static. In the meantime, Moore’s Law and innovation in hardware, software, and communications technology made electronic trading faster and smarter. Electronic trading lacked some of the information that could be gleaned looking in the eyes of the guy standing across the pit, or knowing who was bidding or offering, but it made accessible to traders vast sources of disparate information that was impossible to absorb on the floor. By the late-00s, HFT essentially computerized what was in locals’ heads, and did it faster with more information and fewer errors and less emotion. Guys that were all about competition were displaced by the competition of a more efficient technology.

Floor trading will live on for a while, in the options pits. Combination trades in options are complex in ways that there are efficiencies in doing them on the floor. But eventually machines will master that too. ICE closed its options pits a couple of years ago (four years after it closed its futures pits), and one day the CME will do so too.

The news of the CME announcement reminded me of something that happened almost exactly 10 years ago, 21 February 2005. Around that time, the management of  the International Petroleum Exchange was discussing the closure of the floor. (It decided to do so on 7 March.) Floor traders were very anxious about their future. Totally oblivious to this, Greenpeace decided to mount a protest on the IPE floor to commemorate the Kyoto Protocol. Bad decision. Bad timing. The barrow boys of the London floors, already in a sour mood, didn’t take kindly to this invasion, and mayhem ensued. Punches were thrown. Bones were broken. Furniture was thrown. There was much comedy:

“The violence was instant,” reported one aggrieved recipient of a rain of blows to the head. “I’ve never seen anyone less amenable to listening to our point of view.”

You can’t make that up.

From what I understand, the response was much more subdued in Chicago and New York today. But then again, Occupy or GMO protesters didn’t attempt to sally onto the floor to flog their causes. If they had, they just might have caught a flogging like the enviros did in London a decade back.

Being of a historical bent, I will look back on the floors with fascination. I am grateful to have known them personally, and to have known many who trod the boards in the pit in their colorful jackets, shouting themselves hoarse and at constant risk of being stabbed in the neck with a pencil wielded by a hyperactive peer.

Today is a good day to watch Floored or The Pit. Or even play a game of Pit. The films will give you something of a feel, but just a bit.

2015. The year Chicago lost Ernie Banks and the floor. But life moves on. Machines do not have the color of the floor, but they perform the markets’ vital functions more efficiently now. And not everything has changed in Chicago. The Cubs are still horrible.

*The exact beginning of floor trading on the CBT is unknown. The Board of Trade of the City of Chicago was formed in 1848, but futures trading proper probably did not begin until the Civil War. Sometime in the 1862-1864 period floor trading as we know it today-or should I say knew it?-developed. The first formal trading rules were promulgated in 1867. If you look at pictures from the 19th century or early-20th century, other than the clothes things don’t look much different than they did in the 1980s or 1990s. Electronic boards replaced chalk boards, but other than that, things look very similar.

The Obama administration is apparently reconsidering its refusal to provide lethal military assistance to Ukraine, although reading between the lines I suspect Obama is reprising his star turn as Hamlet. The security establishment seems solidly behind the idea, but Obama frets about getting into a proxy war with Russia.

Merkel came out steadfastly against the idea:

“Germany will not support Ukraine with guns and weapons,” said Merkel, speaking in Budapest. “We are putting all our bets on sanctions and doing our best to find a diplomatic solution.”

Telegram from Mr. Trotsky to Barack and Angela: you may not be interested in war, but war is interested in you.* Nattering on about diplomacy is pathetic given where things stand now, with the collapse of the Minsk accords and the dramatic escalation of conflict all along the contact line, but especially in the Debaltseve pocket. Merkel is engaged in wishful, not to say magical, thinking. Diplomacy and force are complements, and Putin will be uninterested in talk, except as a diversionary or delaying tactic, as long as the military option is viable.

One of the weapons the US is supposedly considering supplying to Ukraine is the Javelin anti-tank guided missile (ATGM). This could be a decisive weapon, and some wicked turnaround for Putin. Hezbollah inflicted great losses on Israel using Russian-made Kornet ATGMs in 2006.  If supplied in quantity, Javelins could neutralize Russia’s substantial advantage in armor, and dramatically raise the cost to the Russians and their proxies in blood, treasure, and equipment in any attempt to expand military operations in Ukraine.

How would this affect Putin? We don’t know what he is willing to pay for various outcomes in Ukraine, but making Ukrainian defenses substantially more effective could make the price for an outright conquest of part or all of Ukraine greater than Putin is willing to pay.

Putin has been able to get by so far by having his proxies bear the brunt of the casualties, and by suppressing news about Russian casualties. But even he would be unable to keep a lid on a large spike in losses. What’s more, his manpower and material resources are in fact quite constrained. Substantial losses could render his forces largely combat ineffective and incapable of a decisive victory.

The main risk is that it may be too late. The arms won’t magically appear in Ukraine overnight, and it would take some time to train the Ukrainians in their use after they arrive. If arms start to flow, Putin may conclude that he has a time window in which to advance, and therefore decide to move now, whereas he might be inclined to wait and rely on other means to dominate Ukraine if he believed that he could invade later if need be. Ironically, the more effective the arms we provide (or more accurately, the more effective Putin and his generals believe those weapons will be) the greater the incentive he has to move before those weapons arrive. Thus, the interval between the decision to arm and the time that the weapons are in Ukrainian hands will be quite fraught, and the US would need to be prepared to deter Putin in other ways during that interval.

There are widespread concerns that Putin would react to the arming of Ukraine by escalating elsewhere, such as the Baltics. He is clearly trying to signal his truculence, as with a provocative flight of nuclear armed Bear bombers through the English Channel. Thus, the issue becomes whether he can be deterred from challenging Nato directly in Estonia, Latvia, or Lithuania, or Poland for that matter. If he can’t be, Ukraine is the least of our problems. Or put differently, we need to revitalize our deterrent regardless of what we do in Ukraine, because Nato countries would be at risk.

If Putin’s madman strategy-real or feigned-is potentially effective in intimidating the West into acquiescing to his subjugation of Ukraine, magical thinking and Hamlet-like fretting are certainly effective at egging him on. People like him sense weakness as a predatory beast can. Arguably the strongest argument for arming Ukraine in the face of Putin’s threats is that it could get him to reassess the strength of American resolve. Obama’s record of temporizing-on Syria, on Isis, on Ukraine-has given Putin considerable reason to believe that when pushed, Obama will back down. It will take something rather dramatic, such as arming Ukraine in a big way, to convince Putin otherwise: even that is merely necessary, rather than sufficient. But if it’s done, it must be done lavishly, and not in a token fashion. But given how stingily we are with arms to the Syrian opposition and even the Kurds (who are actually accomplishing something against Isis), I find it hard to believe that Obama will do that.

The conundrum is that Putin will view American (and European) passivity as an invitation to keep pressing forward. Those who oppose doing something more robust, such as arming the Ukrainians, argue that this action will goad him forward as well: they are deluding themselves if they think he can be appeased. So it seems that regardless of what course is taken, Putin will keep trying.

At least Bloomberg is somewhat consistent. It says that we’re not going to seriously oppose Putin anyways, why give the Ukrainians any false hopes by giving them weapons? Just tell them to get used to living under Russian domination again and don’t encourage them to wage a futile war on their own.

But if you don’t want to acquiesce to Putin dominating the entire Warsaw Pact space, you have to make a stand somewhere. If the Ukrainians are willing to make that stand, give them the means to do it.

* This phrase is widely attributed to Trotsky, but the closest anyone can find written by him is “you may not be interested in the dialectic, but the dialectic is interested in you.”