Streetwise Professor

In a 2-1 decision, a panel of the 7th Circuit Court of Appeals struck down Illinois’ draconian gun control laws.  I am quite pleased with the result, but rather than discuss the law (which is an abomination-good riddance!) or the decision as a whole, I’m going to focus on one part of Judge Posner’s decision that made me smile due because it resonated with family history.

Specifically, this part:

And one doesn’t have to be a historian to realize that a right to keep and bear arms for personal self-defense in the eighteenth century could not rationally have been limited to the home. Suppose one lived in what was then the wild west—the Ohio Valley for example (for until the Louisiana Purchase the Mississippi River was the western boundary of the United States), where there were hostile Indians. One would need from time to time to leave one’s home to obtain supplies from the nearest trading post, and en route one would be as much (probably more) at risk if unarmed as one would be in one’s home unarmed.

Here’s the family connection-directly from the Ohio Valley.  My great-great-whatever grandfather, Abel Sherman, was a Revolutionary War veteran and an early settler in the Ohio Territory, outside of Marietta (“Campus Martius” when he arrived).  He and his family had a farm in Olive Green, near Marietta, and hard on the Ohio River.  During the Indian War of 1794, he and other local families retreated to a small fort.  Abel became concerned about the fate of his cattle, so he set out alone to find them.   He went out armed with his Revolutionary War musket.

While on his search, he came across some wild tomatoes.  He was picking them and putting them in the front of his long hunting shirt when he was attacked from behind by a lone Indian prowling the woods.  The Indian-Silverheels-felled Abel with a tomahawk blow to the head.  He then scalped Abel, and hid his old musket in a hollow log.  Silverheels proceeded to Detroit, where he sold Abel’s scalp for a double price, Abel being double-crowned, so Silverheels cut the scalp in half and sold it as two separate scalps.

How are all these details known?  Well . . . Abel’s family went looking for him, and found him dead, the tomatoes still in the front of his shirt, and his gun in the hollow log.  And some years later, an Indian came into a logging camp, and asked the loggers for a drink.  While in his cups, sitting by the fire, he regaled the loggers with the tale of his killing a white man picking tomatoes in the woods during the late war.  The story was complete with details about the man’s unique scalp, and th emplacement of the odd musket in the log.

Unbeknownst to Mr. Silverheels, one of the  members of the rapt audience was Abel Sherman’s son (the brother of my Great-Great-whatever-minus one Eli).

The next day, Silverheels was found dead by the side of the trail, shot through the heart.

I’ll leave it up to you to connect the dots.

So Judge Posner was spot on.  You were probably more in danger outside your home in the late-18th century Ohio Valley than inside it.  So taking a gun with you while trekking to the trading post-or looking for your cows-was advisable.

But as Abel’s fate shows, a weapon might have been a necessary condition for self-defense: it wasn’t a sufficient one.

Abel’s story is told in detail in the History of Washington County, Ohio.  His first gravestone contained a rough carving of a scalped head.  His more permanent marker was inscribed thus:

Here lyes the body of Abel Sherman who fell by the hand of the Savage
on the 15th of August 1794, and in the 50th year of his age.

His musket is in the little town museum in Waterford, Ohio, and the original tombstone is now in the Campus Martius Museum in Marietta:

In the comments, So? mentions the successful Chinese landing of a J-15 jet on its new aircraft carrier as evidence of China rising.

It is an advance for China, definitely. But a baby step when you consider the complexity of carrier operations, especially at a true operational tempo, with 120 sorties (takeoffs and landing) per 12 hour flight day, sometimes surging to 190 per day. The ballet of the deck is an amazing-and amazingly dangerous-thing. Especially when you start doing it with live ammunition hanging from wings and waiting on deck, and especially especially when you do it day after day and crews become fatigued.

The US Navy has been doing this for close to a century. The accumulated experience and knowledge will take the Chinese a generation to match. (Only four navies-the US, Japan, the UK, and France have operated carriers in a serious way.)

And by the time China catches up with that, the US will have moved on. It is already moving on. For on virtually the same day China landed a manned jet on a carrier, the US loaded an X-47B Unmanned Aerial Vehicle onto the USS Harry Truman for flight testing:

So while China takes its first steps into the 20th century doing what the US (and the UK) first did in 1945-land a manned combat jet on a CV-the US is moving into the 21st by testing unmanned combat jet on a CV.

So who is really making history? And is a gap closing, or opening?

Egyptian President Mohamed Mosri, already clothed with immense legislative and executive powers (and yes, Lincoln inspired that line), has now usurped judicial powers in what opposition figures are referring to as a coup.  Of course Mosri claims that his assumption of these powers is merely temporary.  Of course he claims that he is only doing so to “protect the revolution” and secure democracy.

How many times have we heard that before?  How many times has it turned out to be true?

Mubarek, whom Mosri replaced (and whom he is now retrying) was a corrupt, autocratic bastard.  It’s too soon to tell whether Mosri will be, as virtually all of his ilk eventually become, corrupt.  But it is not too soon to tell that he is an autocratic bastard, and an Islamist one as well.  All in all, Islamist trumps corrupt.  Easily.

So the title of this post isn’t quite right.  Mosri isn’t exactly the same as Mubarek.  And the crucial difference-his Islamism-makes him a far more dangerous figure.

The timing of this is telling.  Very telling.

Mosri made his move within hours of his brokering of a cease fire in Gaza.  He received fulsome-sick-making, actually-praise from Obama and Hillary Clinton for his role there.  For his peacemaking role, he was lionized.

And more to the point-he was also immunized.  Immunized from criticism of his power grab.  How could Obama possibly criticize him or take measures to oppose him in response to his putsch after having praised him to the heavens just hours before?

