Streetwise Professor

The vertigo inducing story of GameStop ramped it up to 11 yesterday, with a furore over Robinhood’s restriction of trading in GME to liquidation only, and the news that it had sold out of its customers’ positions without the customers’ permission. These actions are widely perceived as an anti-populist capitulation to Big Finance.

Well, they are in a way–but NOT the way that is being widely portrayed. What is going on is an illustration of the old adage that clearing and settlement in securities markets (like the derivatives markets) is like the plumbing–you take it for granted until the toilet backs up.

You can piece together that Robinhood was dealing with a plumbing problem from a couple of stories. Most notably, it drew down on credit lines and tapped some of its big executing firms (e.g., Citadel) for cash. Why would it need cash? Because it needs to post margin to the Depositary Trust Clearing Corporation (DTCC) on its open positions. Other firms are in similar situations, and directly or indirectly GME positions give rise to margin obligations to the DTCC.

The rise in price alone increased margin requirements because given volatility, the higher the price of a stock, the larger the dollar amount of potential loss (e.g., the VaR) that can occur prior to settlement. This alone jacks up margins. Moreover, the increase in GME volatility, and various adders to margin requirements–most notably for gap risk and portfolio concentration–ramp up margins even more. So the action in GME has led to a big increase in margin requirements, and a commensurate need for cash. Robinhood, as the primary venue for GME buyers, had/has a particularly severe position concentration/gap problem. Hence Robinhood’s scramble for liquidity.

Given these circumstances, liquidity was obviously a constraint for Robinhood. Given this constraint, it could not handle additional positions, especially in GME or other names that create particularly acute margin/liquidity demands. It was already hitting a hard constraint. The only practical way that Robinhood (and perhaps other retail brokers, like TDAmeritrade) could respond in the short run was trading for liquidation only, i.e., allow customers to sell their existing GME positions, and not add to them.

By the way, trading for liquidation is a tool in the emergency action toolbook that futures exchanges have used from time-to-time to deal with similar situation.

To extend the plumbing analogy, Robinhood couldn’t add any new houses to its development because the sewer system couldn’t handle the load.

I remember some guy saying that clearing turns credit risk into liquidity risk. (Who was that guy? Pretty observant!) For that’s exactly what we are seeing here. In times of market dislocation in particular, clearing, which is intended to mitigate credit risk, creates big increases in demand for liquidity. Those increases can cause numerous knock on effects, including dislocations in markets totally unrelated to the original source of the dislocation, and financial distress at intermediaries. We are seeing both today.

It is particularly rich to see the outrage at Robinhood and other intermediaries expressed today by those who were ardent advocates of clearing as the key to restoring and preserving financial stability in the aftermath of the Financial Crisis. Er, I hate to say I told you so, but I told you so. It’s baked into the way clearing works, and in particular the way that clearing works in stressed market conditions. It doesn’t eliminate those stresses, but transfers them elsewhere in the financial system. Surprise!

The sick irony is that clearing was advocated as a means to tame big financial institutions, the banks in particular, and reduce the risks that they can impose on the financial system. So yes, in a very real sense in the GME drama we are seeing the system operate to protect Big Finance–but it’s doing so in exactly the way many of those screaming loudest today demanded 10 years ago. Exactly.

Another illustration of one of my adages to live by: be very careful what you ask for.

Margins are almost certainly behind Robinhood’s liquidating some customer accounts. If those accounts become undermargined, Robinhood (and indeed any broker) has the right to liquidate positions. It’s not even in the fine print. It’s on the website:

If you get a margin call, you need to bring your portfolio value (minus any cryptocurrency positions) back up to your minimum margin maintenance requirement, or you risk Robinhood having to liquidate your position(s) to bring your portfolio value (minus any cryptocurrency positions) back above your margin maintenance requirement.

Another Upside Down World aspect of the outrage we are seeing is the stirring defenses of speculation (some kinds of speculation by some people, anyways) by those in politics and on opinion pages who usually decry speculation as a great evil. Those who once bewailed bubbles now cheer for them. It’s also interesting to see the demonization of short sellers–whom those with average memories will remember were lionized (e.g., “The Big Short”) for blowing the whistle on the housing boom and the bank-created and -marketed derivative products that it spawned.

There are a lot of economic issues to sort through in the midst of the GME frenzy. There will be in the aftermath. Unfortunately, and perhaps not surprisingly given the times, virtually everything in the debate has been framed in political terms. Politics is all about distributive effects–helping my friends and hurting my enemies. It’s hard, but as an economist I try to focus on the efficiency effects first, and lay out the distributive consequences of various actions that improve efficiency.

What are the costs and benefits of short selling? Should the legal and regulatory system take a totally hands off approach even when prices are manifestly distorted? What are the costs and benefits of various responses to such manifest price distortions? What are the potential unintended consequences of various policy responses (clearing being a great example)? These are hard questions to answer, and answering them is even harder in the midst of a white-hot us vs. them political debate. And I can say with metaphysical certainty that 99 percent of the opinions I have seen expressed about these issues in recent days are steeped in ignorance and fueled by emotion.

There are definitely major problems–efficiency problems–with Big Finance and the regulation thereof. Ironically, many of these efficiency problems are the result of previous attempts to “solve” perceived problems. But that does not imply that every action taken to epater les banquiers (or frapper les financiers) will result in efficiency gains, or even benefit those (often with justification) aggrieved at the bankers. I thus fear that the policy response to GameStop will make things worse, not better.

It’s not as if this is new territory. I am reminded of 19th century farmers’ discontent with banks, railroads, and futures trading. There was a lot of merit in some of these criticisms, but all too often the proposed policies were directed at chimerical wrongs, and missed altogether the real problems. The post-1929 Crash/Great Depression regulatory surge was similarly flawed.

