Streetwise Professor

I was invited to participate in a panel on clearing at ISDA’s Annual General Meeting in Singapore, but unfortunately I had to decline on account of my teaching obligations.  I therefore have to nod (vigorously0 in agreement from afar, because much of the discussion there has focused on the unintended consequences of the clearing and collateral mandates.  Consequences that I have been warning about for over four years.

One of the things that infuriated me about the advocacy for clearing (and yeah, I’m looking at you GiGi) was the claim that clearing would reduce the interconnectedness of the financial system.  I said this was patently false.  Clearing mandates would reconfigure the topology of the network of connections among financial institutions, but they would remain interconnected.  I noted that: CCPs would be vital interconnecting nodes in this new network: failure of these nodes would be catastrophic: and perhaps most importantly, CCPs could be vectors of contagion precisely during periods of financial stress.  I pointed out very early on that CCPs were repositories of wrong way risk because losses would hit default funds precisely during periods of extreme financial stress, and via that channel would bring that stress right back to the balance sheets of the banks with exposure to the default funds.  You know, when they were least able to stand the shock.  The CCP circuit connecting banks would be closed precisely when they were least able to stand the shock.

In retrospect, I seem like a Pollyanna.  Compared to people like HSBC’s Gary Dunn, anyways (Risk link-requires a subscription).  Gary went all Jeremiah at the AGM, warning of an apocalypse emanating from the clearing system.  Actually, his word was “Armageddon”:

Mandatory clearing of over-the-counter derivatives could jeopardise policy-makers’ hopes of a no-bailout financial system, according to Gary Dunn, senior manager for regulatory and risk analytics at HSBC.

Speaking at the annual general meeting of the International Swaps and Derivatives Association in Singapore today, Dunn sketched out an “Armageddon scenario” resulting from the fact that the same group of international banks are all members of the majority of central counterparties (CCPs) – so, a big bank default would simultaneously hit all CCPs of which it is a member.

“What happens when one bank defaults across six CCPs? The remaining members will have to pick up the bill. Given that they are almost certainly members of the other CCPs, this will result in a default contribution bill so large it could potentially lead to their failure also,” he said.

Given the key role CCPs will play in the future financial system, Dunn argued this would ultimately result in a taxpayer bailout amounting to trillions of dollars. In his Armageddon scenario, that bailout would be preceded by the complete liquidation of CCP initial margin stocks – much of which would likely be held in the form of government debt.

“The wrong-way risk in the current CCP system is so large it could potentially lead to a sovereign default,” he said. [Emphasis added.]

Interconnections between SIFIs via clearinghouses, with the fragility of these connections perhaps exacerbated by the fragmentation of CCPs (due to fragmentation along jurisdictional lines, perhaps).  Where have you seen that before?  Hint: Not in a Gensler speech.

The clearing panel also fretted abou the possibility that in its attempt to eliminate TBTF, the G-20 has just created new TBTF institutions.  Too big, and too interconnected:

Central counterparty clearers stand to be the next “too-big-to-fail” institutions and could pose an acute threat to the financial system if regulators stall on plans to manage the potential failure of a clearing entity.

At the annual general meeting of the International Swaps and Derivatives Association in Singapore today, a group of panelists highlighted the lack of clarity over resolution for failed CCPs as a significant concern for the G20 objectives of eliminating systemic risk.

“There are still no resolution plans for CCPs and it is murkier now that clearing houses have moved away from the utility model,” said Athanassios Diplas, senior adviser to the ISDA board, speaking at the event earlier today.

The G20 objectives agreed in 2009 deem that no financial institution should be considered too big to fail and that taxpayers should not bear the costs of resolution for any institution that does fail

While regulators have been busy penning rules to deal with the problem of too-big-to-fail banks, concerns are shifting to clearing houses, and the increased concentration of risk held in them as the Dodd-Frank Act in the US and the European Market Infrastructure Regulation push an increasing number of standardised over-the-counter swaps through central counterparties.

“We’re getting very close to solving too big to fail globally for banks, but I worry that this risk could move to CCPs. I’m not convinced that we have made CCPs deeply resolvable yet – we have to do that to address systemic risk issue in a thorough way,” Wilson Ervin, vice-chairman of the group executive office at Credit Suisse told IFR.

All of which was perfectly foreseeable in 2009 when the G-20 blessed clearing as the silver bullet solution.  Foreseeable-and foreseen by some.

And the late start on addressing this issue before CCP mandates went into effect has left the world financial system in highly exposed:

While the Financial Stability Board addressed basic principals for clearing house resolution in June 2012, the issue remains on the back burner with many regulators as they continue to get to grips with a workable bank resolution regime

CCPs are the solution.  So in their wisdom governments decided to load risk onto them.  But dealing with the failure of these government-mandated SIFIs “remains on the back burner.”

