Streetwise Professor

So where is SWP spending this Labor Day Sunday, you ask?  In the Hamptons, of course.  Well.  Not really the Hamptons.  But close enough: I’m in the Hampton Inn in Fredericksburg, TX.

Took the 3.5 hour road trip to visit the National Museum of the Pacific War.  Talk about an incongruous location: Fredericksburg is in the dusty Texas Hill Country, 4 plus hours drive from any salt water.

But there’s a reason it’s here.  Fredericksburg was the birthplace of Chester Nimitz, Commander in Chief, Pacific, (“CINCPAC”) during WWII.  He took an appointment at Annapolis because none were available at West Point-and he wanted to get out of Texas in the worst way  He thrived in the Navy, despite never having seen water more than knee deep (according to his recollection) prior to his matriculation at Navy.  An interesting commentary about the ability of people, especially smart and driven people like Nimitz, to adapt and learn.

The museum is quite good.  A little overwhelming in fact.  It is quite balanced between the various theaters and service branches.  Indeed, if anything, the Navy gets short shrift: I thought the coverage of the submarine war was especially perfunctory.  Army types would probably think the Marines hog all the glory in the exhibits, but IMO the museum does a good job at covering campaigns that were primarily US Army efforts (New Guinea, the Philippines), and is balanced in its handling of the big inter-service battles (e.g,. the Howland Smith vs. Ralph Smith episode at Saipan).

Interestingly, the museum gives extensive coverage to Peleliu, and discusses forthrightly the carnage, the dubious Marine approach of grinding frontal assaults, and the dubious strategic gain achieved for all the bloodshed.  This is particularly notable because Nimitz made the decision to attack the island at MacArthur’s request, despite the objections of most of the Navy high command.

There is loads of personal memorabilia on display, from both sides.  To me, the most fascinating piece was E. B. Sledge’s “lucky” battle jacket, which he claims to have worn at both Peleliu and Okinawa: it was lucky, he said, because he survived both campaigns without a wound.  The thing looked pristine. Given the abuse it had to have gone through-the dirt, the sweat, being worn for days at a time while Sledge tried to become one with the earth to escape the shelling or advanced through foliage-I would have thought it would have been in tatters.

Another fascinating exhibit was a US M-3 Stuart light tank from Australian service that had been knocked out by a 75 mm Japanese AA gun-also on display-at Buna.  There’s a video of the tank commander recounting the action.  The tank and gun were retrieved years later with help from aboriginal Papuans, and brought to the museum.

All in all, definitely worth the trip from Houston.  If you’re a WWII aficionado, it’s worth a trip from longer distance.

The Pacific War was unbelievably grim.  The ferocity of the combat and the forbidding terrains in which it was fought (from stinking jungles to stinking volcanic islands to the huge expanses of open ocean, forbidding in its own way) made the war in that theater distinctive, as compared to other theaters in WWII, and other wars.  The integration of air power, sea power, land power, and logistics-by both sides-were unique  Victory depended both on high technology and the most elemental face-to-face human combat.  The museum does a good job at telling the very complicated story of this theater in a comprehensive and mostly objective way.

At approximately this hour, 150 years ago, two divisions of James Longstreet’s First Corps of the Army of Northern Virginia launched an assault at Gettysburg that has been called the greatest single afternoon of fighting in history.  And with justice.  In a mere few hours, Longstreet’s two divisions wrecked five Union divisions and a part of a sixth (Caldwell’s division of the Second Corps, Birney’s and Humphrey’s of the Third Corps, Barnes’s division of the Fifth Corps, and the Regular Brigade of Ayres’s division of the Fifth Corps).