And alas, I think that we are doomed to repeat this learning the wrong lessons in the aftermath of GameStop and the attendant plumbing problems. Virtually everything I see in the public debate today reinforces that conviction.

Short sellers have been hate objects since the earliest days of the U.S. stock market–witness the checkered lives of the likes of Daniel Drew or Jacob Little. It is therefore no surprise that the travails of their latter day descendants–hedge funds like Melvin Capital–that have resulted from the huge runups in the prices of stocks like GameStop ($GME) have been the source of considerable schadenfreude. I would suggest, however, that this will end in tears not just for the hedgies, but for those who contributed to their massive losses.

Long story short (no pun intended).  Small investors pile in a stock (GME, and some others like Blackberry), driving up its price.  Hedge funds think the stock is overpriced, so they go short.  A group of small investors thinks that this is an opportunity to punish the short sellers (a lot of mutual disdain/hate here), so via the reddit group WallStreetBets they coordinate to buy more, driving up the price further.  This imposes big losses on the shorts, who buy to cover, driving up the price further, imposing more losses on the remaining shorts, driving them to cover, etc., etc. 

It brings to mind an old doggerel poem from the Chicago Board of Trade in the 19th century:

He who buys what isn’t his’n, Must buy it back or go to prison.

In the case of GameStop, the price action went hyperbolic:

That chart ends at yesterday’s close. Things have been even more crazy overnight, with the price hitting $500/share. There have been gyrations caused by the shutdown of the chatrooms and some retail platforms stopping trading in this and other heavily shorted stocks. But the fundamental dynamic in play now–shorts slitting their own throats in panicked buying to cover–means that attempts to constrain the long herd will not have a lasting impact.

The short interest that had to (and has to) be covered is huge–short interest in GME was 140 percent of outstanding shares–and a larger share of the float. (How can there be more shorts than shares? The same share can be borrowed and lent multiple times!) The effects of the short covering are seen not only in the price, but in the stratospheric cost of borrowing shares. Earlier this week it was about 30 percent–juice loan territory. Now it is at 100 percent.

In many respects, this is reminiscent of some of the more storied episodes in Wall Street history, or more recently the 2008 VW corner which punished shorts severely. But there is a major difference. In some of the earlier episodes (including major corners of shorts in railroad stocks in the 19th century, or battles between shorts and stock pools in the 1920s, or the VW case), there was a single dominant long squeezing the overextended shorts. Here, it seems that the driving force is a relatively large group of small longs, acting with a common purpose.

How will it end? Well, the stock is obviously overvalued, and driven by “technical factors” (as is sometimes said euphemistically). It will crash to earth. When? Well, when the shorts get out. Who will lose? Well, the shorts are likely a big portion of the purchasers at these nosebleed levels, so they will be the biggest losers. But there will be some latecomers and trend followers who will have followed the Pied Piper of rising price, and will lose in the inevitable crash.

Should we really care? There is some possibility that the disruption in GME and other heavily shorted stocks could have knock-on effects. Hedge funds suffering large losses may have to dump other positions, causing those prices to decline. (The events surrounding the Northern Pacific corner, for example, sparked the Panic of 1901.)

One fascinating aspect of this is how it demonstrates the deep populist discontent that is in abroad in the land. The hedge fund laments have been met with a barrage of scorn and ridicule, with a major theme being “you a$$h0les got bailed out in 2008 while the little guy got hammered–how you likin’ it now?” Completely understandable. Revenge of the nerds, as it were.

But, alas, I do not think the visceral satisfaction will last. Things like this inevitably result in litigation. The WallStreetBets lot are in for major lawsuits filed by the losing hedge funds, and perhaps others (e.g., investors who had sold call options).

Following the trend and herd trading is not manipulation–as long as the herd doesn’t explicitly coordinate with the intent to move the price to uneconomic levels. However, many on WallStreetBets expressed an intent to drive up the price in order to impose losses on their bêtes noires, and apparently coordinated their buying activity to achieve this result. Intent and cooperation make the manipulation. Note that the explicit communication and coordination could also transform this into a Section 1 Sherman Act claim–with the attendant triple damages.

Now the hedge funds will never collect even a fraction of their losses. But for them, the process will be the punishment inflicted on their foes. Pour encourager les autres.

The SEC is not committing to any action right now. It merely says it is “monitoring” the situation. The DOJ has also been silent.

However, they will be under tremendous pressure to act. Ultimately, the decision will be political–precisely because of the political nature of the populist resentment. The hedge funds and Wall Street generally will be howling for the government to file cases. But if the government does so, there will be widespread popular outrage that the government is taking the side of the Wall Street elite. Again.

This will be the first thing on Gary Gensler’s plate at the SEC. He is in a no win situation. (Breaks me all up.)

In sum, the events of the past days have been fascinating from both an economic and a political perspective. They represent a back-to-the-future moment of colossal battles between longs and shorts, but with a major twist: whereas the historical battles tended to be between colossi, this one pits an army of Davids against a few colossal hedge funds. This in turn gives rise to a political narrative, which again has historic echoes–the little guy vs. Financial Capital. It’s like the 19th century, all over again.

The battle will play out for some time. For a few days or weeks in the markets, and in the courts for years after that.

After languishing in the doldrums in the Covid era, and at times touching historic lows, the price of LNG delivered to Asia skyrocketed in recent weeks before plunging almost as precipitously:

As always happens with such big price moves, there has been an effort to round up suspects. Here, since the visible price increase occurred in the spot market, the leading culprit is the spot market–something that has been growing rapidly in recent years, after being largely non-existent prior to 2014 or so.

