Streetwise Professor

There’s a lot of talk about exploiting the US energy boom to undermine Putin and Russia.  This boom may have profound effects in the long run, but there is nothing that can be done now that can materially harm Putin in to punish him for his anschluss in Crimea, or subsequent aggressive moves he may make.

Yes, the US restrictions on exports of natural gas and crude oil are economically idiotic, even absent geopolitical considerations.  But even if those bans were eliminated tomorrow (a huge if, given he who sits in the White House-or golfs in Key Largo, as the case may be) Europe’s energy situation would not change one whit.

It would be possible to start moving large quantities of crude if the export ban were lifted, but this would be largely offset by a decline in US exports of refined products.  A major effect of the ban is to distort where crude is refined, not the total supply of crude and refined products (especially in the short run).  The major effect of the ban at present is to benefit US refiners who refine crude that is selling at below world prices because of the ban and export the products.  One study estimates that eliminating the ban would drop world oil prices by cents not dollars.

With respect to natural gas the situation is even less favorable.  Even if DOE granted all pending LNG export licenses, it will be years before product will start flowing.  Cheniere received the first license, in May, 2011, and its facility will not come on line until late-2015 at the earliest.  The company had a head start because it was converting an existing facility built to import LNG: other facilities will take longer to build because they are starting from scratch.

The long run impact of eliminating the export ban depends on the elasticity of supply of gas in the US.  If it is very elastic at current price levels, then yes, once the ban is lifted world prices will fall substantially, and Russia will be hit hard by that.  If supply is less elastic, the impact will be far smaller.  The elasticity of supply will depend crucially on technological factors, including the suitability of new formations to fracking and horizontal drilling, the depletion rates of wells, and the rate of technological innovation.  All of these factors are quite uncertain, and if the experience of the past decade says anything, it says be leery about making predictions about natural gas supply.

In brief: US energy export policy is stupid, but fixing the stupidity will have no appreciable impact on Russia for years.

Similarly, fixing stupid European policies on energy (e.g., fracking bans, massive renewables subsidies like Energiewende) should be done for reasons independent of geopolitics, and even if done tomorrow will have no material impact on European energy prices or Russian energy revenues for years to come.

The main way to impose substantial costs on Russia today via energy would be to impose trade sanctions.  Given the fact that the oil market is essentially global in scope, and that coordinating a global boycott of Russian oil would be virtually impossible, natural gas is a more feasible target.  Europe could boycott Russian gas  unilaterally, and there is no effective way for Russia to sell that gas to Asia or anywhere else.

There is a substantial asymmetry here.  Russia depends heavily on gas exports.  Approximately 25 percent of the Russian government’s revenue comes from Gazprom. The knock on effect on the Russian economy would likely be huge, as severe fiscal constraints would likely put substantial strains on the Russian banking system.

Yes, Europe would be hurt by higher prices and lower consumption of gas.  But gas comprises a far lower percentage of European expenditures than it does of Russian income, meaning that the hit on Europe would be far smaller.  Moreover, some of the impact could be mitigated by substantially increasing coal imports, increased Norwegian production, and some diversion of LNG from Asia to Europe, especially to the UK (which has excess LNG import capacity and could use LNG to displace North Sea gas which it could then pipe to Europe).   Moreover, winter is ending, and the cost of a supply interruption in the spring and summer would be far less than the cost in the winter.

But I doubt that is going to happen, because of another asymmetry.  The asymmetry in political will.  Old Europe has no stomach for a confrontation with Putin over Crimea, Ukraine, or much of anything else. (And yes, Donald Rumsfeld was an a$$hole-a claim I can vouch for based on family experience-but the Old Europe vs. New Europe formulation does capture an essential truth, especially where Russia is involved.) This lack of intestinal fortitude means that Old Europe-and especially Germany-is unwilling to pay any price to punish Putin.  Talk is free, and that’s all they are willing to pay.

And don’t think for a moment that Putin hasn’t based his plans on exactly that calculation.

In an attempt to scare off any attempt at sanctions, Russia has threatened retaliation: Lavrov has told Kerry any such moves will “boomerang.”  Other Russian officials have said that Russia can insulate itself from the west, thereby making it immune to any sanctions.

The retaliation that has been threatened includes expropriation of the assets of western companies.  A quite predictable Russian reaction, and typically self-destructive.  Any such expropriation would just cement Russia’s reputation as a lawless country where foreign investors rush in where angels fear to tread.  Russian equity valuations would crater, and direct investment would too.  Capital flight would accelerate.  The costs inflicted on Russia would dwarf those inflicted on the US and Europe, and would last for years.