Great.  That will turn out well.

Fools rush in where angels fear to tread.  Governments have rushed into prescribing the Clearinghouse Cure, but have relegated addressing the very dangerous potential side-effect of that cure “to the back burner.”

But we’re not done!  The panel also fretted about the potentially destabilizing effects of increasing collateral and margins-both initial and variation margin (can’t find a link to this Mary Childs story: I think it is only available on Bloomberg terminals):

The numbers are large enough to be very worrisome,” Athanassios Diplas, principal at Diplas Advisors LLC and a senior adviser to the ISDA board, said on the panel. “I don’t

think anyone has trillions lying around the couch cushions.” Regulators should be careful in setting the collateral requirements given that margin calls contributed to the escalation of the financial crisis in 2008, according to Kim Taylor, president of CME Group Inc.’s clearinghouse.

Spiraling Losses

“Margin calls triggered liquidation of assets for positions, which triggered mark to market losses for other parties. It contributed to the spiral, and I think there’s the  potential for threshold-based margin” to help avoid a repeat, she said on the panel.

Margin calls exacerbating a crisis.  Whoever heard of such a thing?  Only anyone who has studied past financial panics and market crashes.  But Gensler and Timmy! and so many others assured us that collateral is only good: the more collateral the better.  Just another item on the bill of goods they sold the world-and for which we may have to pay dearly later.

Scary addendum.  At a recent Chicago Fed conference, I told someone from a major central bank that although the initial margin issue was important, it worried me that central banks and regulators seemed to be ignoring how variation margin could destabilize the system, especially with an expansion of clearing, which creates a very tightly coupled system of margin payments that must operate on a very tight and rigid time schedule.  He told me that there wasn’t as much concern about variation margin because it netted out to zero.

Seriously.  I kid you not.   It’s as stupid as the Krugman “we owe national debt to ourselves” mantra.  The payers have to find the liquidity to make the payment to the receivers.  In stress situations, they have to find a lot of liquidity precisely when liquidity dries up.  In response, they do things that impose additional stress on the system, and can break it.  Money is not transferred instantaneously and frictionlessly between those who owe and those who receive.  Those frictions-and just the timing required to recycle the payments-can cause the system to freeze up during periods of stress.

The “what, me worry?” approach to variation margin is very worrisome indeed.

But don’t worry!  Regulators will ensure that CCPs don’t engage in a race to the bottom when setting margins:

Britain’s new regulator for market operators warned clearers of tougher policing of fees to stamp out cut-throat competition that risks undermining financial stability.

. . . .

“We are not in the business of preventing competition but what’s important is the terms of that competition,” Britain’s new clearing supervisor, Edwin Schooling Latter, told Reuters in an interview.

The Bank of England became the regulator for clearing houses this month and Schooling Latter said in his first media interview he will not tolerate “a race to the bottom” such as clearers allowing banks to post too low margins against trades.

Margins refer to traders of derivatives posting government bonds or other high quality collateral to help cover any losses and the level of margins is determined by the clearing house.

“We want a world where the clearing houses compete on the quality of their risk management and not on how low their margins are,” Schooling Latter said.

Because regulators, of course, are so skilled at pricing risks.  They did such a bang-up job of it when setting capital requirements under Basel.  And by “bang-up” I mean like a train wreck.

The Sorcerer’s Apprentice metaphor seems more apt by the day.  Regulators and legislators have cast the spell to bring massive CCPs to life, but cannot control the consequences-which can be dangerous indeed.  They intended to solve one problem, but they have created others, and are scrambling to deal with them.

My most recent contributions to the WSJ energy experts have been posted.

What is the most promising renewable? (This is the don’t-sweat-too-much-for-a-fat-girl piece.)

What should governments do to encourage conservation?

As described in the WSJ, Russia has “slashed” its official 2013 growth forecast by a third to 2.4 percent: this new figure is less than one-half of what Putin had promised during his coronation campaign. And given that the year-on-year growth figure for February was less than 1 percent, 2.4 percent looks rather optimistic: I get the sense that Russia is in the process of revising expectations (A/K/A telling the truth) slowly.  Meanwhile, Russian inflation is running at around 7 percent: that figure for March was considered a victory after the 7.30 percent figure for February.  (Bloomberg seems to live  perpetually up Putin’s rear end, and typically spins things in his favor, so read the link with a grain of salt.)

