Streetwise Professor

I distinctly remember sitting in Sherwin Rosen’s Economics 301 Price Theory course at Chicago (in Winter ’82 quarter, I think), listening to him lecture about the informational role of the price system.  He was talking about relative prices, and all of sudden the volume of his voice rose startlingly, and he almost shouted: “And that’s why inflation is bad.  It F*CKS UP relative prices!”  (Sherwin is truly missed, by me in particular.)  And, if you screw up relative prices, Sherwin continued, you cause the misallocation of resources.  These inefficiencies can be very costly.  (Bertrand Russell once said that “efficiency is the highest form of altruism.”  Thus, screwing up relative prices is a profoundly un-altruistic act.)  

Reading these two posts from Think  Markets  brings Sherwin’s outburst oh-so-long ago to mind.  Mario Rizzo notes how the Fed’s extremely aggressive monetary policy (which bears a major risk of massive inflation) is distorting relative prices.  In particular, it is attempting to inflate housing prices (relative to the prices of other goods and services) by reducing other prices (interest rates).  Worse, it is doing so deliberately, in an effort to influence the allocation of resources in the economy:

On the other hand, demand is being stimulated by Fed purchases of MBS.    As of March 18, 2009 the Fed had $236 billion in such securities  on its balance sheet. In addition, a $8,000 tax credit for first-time home-buyers was included in the stimulus law. More purchases of MBS are forthcoming. This should cause mortgage rates to fall further (although some of that fall is already being seen). And who knows what is coming after that?

(The tax credit will expire in December; that will reduce demand. I doubt this will be a big factor either on the upside or the downside.)

So whatever equilibrium the market is tending toward, it is not a long-run sustainable one. This is because real interest rates will rise in the few years due either to inflation or the Fed’s  sales  of MBS to prevent inflation.

If the first is the mechanism, then we shall probably see another housing bubble bursting. This is because the Fed will not begin selling securities until it sees sign of overall inflation (and not simply price rises in particular markets). This will be too late to prevent a new housing boom.

If the second is the mechanism, then the Fed will have simply succeeded in slowing down movement to the eventual lower-price equilibrium.

Overall, it is good news that housing prices are falling and sales rising. Yet the Fed will manage to turn this good news into bad:    just the opposite of the “Keynesian miracle” –  bread into stones.

This is to take a very Olympian view of the operation of the economy, with the Fed in the role of the All Seeing, All Knowing, All Powerful Zeus.  But, as Mario notes, these interventions are impeding the movement of the economy to a sustainable equilibrium; perpetuating the distortions that materially contributed to the current problems in the first place; and thus laying the groundwork for a future crash (one, by the way, that will wash over an already weakened banking system.)  

In other words, this is an exercise in what I termed NeoSoviet Economics; an attempt to dictate market outcomes in order to sustain an unsustainable status quo.  This is unlikely to turn out well.  

We need resources to flow out of bloated sectors (real estate and construction first among them, but autos and many parts of the financial sector as well).  This is never an easy process.  Indeed, it is inevitably painful.  But it is necessary to compare that pain, to the pain of alternatives.  Distorting relative prices and impeding the flow of resources to higher value uses will only make things worse.  

The Fed could use some of the wisdom of Canute, who knew better than to think that he could command the tides.  The Fed’s efforts to control the Fundy-like economic tides we are currently encountering are likely to be worse than futile; they will instead be destructive, and exacerbate and perpetuate economic dislocations rather than alleviate them.

News reports state that Geithner supports mandatory central clearing of OTC derivatives transactions.   His testimony is not quite so blunt, but could be interpreted that way:

Fourth, we should establish a comprehensive framework of oversight, protections and disclosure for the OTC derivatives market, moving the standardized parts of those markets to central clearinghouse, and encouraging further use of exchange-traded instruments.

I have argued against such a mandate here (“skinny” version), and here (“supersized” version).   Geithner is not specific about the organization of a clearinghouse, and in particular about the scope of products each would clear, but Darrell Duffie has argued that a specialized CDS clearinghouse would increase risk.   I’ve also laid out many of my arguments (that eventually showed up in the papers linked above) here on SWP–just type in “clearing” on the search bar if you’d like to find them.