Not for the first time on the international stage, Obama was not a player.  He was played.

I wonder if he realizes that.  I sort of doubt it.  Speaking of immunized, he seems immune to recognizing his errors.

One more thing about the timing.  Mosri no doubt has been contemplating this for some time: the judiciary has represented the only check on his power.  But he no doubt had to tread carefully, given Egypt’s fraught economic condition (especially regarding its parlous food situation) and resultant dependence on American aid.

Perhaps Mosri just acted opportunistically, seizing the chance to execute his coup when circumstances tied American hands.

But perhaps-and this is just an observation that is consistent with the data, but not proved or likely even provable-there’s something more than that.  Perhaps Mosri is like the arsonist who makes himself a hero by rescuing children from the building he set alight.  He goads Hamas into action, or at the least, signals to them that he will support them in an attack on Israel.  Hamas takes the bait, and Mosri offers his, er, good offices to a desperate US to broker a settlement.  He then banks US goodwill for getting Obama out of the difficult political problem of supporting Israel, which is very popular in most of the US and very unpopular everywhere else, and among Obama’s prog constituency.  Goodwill in the bank, Mosri makes his move.

In any event, Obama is no doubt breathing a sigh of relief that the situation in Gaza has cooled down.  But this is only a respite.  An Islamist who is fundamentally (or should that be “fundamentalist-ically”?) opposed to the US is consolidating dictatorial powers in the largest Arab nation, and can exert tremendous leverage on the US via his ability to regulate-or not-the conflict in Gaza.  Mosri has Obama by the balls, and can squeeze at will.

Apropos the Who song that inspired the title: I tip my hat to the new (Egyptian) constitution; take a vow for the new revolution . . . . I get on my knees and pray, we won’t get fooled again.

But my prayers will not be answered, almost surely. Obama will get fooled again. And again and again.

A programming note.  Wordpress informs me that this is SWP post #2000.  Hard to believe.  The blog started in January, 2006, so that works out to about 6 posts/week.  (It seems I take off the seventh day too :-P).  I am writing this from Eltville am Rhein, Germany, which is kind of appropriate I guess since I’ve posted from 15 countries on four continents.  (This also represents the completion of my Axis Tour 2012: I was in Italy in June and Japan earlier this month.)

I owe a debt of gratitude to all those who have read SWP over the years.  I am continuously humbled by your attention.  The blog has gone in directions I had never anticipated when I started it.  It has had an influence, in a small way, particularly on arcane matters related to financial regulation, a subject I arguably at least know something about.  But the posts on Russia and politics-subjects I did not intend to address when I started SWP, and which some would claim I arguably know nothing about-have attracted the most interest and comment.  I value all the comments, and appreciate all the commenters-even those who bust my ass on a continual basis.  I truly miss people when they disappear from the comments.

This blog has evolved into an interesting micro-community uniting disparate people from around the world with somewhat overlapping interests, and whose interests overlap my rather diverse and idiosyncratic ones in some way.  It has changed my life in ways I had never expected.  I hope it has added something to yours.

And to close, a musical interlude (complete with my role model, Keith Moon!):

Today is the 25th anniversary of Black Monday, the 1987 Crash.  This event had a profound effect on my professional trajectory.  I worked at an FCM at the CME-GNP Commodities-during the Crash.  The firm was owned and run by Brian Monieson, a former chairman of the Merc, and a board member at the time.  I walked into his office on the morning of the 20th, and he told me about how the CME clearinghouse had almost failed.  I had only a dim appreciation for clearing prior to that, but that sparked my interest in the subject.

Little known fact: I Granger Caused the Crash.  Throughout the late summer and fall of  ’87 I had been having issues with my direct boss, and soon after I defended my thesis in August I had received a good offer from one of my advisors, Dennis Carlton, to work at Lexecon.  I tried to work things out at GNP, but by mid-October it appeared hopeless.  I told Brian, and we had several phone calls on the 17th and 18th where he tried to convince me to stay.  I thought it over, and on the evening of the 18th decided that it wasn’t going to work.  So I walked into my boss’s office at 7AM on the 19th and slapped down my resignation letter on his desk.  Apparently the news leaked, and the rest is history 😛

The anniversary has spurred retrospectives from many quarters.  Many of these focus on the role of computers in the Crash, and how this was a harbinger of the supposed horrors the machines are inflicting on the markets today.  One good-well, representative-example of this is “Rage Against the Machine” in the FT:

It has been 25 years since Black Monday, when stock markets crashed around the globe and Wall Street woke up to the risks of computerised trading.

Yeah.  The computers were blamed then.  Suspect number one was “program trading”, a good deal of which was garden variety index arbitrage.  This is not a destabilizing strategy, and numerous postmortems absolved program trading as a cause or aggravator of the Crash.

Indeed, if technology was a problem, it wasn’t that computers were trading too fast: it was that printers were printing to slow.  Seriously.

At GNP we did a little index arb trading.  In the morning, it appeared that the arb was extremely profitable.  The price of the cash index (we were doing MMI) was way, way above where the futures were trading.  It looked like a great opportunity.  My colleague Matt who was in charge of this called down to the CBT floor before doing a trade, to see where the floor was trading.  Our floor clerk said (I don’t remember the numbers exactly): “Somebody is offering X over here.  Somebody else is offering X+20 over there.  Somebody else is offering X-20 over there.  I have no fucking idea what the price is.”  Matt didn’t make the trade.