For example, Reuters’ Clyde Russell writes:

What is more likely is that some buyers misjudged the availability of spot cargoes, and when hit with a surge in demand found themselves unable to secure further supply, thus bidding up the prices massively for the few cargoes still available.

Frank Harris of Wood Mackenzie opines:

“Buyers are going to become aware that you may not always be physically able to source a cargo in the spot market regardless of price,” Mr Harris says. “The most likely outcome is it shatters some of the complacency that’s crept into the market over the last 12-18 months.”

It is incorrect to say that a shortage of spot cargoes per se is responsible for the price spike registered in the spot market. It is the supply of LNG in toto, relative to massive increase in demand due to frigid weather, that caused the price increase. How that supply was divided between spot and non-spot trades is a secondary issue, if that.

The total supply of LNG, and the spatial distribution of that supply, was largely fixed when the cold snap unexpectedly hit. So in the very short run relevant here (days or weeks), supply in Asia was extremely inelastic, and a demand increase would inevitably cause the value of the marginal molecule to rise dramatically. Price is determined at the margin, and the price of the marginal molecule would be determined in the spot market regardless of the fraction of supply traded in that market. Furthermore, the price of that marginal molecule would likely be the same regardless of whether 5 percent or 95 percent of volume traded spot.

If anything, the growing prevalence of spot contracting in recent years mitigated the magnitude of the price spike. Traditional long term contracts, especially those with destination clauses, limited the ability to reallocate supplies efficiently to meet regional demand shocks. The more LNG effectively unavailable to be reallocated to the buyers that experienced the biggest demand shocks, the less elastic supply in the spot market, and the bigger the price increase that occurs in response to a given demand shock. That is, having less gas contractually committed, especially under contracts that limited the ability of the buyers to sell on to those who value it more highly, mitigates price spikes.

That said, the fundamental factors that limit the total availability of physical gas, and constrain the ability to move it from low demand locations to high demand locations in the short time frames necessary to meet weather-driven demand changes (ships can’t magically and instantaneously move from the Atlantic Basin to the Far East), mean that regardless of the mix of spot vs. contract gas prices would have spiked.

Some have suggested that the price spike will lead to less spot contracting. Clyde Russell again:

The question is whether utilities, such as Japan’s JERA, continue with their long-term vision of moving more toward a spot and short-term market, or whether the old security blanket of oil-linked, but guaranteed, supplies regains some popularity.

It’s likely LNG buyers don’t want a repeat of the recent extreme volatility, but perhaps they also don’t want to return to the restrictive crude-linked contracts that largely favoured producers by guaranteeing volumes at relatively high prices.

The compromise may be the increasing popularity of short-term, flexible contracts, which can vary from a few months to a few years and be priced against different benchmarks.

Well, maybe, but color me skeptical. For one thing, contracts require a buyer and a seller. Yes, buyers who didn’t have long term contracts probably regretted paying high spot prices–but the sellers with uncommitted volumes really liked it. The spike may increase the appetite for buyers to enter long term contracts, but decrease the appetite of sellers to enter them. It’s not obvious how this will play out.

I note that the situation was reversed in 2020–buyers regretted long term contracts, but sellers were glad to have them. Ex post regret is likely to be experienced with equal frequency by buyers and sellers, so it’s hard to see how that tips contracting one way or the other.

This conjecture about the price spike leading to more long term contracting also presupposes that the only way of managing price risks is through fixed price contracts (or oil-indexed) contracts for physical supply. But that’s not true. Derivatives allow the separation of who bears price risk from the physical contracting decision. A firm buying spot (and who is hence short LNG) can hedge price risk by purchasing JKM swaps. This has the additional advantage of allowing the adjustment of the size of the hedge in response to more timely information regarding likely quantity requirements, price projections, and risk appetite than is possible with a long term contract. That is, derivatives permit unbundling of price risk from obtaining physical supplies, whereas long term contracts bundle those to a considerable degree. Moreover, derivatives plus short term/spot acquisition of physical supplies allows more flexible management of supply, and management of supply based on shorter term forecasts of need: these shorter term forecasts are inherently more accurate than forecasts over contracting horizons of years or even decades.

So rather than lead to more long term contracts, I predict that this recent price spike is more likely provide a fillip to the LNG derivatives market. Derivatives are a more flexible and cheaper way to manage price risk than long term contracts.

This is what happened in the pipe gas market in the US post-deregulation. Spot/short term volumes grew dramatically even though price spikes were a regular feature of the market: market participants used gas futures and swaps and options to manage these price risks, and benefited from the greater flexibility and precision of obtaining supplies on a shorter term basis. This shifted a lot of the price risk to the financial sector–which is the great benefit of the much bewailed “financialization” of commodity markets.

The same is likely to occur in LNG.

The US military is the most highly respected institution in America today. It is also filled with many ardent supporters of Trump, and Trumpism. Therefore, in today’s febrile and vengeful political environment, it is being targeted.

Case in point. Politico reports that the “FBI is vetting [National] Guardsmen amid fears of an insider attack.” What an appalling slur–and another act in the Security Theater in the “Green Zone”. (Note: that appellation is not hyperbole: that’s how the government is labeling it.)

How much of a slur? This much:

Insider threats have been a persistent law enforcement priority in the years after the Sept. 11, 2001, attacks. But in most cases, the threats are from homegrown insurgents radicalized by al-Qaida, the Islamic State group or similar groups. In contrast, the threats against Biden’s inauguration have been fueled by supporters of President Donald Trump, far-right militants, white supremacists and other radical groups. 

The National Guard. Just like ISIS and al Qaida. Because Trump.

Utterly disgusting.