Given the barrage of words I’ve already hurled at the subject, I’ll limit myself here to a bullet point list of the problematic issues:

• Risk pricing.   Dealers are likely to have better information about counterparty risks arising from the nature of the specific instruments, and especially from the balance sheet risks of counterparties.
• Netting is not necessarily a social benefit.   It redistributes wealth (in the event of a default) to clearinghouse members and from the other creditors of a defaulter, e.g., buyers of the defaulter’s commercial paper, its securities lending counterparties.   It is not immediately obvious that this allocation of counterparty risk is welfare improving.
• Clearing concentrates counterparty risk and redistributes it among the members.
• This concentration is especially problematic since derivatives counterparties have recourse to a dealer’s entire balance sheet in the event of a default.   In a CCP, recourse is limited to the capital of the CCP, plus any additional “good to the last drop” obligations of members to contribute additional capital in the event that the CCP funds are exhausted.   These funds appear small to the potential loss in the event of a major default.   As an example, CME clearinghouse can tap into $6 billion of capital if margins don’t cover a default loss.   (This includes CME stock deposited by clearinghouse members, valued at its current price too, which would likely fall in the event of a major default.)   The size of ICE Trust’s Guaranty Fund (the backstop monies that would be available in the event that margins don’t cover a defaulter’s obligations) is not publicly known (at least I have not been able to track down that number).   ICE has committed $10 million, with a commitment to raise it to $100 million.   I think members are obligated to kick in $20 million to the fund, but that could be scaled as position sizes increase.   I have not seen any indication that there will be “Maxwell House” (H/T Lucio) features in ICE Trust.   Anyways, we’re talking less than $1 billion here.
• CCPs have a more rigid, mechanical collateralization mechanism.   This could be a feature, but it could also be a major bug in times of systemic stress.   CCPs require posting of collateral in cash or close substitutes, sometimes intraday, and no later that the opening of business of the next day.   Dealers can be more flexible with collateralization, extending credit, or accepting a wider range of collateral.   Large market moves create large demands for cash in a CCP structure.   This can contribute to a liquidity crisis.   Note in October, 1987, many banks were unwilling to extend credit to fund margin calls.   Fed action alleviated a collapse of CME and CBT clearinghouses, but the margin induced demand for liquidity nearly led to a systemic collapse.   (Bernanke actually wrote a paper on this in the 1991 RFS).

I have seen no evidence that any of these points have been given serious vetting by the powers that be.

Bernanke and Geithner testified before Congress yesterday, and advocated the creation of vast new Federal powers to intervene in financial markets.   These powers (soothingly called “resolution procedures”) would include the ability to seize “systemically important nonbank financial firms.”   In particular, the government would be empowered to place such a firm “into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate” (Bernanke) and “to sell or transfer the assets or liabilities of the institution in question, renegotiate or repudiate the institution’s contracts (including with its employees), and prevent certain financial contracts with the institution from being terminated on account of the conservatorship or receivership” (Geithner).

This would represent a breathtaking expansion of government authority.   Such power can be used for ill by venal, unscrupulous, vindictive, or power mad politicians.   Think of this authority in the hands of an Elliot Spitzer-type, or an Andrew Cuomo-type.   Hell, think of what Harry Truman could have done with it during his battle with steel companies in the Korean War.   Moreover, merely rational politicians may respond to populist pressures, or to interest group pressure, to utilize these powers in a way that helps the politician, but not the broader interests.   These powers can also be used for ill by well-meaning, but incompetent officeholders.   The performances of Henry “Trust me, I stayed at a Holiday Inn Express Last Night” Paulson or Geithner or Bernanke hardly inspire confidence that such powers will be wielded wisely.

Bernanke briefly genuflected to bankruptcy law, but then dismissed its relevance, arguing that it was too cumbersome to deal with fast-breaking crises like that that engulfed AIG.

In essence, Bernanke and Geithner are pressing for what the property rights economics literature calls state contingent control rights.   Private contracts and the law (e.g., bankruptcy law) also have mechanisms to allocate control rights on a state contingent basis.   For instance, when certain events occur (e.g., a corporate debtor cannot make a payment), rights of control over assets are shifted.   Efficiency considerations provide incentives for parties to design transfer mechanisms that respect information asymmetries and costs, and other transactions costs.   Moreover, these mechanisms also provide protections against opportunistic actions that impair efficiency, but allow one party (or parties) to extract wealth from others.