Which was good, because the apparent opportunity was a mirage.  That’s where the slow printers come into play. Specialist posts on the NYSE had old fashioned daisy wheel printers.  Very, very slow.  They were overwhelmed by the order flow.  At 10AM the printers were spitting out orders that had been entered at 8 or earlier.  So the orders being executed on the NYSE were actually very stale, and the prices didn’t reflect current market conditions.  The futures didn’t have that problem.  So at 10 or 11 NYSE prices were reflecting orders submitted hours before, and the futures were reflecting current conditions.  Hence the futures were way below the cash, making it appear that there was a huge arbitrage opportunity.

The problem was that this induced more people to submit sell orders to the NYSE before they caught onto the fact that NYSE prices were not reflective of current conditions.  This exacerbated the backlog on the printers.

So it wasn’t fast technology that caused problems on 19 October ’87.  It was slow technology.

Program trading wasn’t an issue, really, but portfolio insurance was.  This is sometimes called “computerized trading” but it’s not, really.  Yeah, computers were used to calculate deltas, and these deltas were used to determine trading strategies.  You could have used an HP-12C (complete with Reverse Polish Notation!-and no, that’s not an ethnic joke) and the normal cdf table from Handbook of Tables For Mathematics (pp. 922-929 of the Fourth Edition) to do the same thing.

The problem with portfolio insurance was that, unlike index arbitrage and most market making strategies employed today in HFT, it was a positive feedback strategy, rather than a negative feedback strategy.  As prices fell, portfolio insurers had to sell more, which drove down prices further, which led them to sell more . . . until they pulled the plug on the strategies.  That is, unlike market making strategies which are buy low-sell high trades, portfolio insurance was buy low, sell lower.

The FT article uses the ’87 Crash as a springboard to make the usual litany of complaints about current market structure and computerized trading.

Some of the criticisms are defensible.  The current fragmentation of equity structure in the US is indeed the product of SEC RegNMS, which I characterized at the time of its introduction as implementing an “information and linkages” approach to market structure, in lieu of mandating a CLOB.  This socialization of order flow has some problems, particularly during times of market stress.  Links are vulnerable during times of stress.  Moreover, the proliferation of order types that has complicated trading dramatically is directly the result of this approach: many of the new order types are related to order routing, which is a much more complex task with many execution venues as opposed to one (as in futures markets where order flows are not socialized).

Other criticisms are less defensible.  The authors of the FT piece are apparently scared of the dark, as they warn of the dangers of dark pools.  These things are not new.   They just used to be called “third markets” or “block markets”.

The FT piece also warns that in the computerized world, liquidity can evaporate quickly.  They acknowledge that liquidity evaporated quickly in the old days-as it did on Black Monday-but suggest that can happen more quickly today.  Not really.  At all.  Locals could shut up or keep their hands in their pockets very quickly back on the floor if it looked like order flow was getting toxic.  And they were pretty quick at picking up on that.  Moreover, during the Crash clearing firms pulled their locals from the pits.  You would have thought that the pits would have been in a state of pandemonium on the 19th, but after the initial frenzy, they were actually spookily empty, as most locals and many brokers had been yanked from the floor by their clearing firms.

In brief, the functions of markets haven’t changed.  The technology for performing these functions has.  But the fundamental economics of performing the functions hasn’t.  Face-to-face and machine-to-machine markets have the exact same basic vulnerabilities.  Those who focus on the technology miss the economics.

The FT article, and others like this one in Bloomberg,  blame computerization and HFT, and the consequent alleged “loss of confidence” among investors, for the decline in equity volumes recently.  Color me skeptical.  Futures volumes have dropped too, despite a very different market structure, and a different composition in market users.

Historically, trading volume has ebbed and flowed.  It ebbed and flowed in the pre-computer era. It shouldn’t be any surprise that it ebbs and flows now.

If you are looking for the big lesson from the  1987 Crash that we should heed today, ignore all the BS about technology.  Look at clearing.  Look at the Brady Report and other post-Crash studies of what happened in clearing.  That’s what almost brought the markets down.  The operation of variation margining-which is usually a source of stability-threatened to bring the markets to a halt, with even more devastating consequences.

Then think of what will happen during the next big market move, given that the scope of clearing has been expanded substantially due to Frankendodd, and parallel efforts around the world.  Don’t worry about the technology of execution: worry about what happens after the trade, during clearing and settlement.  That’s where the truly systemic vulnerability lies.

There’s an old adage in the military: amateurs talk tactics, professionals talk logistics.  In the markets, the parallel is that most commentary focuses on execution, when much of the real important action happens out of sight, in clearing and settlement-the logistics of the financial markets.  That happened in post-Crash commentary, and it is being repeated today.  That’s a big mistake.  When looking for object lessons from Black Monday, don’t look at the computers and the execution of trades.  Look at what almost happened with disastrous consequences in clearing.  And worry deeply about how the system is vulnerable to a repeat in the future.  Arguably more vulnerable, given the dramatic growth in the size of the markets and the mandated reliance on clearing, and margining of non-cleared derivatives.

That’s the lesson I first began to grasp in Brian’s office early on 20 October.  And that experience has decisively shaped my criticism of efforts, like Frankendodd, intended to fix the markets.

The UK’s Vickers Report and the EU’s recently released Liikanen Group report both recommend a fundamental structural change to the banking system to reduce systemic risk and the likelihood of taxpayer bailouts of banks: “ringfencing.”    The taxpayer guaranteed deposits of a financial institution would be inside the ringfence, and the ringfenced entity that can fund itself with these deposits can engage only in a limited array of activities that are deemed to be of low risk.  Riskier activities, such as derivatives trading and securities underwriting, would have to be undertaken through separately capitalized affiliates that cannot be funded by the ringfenced entity.

This is, in essence, a variation on the Glass-Steagall approach of separating commercial and investment banking.  The Volcker Rule is another way of achieving a separation of deposit taking and trading and underwriting activities.