More evidence of what the ruling class thinks of the military, because it has a lot of white men who like Trump and don’t like Biden:

.@RepCohen on his concerns w/ the National Guard securing the Inauguration: “The [National] Guard is 90 some-odd percent male; and only about 20 percent of white males voted for Biden … there are probably not more than 25% of the people there protecting us that voted for Biden” pic.twitter.com/ofQfLuCw8I

— Tom Elliott (@tomselliott) January 18, 2021

In other words, political reliability is the criterion by which the military will be evaluated. The military has stayed out of politics, but the politicians will definitely not stay out of the military.

If you’ve been paying attention, you’ll have seen a variety of articles in the last few weeks where government officials and journalists have expressed deep concern about extremist/insurrectionist/white supremacist networks and sympathies within the military.

The military–not so much the flag ranks, or even O6 types, because they have to have been politically tamed to make it that far, but lower grade officers, and senior and junior enlisted–is going to be intensely scrutinized for political reliability. I daresay that something resembling a purge may occur. Political officers, a la the Red Army during various periods? Not inconceivable.

It is very revealing that the FBI is in charge of the “vetting” of National Guardsmen. As we have seen in spades since 2016, they are the domestic enforcers of the ruling class. It is particularly apropos to be writing this on MLK day, because the FBI’s targeting of King provides a telling case study of its immense capacity for political hatchet jobs and witch hunts.

This is something one would expect to see in, say, Turkey, where Erdoğan targeted the military. And no, I’m not referring to the period after the 15 July, 2016 coup, but his actions to tame the military that culminated in the Sledgehammer trial in 2012. Tayyip may have had some justification for his actions. After all, the Turkish military had a well-established record of overthrowing governments–including the hanging of the leaders thereof (e.g., the hanging of Menderes in 1961, in the aftermath of the 27 May coup).

There is no such reason–not by the remotest stretch–to suspect the US military. The aspersions being cast on it and its members, and the clear hints of an impending cleansing, provide a chilling testament to the paranoia of the ruling class, and its bloody minded determination to subjugate anyone and anything that shows anything but abject fealty towards it.

In reply to a comment yesterday, I mentioned John Stuart Mill, who clearly stands second to no one as an advocate for liberty. After all, one of his most famous works is titled On Liberty, which gives a full throated call for extending liberty as far as possible.

Mill is particularly relevant in the debate over whether only the government is the enemy of liberty. He answers quite the opposite:

Like other tyrannies, the tyranny of the majority was at first, and is still vulgarly, held in dread, chiefly as operating through the acts of the public authorities. But reflecting persons perceived that when society is itself the tyrant—society collectively over the separate individuals who compose it—its means of tyrannising are not restricted to the acts which it may do by the hands of its political functionaries. Society can and does execute its own mandates: and if it issues wrong mandates instead of right, or any mandates at all in things with which it ought not to meddle, it practises a social tyranny more formidable than many kinds of political oppression, since, though not usually upheld by such extreme penalties, it leaves fewer means of escape, penetrating much more deeply into the details of life, and enslaving the soul itself. Protection, therefore, against the tyranny of the magistrate is not enough: there needs protection also against the tyranny of the prevailing opinion and feeling; against the tendency of society to impose, by other means than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them; to fetter the development, and, if possible, prevent the formation, of any individuality not in harmony with its ways, and compels all characters to fashion themselves upon the model of its own. There is a limit to the legitimate interference of collective opinion with individual independence: and to find that limit, and maintain it against encroachment, is as indispensable to a good condition of human affairs, as protection against political despotism. [Emphasis added.]

The main problem that I have with Mill in this passage is his reification of society, which he portrays as a conscious, acting being. Perhaps that is merely a verbal shortcut. But that is not a problem when when addresses an issue that Mill could not have imagined in his wildest nightmares, but upon which I am quite sure he would have very strong views: whether those very real, conscious, acting beings in charge of social media corporations (and other corporations, e.g., banks who deprive services from those whose opinions they dislike) can “[practice] a social tyranny more formidable than many kinds of political oppression, since, though not usually upheld by such extreme penalties, it leaves fewer means of escape, penetrating much more deeply into the details of life, and enslaving the soul itself.” The answer of course, is a decided yes.

Mill’s conclusion, suitably modified, then follows:

Protection, therefore, against the tyranny of the magistrate is not enough: there needs protection also against the tyranny of [censorious corporate managements]; against the tendency of [social media companies and other private organizations] to impose, by other means than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them; to fetter the development, and, if possible, prevent the formation, of any individuality not in harmony with its ways, and compels all characters to fashion themselves upon the model of its own.

For what are we seeing today, but vicious efforts to “prevent the formation, of any individuality not in harmony with its ways, and compels all characters to fashion themselves upon the model of its own.”?

Mill recognizes that even liberty must have a limiting principle, and the bulk of his essay is devoted to determining that limit:

But though this proposition is not likely to be contested in general terms, the practical question, where to place the limit—how to make the fitting adjustment between individual independence and social control— is a subject on which nearly everything remains to be done.

In any line drawing exercise, there are difficult calls to make. But as the saying goes, hard cases make bad law. There are certain things that are not hard cases–and censorious managers of private corporations who selectively prevent the dissemination of speech on platforms ostensibly intended to disseminate speech is not a hard case. By Mill’s criteria for distinguishing a legitimate from an illegitimate restraint on liberty–“the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection”–what Twitter and Facebook and Google and Apple and Amazon do is “an illegitimate restraint on liberty.” They are not protecting themselves against any threat to their lives, persons, or property. They are attempting to impose their will on others who are posing no such threat.

I also recommend to you Mill’s discussion of free speech, which is particularly apposite today. One of the lines being pushed to justify selective censorship is a claim that this protects us from falsehoods. Mill considers and resoundingly rejects that assertion. His discussion in Chapter 2 of On Liberty is worth reading in full.