Other that that, a great plan!  Another major asymmetry: any Russian retaliation would harm Russia far more than Europe or the US.  Some boomerang.

It reminds me of the old joke about the genie who grants the muzhik one wish, with one condition: anything the muzhik wishes for he gets, but his neighbor gets double. The muzhik thinks for a minute, then says: “I wish that you pluck out one of my eyes.”

All that said, I do not think that economic sanctions in the form of boycotting Russian energy or other exports, or cutting off imports (e.g., of drilling equipment) are the most effective, or the least costly, way of imposing costs on Putin and the elite on whom he depends. As I have said since Georgia, 2008, the best way to attack Putin and the elite is to go after their money in the west. (This policy is getting widespread publicity now.  I will lay claim to being a very early advocate.)

Such a measure is targeted on those who make the decisions, rather than Russia and Russians generally: as such, it could not be used by Putin to claim that the west was waging a war on Russia.  Indeed, it could undermine his political support not just among the elite who would be paying the price for his adventures, but among the broader population who are already disgusted by corruption and who would be unlikely to have any sympathy for that corruption being exposed, and the ill-gotten gains being seized.  The cost on western economies would very small indeed.  It would represent a victory for the rule of law.

But this would impose some costs on some very connected people in the west.  Moreover, precisely because it would strike so deeply at Putin it would cause him to lose his sh*t, and fear of that causes the Euros to shrink away from it in terror.

But this is something the US can pursue unilaterally.  Yes, given that most dirty Russian money is in Europe or the Caribbean, these measures would be much more effective if the Europeans participated. But the US still can wield considerable power (note how it forced Switzerland to heel on tax issues-not something that I agree with, btw, just pointing out that the US has leverage) and indeed, the mere threat of exposing what it uncovers could make the Europeans think twice.

But again, there is a lack of will.  Hope drives policy: “If we concede Crimea to Putin, he will stop.”

In sum, there is a powerful policy tool at our disposal.  A far better tool than is available in most such circumstances.  Other tools (sanctions) are more costly.  Yet other supposed tools-increasing US energy exports-are chimerical.

If we’re serious, we’ll use it.  But I have my doubts that we’re serious. If Europe (and to a lesser degree the US) has demonstrated anything in recent years, it is that they are past masters at kicking the can.  Crimea, Ukraine, and Putin are likely to be just another can.

News flash: Vladimir Putin did not decide to invade Crimea until after the Yanukovych regime fell.

That brilliant insight is courtesy of the New York Times.  How would we know if the Times wasn’t there to tell us?

The collapse of the regime obviously changed Putin’s calculus.  He had no reason to invade while Yanukovych was in charge.  So of course Yanuk’s panic was a necessary condition for the events that followed.

The article relies heavily on two individuals, Dmitri Trenin and Mark Galeotti, who didn’t predict Putin’s move.  They therefore have considerable reason to try to make this turn of events seem beyond the ability of mere mortals to foresee.  The problem is that both confidently denied that Putin would move on Ukraine and did so after the collapse of the February 21 deal and Yanukovych’s flight.  Which means that they didn’t understand how Putin would react to the precipitous collapse of the regime.  The fact that this collapse might have been unlikely on 20 February is irrelevant to  predictions about events conditional on the collapse occurring.  Trenin’s and Galeotti’s conditional forecasts were wrong, making the surprising nature of the conditioning event totally irrelevant to the issue of their understanding of Putin’s decision making.  They obviously lacked such an understanding, so why go to them for analysis?

Trenin also asserts, without providing a shred of evidence, that Putin was “very passive” before February 21.

Please.  It is far more plausible that Putin was closely involved with events in Ukraine, and arguably was providing support to Yanukovych (including in the form of security personnel), and most likely directing Yanukovych and/or people within the security structures of the regime.

Putin’s actions subsequent to the fall of the regime indicate how important Ukraine is to him.  Would he really have been “very passive” in response to events spiraling out of control in Kiev?  Putin precipitated the entire crisis by dragooning Yanukovych into spurning the EU and subordinating Ukraine to Russia.  Would he have then just stood by “very passively” when those actions precipitated a revolution in Ukraine?

My take at the time was that Putin was pushing for a crackdown and Yanukovych was balking.  At least some in the US intelligence community now say the same. (And yes, I get that the intelligence community is also engaged in CYA, and yes, I get that the story is in Newsweek, aka The Bitcoin Enquirer.)

