Streetwise Professor

Gary Gensler has been a menace to the market system for as long as he has been in government. Those of you who have followed this blog for a long time know that I relentlessly criticized him during his tenure as CFTC chairman. He apparently took notice, because he banned me from the CFTC building. I also consider it extremely likely that he was the moving force behind the 2013 NYT supposed hit piece on me–for which I should probably thank him, because on net that has turned out to be a major positive.

Gary Gensler. (Though this is how I like to think of him.)

At CFTC, Gensler was merely an Igor implementing the Frankendodd creation of his congressional masters. As head of the SEC, however, Gensler has become a full-fledged Dr. Frankenstein, stitching together regulatory monsters that threaten to stalk the landscape leaving economic devastation in their path.

I have already written several times about the SEC’s misguided Treasury clearing mandate. But that is only one of Gensler’s Monsters. There are many others.

Perhaps the most monstrous is the SEC’s proposed rule on climate-related disclosures. This would mandate that public companies disclose their carbon emissions–and those of their suppliers. This is at best vast speculative endeavor, and and worst an impossibility. It’s main concrete effect will be to provide a pretext for lawsuits against companies targeted by activists who will allege that the companies’ calculations were wrong, or were lies because alternative internal calculations came up with numbers that differed from those reported in their 10Ks.

The regulation would also require companies to make fulsome disclosures of their climate risks. Another speculative endeavor that cannot produce any meaningful or useful information. It requires each company to characterize the interaction between one complex system–climate–and another complex system–the economy–to predict the adverse consequences of this interaction for it, a small part of the economic system allegedly impacted by climate. Prognostications about climate are themselves wildly uncertain–indeed, arguably the biggest risk is model risk. Predicting how climate will impact economic outcomes at the company level under myriad possible climate scenarios is a mug’s game.

And indeed, it is even worse than that. For there is another element to the problem–government policy. This introduces an element of reflexivity that is particularly devilish. Government policy will respond to climate and economic outcomes as well as interest group pressure, and will affect economic outcomes (though whether these policies will actually affect climate outcomes is dubious). This is arguably by far the biggest risk that companies face.

Meaning that if the regulation comes into force, I recommend the following boilerplate disclosure for all companies: “We face the risk that some government agency will adopt a boneheaded policy that will dramatically raise our cost of doing business or eliminate the markets we service.”

This will also be a boon to lawyers. “Company X failed to disclose the risk associated with [insert climate scenario here] described in [poorly executed paper published in obscure journal].”

I could go on. But in Congressional testimony John Cochrane did a lot of the heavy lifting for me, so I direct you there.

And I ask: how will this information improve the allocation of capital? It is more likely that this will just add noise that impedes efficient capital allocation, rather than actionable information that improves it. The hive mind of investors is likely far more adept at evaluating the effects of the climate-economics-policy nexus than the managers of corporations.

I further note that this obligation’s burdens are greater for small companies than big ones. Meaning that it will likely lead to exit and consolidation, and greater concentration. Which other parts of this administration–notably Lina Khan’s FTC–think is a great evil. Ironic, that. Ironic, but not humorously so.

Moving right along, the trendy Gary has targeted the New Thing, Artificial Intelligence. In public statements Gensler has made the at least somewhat plausible argument that interactions between very similar AIs can produce destabilizing positive feedback mechanisms. But the SEC’s proposed AI regulation instead focuses on potential agency problems:

Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals. This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests. When offering advice or recommendations, firms are obligated to eliminate or otherwise address any conflicts of interest and not put their own interests ahead of their investors’ interests. I believe that, if adopted, these rules would help protect investors from conflicts of interest — and require that, regardless of the technology used, firms meet their obligations not to place their own interests ahead of investors’ interests.”

The SEC remedy for this litany of horrors?

But under the guise of minimizing conflicts of interest, the SEC now proposes requiring advisers and broker-dealers to write new internal procedures and to log all uses of technologies relating to predictive data analytics for agency review. If left unchallenged, the new rules would hamper the American financial industry’s world-beating innovation.

The definition of what must be disclosed is comprehensive:

“an analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes for, predicts, guides, forecasts, or directs investment-related behaviors or outcomes in an investor interaction.” 

This would basically encompass EVERY analytical function performed by covered entities, including e.g., quant traders’ algorithms, portfolio optimizers, and on and on and on. Basically any use of statistical methods is implicated (note the reference to “correlation matrix”).

Perhaps the “investor interaction” language will limit this to principle-agent applications (as bad as that would be), but it is so broad that it is highly likely that the SEC will interpret it to cover, say, an HFT firms algorithms to predict and analyze order flows. That involves “an investor interaction.”