This puts Putin’s newly appointed central bank head, Elvira (Mistress of the Dark Empire?) Nabiullina, in a difficult situation of being the girl at the stagflation party.  Putin is clearly nervous about Russia’s sputtering growth. He has promised a lot, and a failure to deliver will only further complicate his increasingly fraught political situation.  He has indicated a clear preference for the Russian Central Bank to loosen in order to spur growth.  Deripaska has been outspoken in his advocacy for the bank to reduce interest rates, and I imagine that other oligarchs (particularly in steel and coal, which have reported some rather heavy losses of late) are of like mind.  But bending to oligarchic pressures would likely spark greater inflation that would hit ordinary Russians-most notably low income Russians, especially pensioners, who are Putin’s prime constituency.  The pressures on Nabiullina to loosen Russian monetary policy will be pretty intense.

So what will Putin do?  His economic options are limited, and those that he is likely to try are unlikely to improve growth but will exacerbate inflationary pressures.  Consequently, expect a political response to distract attention, most likely a further intensification of crackdowns on the opposition, and fomenting anti-US sentiment.  He is not quite yet in Hugo Chavez territory, but there are similarities.

The virtual “currency” Bitcoin has been much in the news lately, due to its meteoric rise in price, and even more precipitous drop.  The price rose from approximately $40 in early-March to $266, then plummeted to as low as $54 in the course of a couple of days.

Most of the commentary has been a colloquy between true believers (including anarcho-capitalists, self-styled Austrians, etc.) and more mainstream skeptics.  The true believers say things like “Bitcoin is the most important invention ever” and wax eloquent (and ecstatic) over its liberating potential.  The skeptics point out the various practical limitations, which are quite acute.

Count me as in the skeptic camp, but that’s not what I will address in that post.  Instead, I will focus on the rise and fall in the price over the past month (which has been the second BitBubble-there was also a less severe one in 2011).   What surprises me is that I have yet to see anyone suggest what appear to be an obvious possibility: that the bubble is the result of a pump and dump scheme.

The price movement-a rocketing rise followed by an even more rapid fall-is the classic pump-and-dump pattern.  Moreover, all of the ingredients are there, just like in a penny stock.  An asset traded in a very thin market. A group of cultish true believers in the transformative nature of what they have invested in.  Moreover, this cult has clear doomsday predilections, especially where money is involved, and the events in Cyprus were calculated to stoke paranoia.

All of this is tailor-made for an operator or operators to start a stampede into the currency, and then puke out their Bitcoin at the top.

And there are operators-speculators, if you will-in Bitcoin.  Last week, several stories ran about the Winkelvoss twins’ (of Facebook fame/infamy) speculative investment in Bitcoin.  No, I am not accusing the twins of running a pump-and-dump.  I just bring them up to point out that BTC has attracted a speculative element.  And no doubt some of this type views the bleating Bitcoin flock as primed for shearing.

If it is a pump-and-dump, several questions arise.  One, obviously, is who done it?  Another: where are they located?  Were the laws of any country violated?  (Bitcoin aren’t securities, I don’t think.  Are they commodities, as defined by the Commodity Exchange Act?  That seems quite plausible.)  How much money was lost?  (This would depend on the volume of trade on the various Bitcoin exchanges during the Rise and Fall of the Bitcoin Empire.) I haven’t been able to find any indication that the CFTC has taken interest in this, but given it’s long-running campaign against FX boiler rooms, and bucket shops (to which the various Bitcoin “exchanges” bear more than a passing resemblance) it would seem to be a natural.

To me, the Bitcoin drama of the past weeks seems to be a penny stock manipulation scheme writ large.  What comes of that is quite uncetain, given the virtual nature of Bitcoin and the fact that it is traded at “exchanges” around the world.  These facts mean that it could fall between the regulatory and legal cracks.  To many Bitcoin Believers, that’s a feature not a bug, though one wonders if they will reconsider that if they bought at the top.

Returning to Deep Thinking About Bitcoin, I can’t resist mentioning this Krugman piece.  Paulie Krugnuts appeals to authority, namely Adam Smith, in his critique.  Smith’s analysis of gold and silver is correct, and applicable to Bitcoin, but I find it somewhat amusing that Krugman defers to the Great Scot.  Would that he would  do so more regularly, and on more important matters.  His commentary would improve immeasurably as a result.

This brings to mind a story that George Stigler told.  He used to bet his grandchildren $1 million if they could answer three questions correctly.  (He said something to the effect that eventually the Federal Reserve would make it possible for him to pay off that bet in the event his grandchildren won.  And he may well be right on that, and in the not too distant future.)  The first two questions were trivial, like “what color is the sky?”  The third was the stumper: “Who was Adam Smith’s best friend?”  Then one day his granddaughter said: “You are, grandpa.”  That was probably the correct answer, but it is mind-bending to think of Krugman as vying for that distinction.  Anyways, I hope that Krugman makes a habit of asking “WWASD?” before unburdening himself in the future.  He would be doing the world a favor, and spare himself of much embarrassment.  Assuming, of course, that he is capable of it.

FWIW, I am one of the “experts” on the WSJ’s new “The Experts: Energy” feature.  The first installment was a week ago.  The next one, about renewables, runs next Monday-tax day! Yay!