Bernanke and Geithner pointed to Federal powers to force banks into receivership as a precedent for their request to obtain similar powers over other institutions.   It is important to note, though, that there is a crucial difference.   Government, via deposit insurance, is effectively a direct claimant against an insured bank.   An insolvent bank has incentives to act in ways that is detrimental to the interests of this claimant, and others as well.   Just as bankruptcy law serves to protect creditors against the inefficient actions of shareholders and managers, the ability of the government to intervene protects the government and taxpayers as creditors against the inefficient actions of insolvent banks and their managers.   Note that most of the banks seized in this fashion are small and not systematically important.   This illustrates that this mechanism serves less as a mechanism of systemic protection, but as a means of protecting one class of creditors.

I would also emphasize the breathtaking hypocrisy in this proposal.   Systemically important banks are at the heart of the current financial crisis.   Sure, AIG is a big deal, but so are Citi, BofA, etc.   The government already has considerable power over these banks.   Arguably, it should be using it to control systemic risk, not to mention to limit the exposure of the FDIC as deposit insurer.   But it seems that every action of the Treasury and Fed is consciously intended to avoid taking forceful action.

In their testimonies, neither Geithner or Bernanke specified the kinds of safeguards that would be in place to protect the intertests of affected parties in the event of a government intervention.   Given that government especially is often first and foremost a mechanism for rent seeking, it is imperative that such mechanisms exist.

AIG was the poster child for the Bernanke-Geithner arguments.   One interpretation of their remarks is that the government lacked the authority to impose haircuts on creditors and counterparties, and hence were forced to use government funds to make these firms (e.g., Goldman) whole.   That seems a real stretch.   It seems more likely that the AIG outcome reflected the influence of some firms and interests, and the lack of influence of others.   From this perspective, it is quite likely that the outcome would be the same even if the government had the power to impose a haircut on Goldman or not.   I think that if Paulson and Bernanke had wanted to get AIG derivatives counterparties to share the pain, they could have found the way.   The fact that they didn’t was, in this view, a conscious choice, rather than the result of a lack of the ability to make a different choice.

The power to impose unilaterally contractual adjustments that will influence the allocation of tens of billions of dollars is an awesome one.   It needs serious ringfencing to protect the interests of the myriad claimants of these “systemically important” firms.   Thus, rather than delegating vast powers to the Executive Branch, or the Fed, it would be worthwhile to see how bankruptcy law can be modified to permit more timely intervention while respecting the interests of affected parties against the potentially malign or incompetent actions of the government.   Moreover, an established procedure could reduce uncertainty, which is an important benefit during times of systemic stress.

There’s another thing to be considered.   What will be the equilibrium consequences of such a massive shift in control rights?     Given such a shift in the contracting environment, private parties will adjust their contracts.   They may try to contract around the restrictions in ways that could have serious implications both during a systemic event, but also in “ordinary” times.   How will granting these conditional control rights to the government affect private contracting decisions relating to capital structures?   Employment contracts?   Compensation structures?   How will it affect the sizes of firms?   Their horizontal and vertical scopes?   (I can see, for instance, this leading to an increase in vertical integration, as arms length contracts face additional risks under the Bernanke-Geithner proposal.)   How will it affect other kinds of financial contracting, e.g., collateralization, the use of derivatives, the use of clearinghouses?

I don’t know the answers to these questions.   Many are likely unanswerable ex ante.   But it must be recognized that the unintended effects of this expansion of power are likely to be huge, and deserve consideration ahead of time.   Marry in haste, repent at leisure is not a wise course to follow.   Many of the proposals for regulatory and legislative changes, these included, seem predicated on the view that nothing else will change in response to these changes.   We know that is wrong.   We also know that many of the equilibrium responses of private parties will be individually rational, but reduce efficiency.   The Bernanke-Geithner proposals will not only affect what happens during a systemic event, but what happens every day after they are implemented.   The cumulative impact of these seemingly small changes in individual contracting decisions could be greater than the impact arising from the effect of the proposed regulations on the problem at hand–controlling systemic risk.   I would hope that some serious thought is given to this issue before we put the current crisis to use to vastly expand the government’s power in the next one.

Numerous commentators, including Willem Buiter, have emphasized the potential for adverse selection in the Geithner plan auctions of troubled assets.   Join the party, dudes.   This was the graveman of my skepticism of the original TARP auction scheme.