Why does anyone look to the NYT for deep analysis?  And why would the NYT go to two people who blew the call to explain what happened?

Major banks are having major concerns about the risks associated with CCPs in the aftermath of a failure of  a Korean brokerage firm that resulted in the mutualization of losses on the KRX.  The firm failed due to a fat-finger error (puts? calls? whatever!) and its margins were insufficient to cover its trading losses.

This experience is making CCP member firms re-evaluate the risks of CCPs, the risk controls implemented by CCPs, and the incentives of CCPs to control risk.   They realize that CCPs do not eliminate counterparty risk so much as redistribute it.  They are concerned about the incentives that CCPs have to manage those risks unless they have substantial exposure to them (“skin in the game”).

But here’s the thing.  This particular sequence of events is exactly what CCPs are best suited to handle: the insuring of idiosyncratic risks.  In this instance, the idiosyncratic risk was an random operational error at a single brokerage.

But that’s not why the G20 advocated clearing mandates.  The G20 went down the clearing path to mitigate systemic risk, which occurs when a shock hits many institutions simultaneously.  That is a very different beast indeed.

If banks lie awake at night worrying about the incentives of CCPs to mitigate idiosyncratic risks, they should never sleep ever if they think about systemic risk.  CCPs are ill-adapted to handle systemic risk precisely because risk pooling/diversification works for idiosyncratic risks, but not systematic ones.

Put differently: the failure of the Korean brokerage did not create a wrong way risk.  The failure did not cause a hit to the default fund when the non-defaulting members were under financial strain.  But defaults that occur during a crisis situation are laden with wrong way risk: losses are mutualized precisely when the members of the default fund are least able to bear them.

So if banks are concerned about the potential for a CCP failure in response to a bad realization of an idiosyncratic risk, think about the appropriate level of concern about the viability of CCPs in response to systematic risks.

A bite of kimchi can have a truly bracing effect. Would that regulators around the world take heed of the lessons of recent events from the land of kimchi.

Historical analogies to current events can be illuminating, but dangerous.  Even if strong similarities exist, difference do too, and therefore caution is required when using them.

This is especially true with analogies to Naziism and Hitler.  Argudendo ad Hitlerum is fraught with peril, and is used far too cavalierly.

Hillary found out about the perils when she compared Putin’s incursion into Ukraine-and yes, Crimea is Ukraine-to Germany’s actions in 1936-1938: the occupation of the Rhineland, the Anschluss, the taking of the Sudetenland, and the eventual seizure of the rest of Czechoslovakia.  Her remarks unleashed a storm of criticism.

Mark this day in you calendars.  I am going to come to Hillary’s defense, sort of.  (As to why that is particularly remarkable, consider this bit of personal history.)

There are strong parallels between what Putin/Russia is doing in Ukraine now, and what Hitler/Germany did in 1936-1938.  Most notably, seizing pieces of sovereign territory,  using as a justification the imperative and right to defend fellow ethnics, and putting on sham plebiscites to justify the seizures.

Moreover, there are very strong parallels in the response of the European nations to Hitler’s aggression and Putin’s: that is, no real response at all.  A palpable fear to confront the aggression.  A willingness to concede one flagrant violation of a sovereign nation if the aggressor crosses-his-heart-and-hopes-to-die that he will be satisfied with what he’s taken so far.

There is also a parallel in the cravenness of many in the West (Britain and France in the 30s, Britain, France and Germany in the 2010s), particularly a call to recognize the aggressor’s legitimate interests.  (This is epitomized in the current situation by this piece in Reuters. Complete apologetic BS.)

But the pushback comes: Putin isn’t Hitler!

Well, Hitler wasn’t Hitler in 1938.  That is, we look back at events in 1938 seeing what transpired in the 1940s.  In 1938, no one had any idea of the monster that Hitler was to become.  In many ways, he was perceived like Putin is today.  An aggressive advocate of his nation’s interests, redressing historical injustices.  A reasonable, rational actor who would stop advancing once his nation’s legitimate interests were recognized, the historical wrongs reversed, and his co-ethnics protected.  Hitler then and Putin now were also widely viewed as ridiculous figures, prone to bizarre public displays, and hence not really dangerous.

And that’s exactly why making parallels to 1936-1938 are entirely appropriate.  Those judgments proved horribly wrong, and the consequences were horrific beyond belief.