The question was: “What is the most promising renewable?”  My first instinct was to respond with the punch line from the very non-PC joke Ty Cobb told to a journalist who interviewed him late in life: “I feel like the country boy whose Mama told him to say something nice to his prom date, and he told her: ‘you don’t sweat too much for a fat girl.'” But I resisted the temptation to say that on the WSJ: here, not so much resistance.  But you’ll just have to wait a week to see what I said.  Snarky, but not quite so snarky as that.

It wouldn’t be quite so hard to answer the question: “What is your least favorite renewable?”  Here, we have to have separate categories for electricity generation and motor fuel.

With respect to electricity, the runaway winner is wind.  Economically: a turkey.  Environmentally: it kills turkeys.  Well, maybe not turkeys, but it does slaughter countless winged creatures.  Not that enviros will tell you that.  Rather, they are willing participants in a conspiracy of silence to cover-up the avian and chiropterian holocaust.

First, the economics.  Really.  I don’t have to go find these things.  They find me.

I could go on and on, but let me just point you to Germany.  Germany has made a huge bet on wind.  Huge.  And it is becoming a huge economic albatross (speaking of birds) around Merkel’s neck.  Two articles this weekend point that out, both from sources that are usually pretty enviro-friendly.

The first is from Bloomberg:

With consumer power bills increasing and Merkel facing elections in September, Germany’s energy policy is rising on the political agenda. The cost of developing wind farms in the North Sea has surged following construction glitches and delays in linking turbines to the grid.

“The entire energy switch has derailed,” Marc Nettelbeck, an analyst at DZ Bank AG, said this week by phone from Frankfurt. “The difficulties connecting offshore wind farms to the power grid reduces their profitability and renders the original investment calculations of utilities invalid.”

Merkel has sought to spur development of wind farms at sea — where gusts are typically strong enough to keep turbines generating around the clock — because most renewable sources can’t provide constant, or baseload, power like nuclear plants.

The connection setbacks are “problematic for baseload power capacity and can lead to the failure or delay of the energy switch,” Nettelbeck said.

Spending Reduction

EON, the country’s biggest utility, said last month it will lower clean-energy investments to less than 1 billion euros in 2015 from 1.79 billion euros last year. RWE will cut annual renewables spending in half to about 500 million euros in the next two years.

Read the whole thing.  It gets worse.

The second is from the FT:

The EU’s biggest economy has long been a champion of renewable power, a haven investors could depend on.

This made it a green leader well before it decided to phase out nuclear power after the 2011 Fukushima disaster in Japan, and drive its renewable generation up even further.

Though it is not very sunny nor even that windy, Germany now accounts for nearly half of Europe’s solar power capacity and 30 per cent of its wind power.

Renewable power – mostly wind, solar and biomass – made up a formidable 22 per cent of Germany’s electricity generation last year.

But, with the levy added to German power bills to help pay for this growth nearly doubling to €0.053 per kWh – and an election looming in September – environment minister Peter Altmaier has unveiled plans to freeze renewable subsidies for two years. He has also said future rises would be limited to 2.5 per cent a year after that.

Other proposals to reduce costs include a requirement for renewable generators to sell their electricity to buyers under long- term power purchasing agreements – a far less attractive option than the current system of selling power to the grid and getting paid a set tariff.

These new measures are supposed to take effect from August, but face so much political opposition that nothing may happen before the election.

Still, the consequences have been swift. One big municipal utility with substantial renewable investments, Munich’s Stadtwerke München, has already suspended new clean power projects.

Germany touts that it has made 1.4 billion euros on exporting surplus power (mainly from wind).  It doesn’t tout the fact that it spent 14 billion euros subsidizing wind production.  (H/T Tim Worstall.)

Wind is a diffuse energy source.  Wind production is greatest at night, and smallest when it’s hot.  Meaning that it is there when you don’t need it and isn’t when you do.  Load tends not to be located in windy places, meaning that it requires a substantial investment in transmission.  And wouldn’t you know (a) this is expensive, and (b) people don’t like transmission lines.  Wind is also intermittent, and requires backup traditional generation (fossil fuel or nuclear).

Other than that, it’s great.

But it’s so environmentally friendly, right? Aren’t these small prices to pay?

Why don’t you go ask your fine feathered friends that question?

Wind turbines A/K/A bird cuisinarts, bat blenders.

Master Resource and Watts Up With That? provide chapter and verse about the number of flying creatures killed every year by wind turbines.  The numbers are in the 10s of millions in the US alone, not to mention Europe. Each turbine kills several hundred birds per year.  In some locations, bats are major contributors to the body count.

In contrast: it is estimated that the Exxon Valdez spill killed less than 700,000 birds.