But in the end, it was for naught. Longstreet (with an assist from a division of A.P. Hill’s Third Corps) succeeded in smashing back the Union left to the line Cemetery Ridge-Little Round Top it never should have left in the first place, but could go no further.  Like virtually all frontal assaults in the war (with a few exceptions like Missionary Ridge and Nashville and maybe Third Winchester or Cedar Creek), no matter how initially successful, Longstreet’s attack eventually ground to a halt as the result of casualties, friction, exhaustion, and the disorder that inevitably resulted from an assault.  In the Civil War, there was no way to exploit an initial success: infantry could smash infantry, sometimes, but could not exploit a breakthrough.  There were no reserves to build on the hard won gains won by Hood’s and McClaws’s divisions, and Union commander George Meade was able to rush troops from all over the battlefield (including units of the Twelfth Corps from the opposite end of the Union line, at Culp’s Hill) to shore up his flank.  Indeed, at the very end of the struggle on the 2d, a Fifth Corps division (Crawford’s Pennsylvania Reserve Division) swept across the Valley of Death (more prosaically, the valley cut by the meandering Plum Run) below Little Round Top and drove the Confederates out of the Wheat Field.  The Confederates finished the day not far from where they had started it.

The action on the Union left on the Second is one of the most complex and interesting actions of the entire war.  Prosaic agricultural features (the Wheat Field and the Peach Orchard) and rather exotic geographic ones (Devil’s Den, Little Round Top) became forever etched in the American lexicon and consciousness as a result of what happened during those few short hours.  Formerly pastoral settings became a vast charnel house.  And in this vortex, the Union army won by not losing.  The stolid Longstreet, reputed a defensive genius, had launched one of his four great assaults of the war (Second Manassass, Chickamauga, the Wilderness being the others) but fell short of victory.

Which is probably exactly why he contemplated Lee’s plan for July 3d with such trepidation.  But that’s the subject of tomorrow’s post.  For now, take a minute to think of what transpired at this minute, 150 years ago.  A marvelous feat of arms, which like so many others, proved utterly barren of results except for the bounteous harvest of brave young men.

At a reception on the occasion of Russia Day, Putin held court, and talked about . . . the United States. After awarding the State Prize to Sergei Nikulin, head of the bureau that designed a new nuclear missile designed specifically to defeat US missile defenses, Putin launched into a disquisition on American history:

Pooling together traditional Soviet-time propaganda clichés, Putin recalled the US “genocide” of Native Americans, slavery and racial segregation that is still, according to Putin, very much evident in the United States today. Putin deplored the US nuclear bombing of Japanese cities in 1945 and expressed doubt that Soviet dictator Josef Stalin would have dropped an atom bomb on Nazi Germany if the USSR obtained nuclear weapons in 1945, when an overall victory was already assured. After expressing his “personal opinion” that Americans and their leaders are worse than Stalin, Putin acknowledged that the US is basically a democratic country, built on the principle of individual rights and freedoms, whereas Russian society is built on “collectivism,” which makes it fundamentally different. The Russian national soul, according to Putin, is eternal and directly connected to God, unlike, apparently, the pragmatic American one—“so it is very hard for us to understand each other, but it is possible sometimes”.

Russian soul, blah blah blah.  Interesting, that, during a week when a survey was released showing that Russians were among the least religiously observant people in the world. And as Felgenhauer notes, rather than being a narod united in collective solidarity, Russian society is atomized: the Russian social capital account is heavily overdrawn.  In other words, Putin’s characterization of Russia is a crock.

We are so in Putin’s head.  He is obsessed with the US.  Can you imagine any US president discussing, say, Russian conquests in the Caucasus, or Central Asia?

There is one part of Putin’s remarks that is particularly outrageous:  “Putin deplored the US nuclear bombing of Japanese cities in 1945 and expressed doubt that Soviet dictator Josef Stalin would have dropped an atom bomb on Nazi Germany if the USSR obtained nuclear weapons in 1945, when an overall victory was already assured.”

That is more than a crock: it is an ahistorical outrage.  Allied victory over Japan might have been assured, but the cost would have been horrific.  It took almost 3 months for the US 10th Army to take Okinawa.  It cost about 12,500 American lives (5,000 on Navy ships, killed in Kamikaze attacks).

But it cost over 200,000 Japanese lives, about 107,000 Japanese soldiers and over 100,000 Japanese civilians.

Okinawa followed the appalling battle at Iwo Jima.

American B-29s were firebombing city after city, night after night.

Yet Japan’s military steadfastly refused even to contemplate surrender, and was preparing for a defense of the home islands to the last ditch and the last man.  And the last woman and child.