These structural approaches are completely misguided, in my opinion.  They are unlikely to have the desired effect of reducing systemic risk or insulating taxpayers from the fallout of risky trading activities.

Insured deposits are a potential source of moral hazard, and there is a case to be made for limiting the risks that can be funded with insured deposits.  But historically these activity limits have proved to be a very poor defense against risk taking.  Banks have gotten into trouble while engaging in traditional lending activities; the Latin American debt crisis and the S&L crisis are two prominent examples.  Ditto Northern Rock in the UK.

Moreover, it is beyond naïve to believe that making insured depositors whole is the only, or even the most important, cause of taxpayer funded bailouts.  A failing  investment bank-or a bank-owned trading entity outside the ringfence-poses a potential systemic risk that would likely result in a bailout even if insured deposits are not directly at risk.  Its derivatives counterparties-which are likely other big financial institutions, and which could well be ringfenced banks-would suffer losses if it went other.  Its lenders-which could include, for instance, money market funds that buy its short term debt-are also at risk.   This could lead to destabilizing runs on the money markets.  In brief, even entities outside the ringfence would be highly interconnected with the broader financial system, and with entities inside the ringfence.  The Fed or the ECB would likely deem problems at such interconnected institutions to be systemically threatening, and would find a way to provide support to prevent a failure.

Put differently, an investment bank-like entity outside the ringfence can be too big to fail.

Indeed, looking at the 2008 experience, the most vulnerable institutions were not funded by deposits.  Bear Stearns was an investment bank-it was bailed out.  AIG was not deposit funded-it was bailed out, in large part (IMO) to prevent the failure of another non-deposit funded entity, Goldman Sachs (i.e., the AIG bailout was in part, and likely in large part, a backdoor bailout of Goldman).  Merrill was foisted on Bank of America to prevent its failure.  And of course there is Lehman.  It wasn’t bailed out-but you can be metaphysically certain that inaction won’t be repeated again.

It is quite easy to envision that there will be firms outside the ringfence that are deemed TBTF.  If one of these firms looks acutely vulnerable, central bankers and regulators concerned about systemic contagion will find some way to prop it up.  Taxpayer money will be at risk.

Moreover, the ringfencing idea creates a particular kind of vulnerability that proved to be an acute problem in 2008, and which is pretty well understood theoretically.  The funding of non-deposit funded entities is often quite fragile, and vulnerable to runs.  Like investment banks in ’08, entities outside the ringfence are likely to depend on short-term wholesale funding that can-and will-run if the entity looks shaky, and there is doubt that a bailout would be forthcoming.

Deposit funding is stickier, and a destabilizing-and inefficient coordination game equilibrium-run is less likely to occur with sticky funding.  Thus, putting trading activities outsie the ringfence, and funding these risky activities through the wholesale markets exacerbates a source of financial fragility.

Thus ringfencing increases the risk of liquidity/funding crises that trigger a bailout.  It exacerbates a form of fragility that was devastating in 2008, when it was financial institutions that were outside the Glass-Steagall ringfence that proved most vulnerable to the fallout from the decline in real estate prices.

The knotty issue here is why the funding of trading, market making, securities underwriting and similar activities is typically quite fragile.  The Diamond-Rajan story is that runs are a way of disciplining opportunistic intermediaries.  With the potential for externalities from runs (due to contagion effects) one could make a case that funding is excessively fragile.  But that is hardly an argument for ringfencing, which precludes the ability to use less run-prone deposits to fund these activities: indeed, if anything, it is an argument against ringfencing.

The nostalgia for Glass-Steagall-like structural “fixes” is pervasive.  But structural separation of certain forms of financial intermediation, and separation of certain forms of activity from deposit taking, don’t address a fundamental source of systemic risk: the reliance on short-term, wholesale funding that is vulnerable to runs.  Indeed, it likely makes the problem worse because it increases the reliance of the segments outside the ringfence on such funding.  It is delusional to think that just because taxpayer-guaranteed deposits are not directly at risk, that taxpayers are not on the hook for bailouts.  If a big, interconnected entity that sits outside the ringfence teeters on the brink, regulators and central banks may well deem it too big to fail: No More Lehmans is their motto.  Ringfencing does not isolate derivatives trading, underwriting, etc., from the broader financial system: entities outside the ringfence will still be interconnected.

So even if there is no explicit taxpayer obligation (as with insured deposits), there is an implicit one.  We’ve seen that implicit guarantee invoked before, and we could see it again.  Ringfencing does not address the problem of a non-depository SIFI that is highly interconnected.  Indeed, by increasing the number and size of such entities, it almost certainly makes this problem worse.

Today is Milton Friedman’s 100th birthday.  I consider myself his intellectual grandson.  He was the thesis advisor to my thesis advisor (Lester Telser).  There is a strong degree of affiliation between his views and mine-not surprisingly, since he decisively shaped the intellectual environment that shaped me.

Even though he has been dead six years, Friedman remains an influential figure-and a polarizing one.  Indeed, the financial crisis and subsequent economic turmoil have intensified the battle over his legacy.  Today you can find numerous encomiums to Friedman today.  But to many, he personifies the capitalist or “neo-liberal” ideology that wreaked economic havoc.  The controversy over the Milton Friedman Institute at Chicago, right at the height of the crisis, is one example.  Or Naomi Klein’s screed Disaster Capitalism, which identifies Friedman as the main intellectual architect of said disaster.