So surely, the enviros are shrieking in their opposition to wind, right? Right?

Hardly.  And as the links above demonstrate, the Federal government is actually complicit in efforts to cover up the bird and bat body counts.  Indeed, the Feds actually give licenses to kill.

To recapitulate.  Wind is economically inane and environmentally dubious.  Other than that, I see no problems whatsoever.

Now ethanol.  Another historically enviro-leaning source, The Economist, takes it apart.  Like wind, it is neither economically efficient nor environmentally friendly:

Moreover, ethanol burned in an engine produces more than twice as much ozone as the equivalent amount of petrol. Ground-level ozone is a big cause of smog. And, while good at boosting a fuel’s octane rating, ethanol packs only two-thirds the energy per gallon of petrol. As a result, motorists get fewer miles per gallon using fuel blended with ethanol than with undiluted petrol. So, even if blended fuel is cheaper per gallon than petrol (thanks to ethanol’s subsidies), the overall cost of using it tends to be higher

Not to mention (which the Economist does) that ethanol mandates are screwing up the gasoline market, and inflating the price of motor fuel in the US.

And definitely not to mention (which the Economist does not, at least in this article), that the subsidy- and mandate-driven demand for ethanol has increased the demand for corn, thereby increasing corn prices, and food prices generally.  The biggest victims of this?  The poor, notably in developing countries, who spend a very large fraction of their income on food.

Wind and ethanol are monstrosities.  Moreover, governments-through subsidies and mandates-are the Frankensteins who created these monsters.  (At least the original Dr. Frankenstein created only one monster.)

To the extent that fossil fuels create externalities, it is best to provide incentives to reduce their consumption, and to encourage the production of substitutes, through taxes (taking into account the heavy tax burden that fossil fuel consumption already incurs).  Then let market participants determine the most efficient way to mitigate these externalities.  Instead, for decades governments have attempted to pick winners, and constructed an elaborate system of subsidies and mandates that have been driven by politics and politicking, and which have led to the massive stimulation of the worst of the non-fossil fuel technologies: wind and (corn-based) ethanol. In so doing, they have picked total losers.

What’s more, the subsidization of inefficient technologies, actually suppresses the incentive to develop more efficient technologies (where efficiency includes the environmental costs).   This unseen impact is arguably as devastating as the seen effects-and those are bad indeed.

Obama is on a roll.  A roll of idiocy.

I can hear you say: “Uhm, so what else is news?”

Let me tell you.

Item 1: in a political rally in Colorado, Obama offered us this disquisition in political theory:

“You hear some of these quotes: ‘I need a gun to protect myself from the government.’ ‘We can’t do background checks because the government is going to come take my guns away,’ Obama said. “Well, the government is us. These officials are elected by you. They are elected by you. I am elected by you. I am constrained, as they are constrained, by a system that our Founders put in place. It’s a government of and by and for the people.”

This, mind you, was from an alleged Constitutional Law professor.  For one thing, Constitutional Law is frequently abbreviated to “Con Law.”  Well, with Obama, that formulation fits, with an emphasis on the “Con”.  For another, he wasn’t a professor.  A lecturer.  (Read what Richard Epstein has written about Obama’s lack of intellectual engagement at Chicago.  Not a surprise.  He knew-knew-he was a pretender who had no chance of prevailing in an actual intellectual interchange at a Chicago workshop or lunch table.  No chance.  So he distanced himself from it. My ex-boss Dan Fischel offered Obama a professorship.  Which Obama declined.  Fischel obviously made the offer for political and AA reasons.  And by AA I don’t mean “alcoholics anonymous.”)

Where to begin?  This seems to presume that “us” is some monolithic, reified thing.  That there is some “will of the people.”

What about the tyranny of the majority? What about the tyranny of minorities that can occur in any democratic or representative system?

The whole freakin’ reason behind a bill of rights is that even in a democratic (or, more properly, republican) system, individual rights can be trampled and abused by a government responsive to the whims of a majority, or an empowered minority.  That’s why we have a Bill of Rights.

In Obama’s formulation, not only would the 2d Amendment be superfluous, but so would the 1st and 5th (and 3d and 4th etc. etc.) No one need fear the denial of their freedom of speech or worship or assembly or right to a fair trial, because hey, the government is just us, and we would never harm us, would we?

It is hard to overstate the cluelessness-or, more accurately, disingenuousness-of Obama’s formulation.  “We’re from the government, and here to help you, ‘cuz we would never ever hurt us, right?”

So I would ask Obama point blank: OK, Mr. Con Law Poser “Prof”, are you advocating the abolition of amendments 1-10 of the Constitution (or perhaps 1-27)?  Because under your “the government is us” theory, they are completely superfluous.  QED.