Contrary to Putin’s insinuation, the war against Japan was not in its denouement.  It was approaching a gruesome climax that would have cost hundreds of thousands of lives.  Most of them Japanese.

Truman weighed the facts, and made a decision.  The fates of millions of American and Allied soldiers rested on his shoulders.  I cannot imagine any American president reaching a different decision.  The only reason Stalin would have chosen invasion over the use of atomic weapons is that the lives of Soviet soldiers meant little to him.

Note that even after the US dropped atomic weapons on Hiroshima and Nagasaki, the Japanese military resisted surrender.  Hirohito made the decision, and even then, the military attempted a coup to prevent the broadcast of the Emperor’s surrender statement.  Achieving the “assured” victory against Japan would have been a humanitarian catastrophe, won against a fanatical enemy at a cost against which the toll of Hiroshima and Nagasaki, as horrific as it was, would have paled in comparison.

Putin’s slur is particularly disgusting coming from a man who has attacked WWII revisionism, and supported laws criminalizing criticizing the Soviet role in the war:

“We must keep and defend the truth about the war,” he said after attending the opening ceremony of a Red Army World War II memorial in the Israeli city of Netanya.

The rewriting of history is a crime to the millions of people who gave their lives for the victory in WWII and future generations who should know the true heroes of the war and be able “to distinguish the truth from blatant and cynical lies,” Putin stressed.

Yeah.  Take your own advice: distinguish the truth from blatant and cynical lies.

And remember, Russia has criminalized criticism of its role or tactics in WWII.

Sergei Shoigu, the respected emergency situations minister, has called for a law, based on Holocaust denial legislation in Germany, that would make it a criminal offence to suggest that the Soviet Union did not win the War.

Mr Shoigu indicated that the legislation would also seek to punish eastern European or former Soviet states which deny they were liberated by the Red Army. The leaders of those countries could be banned from Russian soil, he said.

The minister’s comments appeared particularly aimed at Estonia, which relocated a statue a Red Army soldier from a central square in the capital city Tallinn two years ago to a nearby war cemetery, prompting outrage in Russia.

“Our parliament should pass a law that would envisage liability for the denial of the Soviet victory in the Great patriotic War,” Mr Shoigu said. “Then the presidents of certain countries denying this would not be able to visit our country and remain unpunished.”

I suggest reading that whole article.  Shoigu, by the way, is currently Russian Defense Minister.

Putin’s obsession with the US would actually be pathetic, if it weren’t so destructive.  The catastrophe in Syria, for instance, is a direct consequence of this obsession, and the zero sum attitude Felgenhauer mentions (and which I’ve written about repeatedly in the past). Russia is “led” by a warped, cynical, twisted man.  The destination to which he is leading it is frightening to contemplate.

Addendum: Victory over Nazi Germany was assured in April, 1945, yet Stalin ordered a relentless assault on Berlin, pitting Zhukov against Konev to goad them to getting to Berlin quickly.  The casualties were appalling.  Official estimates of Soviet dead are around 81K, but it is widely believed that actual deaths were far in excess of that. Probably 100,000 Germans were killed.  Do you doubt Stalin would have used everything at his disposal to hasten the conquest of Berlin, despite the fact that victory was assured?  And what about Stalin’s launching war against Japan in August, 1945 . . . again when the ultimate outcome was assured.

It’s always unpleasant watching a dog chase an SUV, especially an armored presidential one, even if you’re not that fond of the dog.

Further my post of yesterday.  Today’s main revelation about Snowden is that he revealed confidential information about NSA hacking of China to a Chinese paper.  But I’m sure Glenn Beck and Fox News are totally cool with that. Because they are in solidarity with the PRC.

Um, how long do you think it would take me to find a Fox News story or Beck bit freaking out about Chinese hacking of the US?

The mere fact that Snowden decamped to Hong Kong-i.e., China-should raise alarm bells.  And spare me the BS about Hong Kong being a bellwether of free speech and civil liberties.  We aren’t partying like it’s 1999 anymore.  Hello.