This all brings to mind previous regulatory initiatives to require disclosure of all trading algorithms–something that was mercifully killed.

And what will the SEC do with this information? This would represent a massive amount of highly technical information that the SEC would not have the capacity or expertise to analyze proactively, and information that would metastasize inexorably. Hell, even storing the information would be a challenge.

Again, like the climate reg, this seems all pain no gain. This disclosure would entail massive cost. And for what? To find an agency violation needle in a massive informational haystack? Agency violations (such as trading ahead) that could not be detected using existing methods?

But that’s not all!

Gensler also looks askance at exchange volume discounts. Why? Because NO FAIR:

“Currently, the playing field upon which broker-dealers compete is unlevel,” said SEC Chair Gary Gensler. “Through volume-based transaction pricing, mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges. We have heard from a number of market participants that volume-based transaction pricing along with related market practices raise concerns about competition in the markets. I am pleased to support this proposal because it will elicit important public feedback on how the Commission can best promote competition amongst equity market participants.”

Volume discounts are obviously pervasive throughout the economy in the US and indeed the world. So why should these be somehow so nefarious in stock trading as to require their elimination?

Let’s apply some economics–which alas is an alien concept to Gensler. There are two basic reasons for volume discounts.

One is that it is cheaper to service bigger customers. In which case volume discounts are efficient, and banning them would be unambiguously bad.

Another is that it is a form of price discrimination. For example, big intermediaries may find it easier/cheaper to shift business between exchanges than smaller intermediaries, in which case their demand for the services of a particular exchange would be more elastic than the demand of the smaller firms. Exchanges would then rationally charge lower prices to the more elastic demanders.

The welfare effects of this type of price discrimination are ambiguous, making the case for banning it–even if it can be established that the volume discounts are demand-elasticity-driven discrimination vs. cost-based discrimination–ambiguous as well.

With respect to “concerns about competition,” well, elasticity-based discrimination requires that inter-exchange competition not be perfect in the textbook sense. But if that is what is driving the volume discounts, outlawing them treats a symptom of market power rather than market power itself, and how “imperfectly competing” exchanges will price when they can’t price discriminate is very much an open question–and exactly why the welfare effects of price discrimination are ambiguous.

Gensler seems to be channeling discredited Robinson-Patman like logic that protected the high cost against competition from the low cost. That is anti-competitive, not pro-competitive.

These are only some of the monsters the Frankensteinian Gensler is assembling in his DC laboratory. I could go on, but you get the idea.

There is hope, however. Whereas Gensler’s CFTC actions were largely rooted directly in very specific statutory directives, his work as Dr. Frankenstein is based on extremely expansive interpretations of the SEC’s statutory authority dating back to the 1930s. Such expansive interpretations–not just by the SEC, but many other agencies–are currently being challenged in the courts, including cases pending before the Supreme Court.

It is possible therefore, and indeed to be fervently hoped, that the Supreme Court will hand down decisions that demote Gensler back to Igor implementing very specific Congressional mandates, and end his career as regulatory Frankenstein.

And the benefits of such decisions would extend beyond reining in the SEC, for as bad as it is that agency is probably not the worst offender–the EPA probably is, but the competition for this dubious honor is intense. The administrative state–the American Mandarinate, as I like to think about it–needs to be culled. And with extreme prejudice, and as soon as possible.

The market for United States Treasury securities (notes and bonds) has been a source of concern for some years, dating back to the Treasury “flash” event of 15 October 2014, but especially in the aftermath of the “dash for cash” during the March 2020 Covid scare. The relentless selloff of Treasuries in the past year plus has contributed to the angst.

This has led the SEC to propose various changes to the structure of the Treasury market. The most important of these is mandated central clearing of most Treasury cash trades and repos. Well, since Gigi is back in the clearing saddle, I guess I have to mount up too.

The main justifications of the mandate come from Darrell Duffie and various collaborators at the New York Fed (notably Michael Fleming). The IMF has also produced an analysis outlining justifications of the mandating of clearing.

Just as with the Frankendodd clearing mandates, the case for Treasury clearing is very weak.

The basic argument is that Treasury market liquidity has eroded, and that clearing will enhance market liquidity. The supposed main cause of the decline in liquidity is that primary dealers face balance sheet constraints that limit their ability to intermediate the Treasury market.