Part of the reason that those on the left feel free to bash him is because he isn’t around to defend himself or his views.  And the fact that he was so effective as both a scholar and a polemicist is part of the reason he is so despised on the left.  He got in their heads in the 60s and 70s, and has never left, even though he has departed this earth.  Almost singlehandedly he challenged the professional consensus within economics (the reigning Keynesian orthodoxy) and the political consensus throughout the country (big government liberalism), and although he did not vanquish either, he certainly put them on the defensive.  He debated and wrote and argued prolifically and tenaciously, and like some modern David slew many Goliaths.  His main adversary at the time was Paul Samuelson.  Yes, Samuelson was a great economist, but he is not remembered today either in economics or society at large the way Friedman is.

The sad thing is that the left routinely excoriates Friedman as inhumane, when he was in fact anything but.  He passionately believed that liberty was good for its own sake, but that it was the best way to alleviate human misery and encourage human development.

I wish Friedman had lived to comment on the financial crisis of 2008, and the slow motion crisis in Europe right now.  I am sure that he would have given those who lay the blame for these at his feet (and those of his intellectual and political acolytes) more than they could handle.

Happy Birthday, Milton.  You are missed, but your influence lives.  Everyone passes on, but the ideas of a select few live on far after their passing.  Milton Friedman is one of those few.

I am in Ben Bernanke’s home town, Columbia, SC.  (Psst.  Don’t tell anyone that my great-great-great-great uncle helped burn the place down in February, 1865.)  No, I am not making a pilgrimage to Ben’s birthplace.  I am on a mini-vacation with my dad, visiting some historical sites.

Today we visited the Ninety Six National Historical Site.  You have to want to go there, because it’s not on the way to anywhere.  At least now.  Back in the mid-18th century, it was a fairly important place, because it was on the way between Charleston and the Cherokee lands to the west.  The most common explanation of the name is that the settlement was 96 miles from the Cherokee town of Keowee, but only per the measurements of a drunken surveyor: the actual distance is in the mid-80 mile range.

Ninety Six was the site of bookend battles in the American Revolution.  It was the location of the first major action in the South, in November 1775.  It also saw a major battle a few months before Yorktown, when Nathaniel Greene (the most underrated general in American history) unsuccessfully besieged the place in May-June, 1781 before being driven off by a relief force under General Rawlinson.  All the combatants on both sides in both battles were Americans: the war in the South was a civil war, with all of the bitterness and horror that entails.

Most Revolutionary War sites are underwhelming.  The battles were small, with a few thousand on each side even in the bigger battles.  The siege at Ninety Six involved less than 2000 combatants.  The combatants didn’t mark the fields, as was done with big engagements in the Civil War.  Some battlefields are dimly understood: the general locations are known, but lack of documentation makes it impossible to know precisely what happened where.  So sometimes visiting a Rev War site is about as interesting as looking out into your back yard, or visiting a local park.

Ninety Six is an exception.  The site contains one of the best preserved earthworks from the War: the British “Star Fort” that Greene (and his chief engineer, Thaddeus Kosciusko) unsuccessfully besieged.  There are remnants of the American sap trenches and parallels, the last of which was within a stone’s throw of the fort.  The Americans were so close you would think they could have taken the place in a rush, but obstacles including abattis (interlaced tree branches) and chaveaux des frises (sharpened stakes) and a moat/ditch slowed attackers: a forlorn hope attack by 60 Americans was beaten back with 50 percent casualties.  There is also the remnants of a mine that the Americans were digging under the work, but which they abandoned when Rawlinson’s Rawdon’s army approached, lifting the siege.

The Park Service has also reconstructed the palisade fort where the 1775 battle took place.  Everything is well marked, and pristine: civilization really does not encroach, so the visitor can get a feel for what it was like in 1775 or 1781. The visitors’ center has a nice 20 minute film.  NHS and NBP films are highly uneven: some are truly cringeworthy.  But the Ninety Six film is quite well done (except for the ahistorical exploding shells: the artillery used in the battles was capable only of firing solid ammunition): it won an award at a Houston film festival last year.  The staff is also cheerful and helpful.

There are few Revolutionary War battlefields I think worth an extended visit.  Ninety Six is definitely one of them.  It is out of the way, but if you are in western NC (where my parents live) or western or central SC it is worth a trip.  Especially if you can go with your dad.

Here are a couple of pics. The first is a view of the last American parallel (and the site of sharpshooter’s tower) from the rampart of the fort.

The second is a view of the fort (in the background) with the American saps and parallels in the foreground.

Luigi Zingales is a brilliant guy.  I find his advocacy in the FT of a return to Glass-Steagall less than brilliant.

Zingales identifies four reasons for supporting G-S.  Three are wildly implausible, the fourth hardly persuasive enough to justify a return to 30s-era regulatory structures.

The first reason is that it makes sense to restrict commercial banks’ participation in “very risky activities.”  There are at least two problems with this, when evaluated in the context of the financial crisis.

First, the investments and activities that put commercial banks at risk during each of the last two crises-mortgages and MBS in Financial Crisis I and sovereign debt in Financial Crisis II (the one currently ongoing, particularly in Europe)-were blessed by regulators as low risk activities.  They almost surely would have passed muster under Glass-Steagall.  There were other major banking crises under Glass-Steagall.  It is painfully clear that G-S is not sufficient to prevent banks from taking on risk in sufficient amounts to put individual banks and the banking system at risk.

Second, and I realize I am an apostate on this, although moral hazard is a concern associated with deposit insurance, funding and liquidity risk is as dangerous and arguably more dangerous.  Runs are more likely, the less sticky the funding.  Concentrating riskier activities in institutions like stand-alone investment banks that rely on wholesale markets rather than stickier insured deposits for funding increases the risk of destabilizing runs and makes the system more fragile.   It therefore seems extremely dangerous to allow the institutions with the riskiest funding hold the riskiest assets, and preclude the institutions with the safest funding not hold such risky assets.  Look for other means-such as risk-based deposit insurance premiums or capital requirements-to control the moral hazard problem.