In sum, an essential element of Mills’ thought is that it is unduly cramped to conceive that only governments can restrict liberty, and that anything not done by a government cannot be considered a violation of liberty. Mill makes the argument that “society” can limit liberty. Setting that reification aside, he talks about specific cases, such as churches and religion. He certainly would recognize that tech companies (and myriad other companies too) are limiting liberty, and he would reject this on his strict utilitarian lines. One can also reject it on natural rights lines that Mill explicitly rejects.

But the point stands: private individuals and private entities can oppress, and deprive others of liberty. Depriving some of the liberty to restrict the liberties of others without the latter’s consent advances liberty, rather than detracting from it. Regardless of whether you advocate liberty on utilitarian or natural rights grounds–or maybe both–it is anything but libertarian heresy to support restrictions on the ability of private entities to deprive others of the freedom of thought, speech, and action.

In Baghdad, the US embassy complex is a massive fortified area hard on the Tigris called The Green Zone. It is to protect representatives of America’s government–and its governing class–from the barbarians beyond. In advance of Wednesday’s inauguration, Washington DC is being turned into the Green Zone on the Potomac. (H/T to @libertylynx for suggesting the analogy!)

So just who are the barbarians whom the governing class is attempting to exclude from the nation’s capital?

This could be a particularly grandiose exercise in security theater, meant to convey that the country is under threat from shadowy right-wing insurrectionists, and thereby provide a justification for sweeping “domestic terrorism” legislation, followed by early-21st equivalents to early-20th century “Palmer Raids” (Garland Raids?)–these directed at American “fascists” and “white supremacists,” rather than communists and anarchists as in 1919-1920. This would bode very ill for our freedom. It could be the death knell, in fact.

This could also reveal the governing class’s panicked realization that they are heartily hated by a large portion of the populace–and that they know that they are hated for good reason, due to their abject incompetence, irredeemable corruption, and sneering disdain for vast swathes of Americans. We have the worst governing class in the country’s history–and that includes the 1850s, during which the previous holder of this dubious distinction led the country to civil war.

These explanations are not mutually exclusive, of course. A hated “elite,” all too conscious of its failings and unpopularity (Congress ranks somewhere below tertiary syphilis in esteem, with the federal bureaucracy and the media hot on its heels), will out of self-preservation engineer crises that justify the employment of the government’s vast coercive apparatus to crush those who wish them gone.

It is extremely illuminating that actually burning things down, which occurred not just in DC but around the country in May and June, did not elicit such a hysterical response. Only when the precious denizens of DC feel personally threatened by the people they ostensibly govern do they go to Defcon 1.

Don’t fall for it. Don’t let a stupid, but wildly exaggerated, rampage in the Capitol (that never would have happened had the most basic measures been taken–which should make you wonder why they weren’t) provide the pretext for purges and “domestic terrorism” legislation that deprives you of your rights, puts your liberty at risk, and threatens to bring the country to the brink of another break. Don’t fall for the security theater and the FBI’s alarums. These are a pretext to deprive you of your freedoms, most notably your freedom to heap scorn on a failed ruling class, and to hold them to account for their myriad failings.

Big Tech’s war on speech–or more precisely, on speech that they dislike–escalated wildly in the aftermath of the Capitol “insurrection.” Starting with the erasure of Trump (and others deemed in his orbit) from Twitter and Facebook–actions that drew rebukes even from France and Germany–it continued to expand over the weekend, most notably with Amazon’s abrupt termination of its hosting agreement with Twitter competitor (and nascent conservative platform) Parler, and Apple’s and Google’s extirpation of the Parler app from their app stores.

This is an escalation, yes. But in a war that has been raging for years. Amazon, Apple, Facebook, Google, and Twitter merely see an opportunity to gain a big victory in that war.

During that war, a standard response from many on the non-left has been: “They are private companies. They can do what they want. Constraining their ability to take these actions is anti-capitalistic, and anti-liberty.”

These arguments are simplistic, and as a result, it is easy to conclude that many of those making them are simpletons.

The simplistic presumption behind these arguments is that only governments can coerce, or exercise power to constrain liberty.

It is no doubt true that government power to coerce is typically greater than that of private individuals and enterprises, and that therefore government is most likely to be the enemy of freedom. But that does not imply that government is the only enemy thereof, and that therefore only governments should be constrained from limiting freedoms.

The presumption that private entities possess little coercive power is based on an implicit assumption. Namely, that competition between firms and individuals in markets sharply constrains coercive power, whereas government faces little competition and can therefore coerce more effectively.

The implicit assumption is reasonable in many contexts. I don’t have to worry about being coerced by my grocer or even auto manufacturers. Competition is robust, and if they try to coerce me, I can shop elsewhere. Absent collusion, I can rely on competition to discipline coercion.

The implicit assumption is definitely and wildly unreasonable in the case of the large tech companies. There network effects have sharply reduced competition, and greatly constrained choice. Further, as Amazon/Google/Apple v. Parler show, these companies are willing and able to utilize their control over certain assets to destroy those whom they oppose.

The standard arguments discounting the likelihood of predatory pricing or other predatory conduct don’t apply here. Those arguments presume profit maximization as the corporate goal. But the underlying motive for Amazon or Apple or Google to cut off Parler is almost certainly not to make higher profits later–Parler is not even a competitor of Amazon. Instead, their motive is nakedly political. Jeff Bezos is no doubt willing to take what for him (richest man in the world) is a small economic loss in order to advance his political and ideological objectives. (Do you think he bought the WaPo to make money? As if.)