In the Duffie paper and the Duffie, Fleming et al paper he cites, the main evidence of the deleterious effects of balance sheet constraints comes from the “dash for cash” in March 2020. Summarizing a variety of measures of market liquidity using principal components analysis, they show that liquidity usually varies inversely with market volatility, but liquidity declined far more than predicted by volatility alone in 2020. This was due, it is claimed, to the fact that dealers were not able to increase their holdings of Treasuries due to balance sheet constraints. Their ability to make markets was therefore constrained.

There is a big problem with this analysis. Dealers ended up holding far more Treasuries because Covidmania caused a sharp drop in the demand to hold Treasuries by hedge funds and others–they wanted to substitute cash for Treasuries. Part of the demand drop was accommodated by a price decline, but evidently dealers’ demands did not drop as much as the demands of non-dealers: thus, there was a major portfolio adjustment, with hedge funds etc. reducing their holdings and dealers absorbing as much of these sales as their balance sheets allowed.

Thus, this was a structural change in demand that led to major portfolio adjustments. Yes, the portfolio adjustments were accompanied by a decline in conventional measures of liquidity (bid-ask spreads, depth, etc.) but this decline in liquidity was a consequence of the underlying shock, and clearing of cash Treasuries or repos would have had little, if any, impact on this decline. Even if clearing increased dealers’ balance sheet capacity (something I discuss further below), given the underlying Covid-driven (and Covid policy-driven) demand shock it is highly likely that this incremental capacity would have been fully utilized as well and liquidity would have been about as bad.

This extraordinary shock that led to strained dealer intermediation capacity is different than the types of shocks that dealers typically intermediate. The role of Treasury liquidity suppliers–be they dealers or prop trading firms–is the same as the role of liquidity suppliers in any other market, be it stocks or currencies or commodities: to utilize inventory adjustments (balance sheet) to absorb temporary, temporally uncorrelated, and largely cross-sectionally uncorrelated investor (buy side) demand shocks. The dash for cash was a long-lasting shock highly correlated across major investors in Treasuries. It was a systematic shock that led to a long lasting adjustment in dealer portfolios, whereas market makers absorb idiosyncratic shocks that do not require long lasting adjustments to dealer portfolios.

That is, the kind of portfolio adjustments that occurred in response to Covid were fundamentally different in nature from the kind of portfolio adjustments that firms undertake to make markets. A long term transfer of risk rather than a short term transfer.

Therefore, using the dash for cash as the basis for policies intended to improve Treasury market liquidity is fundamentally misguided.

Be that as it may, it provides the underlying logic advanced for clearing mandates: improving liquidity requires increasing dealer balance sheet capacity, and clearing can supposedly do that.

How can clearing improve balance sheet capacity? The mandate defenders offer that hardy perennial as a justification: netting. For both cash Treasuries and repos, the argument goes, netting out offsetting exposures reduces the amount of capital and cash that dealers require to intermediate. For cash transactions, Duffie, Fleming et al estimate that netting would reduce daily settlement volumes substantially (70 percent in March 2020 according to their figures). This, and other factors, allegedly result in freeing up of dealer balance sheet capacity.

This analysis begs an important question: since dealers would internalize the benefits of more economical use of balance sheets that would result from clearing, why is it necessary to mandate it? Why don’t dealers and other market participants voluntarily utilize clearing more extensively in order to economize on the use of a scarce resource–balance sheet? After all, historically voluntary adoption of clearing in the stock market (e.g., NYSE clearing and CBOT clearing in the 19th century) was specifically intended to reduce settlement volumes by netting. In the case of the CBOT, the clearinghouse netted payment obligations but did not mutualize credit risk on derivatives transactions or impose margins (which were negotiated bilaterally).

The alleged failure of profit-motivated entities to reduce cost (from inefficient use of balance sheets) suggest that this does not come for free: at the margin there must be some cost for clearing that is greater than the putative benefit. That is, profit maximizers will balance marginal private benefits and marginal private costs. The benefits of netting from clearing are private, and thus the current degree of penetration in clearing likely reflects an efficient balancing of these marginal benefits and costs. The advocates of a mandate surely have not shown otherwise.

I further note that, as I wrote repeatedly during the Frankendodd era, netting redistributes default risk rather than reduces it. It is by no means clear that the distribution of default risk under central clearing/netting is more efficient than that under bilateral clearing.

Put differently, the advocates of clearing (both cash and repo) have not identified a “market failure”, e.g., a benefit from clearing that market participants do not internalize. Such a failure is a necessary (but not sufficient) condition for regulatory intervention such as a clearing mandate.