Zingales’s second reason is that Glass-Steagall was simple.  Well, yes, the original bill was (as compared to Frank-n-Dodd or the Volcker Rule portion thereof) but there did grow up a thicket of regulations and interpretations and decisions around it.  This is inherent in any law that attempts to draw lines between activities: such laws generate efforts to engineer products that cross the lines in substance but seem to comply to the letter.  This generates a process of litigation, interpretation, regulatory challenge, etc.

And does anybody believe that if Glass-Steagall were to be brought back, it would be the same today as in the 1930s?  Glass-Steagall was simple in part because it was the product of simpler times  Financial markets are much more complicated today, and splitting the baby would be far harder.  Any attempt to do so would almost certainly result in a Son of Glass-Steagall that is far more complex, and far longer, than the nearly 80 year old original.

I have to say that Zingales’s third reason is cracked:

The third reason why I came to support Glass-Steagall was because I realised it was not simply a coincidence that we witnessed a prospering of securities markets and the blossoming of new ones (options and futures markets) while Glass-Steagall was in place, but since its repeal have seen a demise of public equity markets and an explosion of opaque over-the-counter ones.

I realize this is a newspaper oped, with tight space limits, but Luigi provides no serious evidence to support his realization that coincidence equals causation.  With respect to the demise of public equity markets, trading volumes have skyrocketed, and although there has been an increase in “dark markets”, such things existed in the glory days of G-S, just under a different name (“third markets”, for instance), and there are good economic reasons why this is so.  Moreover, some problems associated with equity markets are attributable to other regulations, notably Sarbanes-Oxley.

With respect to OTC instruments, Zingales’s characterization of cause and effect is muddled and ahistorical.  OTC derivatives began to grow rapidly in the 1980s, while G-S was still in force, but their growth was constrained by regulation.  However, it was legal uncertainty under the CEA that was the main problem, not Glass-Steagall.  This was addressed by the CFMA of 2000, rather than the Gramm-Leach-Bliley  (GLB-wouldn’t it have been funny if there had been a fourth co-sponsor with a name starting with “T”?) of 1999, which repealed G-S.  Commercial banks and investment banks both did OTC derivatives before GLB, and would likely continue to do them under Son of Glass-Steagall.  What’s more, they are constrained-over-constrained, IMO-by Frank-n-Dodd.

Zingales continues in a rather bizarre vein:

To function properly markets need a large number of independent traders. The separation between commercial and investment banking deprived investment banks of access to cheap funds (in the form of deposits), forcing them to limit their size and the size of their bets. These limitations increased the number of market participants, making markets more liquid. With the repeal of Glass-Steagall, investment banks exploded in size and so did their market power. As a result, the new financial instruments (such as credit default swaps) developed in an opaque over-the-counter market populated by a few powerful dealers, rather than in a well regulated and transparent public market.

But the IBs that got into trouble (Bear, Lehman, Merrill, Morgan Stanley) never had access to deposits post-GLB.  Not before, not after.  So the cause-effect link between the repeal of G-S and the explosion in size of IBs that Zingales posits (resulting from the the access to deposit funding for IBs inside CBs) never happened.

No one knows the exact cause (global imbalances, Fed looseness), but the financial system was flooded with funding liquidity in the 2000s.  That is what permitted the IBs to lever up and risk up, not a sudden access to insured deposits.

And by objective measures, markets were more liquid-substantially so-post-G-S.  Spreads were smaller.  Volumes were bigger.  The number of participants was larger: hedge funds proliferated, for instance.  Really, I don’t think anybody noticed the markets getting less liquid post-G-S.  If anything, the concern was that there was too much liquidity, too much trading.

And insofar as CDS are concerned, it is hard to believe that G-S would have (a) prevented the creation of these instruments, or (b) resulted in them being traded by something other than big dealer institutions.  Again, note that stand-alone IBs were major dealers in these instruments, and that they were first developed by a commercial bank (JP Morgan) prior to 1999.  In many respects, the disintermediation of banks by capital markets, a process that started and became quite pronounced under the G-S separation led banks into other, non-lending forms of intermediation.

I would also emphasize that there are intense economies of scale in responding to expansive regulation like Dodd-Frank, meaning that regulation can contribute strongly to consolidation in finance, with its consequent effects on competition, the number of market participants, and systemic risks.

Zingales’s history, in other words, isn’t history at all.

There’s another point here.  If G-S was that important, why didn’t its repeal lead to dramatic changes in market structure, with the demise of stand-alone IBs and the dominance of integrated, full-service universal banks with access to insured deposit funding?  Zingales’s narrative is inherently contradictory: he focuses on the metastasization of IBs post-GLB, but if you believe his story, the repeal should have caused IBs to shrink or die or get absorbed by commercial banks or turn themselves into universal banks funded substantially by deposits.  None of that happened.   Indeed, there were numerous studies in the mid-2000s, notably by the Fed, the Senate Banking Committee, and the St. Louis Fed that all concluded that GLB’s G-S repeal had very limited effects on the structure of US financial markets: most of the major changes in market structure had occurred in the 1975-1998 period.

It is also worth mentioning that the universal bank model that Glass-Steagall eliminated developed in a world without deposit insurance.  Indeed, Glass-Steagall created deposit insurance, which means that at least then implicit subsidies in deposit insurance couldn’t have caused the combination of investment and commercial banking.  Why should we believe that deposit insurance would cause such an integration today?  Especially in light of the fact that the elimination of G-S boundaries did not result in the absorption of investment banking into commercial banks.  Given the role that deposit insurance plays in Zingales’s narrative, this is a major problem for it.