Let me state clearly: Too often, the government is not us.  The government is too often the anti-us.  Which is precisely why elections are an insufficient constraint on its predations, and why Constitutional constraints on the legislative and executive branches are imperative.

Obama traveled from Colorado to California to raise money from the Bay Area elite.  Mr. I’m Fighting For the Middle Class sucked up to the very, very small fraction of the 1 percent in order to raise money for the campaign to regain the House in 2014.

Put aside the truly risible things he said, like his remark that Nancy Pelosi never let ideology cloud her judgment: that would presume that she had judgment to begin with, and there is incontrovertible empirical evidence that she has no judgment-or brain-to speak of.

No, let’s look at the spectacle of his abasing himself before the execrable hedge fund billionaire Thomas Steyer, a hard core green, and opponent to the Keystone pipeline:

Appearing at the home of an outspoken critic of the Keystone XL pipeline, President Obama on Wednesday night told a group of high-dollar donors that the politics of the environment “are tough.”

. . . .

In the face of those pressures, at the fund-raiser on Wednesday — and at a second one at the home of the billionaire philanthropists Ann and Gordon Getty — the president sought to reassure his supporters that he would continue to fight for environmentally friendly policies.

Excuse me while I wipe away the tears.

The Steyers and the Gettys have theirs.  (The Gettys acquired their wealth by oil, ironically.  Not that Gordon actually did jack to create it.) They will live large regardless of whether energy is cheap of expensive.  Large, hell: they’ll live huge.

But I wonder.  Are they “us”?

So indulging enviro fantasies costs them nothing.  They are the very non-apocryphal modern embodiment of the apocryphal Marie “let them eat cake” Antoinette.  “They can’t buy gas?  Let them drive Teslas.”

But this is who Obama panders to, and who lionizes Obama.  They are ones who consider it only natural that they lord over “us”, and who quite openly attempt to buy influence.

Which is exactly why there needs to be constraints-hard, binding limits-on government power.  Contrary to Obama’s Schoolhouse Rock political theorizing, unconstrained democratic institutions are a threat to individual rights and liberties.  Not least because they are vulnerable to the manipulations of oligarchs.  Like Thomas Steyer, and Getty and Goldman spawn.

Several stories converge to tell a single story.

1. Russian capital outflows totaled $25.8 billion in the first quarter.  Given that the government had forecast between $0 and $10 billion for the year . . . they’re revising their projection.  To $40 billion.  Who wants to quote an over-under for the next revision?
2. Russian economic growth slowed to .1 percent year-on-year in February.  In other words, barely any growth at all.
3. Putin gave an order to all state officials to close foreign bank accounts within three months, or be fired.
4. A deputy chairman of the Russian Central Bank said that Russian officials may be required to invest in domestic securities.
5. Putin is again mooting the idea of some sort of popular front, and ditching United Russia has his favored political vehicle.  United Russia, of course, being basically the bureaucrats’ political party.
6. Putin is cracking down on NGOs that have any connection with the West.

1. and 2. are symptomatic of a sputtering economy that cannot generate the growth or the capital necessary to pay for Putin’s promises, or his ambitions.  3., 4., and 5. show that Putin is at war with the bureaucracy-just like the Tsars and Commissars from the beginning of Russian history.  6. reveals Putin’s continued paranoia that NGOs are plotting some sort of Orange venture in Russia.

All suggest that Putin is increasingly beleaguered.  Life was easy when the economy was doing well.  Not so easy when it’s stagnating: given Russia’s presumptions as an emerging market, .1 percent growth is equivalent to a major recession in the US: a far cry from the 6+ percent of the mid-00s, and even the 4-5 percent which Medvedev and Putin have claimed to be expecting.  Standing still is falling back, especially when Putin has promised big increases in both social and military spending.

So where does he turn?  The predations of the bureaucracy are a drag on growth: so attack them, like the Tsars and Commissars before him.  Uhm, good luck with that.  Like cockroaches, the bureaucrats have always survived every attack against them.  Stalin imposed some discipline-but look at what was required.

But outlawing foreign accounts is one knout that he can wield that hits them where it hurts.  It also is a form of financial repression that can offset, in part anyways, the difficulties that Russia faces in attracting and retaining capital, due to its poisonous investment climate.  In essence, Putin is attempting to reassert his power over the bureaucracy and at the same time to recirculate their ill-gotten gains within Russia, rather than without, thereby offsetting the reluctance of foreign investors to risk their capital to the whims of the Russian state and its agents.

But resorting to sticks, rather than carrots (“play along and you can share in the rents”) Putin is betraying some desperation.  Moreover, although the bureaucrats may mulishly submit to the knout, they will resent Putin’s resort to coercion.  They may falsify their preferences, and promise fealty.  But they will be alienated.