Putin needn’t be anywhere near as evil as Hitler for the consequences of unchecked Russian aggression to be horrible indeed.  Meaning that the lesson of 1936-1938, that checking an aggressor can forestall truly frightening consequences, is valid today.  (And even Hitler could have been checked.  He was virtually petrified with fear when he went into the Rhineland.  It was the failure to stand up to him then which emboldened him in the years to come.)

What’s the downside of taking robust economic, non-military measures against Putin today?  Some modest economic pain.  What’s the upside? Deterring unpredictable, and potentially disastrous actions by an erratic autocrat emboldened by the weakness of his adversaries.

As insurance policies go, it seems like a very reasonable purchase.  Yes, we don’t know what Putin will do.  We don’t really know his ambitions.  We cannot look into his soul.  We don’t know how his behavior will change if nations opposed to him cave at every turn.

But is precisely that uncertainty which makes paying a premium today a bargain.  Hitler demonstrates what the tail risk is.  Putin doesn’t have to be nearly that far into the tail to be a grave danger to vast multitudes.

Better to take something of a hit now, in order to reduce substantially the risk of a future calamity.

That’s the lesson of the 1930s.  And Putin doesn’t have to be as evil as Hitler to make it imperative to take heed of that instruction.

ExxonMobil’s CEO Rex Tillerson (whose first name gives you an idea of his self-image) has decided to suspend offshore gas exploration projects in Ukraine, while continuing extensive cooperation with Russia (including a project very close to Crimea).

Talk about shivving someone when they are down.  Although any project like that the one that Exxon shelved would only produce years from now, if ever, a necessary condition for Ukraine to escape the Russian yoke is that it reduce its dependence on Russian energy, particularly Russian natural gas.  The Exxon decision makes that prospect ever more unlikely.  Ukraine’s bargaining power vis a vis Putin has just taken a big hit.  The Exxon betrayal also has huge symbolic importance: it indicates that energy companies are likely to deal with the devil-Putin-and willingly throw Ukraine on his tender mercies.  This will further convince Ukraine, and the Euros, that the country’s only option is to kneel before Don Vladimir.

Tillerson claims that he has no qualms about continuing to work with Russia, because he perceives no political risk:

“As for the current situation, obviously it’s early days,” he said. “There’s been no impact on any activities or plans at this point, nor would we expect there to be any, barring governments taking steps beyond our control.

“In terms of our view of country risk, geopolitical risk, other than things like sanctions, we don’t see any new challenges out of the current situation,” he said.

If you don’t see any new challenges relating to political risks in Russia arising from this situation, Rex, you need to get an eye test.  The substantial sell-off in Russian stocks was all about political risk.  And a victory in Ukraine would embolden Putin and make him more likely to expropriate western energy companies, including Exxon.

But maybe Tillerson’s vision is just fine. As I wrote about a couple of years ago, Exxon has tried to manage that expropriation risk by tying its ventures in Russia to cooperating with Rosneft in the Gulf of Mexico in what is effectively an exchange of hostages: if Russia takes from Exxon in Russia, Exxon can retaliate against Rosneft here. Maybe that’s what convinced Tillerson he can deal with the devil.  He gets the devil’s goodwill by abandoning Ukraine, and feels confident that the hostage he holds in the GOM will protect XOM against future Russian predations.

Arguably this is a smart bargain from the perspective of Exxon shareholders. But there are huge externalities here. Ukraine is obviously a big loser.  But so are other investors in Russia who are not so fortunate as to have valuable hostages as does Exxon.  But US national interests, and the interests of myriad US allies, notably Poland and the Baltic states, are also severely damaged by Tillerson’s cynical calculation.

This is precisely the circumstance in which it is justifiable, and indeed necessary and desirable, for the government to address a serious collective action problem through the imposition of sanctions on Russia and companies that provide it material and moral support (as Exxon is doing), and through the use of carrots and sticks to cajole companies like Exxon to provide aid and comfort to Ukraine.

But, cynic that I am, I doubt that this will happen.   The reason that Germany and the UK are so adamant against sanctions or any other economic measures against Russia in response to Ukraine is that it hits their businesses’ bottom line, and those businesses are are pressuring their governments very hard to take a soft line on Putin.  No doubt Exxon is doing the same.

Lenin was right about at least one thing, perhaps.  That capitalists would sell you the rope you use to hang them.  Or in this instance, Exxon will gladly sell Russia the rope Putin uses to hang Ukraine.