Zingales also claims that the financial system was more resilient under G-S, and points to the contrast between the ’87 Crash (which was not followed by a financial crisis) and the ’08 debacle (which was) as an illustration.   I really don’t see any connection between G-S and how the broader financial markets fared post-Black Monday.  Zingales notes that commercial banks didn’t have problems post-Crash.  Well, investment banks didn’t either, for the most part.  The main difference is that in ’87, most equities were held by real money investors, not financial institutions: ditto the Dot Com crash.

In contrast, in ’07-08, the mortgages that cratered were held primarily by highly leveraged financial institutions-commercial and investment banks; many of these were destined to go to real money investors, but banks and investment banks were caught with them before they could securitize them and market them to real money.  Today, in Europe, sovereign debt is held mainly by leveraged financial institutions.  Banks today don’t hold huge amounts of equities, and an ’87-type event, where the crash originated in the equity market would probably have a similar result today.  The equity crash in ’08 was a response to the crash that was occurring in mortgages.  The events are very different.

And it is quite plausible that these two events were the direct result of regulations, notably the very favorable capital treatment of mortgages and MBS (especially those transformed into AAA securities despite the quality of the underlying collateral) and sovereign debt.

Luigi’s last point is that a divided financial industry is less effective in exerting political influence because commercial banks, investment banks, and insurers have divergent interests.  But again, commercial banks, investment banks, and insurers existed post-GLB.  There was not a wholesale shift to universal banking in the US.  Certainly this could have happened, post-GLB, but it didn’t.  The greatest impetus to consolidation was the crisis itself, when IBs either blew up or were absorbed into commecial banks.  Thus, again, the structural change that could have happened under G-S didn’t happen to that great an extent, meaning that the political economy didn’t change that much either.

Moreover, to the extent that the activities of financial institutions are siloed, as under G-S, they are not competing with one another in the marketplace.  This also limits their need to compete with one another in obtaining favorable legislation or regulation.  Each can focus its efforts on obtaining favorable laws and regulations pertaining to its silo.  Commercial banks focus on favorable rules for commercial banking activities; insurers focus on favorable rules for insurance; investment banks on favorable rules for broker-dealer and securities underwriting.  There is no Galbraithian “countervailing power” mechanism operating that pits investment banks against commercial banks when they are functionally separated a la G-S, because the very separation of these activities means that the firms in one segment are not competing for rents against firms in the other segment.

In brief, it appears that Luigi is aiming his argument at a world that could have arisen after the repeal of Glass-Steagall.  A world in which there was a decisive move to universal banking in the US, resulting in the disappearance of stand-alone investment banks.  Some certainly predicted that outcome in 1999, but it didn’t occur.  There were some changes in market structure, but only modest ones.  It is passing strange that Zingales attributes the growth in investment banks to a law that, under the most straightforward interpretation of his argument, should have led to their demise.  Most importantly, the mechanism that Zingales posits-the availability of cheap insured deposits to fund risk taking by investment banks-didn’t work that way in practice.  Risk taking was funded through the wholesale markets which were awash in money.  That was the vulnerability of the system.

Zingales’s history about the evolution of equity markets, OTC derivatives markets generally, and CDS markets in particular, is also suspect.

So when reading this article, a Mark Twain quote came to mind: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

The latest official line on Syria is incredibly mendacious, even by Russian standards.  First, Putin claims that Russia is not taking sides:

“We have a good, long-standing relationship with Syria, but we do not support any side from which the threat of a civil war may emerge,” Putin told a joint news conference with Merkel.

Second, and worse, Putin made this remarkable statement:

“As for supplying weapons, Russia does not provide weapons that could be used in a civil conflict,” he added.

Just what kind of weapons cannot be used in a civil conflict?

Syria is using armor and artillery in its current onslaught, so those quite evidently can be used in a civil war.  Moreover, reports about the most recent shipment indicate that a Russian ship supplied small arms and ammunition to Syria:

The ship, the Professor Katsman, apparently turned off its transponder on May 26 in the vicinity of Tartus, Sadia Hameed of Human Rights First told AFP. The vessel had been tracked from Piraeus in Greece.

Hameed said she could not be sure of the cargo because there was no official manifest. “The sense we get is that (the ship’s contents) are small arms and ammunition.”

Nice touches.  No official manifest.  Turning off the transponder. Yup, VVP-obviously nothing to hide.

Previous shipments also apparently included small arms and ammunition:

The biggest importer of arms to Syria, Russia sold Damascus nearly $1 billion worth of arms including missile systems last year, while shipments of hard-to-track Russian small weapons have risen since the uprising against Assad started, government defectors say.

In January, the Russian ship Chariot, loaded with arms and ammunition, turned off its radar and sailed quietly to Syria to avoid attracting the attention of world powers increasingly frustrated by Russia and China’s refusal to back U.N. Security Council resolutions aimed at ending 11 months of violence.

. . . .

ThomsonReuters shipping data shows at least four cargo ships since December that left the Black Sea port of Oktyabrsk – used by Russian arms exporter Rosoboronexport for arms shipments – have headed for or reached the Syrian port of Tartous.

Separately was the Chariot, a Russian ship which docked at the Cypriot port of Limassol during stormy weather in mid-January. It promised to change its destination in accordance with a European Union ban on weapons to Syria but, hours after leaving Limassol, reset its course for Syria.

A Cypriot source said it was carrying a load of ammunition and a European security source said the ship was hauling ammunition and sniper rifles of the kind used increasingly by Syrian government forces against protesters.

Among the weapons provided earlier in the year were sniper rifles, obviously of no use at all in a civil conflict.

But don’t worry! If there are any weapons being shipped, it is because Russia has a contract with Syria to supply them, and we all know that the Russians are nothing if not honor bound to adhere punctiliously to contracts!:

Russia’s UN ambassador Vitaly Churkin has rejected criticism of the arms sales insisting they are legal and have no influence on the Syria conflict.