Look.  Snowden and Greenwald obviously have an agenda.  Greenwald has been totally upfront about that agenda.  The agenda is that the US should not be collecting intelligence on anyone, anywhere, anytime.  Snowden has said as much.

Is that really the conservative position now? If not, why are many conservative outlets implicitly endorsing it, by continuing to flog the Snowden/Greenwald line? Are we now all Henry Stimsons, circa 1941 updated to the Internet age: “Gentlemen do not read other gentlemen’s emails”? If so, say so.

And if you’re a libertarian, a man with unimpeachable libertarian credentials and encyclopedic knowledge of the law and the Constitution says, categorically, that the collection of metadata is legal and Constitutional.  And bonus points: he’s joined in this opinion by a legal scholar at Cato.

Attention idiots: this will not harm Obama in the least, and you are being played by people with a deeply-held anti-American agenda.  You are playing into Greenwald’s hands, and are enabling the activities of people who are willing to betray highly confidential information to China.

Can you be more stupid?  Don’t answer that.  I think I know the answer.

Update. I’ve focused on Glenn Greenwald, but Laura Poitras deserves attention too.  She’s had an anti-NSA agenda for some time, as evidenced by this “Surveillance teach-in” that she put on last year.  Note the usual suspects involved-specifically, William Binney and Jacob Appelbaum.  I’m curious as to whether Appelbaum facilitated communications (e.g., help with encryption or the use of Tor) between Snowden, Greenwald, and Poitras.  She’s obviously had an agenda for quite a while. Then there’s this little tidbit about Poitras’s dalliance-and perhaps far worse-with insurgents in Iraq who ambushed an American patrol.  Lovely.   The WaPo gave her a byline, why, exactly, since it seems to be directly contrary to its policy not to give one in a news story to a political activist?

There is a little cabal here.  I further note that Poitras and Greenwald were in communication with Snowden before he removed classified items from NSA computers.  If they asked him to provide proof for his stories, I’m thinking accessories before the fact.

And oh look, Sean Hannity is giving a platform and a wet kiss to William Binney, who is also adored by OWS.  Bizarro World doesn’t come close to describing all of this.

Commenter Michael brought up an excellent question: what about the Turkish army?  From the beginnings of the Turkish Republic in 1923, the army was the final arbiter of Turkish politics, and viewed itself as the defender of the Kemalist secular state.   Erdogan and Gul recognized this, and after the AKP ascended to power they went after the military, primarily through judicial means.  It has largely neutered military opposition.  At present, something like 20 percent of Turkey’s flag officers are in jail on a variety of charges, from plotting coups to far more sordid crimes.

As a result, the military is back on its heels, and poses far less of a threat to Erdogan’s government.

But the protests might change everything, because it changes the game and the players’ beliefs.  No doubt the military is nursing its hurts, but heretofore has been unwilling to act because the government appeared popular and on the march.  The protests demonstrate that there is serious opposition to Erdogan, and protests can be self-feeding: as protests gain mass, others who disagree with the government learn that more people than they had believed also disagree, which makes them more likely to oppose the government publicly.

This also provides information to the military, telling the officers in particular that Erdogan is more vulnerable than they had believed.  This makes them more likely to become emboldened to challenge him.  Military opposition, even if scattered, can in turn embolden the civilian opposition.

The military can also use any excesses by Erdogan’s government to justify intervention, saying that they are acting on behalf of the people, protecting them from oppression.  They can wrap self-interested intervention in patriotic and populist justifications.

This is now a plausible scenario.  Though not the only one.  The opposition has a varied agenda, and inherently faces coordination problems that the government can exploit.

But the military can potentially determine the balance of power.  Whereas it was reluctant to act independently after Erdogan’s purge, its calculus is now likely to change, because it now knows that there is widespread public opposition to Erdogan: this increases its estimate of the odds that it can prevail if it challenges the government.  It can serve as a power broker, either by throwing its support to the opposition, or by threatening to do so, and negotiating with Erdogan to restore its dominant position in the Turkish state.