The consensus opinion after Putin’s press conference earlier today is that he has lost his mind.  It was rambling, angry, discursive, and at times just bizarre.

Of course all of the usual Putinisms were there.  Most notably, blaming the West for everything in a stream of whataboutism.  This was accented by claims that the Ukrainian opposition consists mainly of thugs and fascists; that Yanukovych was wrongly ousted and didn’t order any violence against protestors; and that the opposition was very well trained and professional, having passed through training camps in the Baltics and Poland.  (Take this as a very ominous warning, people.)

My dear colleague, look how well trained the people who operated in Kiev were. As we all know they were trained at special bases in neighbouring states: in Lithuania, Poland and in Ukraine itself too. They were trained by instructors for extended periods. They were divided into dozens and hundreds, their actions were coordinated, they had good communication systems. It was all like clockwork.  Did you see them in action? They looked very professional, like special forces. Why do you think those in Crimea should be any worse?

Yes. Those evil Poles and Lithuanians, training crack troops to throw rocks and fashion catapults.  Definitely far more lethal than camouflaged masked men toting AKs.

More broadly, Russia and Putin are always right: the West is always hypocritical and wrong.

Putin also denied the obvious, claiming that there are no Russian troops in Crimea, just local “self-defense forces” which he denies were trained by Russia.

In other words, there is no agreement on the basic facts of the situation, meaning that any attempt at negotiation with him, either by the Ukrainian government or the West, is doomed to failure.  He rejects the legitimacy of the protests,  views the outcome as a fascist coup arranged by the West, and denies that Russia is directly involved in the occupation of Crimea.

These were the substantive elements of insanity (paranoia, specifically) of the conference.  But Putin added various asides that illustrated a man that feels no need to self-censor, but is so convinced of his own brilliance that anything that crosses his mind should be shared with the world.  These “thoughts” were truly bizarre and mendacious, and even more suggestive of madness.

For instance, when discussing the alleged self-defense forces in Crimea, Putin claimed they were just kitted out in store-bought gear:

QUESTION: Mr President, a clarification if I may. The people who were blocking the Ukrainian Army units in Crimea were wearing uniforms that strongly resembled the Russian Army uniform. Were those Russian soldiers, Russian military?

VLADIMIR PUTIN: Why don’t you take a look at the post-Soviet states. There are many uniforms there that are similar. You can go to a store and buy any kind of uniform.

They must have some awesome Army-Navy stores in the FSU: not only can you get up to date cammo, you can also pick up the latest AKs and military trucks.

Then he went on to criticize the massive corruption and social stratification in Ukraine, but denied there was anything comparable in Russia:

Corruption has reached dimensions that are unheard of here in Russia. Accumulation of wealth and social stratification – problems that are also acute in this country – are much worse in Ukraine, radically worse. Out there, they are beyond anything we can imagine imagination. Generally, people wanted change, but one should not support illegal change.

Words fail.

In the same breath, he gave a Ukrainian history lesson:

In my opinion, this revolutionary situation has been brewing for a long time, since the first days of Ukraine’s independence.  The ordinary Ukrainian citizen, the ordinary guy suffered during the rule of Nicholas II, during the reign of Kuchma, and Yushchenko, and Yanukovych.

Ordinary Ukrainians guys suffered under Nicholas II, Kuchma, Yushchenko, Yanukovich.  Anybody notice a name missing from that list?   Stalin, maybe?  (Lenin should get honorable mention too.)  The guy who killed one-third of the Ukrainian population via starvation and executions, a total of around 3-8 million people? Think there was a little suffering in 1932-1933? As bad as Yanukovych was, his total body count during the uprising is on the order of the body count every 6 minutes at the height of the Holodomor.

This omission is particularly disgusting given the immense psychological toll that the Holodomor took and continues to take on Ukrainians.  Don’t think that the omission will not resonate deeply in Ukraine.  It is a taunting reminder of how Russians deny, deny, deny the Holodomor, and get incensed-hysterical, actually-at any moral claim made against them by Ukrainians.

The impression of insanity is only reinforced by other actions during the past several days, including a live fire exercise in the Baltic (witnessed by Putin) and today’s launch of an ICBM test.  Put it altogether, and Putin gives the impression of approaching Kim Jung Un or Kim Jung Il levels of aggressive craziness.  (And for those who say these exercises and tests were planned in advance, they could have easily been canceled if Putin wanted to lower the tension level.  The fact he let them proceed tells you all you need to know about his intent and mindset.)