This is the classic authoritarian dilemma.  A subservient but resentful class of underlings.  Coordination problems mean that few are willing to declare openly their opposition.  But this equilibrium is quite tenuous.  A shock to the system that weakens the autocrat-a natural disaster handled badly, an overreaction to an isolated act of opposition-can lead to a rapid and uncontrolled chain reaction in which those who suppressed their true feelings stop falsifying their preferences.  This is the dynamic that toppled Mubarek in weeks, and unleashed civil war in Libya.

Stability in autocracy is one equilibrium in a global coordination game: complete collapse is another.  The literature on global games predicts that the stable equilibrium is a fragile one.  A small event can lead to a “run” on the autocratic bank of power.

That’s where Putin is now.  I am not predicting that Putinism will collapse.  I am saying that the risk of such collapse is heightened.  The best evidence for this is Putin’s ratcheting up of oppressive measures, whether they be applied to bureaucrats theoretically subordinate to him, or NGOs.

Look back to posts I wrote in 2007-2008 where I emphasized the brittleness of Putinism.  Putin recognizes this.  His actions demonstrate that clearly.  A confident autocrat would not do what he is doing.

The LSE recently hosted the 6th Annual Russian Business Conference, which was well stocked with apologists and whataboutists.  Kudrin was there, and said some sensible things, especially regarding the Russian energy industry.  Others, well . . .

For instance, Presidential Commissioner for Entrepreneurs’ Rights Boris Titov.  Titov was defensive about the Magnitsky case, and cautioned the audience against generalizing from that case:

Titov admitted that the protection of business rights in Russia was a thorny issue, but asked that the situation not be dramatized.

“Such high-profile cases exist in many countries, but investors should look at the overall [investment] environment: how do the law-enforcement agencies and the prosecutor’s office operate? Is the problem of raiding being tackled or not? Conclusions must not be drawn on the basis of scandalous politicized cases that do not reflect the actual state of affairs,” remarked the ombudsman.

And just what would the “actual state of affairs” be? Just how do law enforcement agencies and the prosecutor’s office operate?  Tell us, Boris, is the problem of raiding being tackled?  Magnitsky aside, the answers to all of these questions-answers that Titov does not provide, but are well known-make it plain that “business rights” in Russia are in a parlous state indeed.

Scotsmen (based on the name) are willing to play along, if they are in the employ of a Russian bank, anyways:

Titov’s position echoes the opinion of VTB Bank’s Neil McKinnon, who points out that corruption and double standards are not the exclusive preserve of Russia. McKinnon cites some recent criminal scandals in Britain itself:

“In the UK there is a problem with corporate governance and I think… and in the City where I work. There have been a number of world-publicized cases – The London Whale, JP Morgan […] A whole host of problems.”

“HSBC and Standard Chartered have been fined 1.9 bln dollars for money laundering. If I was to money launder, I’m walking into a maximum imprisonment of 14 years and I’m not allowed to work in the City ever. If I’m on board of HSBC or Standard Chartered, I pay a 1.9 bln dollar fine, collect my bonus and I stay in my job. I think that is a disgrace. But I think that the City elite don’t get it,” he added.

Uhm, HSBC’s money laundering, the Whale, etc., are completely off-point in this context.  It’s not an issue of the misconduct by private business: it’s an issue of private business being preyed on by the state, “law enforcement”, security services, and criminal syndicates affiliated with the above.

Another speaker bemoaned the lack of long term funding:

In addition to the stereotypes surrounding Russia, the mood of foreign investors is clouded by the lack of cheap sources of financing within the country. According to experts, growing companies in the Russian market find it hard to attract long-term funding, whereas Western financiers are willing to wait a little longer for their investments to bear fruit.

“Russia has money, but no capital,” says Alexander Galitsky, renowned entrepreneur and owner of the venture fund Almaz Capital Partners.

And why is that, Alex? Why aren’t people and institutions willing to invest long term?  This is endogenous, after all.  Could the insecurity of property rights and the risks of expropriation make investors reluctant to provide long-term finance?  Just askin’.

Are these three actually this clueless?  Or are they just gulling the gullible?

A Medievalist has discovered that, heaven forfend, Shakespeare was a FOOD HOARDER!:

William Shakespeare’s lesser known role as an illegal food hoarder 400 years ago helps us understand him as a more complex figure, says new research.

As well as hoarding during food shortages, the Aberystwyth University study said the bard was also threatened with jail for tax evasion.

. . . .

She said the poet and playwright’s role as a grain hoarder during food shortages in the late 16th and early 17th Centuries were something that people had largely forgotten about him.

Over a 15-year period, Shakespeare bought and stored grain, malt and barley for resale at inflated prices to his neighbours and local tradesmen.

. . . .

He was pursued by authorities for tax evasion, and in 1598 he was prosecuted for hoarding grain during a time of shortage.