But, I think that moral hazard is the key problem with the Treasury plan.   That is, the plan defers Judgment Day for the banks.   We need to separate the Saved from the Damned, but instead Geithner lets dodgy banks continue to operate.   They have the option as to whether to participate in the sale of troubled assets, and will exercise that option to maximize their value.   Unfortunately, maximizing this option value means that the banks will do what it takes to defer Judgment Day, and in so doing, they have very perverse incentives.   Moreover, inasmuch as there is arguably an externality from the continued operation of insolvent banks (as it calls into question the solvency of the entire banking system, and poses the ongoing risk of another systemic event), deferring Judgment could be very costly indeed.

This is not to say that adverse selection is important.     It is, but in a way different from what Buiter and others have emphasized.   In particular, adverse selection arising from the fact that sellers of the toxic assets are likely to have better information about their value than buyers means that, to protect against the “winner’s curse”, potential buyers will low-ball their bids.   That is, their bids will be at a discount (on average) from the true value of the assets.

This represents a further deterrent to banks to participate.   Indeed, if the information asymmetry is sufficiently severe, trading activity in this market may be de minimus.   Thus, low ball bids will represent an even further disincentive for truly bad banks to participate in the sale of toxic assets.   And they will be able to make a credible case that these prices do not reflect true values.

This problem is a reason why, in the Fall, I proposed Humpty Dumpty.   By aggregating bad assets, and selling equity claims on the pool of these assets, asymmetric information/adverse selection problems are mitigated.   Substantially.   This selling stuff a piece at a time is just nuts, and maximizes the potential for adverse selection.

Like Casey Stengel once said: “Doesn’t anybody know how to play this game?”

One interesting thing in the news today. New media darling Sheila Bair supposedly recognizes that bad banks have little incentive to participate in the sales of toxic assets, and is reported to be planning to exert pressure on the banks to sell.   Moreover, the government will supposedly use the results of stress tests (remember them?–funny how Geithner didn’t mention them in his most recent announcement)   push the banks to sell.

I guess that’s an improvement, inasmuch as it at least indicates that there is a glimmer of understanding of the problem at the root of the Treasury plan.   But why do so in such an opaque, indirect, and potentially ad hoc and arbitrary way that could be undermined by influence activities?   (Who decides who gets pressured, and how much?   How is compliance going to be measured and monitored?   How will political pressure and lobbying affect the process?)   Why not do it in a straightforward, public, mandatory, non-discretionary, non-arbitrary way?   This is, after all, allegedly the era of transparency in finance.   Why is the government being so un-transparent in its handling of this?   Could it be that they don’t have   the political will to do things openly and honestly, or that they are skeptical that such an approach will work?   Could it be that they prefer such ill defined and imprecise approaches because it maximizes their residual control rights?

So, Sheila, I say: If you think that the moral hazard involved in allowing banks to choose their degree of participation in the sale of toxic assets is a bad thing, come up with a credible, public statement of a way to address that problem.   Delphic utterances and leaks that create uncertainty are not what we need right now.   We need to resolve uncertainty, not layer it on.

Vlad is POd.  Seriously POd.  At the Ukrainians and the Euros, for having the audacity to modernize Ukraine’s shambolic gas pipelines without consulting HIM.  Can you imagine, the nerve.  Like Ukraine must think it is a sovereign country or something.

Here’s a glimpse at little Vlad’s foot stamping, hold-his-breath tantrum:

“It seems to me the document about which we are talking is, at a minimum, ill-considered and unprofessional because to discuss such issues without the basic supplier is simply not serious,” Putin said in the Black Sea resort of Sochi.

Just how the “basic supplier” would be harmed by measures that would improve the reliability and capacity of a major route linking its supplies to the ultimate consumer, Vlad didn’t say.

He’s so cute when he’s mad, dontcha think?  All I can say is, when he goes off like this, I know there is something right with the world.  For a change.

Loyal Putin creature Sergei Shmatko, the Energy Minister, chimed in:

Shmatko said the joint declaration touched on more sensitive issues than just gas and might damage EU energy security.

“It goes far beyond modernization of the Ukraine transit system and talks of the integration of Ukraine into the legal sphere of the European system as far as energy is concerned,” he told reporters.

Uhm, and what business is of yours, Sergei?  Ukraine and Europe have a perfect right to enter into such relations, even if it does involve some legal integration.  The concept is called “sovereignty.”  I’m sure you’ve heard about it.  After all, you and your cronies never tire of telling the rest of the world to f*ck off, and leave your “sovereign democracy” alone.  Goes both ways, dude.