So what are the broader implications of his disturbing display of mental imbalance?  No doubt the Europeans are even more intimidated now, and will be all the more reluctant to challenge a leader with a nuclear arsenal that they view as mad.

And that raises another possibility: that Putin was playing the psycho for effect.  The Slavic version of Nixon’s Madman Theory, and which Machiavelli wrote about centuries earlier: he wrote that leaders can find it “a very wise thing to simulate madness.”

I will say, watching the video, that Putin did a very, very credible impression of a madman, but that’s necessary to make the gambit work, isn’t it?

I don’t know whether he’s truly mad, or merely feigning it, but the effect will likely be the same.  The disturbing display of mental imbalance will work to his favor, and lead the Europeans in particular to back away slowly, letting him keep his current conquests, and prepare for his next move.  He may back off now, but he will be back for more.  And quite possibly not just in Ukraine.  But in the Baltic states and Poland.

And now for something completely different . . . finance.  (More Russia/Ukraine later.)

The Bank of England wants to put a stay on derivatives contracts entered into by an insolvent bank, thereby negating some of the priorities in bankruptcy accorded to derivatives counterparties:

he U.K. central bank wants lenders and the International Swaps and Derivatives Association Inc., an industry group, to agree to temporarily halt claims on banks that become insolvent and need intervention, Andrew Gracie, executive director of the BOE’s special resolution unit, said in an interview.

“The entry of a bank into resolution should not in itself be an event of default which allows counterparties to start accelerating contracts and triggering cross-defaults,” Gracie said. “You would get what you saw in Lehmans — huge amounts of uncertainty and an uncontrolled cascade of closeouts and cross defaults in the market.”

The priority status of derivatives trades is problematic at best: although it increases the fraction of the claims that derivatives counterparties receive from a bankrupt bank, this effect is primarily redistributive.  Other creditors receive less.  On the plus side, in the absence of priorities, counterparties could be locked into contracts entered into as hedges that are of uncertain value and which may not pay off for some time.  This complicates the task of replacing the hedge entered into with the bankrupt bank.   On balance, given the redistributive nature of priorities, and the fact that some of those who lose due to the fact that derivatives are privileged may be systemically important or may run, there is something to be said for this change.

But the redistributive nature of priorities makes me skeptical that this will really have that much effect on whether a bank gets into trouble in the first place.  In particular, since runs and liquidity crises are what really threatens the stability of banks, the change of priorities likely will mainly just affect who has the incentive to run on a troubled institution, without affecting all that much the overall probability of a run.

Under the current set of priorities, derivatives counterparties have an incentive to stick longer with a troubled bank, because in the event it becomes insolvent they have a priority claim.  But this makes other claimants on a failing bank more anxious to run, because they know that if the bank does fail derivatives counterparties will get a lion’s share of the remaining assets.  By reducing the advantages that the derivatives couunterparties have, they are more likely to run and pull value from the failing firm, whereas other claimants are less likely to run than under the current regime.  (Duffie’s book on the failure of an OTC derivatives dealer shows how derivatives counterparties can effectively run.)

In other words, in terms of affecting the vulnerability of a bank to a destabilizing run, the choice of priorities is something of a Hobson’s choice.  It affects mainly who has an incentive to run, rather than the likelihood of a run over all.

The BoE’s initiative seems to be symptomatic of something I’ve criticized quite a bit over the past several years: the tendency to view derivatives in isolation.  Triggering of cross-defaults and accelerating contracts is a problem because they can hasten the collapse of a shaky bank.  So fix that, and banks become more stable, right? But maybe not because it changes the behavior and decisions of others who can also bring down a financial institution. This is why I am skeptical that these sorts of changes will affect the stability of banks much one way or the other.  They might affect where a fire breaks out, but not the likelihood of a fire overall.

The pusillanimity of the US in the face of Putin’s aggression is bad enough (spare me any more expressions of “deep concern”), but it pales in comparison with the utter cowardice of the Europeans, especially the Germans and shockingly, the British.

There is only one explanation: they have been cowed by their energy dependency on Russia, and corrupted by dirty Russian money-much of which is merely money Europeans spent on Russian energy, recycled/laundered through European financial institutions.

There are myriad reports that Britain will not support any trade or financial sanctions against Russia. The fig leaf is that such measures will damage the world economy:

However, a document photographed in Downing Street suggested that Britain is concerned about the economic impact of any sanctions against Russia. The paper states that the “UK should not support, for now, trade sanctions … or close London’s financial centre to Russians”.