It’s also essential to note that these “don’t interfere with private contracting decisions” arguments completely fail to recognize that the ship sailed decades ago, and that the current legal and regulatory environment represents almost a complete inversion of the appropriate spheres of which contracting decisions should be left alone, and which may justify some restrictions.

In the US, federal, state, and local governments have imposed extensive restrictions on the freedom to contract in competitive industries, while allowing firms in highly non-competitive industries (like the tech firms) to operate with impunity. Bakers and florists operate in high competitive markets–yet they cannot exclude some customers due to their religious convictions. Restaurants in highly competitive markets are highly constrained in their ability to choose whom to serve. The same goes for landlords in highly competitive rental markets, employers in highly competitive labor markets, and banks in highly competitive lending markets.

If you agree with–or even accept–such restrictions on private firms in competitive markets, you have no basis to demand that no constraints be imposed on firms in highly uncompetitive markets, just because they are “private.” Moreover, even if you disagree with the imposition of such restrictions in competitive markets, that does not necessarily entail disagreeing with restrictions imposed in uncompetitive ones. It is quite logical to oppose restrictions in competitive markets and oppose them in uncompetitive ones.

Indeed, as I noted when I first took on this issue some years ago, there were common law restrictions on firms with considerable market power even in what is arguably the most libertarian/classical liberal period and country in history–18th/19th century England/UK. Common carriers like inns and coaches were deemed to have market power, and the common law required such “common carriers” not to discriminate. That it an era of laissez faire that has not been equaled since.

Furthermore, and most importantly, it is simplistic–and actually idiotic–to presume that there is a bright line between public and private. The tech companies wield enormous political power, both through traditional means (lobbying, rent seeking, influence buying) but more importantly through their control over information flow, and their information about you, and their use of your information to control the information you get. The ability to manipulate politics, political outcomes, and government policy that this information dominance provides is arguably unparalleled in history. The two most powerful weapons in politics are money and information. Big tech has wild amounts of both.

What do you think that we are seeing right now, other than an attempt to utilize that dominance to manipulate political and policy outcomes? Saying that this is acceptable because these entities are formally private companies is to give them power that a US government with monopoly of violence is not permitted to wield. If you are fine with that, then you are my enemy, and the enemy of most Americans.

I also note that amidst all of the accusations that Trump is a fascist, and his supporters are fascists, a defining characteristic of classical fascism is collaboration between the state and large corporate enterprises. Who is the puppet and who is the puppeteer is not always easy to determine, and can change over time, but an alignment of interest between the state and large enterprise is characteristically fascist, and antithetical to liberty.

At the very least, these tech companies should be subjected to non-discrimination requirements–requirements that common carriers have been subject to for centuries, and which even non-common carriers (e.g., the baker and florist) are routinely subject to today. These platforms have market power, and those that control them use that power to discriminate, most notably on the basis of viewpoint and political belief/affiliation, and do so to influence how the government coerces you. They should be stripped of their right to do so.

With respect to Parler in particular, it has sued Amazon and Twitter, on three grounds. The most interesting is a Section 1 claim alleging a conspiracy between Amazon and Twitter to destroy a Twitter competitor. This is potentially the most dangerous claim, but also the one that is least likely to survive a motion to dismiss. Yes, such a claim of conspiracy is plausible, but evidence of a conspiracy must include more than parallel conduct or mutual interest. So far, what we know publicly does not provide evidence of an actual conspiracy.

The second claim is tortious interference. This could potentially have legs. Amazon has clearly interfered with Parler’s ability to provide services to its customers. It is very plausible that that interference is tortious.

I am thinking that Parler customers might have a tortious interference claim as well, that could be pursued via class action.

The third claim is breach of contract. Amazon gave Parler 30 hours notice of termination: Parler claims the contract requires 30 days notice. No doubt the contract is byzantine and complex and long, and that Amazon can point to some clause which permits termination with less than 30 days notice under certain conditions. Then it becomes a matter of fact whether those conditions were met. Parler will no doubt argue that they were not, and at the pleading stage the court has to accept plaintiffs’ version of the facts.

Truth be told though, Amazon may well be willing to accept a loss on the breach claim, and maybe even the interference claim. It will be all rather moot for Parler: it is likely dead even if it prevails on those claims. But Amazon will have achieved its true objective: killing an apostate.

Big tech is our enemy. It must be fought. It must be defeated. Posturing about their inviolability because they are private companies is simplistic, wrongheaded, downright stupid–and highly destructive to the point of being evil. They dominate the public space in ways no “private” entity has ever done, and thereby have directly and indirectly immense powers of coercion that must be controlled. They are currently wielding those powers ruthlessly. Only fools and knaves accept that based on some imagined principle that private entities are immune from any constraint.

My main reaction to Wednesday’s debacle at the Capitol is the same as Fouché’s to the murder of the Duc d’Enghien: It was worse than a crime: it was a blunder. As “insurrections” go, it was rather farcical, with limited instances of real violence the exception, and theater of the absurd the rule. As a result it was utterly ineffectual in achieving any object. And I use the passive tense deliberately, because it is rather hard to identify any actual person with an objective.

But that is a major reason why this was such a colossal blunder. It was utterly aimless and pointless and ineffectual and barren of any result–except for giving the governing class a reason to begin a ruthless purge of anyone in opposition to it. Anyone who is opposed to the governing class (which extends far beyond government, and includes large swathes of corporate America) is equated to those very few who rampaged through Nancy Pelosi’s office, even if they were nowhere near DC at the time. They are deemed seditious insurrectionists and “domestic terrorists” who must be excised from public life–including in particular participation in social media–and whose private employment is at risk.