It surprises me that little of the commentary has considered the military’s role going forward: the coverage has focused on the turmoil in the streets.  (I plead guilty too-Michael’s comment snapped me out of it.)  This reflects a Romanticism that dominates popular perceptions of revolution.  But in revolutions, the military typically plays the decisive role.  This is likely to be true in Turkey too, especially given the military’s role in the Turkish Republic for the last 80 years. A new Kemal, or a Turkish Franco, is a very real possibility.

So keep an eye on the Turkish military.  Hopefully the media will figure out it should be watching it more closely too.

It’s a damned good thing I went to Istanbul two plus weeks ago rather than now.  I was in most of the locations where the rioting has taken place over the last couple of days: when I was there, the place was crowded as hell but peaceful.

The epicenter of the protests is Taksim Square.  Funny story about that.  I took a boat tour of the Bosporus, during which I was on the bridge where some protests took place.  Afterwards, the tour went to Dolmabache Palace.  The tour operator was supposed to take me from Dolmabache back to my hotel, but she said: “It will take us two hours to get there through traffic.  We’re dropping you off at the Metro  station.”  So I was unceremoniously plopped down at Taksim Square, where I picked up the Metro to go Sishli.  It all worked out well . . . but I doubt that would have been the case this week.

My admittedly superficial impression from my visit was that there is substantial tension between Erdogan and his relentless efforts to move towards a Islam-dominated Turkish state and more secular elements of Turkish society.  It’s hard to explain, but I did pick up uncomfortable vibes in conversations.  For instance, when I was in an office with a TV playing Erdogan giving his weekly speech to the Turkish parliament: I sensed that my hosts were probing to learn my opinions of Erdogan before revealing anything, and felt that they were expressing disapproval, but tacitly.

These articles from the Economist and the FT support that interpretation, with the added twist of Erdogan’s symbiotic relationship with property developers and contractor (which reminds me of Houston).

Erdogan is not backing down, and in fact is doubling down.  For instance, he has said that he will demolish the Ataturk Cultural Center, and replace it with an opera house.  That is highly symbolic because Ataturk, aka Mustafa Kermal, was as relentless in his efforts to secularize Turkey as Erdogan is to Islamize it.

Twitter accounts suggest that the opposition in Taksim and elsewhere is rather disorganized and lacking in leadership.  On the one hand, that suggests that a highly disciplined force like Erdogan’s government and party and security forces should be able to control it.  But on the other, it suggests that it is spontaneous, genuine, and taps into deeply felt resentments.  And given the way that falsified/suppressed preferences work, the revelation of widespread discontent can lead to a positive feedback loop, as people who were upset by Erdogan but kept silent because they believed they were in the distinct minority may feel emboldened by the public expression of opposition.  This is why leaders like Putin-and, presumably Erdogan-live in fear of color revolutions, and take extensive measures to quash any expression of public protest.  By the time things reach the pitch observed in Taksim, though, it can be too late.

Just what the world needs.  More instability in the Middle East.  Particularly in a country that was widely considered to be the potential foundation for a new order in that region.  It is clear that there are deep fault lines in Turkish society, and seismic changes may occur, and quickly.

I have a tentative invitation to return to Istanbul in September.  Who knows what things will be like then?  Although I sensed some tension during mid-May, I never anticipated that things would boil over within mere days.  Three months is a lifetime.

Today is the sesquicentennial of the 3d day of the Battle of Chancellorsville.  Jackson’s flank attack on 2 May, 1863 is usually the focus of accounts of the battle, and indeed, it was a daring and brilliant achievement.  But it did not win the battle for Lee and the Confederacy.  Lee only prevailed after a brutal slugging match on this day, 150 years ago.  Wave after wave of Confederates, under command of Jeb Stuart, repeatedly assailed the western side of a Federal salient surrounding the Chancellor house.  And wave after wave was beaten off by Union soldiers of the Third and Twelfth Corps.  What proved decisive was a disastrous decision to evacuate the high ground at Hazel Grove, made by the Union commander, Joe Hooker.  The Confederates seized this commanding terrain, and the artillery planted there proved decisive.  It was perhaps the only time in the war that Confederate artillery decided a battle: there were several fields where Union artillery proved decisive.  Confederate artillerist and memorialist Porter Alexander said of the abandonment of Hazel Grove: “There has rarely been a more gratuitous gift of a battlefield.”