“The weapons we may have provided to Syria under various contracts, which were concluded a long time ago, are fully in line with international law and do not contribute to the current armed violence in Syria,” Churkin told reporters on Wednesday.

Yes.  I’m sure that the Syrians just put those weapons aside, just to make sure they do not contribute to the current armed violence.

I note that it is quite easy to find numerous articles detailing contracts for small arms and ammunition entered into between Russia and Syria in the 2005-2006  time period: would that count as “a long time ago.”

Of course not all the weapons Russia has supplied to Syria-notably anti-aircraft missile systems and anti-tank weapons systems-have been used by the Assad regime in its attempt to crush the uprising.  But it is abundantly clear that since virtually every weapon in the Syrian arsenal is of Russian origin, and that Russia continues to supply weapons, Putin’s claim is a particularly bald-faced lie.

Given Putin’s clear willingness to stand right next to Angela Merkel, and mouth such outrageous untruths-in full knowledge that anyone who has been paying attention knows that they are untruths-should be more than sufficient to convince even the most naive and deluded that Russia will not back away from protecting Assad (and arming his regime) regardless of how many more Houlas there are.

For a perfect example of gibbering incoherence, take a look-if you can stomach it-at the Obama administration’s Middle Eastern policies.

Earlier today, I asked on Twitter whether it would be possible to replace “Libya” with “Syria” in Obama’s 2011 speech justifying intervention in the former country and not conclude that if the intervention were justified in Libya it would be in Syria.  I wondered if anyone would dare to ask Obama or Carney this, and lo and behold, someone did (h/t R).  And no, the answers didn’t make any sense.

“There’s a significant amount of analysis you could do on why Syria is different from Libya,” he noted, saying action against Colonel Moamer Kadhafi followed unity among regional governments and a UN Security Council blessing.

Obama took office in 2009 as Americans’ patience for quagmires in Iraq and Afghanistan wore thin, but as he brought troops home, sought to frame principles for the use of US force abroad.

Officials have balked at the idea of an Obama “doctrine” partly to avoid difficult-to-answer comparisons between the crises in Syria and Libya.

But in the case of Libya, Obama established clear tests for when “the course of history poses challenges that threaten our common humanity and common security.”

He argued Washington had a unique ability to stop horrific violence, a broad international mandate for action, an international coalition ready to act, the backing of Arab nations and a plea for help from Libyans.

There is considerable unity among Arab governments against Syria.  The violence is horrific.  Our capabilities to influence the outcome in Syria are as great or greater than our capabilities in Libya-which we hardly utilized.  There is a broad international mandate-except for Russia, China, and Iran.  And that is preventing anything from proceeding in the UN.

Obama is also operating under the delusion that Russia will assist in dealing with Iran.  As if.  Russia clearly has a strong motive in keeping things on a low-to-medium boil, in order to keep oil prices high: and besides, in Putin’s zero sum view, anything that helps the US or the west makes Russia worse off.

There is one major difference between Syria and Libya: Libya is strategically irrelevant, but Syria is strategically crucial.  It is Iran’s primary ally, and is an essential link in the support network connecting Iran and Hezbollah.  Removing Assad would seriously weaken Iran, and most importantly, Iran’s ability to project power through proxies like Hezbollah.  Eliminating Assad would be an indirect approach at Iran, and would economize on force-strategic principles with which Obama is clearly ignorant.

So Obama chose to intervene, half-heartedly, based on humanitarian motives in a strategic backwater but has refused to get involved in a strategically important country where the humanitarian considerations are equally or more pressing.

Makes perfect sense. No wonder people in the administration flee from the idea of an Obama Doctrine.

What does Obama do? He indulges his inner Jupiter, personally selecting targets for his Game of Drones (props to R for that very apt description), at whom he hurls thunderbolts-Hellfires, actually-from the sky.

Or should I say his inner LBJ?  Remember that LBJ personally approved bombing targets in Viet Nam, in what has become the quintessential example of misdirected presidential micromanagement devoid of any strategic sense.

And the same is true of the Drone War generally, and Obama’s role in it.  At most, this campaign is a war of attrition, and attritive methods are a confession of strategic bankruptcy.  Moreover, there are strong reasons to doubt that it works even as a war of attrition, which requires that you actually reduce the enemy’s forces and diminish his combat power.  It is at least arguable that in Pakistan-Afghanistan that the drone strikes have actually strengthened the enemy, by encouraging recruitment and alienating the Pakistani government.

It is frequently the case that those who are overwhelmed by the big issues, the hard choices, focus on those things they can control, regardless of their importance.  Obama can play Jupiter and feel like he’s doing something even when there is complete drift in the strategically important policies, notably Iran and Syria.

And again the complete incoherence is obvious. Obama was an early and dogged critic of Bush’s tactics in the terror war, including Gitmo, enhanced interrogation, and rendition.  So how are these things veritable war crimes, while it’s perfectly acceptable to kill by drone strike?

Obama’s flack defends the kill list:

“President Obama made clear from the start to his advisers and to the world that we were going to take whatever steps are necessary to protect the American people from harm, and particularly from a terrorist attack,” White House Press Secretary Jay Carney said.

That was the Bush-Cheney justification, no? So why is it OK for the Obama goose but not the Bush gander?

What’s more, there was at least some possibility that the Bush methods that candidate and Senator Obama excoriated produced some actionable information.  Crispy corpses in the Tribal Territories or the Yemeni wilds not so much.

I challenge you all to come up with an example of a more incoherent, strategically inverted set of foreign policies in American history.  I surely can’t.