Putin, gansta that he is and wants to be, sounds like one.  “Hey, Ukraine, you MY b*tch!  How dare you go out with somebody else.  Don’t make come over there and slap you around like I did that Georgia b*tch!”

This is all particularly rich in light of some of the things that Putin said during January’s gas war.  (Seems like years, not months, ago.)  At the time, Putin repeatedly denigrated the condition of Ukraine’s gas transport system, and called its reliability into question.  This was, in large part, an effort to pump up the prospects for Nordstream and South Stream, both of which would bypass Ukraine.

And that’s the real reason for Vlad’s pique.  He doesn’t want a reliable Ukrainian transportation network.  It undermines his goals, geopolitical and economic.

So, I say to Ukraine–You Go.  And to the EUnuchs–you surprise me, and in a good way.  (Though perhaps they didn’t foresee how Vlad would react.  It will be interesting to see whether they hang tough after Vlad’s outburst, and the inevitable follow on efforts to intimidate, and to play divide and conquer in an attempt to undermine this deal.  I’m sure that Schroeder will soon slouch to Moscow to get his orders to attempt to derail this deal.)

In other Russia news, Economy Minister Nabiullina has announced that the Russian economy contracted 8 percent year-on-year in February, and will likely contract 7 percent YOY for the first quarter. To put things in perspective, this collapse began in August, when GDP was probably on the order of 3-4 percent above its level as of February, 2008.  Thus, in 6 months, GDP has declined about 10-11 percent, a 20+ percent annual rate.

Economists often evaluate performance relative to growth potential.  Given a growth potential in Russia of 6-7 percent annualized, GDP should have been 7 percent higher, rather than 7 percent lower, than February 2008 as of the end of 2009.  This output gap of 14 percent compares with an approximate 8 percent gap in the US.

This is consistent with my view that the economic crisis has hit Russia harder than the US and Europe.  As is the fact that Russian economic indicators (e.g., the stock market, the ruble) have done better than their counterparts as of late.  The US market has turned around in recent weeks.  As I’ve noted, Russia is effectively a strongly procyclical economy (it’s “beta” to the world economy is greater than one) due to its dependence on highly procyclical energy and mineral industries.  With oil rallying 25 percent plus in recent weeks, in part due to the Fed’s apparent willingness to tolerate a lot of inflation to turn around the economy, and other commodity prices (e.g., copper) rallying too, Russia has benefited.

Though not so much as to justify this heady optimism by Deputy Prime Minister Igor Shuvalov (H/T R):

In comments to foreign media, First Deputy Prime Minister Igor Shuvalov said the government was increasingly upbeat about the Russian economy and hoped it would start growing again by the end of this year if the global economy doesn’t sharply deteriorate. As oil prices have risen above $50 a barrel, the ruble has steadied against the dollar and the Kremlin says there are tentative grounds for optimism, sounding an increasingly confident note about its handling of the financial downturn.

“The first phase is over,” said Mr. Shuvalov. “Most businesses have already adapted and the budget is not playing out according to the worse scenario.” Mr. Shuvalov confirmed that the Kremlin was no longer willing to offer large-scale bailouts to distressed corporations, something it did during the first stage of the crisis, but said that the government would help strategically important firms that had a genuine need. He stressed that commercial banks were now awash with cash, however, and could cover many of the lending requirements.

It is way too early to make such giddy pronouncements.  Russia is still highly dependent on the state of the world economy, which is anything but strong.  Kudrin is certainly not so ebullient.  He recently warned of a new wave of bad debts hitting Russian banks.

And Russia still faces its own home-grown curse: its legal nihilism, personified by Igor Sechin (will Marty Feldman play him in the movie?).  Sechin sent a letter to Norilsk Nickel, raising questions about some transactions, and in shades of the Mechel episode, Norilsk’s stock tanked immediately:

Norilsk slumped as much as 12 percent after the country’s biggest mining company said it received a letter from Deputy Prime Minister  Igor Sechin‘s office seeking information on transactions that were carried out last year.

. . . .

Norilsk sank 11 percent to 2,203.90 rubles on the Micex Stock Exchange, the biggest drop in a month. Sechin is seeking details on 86 billion rubles ($2.6 billion) of spending on share buybacks and asset purchases, and information on the sale of mining permits to a company owned by former Chief Executive Officer Mikhail Prokhorov, company spokeswoman  Erzhena Mintasova  said today.