This is affirming the consequent on steroids, but that fallacy is one of the most useful tools of political propaganda. And the governing class is using that tool with utter ruthlessness. Those who do not express complete fealty are at risk of being destroyed. And to be honest, expressing fealty today is likely to be insufficient, if one is deemed to have committed some sin against orthodoxy in the past.

This has been a judo move that turned Trump’s biggest strength–his ability to engage the passions of millions of people–into his greatest liability. He should have understood the risk, but so consumed was he by his increasingly Quixotic efforts to overturn his election loss that he failed to see it, and in fact fell right into the trap–that is his blunder. And in so doing he has inflicted a grievous harm on his most fervent supporters, and those not so fervent yet broadly aligned with him in their opposition to the governing class.

This is a blunder from which recovery will be nearly impossible, at least for some years–or until the governing class commits a similarly egregious blunder.

The governing class is not going to miss this opportunity to bludgeon its adversaries–and indeed, the campaign to do so ramped into high gear after the Capitol was cleared. It continues to intensify, led by the governing class’s Praetorian Guard: the social media and tech companies.

The most striking–and revealing–phenomenon is the stark contrast between the governing class’s reaction to this spasm of mob violence, even as highly limited in duration and extent as it was, to the epidemic of mob violence that lasted for months from sea to shining sea starting in May. I’m so old that I can remember when public protest–including protest that descended into destruction and death far more extensive than what occurred in DC on 6 January–was the highest expression of patriotism, and the most authentic expression of the discontent of the dispossessed, oppressed, and disenfranchised.

But that’s because those protestors were advancing the interests of the most ruthless part of the governing class, whereas these protestors are expressing their contempt for the governing class.

Who, whom, you know. It’s not the fact or protest or the intensity or violence thereof that matters: it’s who is protesting against whom, and why. The attempted assault on the White House in June, let alone the consummated assault on a Minneapolis police station or the nightly attacks on Federal buildings in Portland, were far more intense and angry and destructive than what happened on Wednesday. But to the governing class, those are legitimate targets. They are not, and since the rampage at the Capitol targeted the governing class, it is beyond the pale.

The reaction is what one would expect from tyrants, and indeed the entire episode is symptomatic of tyranny. Not the tyranny of Trump, but the tyranny of the governing class. As I’ve written for years, Trump is a symptom, not a cause. His victory, and his popularity among a massive number of Americans, stems directly from his opposition to the governing class. Trump cannily recognized the widespread discontent, and tapped into it. His populism reflected the undeniable fact that a large fraction of the people were–and are–mad as hell at those who presume to rule us–with very good reason. Populism is almost always a consequence of government failure–which is why governing classes hate it so much.

This discontent has been stoked to a fever pitch by the unrelenting campaign against covid, which has saved pitifully few (if any) lives, but destroyed many livelihoods and deprived most of us the things that make life worth living. Further, the highly dubious outcome of the election–and perhaps more importantly, the phalanx-like opposition of the governing class (including notably the Republican establishment) to any investigation of this dubiousness–has fueled the fires further.

In sum, there are a large number of desperate and angry people who believe the governing class despises them, and is indeed at war with them. So why should anyone be surprised that this desperation and anger has resulted in mob action? No one–least of all those who rationalized the Floyd protests (and riots) as a natural response to desperation and anger.

And to be frank, I am pretty sure that the ruling class is not surprised. They would never acknowledge it, but they know they hate these people, and are hated back in return. Which is precisely why they are using this opportunity to try and crush those that they hate, both out of a self-defense reflex, and for the pure pleasure of vanquishing one’s foes.

This is what tyrants do. They believe that their power and legitimacy is non-negotiable and indisputable, and that anyone who challenges the one and questions the other is seditious and deserves to be crushed. The left makes a big deal about demonizing “The Other.” Well, to the left and the governing class which is largely left, The Other is, well, probably you. And you are being demonized, and that demonization is used to justify the imposition of coercion on you.

Their expectation, like that of all tyrants, is that if they exert enough force, their opponents will be crushed or cowed into abject submission. Sometimes that is correct. But often it has the exact opposite effect, and exacerbates tension and hostility to such a degree that there is a revolutionary convulsion.

In other words, we are living in pre-revolutionary times, and the reflex of the governing class to double down on coercion when challenged is greatly increasing the odds that soon the prefix “pre-” will be obsolete. So convinced of its righteousness, rectitude, and right to rule, the governing class is failing to ask why so many hate them so much–they just dismiss them as rubes and rednecks and racists and religious freaks. And by failing to ask the question, they greatly increase the odds of getting an unsolicited, and very violent, answer to the question they should ask but haven’t.

In the covid months I’ve let my beard grow out, mainly as a statement about how the restrictions on normal life in 2020 rendered irrelevant certain social conventions. When someone commented rather snarkily about that, I responded “well, if we are headed for a civil war, I thought I should look the part.” If that sardonic response was comprehensible when I made it a few months ago, it is all the more so after the events of the past weeks, and last week in particular.

There are other things about the Capitol catastrophe (catastrophic much less in its direct effects than its fallout) that deserve attention. Such as: why was it even possible that a rather inchoate and spontaneous mob was able to get access to the Capitol? But all that must be based on speculation colored by one’s pre-existing beliefs. The fact is that it did happen, and it will have consequences. It is those consequences that we must focus on, as I’ve tried to do here. And I am increasingly convinced that the most important consequence will be a grave escalation in internecine conflict as the governing class attempts to suppress those millions who already feel oppressed by their rule, with the possible (and indeed, likely) results being frightful to contemplate.