Seriously?  This gives new meaning to the old phrase “perfidious Albion.”

But what should we expect, really? Britain showed its true colors in its abject refusal to investigate seriously the Litvinenko murder and release any evidence that would make plain the connection between the murderers and the Russian state.  Heaven forfend that real estate in Belgravia take a hit.

Then there’s Germany.  Despite the fact that Merkel herself has all but admitted that Putin is insane, Germany is adamant against taking any measures that will actually inflict pain on Russia.  Indeed, Foreign Minister Steinmeier met with Lavrov in Geneva, and bleated out a statement about the necessity of relying on diplomacy:

Ahead of an extraordinary meeting of EU foreign ministers in Brussels, Germany’s Foreign Minister Frank-Walter Steinmeier said international diplomacy must prevail to solve the crisis.

“Crisis diplomacy is not a weakness but it will be more important than ever to not fall into the abyss of military escalation,” Steinmeier told reporters.

Steinmeier also suggested a fact-finding mission by the Organization for Security and Cooperation in Europe (OSCE), Europe’s main human rights and democracy watchdog, as an initial response.

“We are considering whether it wouldn’t make good sense to create transparency about what is happening on the ground in eastern Ukraine and Crimea instead of being dependent on rumors,” he said.

Yes.  There is so much ambiguity about what is happening on the ground.  We are so starved of facts about what Russia is doing.  Fact finding! That’s what we need!

There are none so blind as those who will not see.

Remember that Steinmeier is a SPD leader, and Schroeder’s political protege.  And further remember that Schroeder is Putin’s apologist and waterboy, and has been awarded for his lifetime of service with a sinecure as chairman of the board of Gazprom’s Nordstream pipeline.

If there was ever a more vivid illustration of why I’m damned glad NSA was giving extra special attention to German politicians, I’d be hard pressed to think of what it might be.

Indeed, this seems like a perfect time for a dump of some juicy kompromat on Herr Steinmeier and his ilk in the SPD.

In light of this, thinking of all the condescension and moral superiority directed at the US by German politicians and the German populace in the past 12-13 years is beyond nauseating.

Germany dresses up its cowardice in the garb of moral superiority.  In fact, its cravenness is driven by its dependence on Russian energy and the deep ties of German businesses to Russia.  Germany gets about 1/3 of its gas and about 28 percent of its coal from Russia (h/t @libertylynx).  The European oil market is also highly dependent on Russian supplies.

And of course, Germany has increased its dependency as a result of an insane energy policy, retiring its nuclear generators in a hysterical reaction to Fukushima (lest there be any tsunamis in Bavaria) and forcing a massive reliance on inefficient renewables.

Churchill said that the Germans are either at your throat or at your feet.  It’s quite obvious that the current generation of Germans has an intimate acquaintance with Putin’s taste in footwear.

The Balts and Poles are rightly freaking out.  Just today the Russians conducted live fire exercises in the Baltic.  Yes.  Totally pacific.  Just routine, surely.  But the Germans consider these long suffering victims of Russian (and truth be told-German) oppression as annoyances who are interfering with their desire for Ostpolitik and Ostwirtschaftlich.   Germany stymied the effort by Latvia and Lithuania to invoke Article 4 of the Nato Washington Treaty.  But Poland is having another go.

Ironic, isn’t it, that countries that border the Baltic are the true Atlanticists now?  The original Euro-Atlanticists, the UK and Germany, have been suborned by energy dependency and dirty Russian money. Germany accepted American protection when it faced an existential threat from Russia, but now repays the favor by running interference for Putin when it perceives that only Untermenschen  in eastern Europe are going to be ground under the Russian boot.

The poet Auden called the 1930s a “low, dishonest decade.”  The 2010s are proving to be one of history’s rhymes. The same fecklessness and cravenness in the face of aggression, and this cowardice is yet again dressed up in the language of high principle.

Appalling.

In 2007, in my 60th post on SWP, I wrote a post about Putin and the Euros, titled “A Man in a Hurry.”  If you look at Putin’s aggression in Ukraine, and the utterly pusillanimous European response to this aggression, that post from more than 7 years ago is quite clearly prophetic, to the last jot and tittle.