Norilsk Nickel has complied with Russian law and the company’s own charter for all its transactions, Mintasova said.

Sechin, as chairman of  Rosneft, oversaw the state oil company’s acquisition of bigger rival  Yukos Oil Co.‘s largest assets at bankruptcy auctions after an investigation that led to the imprisonment of Yukos founder  Mikhail Khodorkovsky, once Russia’s richest man.

Meanwhile, the Telenor/Vimplecom farce continues:

Telenor said a Russian court rejected a motion to stay a ruling that found the Nordic region’s largest phone company liable for $1.7 billion in damages related to a dispute among OAO VimpelCom shareholders. VimpelCom sank as much as 11 percent in New York trading.

Wise words, these:

“The Norilsk and Telenor cases serve well to remind investors that Russia risk is a real phenomenon, which is the last thing Russia needs in this new, tighter-liquidity global market,” said  James Beadle, chief investment strategist at Moscow-based Pilgrim Asset Management.

The dispute is “an open demonstration of Russia’s aggressive business culture,” and is the same story as  OAO TNK- BP Holding, Beadle said.

So, in other words, la plus ca change.

The political uncertainty also continues.  A couple of interesting articles today, one by Pavel Baev in EDM, which noted:

Both Medvedev and Putin tried to perform as wise statesman meeting with Kissinger, but in reality for them global issues are just a public relations campaign of little importance compared with their real priorities of re-distributing money and property among servile but disloyal oligarchs (Grani.ru, March 20). This role of two-headed godfather is central for the regime’s survival in times of falling oil revenues when doubts in the irritated elites grow and spread under the surface of total obedience. Firing governors is apparently not enough to exterminate these mutinous doubts, so the second trial of Mikhail Khodorkovsky and Platon Lebedev is rolling towards the “guilty-as-charged” sentence (Novaya gazeta, March 18).

There is no way around the simple premise that in order to achieve a new positive start in U.S. relations, Russia has to begin a meaningful reformatting of its corrupt quasi-democratic regime. The Obama administration refrains from advocating any conditions of this sort, but Medvedev seems to be aware of the need to modernize the rigid system of “Putinism.” He remains reluctant, however, to deviate from the course set by his senior partner, who believes that the crisis hurts the U.S. more than Russia and will diminish its leadership, scorned as “uni-polarity.” Putin relies on the “fear factor” to keep the disgruntled elites under control and expects that demonstrative generosity towards pensioners and other “have-nots” would prevent an escalation of protest activity. His new anti-crisis plan unveiled last week does not envisage any new grants to struggling oligarchs, but gives first priority to social protection; it could, however, be overtaken by the unfolding disaster – as was the previous plan adopted last November (Kommersant, March 19). Such an emergency would require different kinds of measures, and forceful mobilization against an external threat is Putin’s fall-back option of choice; anti-Americanism, therefore, remains an important political resource – perhaps the very last refuge for a pair of scoundrels.

I particularly agree with Baev’s statement that the Khodorkovsky/Lebedev trial is intended to squelch “mutinous doubts.”

I found this paragraph entertaining:

Medvedev has personally explained to bankers that it would not be “fair” to demand money from the insolvent Rusal and its owner Oleg Deripaska; he also maintains that the International Monetary Fund should be governed by a board with a “fair” representation of contributors. Deputy Prime Minister Igor Sechin suggested at the recent OPEC meeting to establish a more “fair” system of regulating oil prices, which the gang of seasoned quota-fixers found only slightly amusing (Kommersant, March 16). This concern about “fairness” is not always driven by pragmatic calculations but betrays a grudge about the lost prosperity and stability that were perfectly on track until the U.S. made their economic problems everybody’s headache by provoking the global crisis.

The touching concern of Medvedev, Sechin et al for fairness brings to mind a spoiled child screaming “No FAIR!” when he doesn’t get what he wants.  Not that he earned it.

The other interesting article is from Goble’s WindowOnEurasia:

Even in other countries, he suggests, the notion that people are ready to sacrifice their rights to the state in exchange for economic well-being and will revolt if the government fails to provide it is overstated. Even in today’s severe economic crisis, the Moscow commentator says, “there are no signs in Europe of an 1848 or even of a 1968.”