Chancellorsville is often called Lee’s Masterpiece.  And it was, in many ways.  But it also illustrates the ultimate futility of the Confederate cause.  Even after the rout of the Eleventh Corps on the 2d, the Union forces far outnumbered Lee’s and were in a position to carry out a vigorous defense.  Even with the gratuitous gift of Hazel Grove, the Army of Northern Virginia suffered huge casualties to drive the Federals from the environs of the Chancellor House and Fairview.  The casualties were particularly devastating at every level of command.  The battle was a virtual holocaust of division and brigade commanders, field officers, and company officers.  As a result of the battle, Lee had to undertake a wholesale reorganization of his army, and many of those promoted to fill the positions of those killed or maimed on May 3d proved overmatched two months later, on the fields of Pennsylvania.

In brief, even to execute a “masterpiece”, and one facilitated by numerous errors by his opponent Hooker, Lee had to spend lives at an unsustainable rate.  One wonders how it would have been possible to prevail, since even victory was impossibly costly.

Indeed, even the action of the 3d was not decisive.  The Army of the Potomac retreated from the Chancellorsville salient to a more compact position abutting the Rappahannock River, and entrenched it strongly.  It is highly unlikely that it could have been dislodged by an attack by Lee’s spent force.  But Hooker, who had already suffered a loss of confidence and courage on 1 May, and who had been severely concussed by a shell on the 3d, wanted no more of Lee.  Even though a majority of his corps commanders favored fighting it out on the new line, Hooker decided to retreat.  The ultimate victory was due more to Lee’s psychological dominance over an addled Hooker that proved decisive, than to the military dominance of the ANV.

And this worked on Lee’s psychology too, and not in a good way.  Chancellorsville contributed to a hubris that proved disastrous at Gettysburg.

Meanwhile,while Lee was triumphing at Chancellorsville, events were developing far to the west, in the heart of Mississippi.  After months of frustrated attempts to get at Vicksburg, Grant was on the east side of the Mississippi River.  He had beaten back a Confederate force commanded by John Bowen at Port Gibson on 1 May.  He was advancing east, towards Jackson.

Lee fought a masterful battle in early May.  Grant fought a masterful campaign over three weeks of that month.  The campaign proved far more decisive than the battle, as I’ll discuss in future posts on Jackson, Champion Hill, and Big Black Bridge.

Further my last.  Europe may be out of sight for now, but that’s only because it’s not out of the woods.

Draghi be damned: Spain still in a debt death loop.  And that doesn’t even take into account the fact that 90 percent of the Spanish state pension fund is invested in Spanish government debt.  Or that Spain has long leaned on its banks to buy its debt, meaning that Spanish banks buy the bonds of the government that is supposed to bail them out if they get in trouble.  There’s a financial Escher etching for you.

So what does Spain do? It begs Germany to increase growth. As if it’s like turning on a faucet.

And if there is such a faucet, the handle has come off in Germany’s hand: the economy contracted more in 4Q12 than at any time since the depths of the financial crisis.

Meanwhile, France is getting deeper into Mali.  IMO, best outcome: something like the American Punitive Expedition to Mexico in 1915, which futiley chased Pancho Villa around the deserts of northern Mexico for a year. Worst case: British army in Afghanistan, 1842, or Islawanda.

US support-per the linked FT article-is lukewarm at best.  We (and the Brits) are supplying airlift.  A telling illustration of the lack of sustained expeditionary capability in NATO outside of the US.  Given the extreme logistical challenges of operating in the Texas-size wilds of northern Mail it is hard to imagine a force of a few thousand frenchies doing anything but getting swallowed up in the vast, desolate expanses.

And as I noted yesterday, France is approaching economic zombiedom.

So yeah. Everything is just hunky dory. Maybe as long as Draghi’s paper lasts.  Or more accurately: as long as the bond markets believe in the magic of paper.

There is an I-told-you-so tizzy going on about the revelation of the BATS exchange that a system (or programming) error had resulted in the execution of about 450,000 orders at prices worse than the best bid/offer (BBO).  Oh, the humanity!