In 1893, at the World Columbian Exposition in Chicago, Wisconsin historian Frederick Jackson Turner presented his soon to be famous article, “The Significance of the Frontier in American History.” The article has been extensively analyzed, and heavily criticized, over the years. Of course any grand theory of cause-and-effect regarding the history of an entire people over a period of centuries is going to oversimplify, omit other causal factors, and have some implications that are falsified by the historical record. Nonetheless, Turner’s tour de force does make many insightful observations and generalizations. Because of these, it provides a very useful analytical frame that sheds quite a bit of light on America’s current divided state, how it got here, and where it will go hence.

Most notably, Turner identified many character and behavioral traits that he identified with the frontier. Most notable of these are individualism, though it must be stressed that “individualism” is not a synonymous with social atomism, for as Toqueville noted at the time the frontier was very much a going concern, Americans had a mania for voluntary associations of various sorts, i.e., Americans exercised their individualism by gathering together in private (or at most quasi-public) organizations ranging from churches to charitable and social reform groups to militia companies.

Other characteristics noted by Turner include informality, democracy (of a particularly local variety), risk taking and initiative, and yes, violence. To which I would add another Toqueville observation–a passion for equality, in the sense of a resistance to a formal social hierarchy. (This is related to “informality.”). There was also an active scorn for ideas and norms and fashions originating in Europe.

Stated broadly, the frontier ethos was one of individual autonomy and liberty and freedom from authority.

These values can be seen on one side of the American political divide. They are, for example, highly correlated with support for Trump.

They are also the values that are most intensely scorned by those on the other side of the divide. Those people–painting with a broad brush, the progressive left–elevate the collective over the individual. They denigrate liberty, and emphasize equality, but not of the Toquevillian sort. They construct elaborate social hierarchies, which are at present organized around various attributes of “identity”–race, gender (pick one! hell, pick several!), ethnicity, religion (or lack thereof). They elevate security and safety over risk taking. They take Europe as a model.

It must be noted that this fissure has always been present to some degree in the U.S., although its nature has changed dramatically over the years. Take for example the War of 1812, which was fervently supported by those on the frontier, and adamantly opposed by the urban and commercial elites in New England and the Middle States. A similar divide between Jacksonians on the frontier and anti-Jacksonians outside of it.

Since Turner wrote, the frontier values that Turner identified as central to the American identity at the time that he wrote have lost ground to their antithesis. The causes are too numerous to list, and are interrelated, but a few salient ones that come to mind include:

• Urbanization.
• The dominance of large scale enterprise, especially corporations but also government bureaucracies, which means that most people earn their income working in a large organization which inherently limits the scope for individuality and individual initiative, and conditions people to operating in highly collectivist environments (even if they are privately owned).
• The emergence and increasing prominence of women in the workplace, government (especially primary and secondary education), and politics. (Even in frontier days, women were at the forefront of reform movements, e.g., temperance, that were explicitly directed at sanding down the rough edges of (male) frontier behavior.) The impact of women is profound, not just directly, but indirectly, primarily through public education and the socialization of men.

(Immigration is somewhat interesting, and cuts many ways. Many immigrants self-selected precisely because they were individualists at heart. Even those who emigrated from relatively collectivist societies (e.g., Scandinavia) tended to be the more adventurous and individualistic. But immigration also brought strains of collectivist thought and identity. )

All of these trends show no sign of abating.

Indeed, the Covid hysteria is arguably accelerating these trends, and greatly so.

The experience of the last year illustrates the divide, and also gives an idea of where the balance now lies, especially among the alleged “elite” in business, media, government, and politics. The safetyism and collectivism of the advocates of mask mandates and lockdowns (in the face of much evidence of their inefficacy, and irrefutable evidence of their costs) is pitted against those who bridle at restrictions on individual choice.

But Covidianism is more than a mirror on social changes that have taken place and existing fissures: it is driving further changes away from the frontier Americanism ethos. The lockdowns, and the self-limiting behavior promoted by the endless drumbeat of doom-and-gloom emanating from government and media, are gutting one of the major bulwarks of Jacksonian America–small business–while at the same time greatly empowering large enterprises and governments. Indeed, every time it looks like there may be some respite, the lockdowns and restrictions are slammed down again, and yet again–despite the lack of evidence of their efficacy in fighting Covid and the palpable evidence of their baleful economic consequences.

Those on the collectivist side–in the US, but especially outside the US–see this as a golden opportunity to throttle their individualist enemies. Call it “The Great Reset” or “Build Back Better” or whatever other Orwellian phrase du jour they choose, the collectivists see Covid as an opportunity to reorganize society on collectivist lines, and to quash “selfish” individualism. It has proved so much more powerful a bludgeon than “climate change” to achieve their agenda, so they are wielding it with a relish.

I say “opportunity”, which suggests that seizing on the Covid hammer is merely opportunism–letting no good crisis go to waste. But the utility of Covidianism in the advance of collectivism has raised questions in some minds as to whether this is more than mere opportunism.

I would say that in this century, and through much of the late years of the last, the frontier ethos was fighting a rear guard action. The Trump years have been, to a considerable degree, a particularly intense battle in that fighting retreat. This is why the 2020 election was so pivotal–if it had gone the other way (and it is defensible based on evidence to say if it had not been stolen) the collectivist surge might have suffered a serious setback. But in the event, it was the individualists who suffered the reverse.

The battle is not over yet. The inherent flaws in collectivism, and the very real potential that the 2020 winners may succumb to Victory Disease and overreach, could lead to an individualist comeback, a la the late-1970s/early-1980s. But even then, there is a ratchet effect at work. Each rebound starts from a lower level, and seldom is able to restore things to the way they were before the previous decline.

A rather bleak prognosis, I’m afraid. But there is honor–and sometimes profit–in fighting against heavy odds. That’s a frontier value too. That is what I will strive to do. I hope you do as well. Perhaps we can seize victory from the jaws of defeat. But only if we fight, and never if we submit.