The research found that Shakespeare “pursued those who could not (or would not) pay him in full for these staples and used the profits to further his own money-lending activities.”

About his prosecution, Ms Archer told the BBC: “It’s one of the things that we’ve forgotten about Shakespeare.

“As well as writing for people who were experiencing hunger, he was exploiting that need himself.

“He was using his role as a playwright and the public playhouses, gathering coin, in order to take advantage of the market when it’s at its most profitable, and selling food at inflated prices to secure the long-term future for his family.”

No doubt Shakespeare was prosecuted under the engrossing and forestalling laws rightly excoriated by Adam Smith in Chapter V of Book IV of Wealth of Nations (“Digression Concerning the Corn Trade and Corn Laws.”)  Laws which Smith demonstrated actually contributed to dearth and famine.  As Smith clearly showed, rather than being exploitative, the speculative storage of grain reduced the likelihood and severity of “dearth”.  So rather than warranting Prof. Archer’s tsk-tsk-ing about exploitation, taking advantage of the market, blah blah blah, this is another reason to admire Shakespeare.  “Tak[ing] advantage of the market when it’s at its most proitable, and selling food at inflated [by what measure can you tell the prices are inflated, pray tell, Prof. Archer?] to secure the long-term future for his family”-that’s the invisible hand in action.  Adam Smith would have no doubt approved, and when it comes to economics, bet on Adam Smith over a MedLit prof.  Every. Time.

The BBC piece (and other articles describing Archer et al‘s research) mention Shakespeare’s Coriolanus, in which there is a conflict between patricians and plebleians over Rome’s stocks of grain during a famine. Note, however, that there is a major difference between state-controlled grain stocks, and a competitive storage market.  In the play, the patricians are paternalistic, claiming that they allocate stocks in the interest of the people.  But one patrician, Marcius, says that those plebleians who serve the state (by fighting in the army) can get all they need.  In other words, the system described in Coriolanus is one in which grain is allocated on the basis of political considerations, rather than a competitive process.

But no doubt such subtleties are lost on Medieval Lit profs.

Though Prof. Archer and her colleagues are no doubt shocked and dismayed by their findings, they make me admire Shakespeare even more.  An incomparable artist who could also do business.  And in the bargain, improve the allocation of resources and reduce the threat of famine, though that was not his explicit intention.  Well played, Will.  Well played.

In the immediate aftermath of the abortive deposit levy in Cyprus, I confessed being unsure as to why Russian stocks took a bigger hit than about stocks in any other country, including those in the EU where the precedent of expropriating insured depositors would seem to be most salient.

Upon reflection, the most likely explanation is that Cyprus’s financial straits would impede the utility of the country as a tax haven for Russian companies.

Although European and US stocks have rebounded, Russian stocks haven’t.  This got me thinking about the implications of the recent deal for Russian companies.

Capital controls appear to be the key.  If Russian corporates can get their money into Cyprus, receive the favorable tax treatment, and then get it out again, boomerang-like, they are OK.  Conversely, if Cyprus becomes a roach motel, where money goes in but can’t get out, that would really put a tax crimp on Russian corporates.

There have been wildly conflicting claims about the prospects for capital controls in Cyprus.  This seemingly official announcement only adds to my puzzlement:

Capital controls imposed to avert a run on banks in Cyprus after a painful EU rescue plan will be “loose” but will apply to all banks on the island, the Central Bank governor said on Tuesday.

“We aim for some restrictions which, in the words of the president, will be loose,” Cyprus Central Bank governor Panicos Demetriades said. He said the measure would apply to all banks based on the island.

Demetriades said the restrictions would be “temporary” but would not say how long they would last.

“Temporary” I sort of get.  Though I think of the withholding tax, which was a “temporary” wartime measure adopted in 1942.  Better yet, the “temporary” tax on telephone services, adopted to fund . . . the SpanAm War in 1898.  Still on your bill today, folks.

The “loose” part is a mystery.  WTF does that mean, exactly?

My interpretation: Cyprus wants to ensure that Russian companies can continue to boomerang money through the country.  If capital controls are “tight”, Cyprus becomes a roach motel, and Russian money will not check in knowing it wouldn’t be able to check out.

My question: what say the Germans about this?  I sense that the back-and-forth over capital controls is just part of the battle between the Germans and the Russians, in which the Cypriots want to support the Russian side.  I suspect the Germans will consider “loose” to be unacceptable. Meaning that there will be more conflict to come.

The anti-Russian implications of the German hard line on Cyprus are striking, and hard to understand completely, given the fact that Germany has taken a relatively pro-Russian line in Nato.  But perhaps there’s something deeper going on here.  Maybe something personal.  I wonder if Putin regrets setting his dog loose on Merkel-a notorious caninophobe.  Could caninophobia have led to Russophobia?