A little perspective here.  According to BATS, the total loss (which is a wealth transfer, mind you) totaled . . . brace yourselves now . . . $420,000.  Excuse me.  $420,360.

There seems to be some presumption that there was a Golden Era of trading, before the invasion of the dreaded machines, when intermediaries had hearts of gold rather than a hunger for it.  When bids and offers were never violated.  When there were never trading errors.

Wrong.  There was no Golden Age.  Nirvana is still just a band.

Think that the BBO was never violated on exchange floors?  Think again.  Sometimes this was inadvertent in the chaos of the pits/trading posts during active markets.  Sometimes it was very advertent (is that a word?)  May I remind everyone of the FBI sting on the CME and CBT, which discovered that some brokers would collude with locals to execute customer orders at off-market prices, and split the proceeds, sometimes delivered by bagmen-literally, guys passing paper bags of bills.   Given the relatively crude time stamping of trading cards, it was very difficult to construct an accurate audit trail.  Trades couldn’t even be sequenced with precision, and since the bid/offer were not recorded continuously or time stamped, it was impossible to see whether  a trade violated the BBO.  There were pit monitors who tried to keep an eye on things, but no human monitoring was capable of detecting all violations.  Indeed, the sociology of the floor and the member domination of exchanges (a subject I’ll turn to shortly) meant that social pressure discouraged cracking down too aggressively, particularly on the most powerful.

Enforcing the BBO on the floor was in many ways constrained by a lack of data.  If anything, current market monitors have the exact opposite problem: they are drowning in a sea of data.  But as BATS shows, it is possible to go back through years of this data and pick up mistakes that cost customers about $1 per error.

Then shall we discuss out-trades?  Out-trades-trading errors, where trade terms submitted by the buyer and seller didn’t match-were common on the floor.  Brokers were on the hook for errors, and there were stories of brokers writing six figure checks to make a customer whole for a loss.  I would not be surprised that on an inflation adjusted basis, a single broker wrote a check to a customer that exceeded $420,000 in 2013 dollars.

But this reality of the way things were doesn’t stop the hue and cry about the fallen state of today’s computerized markets.  The biggest huer-and-crier (emphasis on the crying) is Jackass Joe Saluzzi of Themis Trading.  Here Joe outdoes himself, by suggesting that we need to go back to the days of non-profit exchanges in order to restore public confidence in broken markets. (h/t Blivy.)

JJ apparently believes the old mutual non-profit exchanges were freaking charities, like the March of Dimes or something.  Uhm, no.

Let’s look at the facts.  The old mutual exchanges were cartels of intermediaries.  They restricted membership in order to enhance the rents of those members.  For decades, most of them ran brokerage cartels that fixed commissions.  Some created monopoly privileges for some members (e.g., NYSE specialists).  Others (NASDAQ comes to mind) had order handling rules that basically precluded public customers from competing with member market makers in supplying liquidity: NASDAQ was also the nexus of a flagrant conspiracy among market makers to fix spreads at supercompetitive levels.

Non-profit status had nothing whatever to do with the charitable urges of old time brokers and market makers.  As I showed in research done just as the transition from non-profit to for-profit status was occurring, exchanges chose the non-profit form because the non-distribution constraint inherent in that form prevented the exchange from choosing pricing policies that transferred wealth among heterogeneous members with very specialized human capital.  (An abbreviated version of the argument is here.  The full version was published in J. Law & Econ. in 2000.)  Electronic trading undermined the rents and the specialized assets that drove the choice of non-profit form, so the move to electronic trading in turn impelled the transformation of exchanges to for-profit entities.

In other words, non-profit form was chosen by very greedy, profit-driven individuals to protect their profits.  And a good chunk of those profits resulted from the exercise of market power and the adoption of collusive arrangements by exchanges.

So spare me nostalgia.  Indeed, methinks that a good deal of the nostalgia-and the related criticism of modern electronic markets-is a shriek of rage by those who profited under the old system, and are furious that someone ruined their racket.