In most cases, he argues, “the chief stabilizer is open political activity within a legal framework.” But in Russia, “our system is completely different, although it employs (for conspiracy!) the very same words,” an arrangement which includes the kaleidoscopic assertion that with Russians everything is exactly the same and at the same time entirely different.
This pattern has deep roots in Russian history and reflects a decision on the part of all those not intensely involved in political issues to focus on “their personal affairs and only on them” and to view politics as something alien to and apart from them and yet to see leaders as “symbiotically” involved in the survival of the state.

To this arrangement, Radzikhovsky says, a European would react with surprise: “They are DEPRIVING you (the people) of the rights to judge and decide and you (the people) nonetheless are still willing to support this arrangement!” But a Russian, he suggests, would understand the situation instantly, seeing it was being “a question of words.”

For the Russian it is not about deprivation, it is about “RELIEVING” the individual and society “of responsibility … and of the work involved in judging and deciding.” And as an example, to Radzikhovsky quotes Saltykov-Shchedrin’s observation that “the energy of the actions of fools opposes the energy of inaction.”

“The energy of societal inaction is the foundation of [the Russian] State,” he continues. “Therefore firmly or shakily, we stand by it.” Indeed, he says, “individualism (in individual affairs) plus humble fatalism (in common affairs) equals the ethnic Russian or better civic Russia (everyone in Russia, regardless of nationality acts that way) social-political SYSTEM.”
Given that set of attitudes – and Radzikhovsky insists that they can be called “sobornost,” “collectivism,” “apoliticalness,” or “alienation” – the relationship of those in power and everyone else is fundamentally different. Those in power have “a DIFFERENT function” and serve as “a shepherd” to the society.

Such a system, of course, has a dangerous tendency: the absolute power of the state in such circumstances tends to “corrupt absolutely, “both those who rule and those who are ruled.” But there is “a still more dangerous alternative: the absolute lack of rights on the part of the government and the absence of power [which can also] corrupt the people absolutely.”
The way out of this vicious circle would be a government with “LIMITED POWER,” but in Russia that has never been known and is not unknown now. “And with that is connected the completely SPECIAL role of the government in Russia,” one that is reflected in the very different attitude people have toward criticizing the government.

In most countries, Radzikhovsky continues, government is viewed as “only a superstructure’ over society” and thus as something from whose change the society does not think will change society. Consequently, any criticism of the powers that be for [such a] society is secure.”
But for Russians, “as is well known to all,” the picture is “different.” That is because criticism raises the question of leadership change, and “in the course of all Russian history up through today the main political question has not been resolved.” That is the question of the creation of mechanisms for a peaceful, regular and lawful change of the highest levels of power.”
Those in power, of course, “exploit this: destroy the powers that be and you will destroy Russia! This is a big EXAGGERATION. But it is only an EXAGGERATION” because the problematic situation it reflects is not invented but quite real. Russia has not succeeded in dividing “the powers that be” and “the country” just as it has not split power and property.

Consequently, the deference the population shows to the rulers is not so much “a slavish instinct” as an instinct for national SELF-PRESERVATION,” Radzikhovsky suggests, arguing that it rests on the notion that the powers and the population are linked together in “a biological symbiosis” whose violation by either side could lead to the death of the whole.
Thus “the real social compact [in Russia] is much more serious. It is not a trade off of independent sides,” and it is not about well-being “but about survival.” In this situation, the population will remain far more willing to defer to those in power because “the people DO NOT WANT” to do anything but “to AVOID being the opposite of humble.”

Understood in this way, Radzikhovsky concludes, the social compact in Russia has not yet been violated sufficiently to cause a revolt, especially given how great fears remain of “chaos.” And he reminds his readers that “one cannot free people externally more than they are ready for that internally.”

This is a very interesting commentary on the apathy of Russians.  It points out the fundamental lack of a civil society in Russia, the alienation between state and people (in spite of the allegedly organic relatonship between them) and reinforces a point that I made in my summer post On Russophobia, namely, that classical liberal limited government is an anathema in Russia.  (This, ironically, gave rise to charges that I was in fact a Russophobe projecting pejorative images of The Other.  But, as I noted at the time, this is considered a feature not a bug by many Russians, and many Russians like Radzikhovsky who think it is a bug acknowledge its existence nonetheless.  They have met The Other and it is Them.)

This is why, although I don’t discount the possibility of popular unrest, I believe that the main threat to the system comes from within, due to the “doubts in the irritated elites . . . spread under the surface of total obedience” (in Baev’s words).