The closing paragraph:

I think that most Europeans, and those few Americans who seem to pay much attention to these issues, are nonplussed by Putin’s audacity in large part because they are projecting their attitudes onto him. They cannot envision why someone would engage in such seemingly short sighted actions. As a recent Newsweek story puts it, they wonder why Putin is risking severe “blowback.” However, their attitudes have evolved and developed in a completely different institutional, economic, and political environment than Russia’s. The Euro-American environment is much more conducive to taking the longer view that the unsettled (and unsettling) environment that characterizes Russia today. So, the Europeans–and Americans–should be ready for more “surprises” from Putin–which shouldn’t be surprises at all.

My main question is why a blogger, and amateur student of Russian politics, could figure this out, but the State Department, the intelligence agencies, the national security community, the vast bulk of think tanks, and the editorial pages of every major US paper couldn’t.  And why they haven’t been able to do so despite all that has happened since.  Georgia.  The castling move whereby Putin resumed the presidency.  The unrelenting crackdown on civil society.  It’s one thing to ignore reality when it’s lying around.  It’s another to ignore it when it is hitting you in the goddam face.

I’m not claiming genius.  Quite the contrary. This shouldn’t have been that hard.  I’m claiming common sense and a willingness to look objectively at reality.

But maybe that’s the problem.  All the king’s horses and all the king’s men were unable to do that for the reason I mentioned in that old post: a dominant mindset in which the bien pensants projected their own self-image onto Putin.  A failure of a navel gazing elite.  (We would be better served by a naval gazing elite, but since history ended that’s apparently so passé.)

This, frankly, is why we are where we are today.  Which is totally f*cked, by the way.

While I’m in this mood, I will also take credit for being among the first to advocate what is now becoming recognized as the only real way to hit Putin and the Russian elite where it hurts: an aggressive investigation of all the dirty money these bastards have squirreled away around the world.

Sadly, although this is widely recommended, the Germans and the British are going to fight this tooth and nail.  More on that later.

Postscript. Speaking of Putin as a Man in a Hurry, imagine my surprise to read Matthew Kaminski’s WSJ piece last night in which he said that Crimea was Putin’s appetizer, and characterized Putin as “a man in a hurry.”  Perhaps it is just coincidence, but more than 24 hours before I had written a post in which I had said that Crimea was Putin’s appetizer, and  that I had long said that Putin was a man in a hurry.  Surely a coincidence, except for the fact that the only references I can find to Putin being a man in a hurry are things I wrote.  Also probably a coincidence that 24 hours after I wrote a post saying that the EU had “midwifed” a deal with Yanukovych and that the ultimate outcome would probably be him ruling over a “rump state” in eastern Ukraine, Andrew Peek in the Fiscal Times uses the exact same words to express the exact same ideas.   It’s not like “midwifed” and “rump state” are everyday expressions.

Sorry.  Perhaps this is self-indulgent.  But this happens with some frequency.  Too often to be purely coincidence.  Citation/acknowledgement is the coin of the realm in academia, and as a result, using without attribution is tantamount to grand theft, which is why it gets under my skin.  But I guess journalism and academia are quite different.  In fact, I don’t guess: I know.  Journalists (and many bloggers) are the biggest lifters of the work of others that I know of.

In one of his famous papers, Durability and Monopoly, Coase conjectured that a durable goods monopolist could not exercise market power because he could not credibly commit to reduce output.  Let’s say that the monopolist had a stock of the good equal to X.  He sells the monopolist quantity of .5X.  Once he does that, he has an incentive to sell half of the remaining half.  Then he has an incentive to sell half of the half of the remaining half.  And on and on.  Understanding this, consumers believe that the monopolist will eventually sell all X units, and hence will pay no more than P(X)-which just happens to be the competitive price.  Due to the inability to precommit, the monopolist cannot charge a monopoly price and extract a monopoly rent.  (Stokey and others have proved Coase’s conjecture formally.)

The other day I was speaking to someone in the aluminum business.  He related a conversation with a Russian guy who traded for Rusal-Oleg (“The Living Neanderthal”) Deripaska’s aluminum company.  Since the Crisis, huge stockpiles of aluminum have built up.  These stocks weigh on prices.  Rusal and others are keeping these supplies off the market, but that still doesn’t support prices because consumers realize that they will eventually be released.  Rusal (and others) cannot credibly commit not to sell these ingots in the future.

What a dilemma.

But the Russian Rusal trader had a solution.  He said: “If only there was a way to make all this aluminum radioactive! Then all our problems would be solved!”

And he’s right: once contaminated, the metal would be unsaleable. Credibility problem solved.

Call it the Aluminum Meets Polonium Solution to the Coase Conjecture.