Joe does get one thing right (cf. blind hog, acorn).  He attributes the specific BATS problem, and the increased complexity of the equity markets, to RegNMS.  This is correct.  The information-and-linkages approach chosen by the SEC led it to adopt regulations that socialized order flow.  This was done with the explicit goal of encouraging competition among trading platforms.

Another example of “be careful what you ask for: you might get it.”  Pre-RegNMS, NYSE executed about 85 percent of the trades in its listed stocks, and the bulk of the remainder was executed in Third Markets which did not contribute to price discovery.  NYSE was essentially the natural monopoly supplier of price discovery.  Now, NYSE market share is in the low-20s, and executions are shared pretty much equally among a handful of platforms.

But this socialized order flow model requires linkages between the execution venues.  It is that necessity that accounts for the complexity of the current equity markets.  The interconnection imperative is directly responsible for the proliferation of order types that many find so vexing, and which indeed give advantages to specialized electronic traders.  Note that the BATS error was in an order type designed to ensure compliance with RegNMS rules relating to the BBO.

You can criticize this market structure.  But if you do so, you have to grasp the nettle of the fundamental trade-off.  The choice is binary.  You can choose to socialize order flow, or not.   If you do, you get something like the current equity market structure, with intense competition among execution venues linked by a complex web of fragile connections and a proliferation of order types.  If you don’t, you get something like the pre-RegNMS market structure, or futures market structure past and present.  A market that tips to a single execution venue that exercises market power, either by restricting access (the old mutual model) or by charging supercompetitive prices (the new for-profit exchange model).

Those are the choices.  But the debate is almost never framed that way.  Instead, bat sh*t crazy people like Saluzzi (enabled by folks like the CNBC talking head in the BATS Hit video) take up all the oxygen screaming about how bad the current market structure is and retailing myths about some Golden Age that never was.

Political economy considerations almost certainly ensure that the SEC is not going to go back on RegNMS, and it is truly invested in the information-and-linkages approach it chose.  So we are likely to see a continued series of controversies over problems that are inherent in the socialized order flow model.  The SEC will pull its chin, and deal with each problem as it appears in an ad hoc way, just adding to the complexity as the new games are devised to exploit the new rules implemented to stop the old games that exploited the old rules.  This will make for never ending media appearances for the likes of Joe Saluzzi, but  don’t buy his line about the good old days.  The good old days that existed when regulation effectively opted for the other binary choice (no socialization of order flow) weren’t all that great.  There was a different set of problems, and a different set of people and firms profiting off the inefficiencies that inhere in the network nature of financial trading.

Vladimir Putin delivered his annual State of the Nation address yesterday.

It can be summarized simply: “Western ideas out of Russia: Russian money out of the West.”

He harkened back to Russian traditions, in line with his recent spasm of nostalgia-marked by calls to revive the Hero of Socialist Labor decoration and Tsarist regimental names.  He lamented Russia’s degraded spirituality, and called for a restoration of Russian spiritual traditions and a rejection of foreign influence.  He lauded democracy, but with peculiarly Russian characteristics: to Putin, democracy is “the power of the Russian people with their traditions” and “absolutely not the realization of standards imposed on us from outside.” Further, he recommended a ban on foreign investments by government officials. He excoriated companies for using offshore tax havens and lamented that nine out of ten large transactions involving Russian companies were executed under foreign, not Russian law.  He pleaded: “We need a whole system of measures to ‘de-offshore’ our economy.”

All a piece with a longstanding historical pattern in Russia, where for centuries tentative reformist movements and wary engagements with the West have inevitably been followed by conservative reaction, authoritarian relapse, and rejection of foreign influence.  These conservative episodes have been sparked by unsettling domestic political ferment and the aging of the leadership.  Like now.

Putin’s speech gives the lie to the numerous commentators who predicted that Putin would have to liberalize politically and wean the economy from energy and state enterprises in order to prevent decline or revolution.  As if this is consistent with an understanding of the nature of Putinism, Russian history, or the way that aging men think and behave.   What were they thinking?

No.  The Russian hamster wheel is making another turn, like it has for centuries.  Few countries are prisoners of their history in the way Russia is.  Putin has announced to the world that he is taking Russia back to the future.