With respect to repo clearing, another supposed benefit is the disparity of margins (“haircuts”) in the repo market. Haircuts for some counterparties are low, but for others they are higher. Central clearing would impose uniform, value-at-risk (“VaR”)-based margins.

The operative theory behind central clearing is that the “loser pays”, namely the resources (margin, default fund contribution) posted by a counterparty is sufficient to cover any losses in the event of that counterparty’s default. Ideally, counterparty credit risk in central clearing is zero, though in reality some always remains.

Well, this begs another question: is the optimal amount of counterparty credit risk/default risk zero (or close to zero) in all transactions? Relatedly, is it optimal not to permit the pricing of counterparty credit risk, where the price varies by the creditworthiness of counterparties, with high credit quality entities paying smaller haircuts than lower quality credits? Central clearing makes pricing independent of creditworthiness, whereas bilateral arrangements that advocates of clearing dislike allow pricing of credit risk that reflects assessments of creditworthiness of counterparties.

Since credit risk mitigants (including margins/haircuts) are costly, and since market participants trade-off the costs and benefits of credit risk and its mitigants, allowing choice and competition on this dimension has strong justifications. Certainly the advocates of mandatory Treasury clearing have not identified a “failure” in this market that justifies regulatory intervention in the form of clearing mandates.

Put differently, clearing mandates force market participants to a corner solution–clear everything, and impose margins that make counterparty credit risk de minimis. The existing state of the market, where market participants can choose to clear with a CCP or not, reveals that they strongly do not prefer the corner solution. Furthermore, the advocates of clearing have failed to identify any market failure that implies that the interior solution/equilibrium is inefficient and can be improved by mandating the corner solution.

And the advocates have yet again failed to recognize the trade-off inherent in clearing: that is, the trade-off between counterparty credit risk and liquidity risk. This despite the fact that the reality of this trade-off has been made abundantly clear (no pun intended) repeatedly in the past–and including in particular the Treasury market basis trade turmoil during the dash for cash.

The real issue in Treasury markets right now, and the real threat to their stability, is the massive deficits in the United States, and the resultant increase in Treasury security issuance and Treasury securities outstanding. It is deficits and issuance that are driving the massive increase in the size of Treasury markets, and the consequent strains on the ability of dealers and others to intermediate the swollen market.

This is a challenge that no rearranging the market structure furniture on the deck of SS Treasury Titanic will fix. Furthermore, the economic case for mandating clearing of Treasury cash and repo transactions is laughably weak even if one overlooks that fact that clearing does not get at the real problem. But it appears that Gigi (cheered on by the Fed) will mandate a corner solution that makes the market less efficient, not more.

1. Israel has played the role of Sisyphus in Gaza for virtually the entire nearly 2 decades since it left Gaza. The horrific Hamas attacks of 7 October reveal the futility of that “strategy,” and persisting in it will only guarantee a repeat–or worse. Although success is not guaranteed, at least at a price acceptable to Israel, it should now endeavor to push the rock down the other side of the mountain and extirpate Hamas.
2. Israel seemed determined to do that in the immediate aftermath of the horrific attacks, but has delayed, apparently due to pressure primarily from the US but also Europe. The claim is that the US needs a delay in order to rush anti-air and anti-missile defenses to protect its troops and facilities in the Middle East. Perhaps, but the mixed messages coming out of Washington suggest that there are elements within the administration who are opposed to Israel eliminating Hamas.
3. The US’s and Europe’s interests are not aligned with Israel’s. The “leaders” of other nations do not face the threat from Hamas that Israel does, and would much prefer to kick the can down the road and make the reckoning the problem of future governments. Furthermore, Europe in particular is infested with Arab and Muslim populations who are violently anti-Israel. Feckless Europeans are deathly afraid of mass uprisings among these populations in the event of an overwhelming Israeli invasion of Gaza.
4. The 7 October attack obviously represents a colossal intelligence failure by Israel and the United States. Virtually all such intelligence failures reflect not the failure to obtain the necessary information, but instead the failure to interpret the information properly. Such failures are almost always attributable to the dominance of preconceived beliefs that are inconsistent with the information. That is, to an overweighting of prior beliefs and a failure to update them upon receipt of contrary information. In the presence of such beliefs, the information produces, at most, cognitive dissonance that leads to its being dismissed.
5. That appears to be the case for 7 October. Israel had been engaging with Hamas for months, and had become convinced that Hamas had become focused on economic development in Gaza, and hence that it would not jeopardize greater access of its population to Israeli labor markets and the like.
6. There is no doubt in my mind that Hamas deliberately cultivated such beliefs precisely in order to lull Israel into a false sense of security. This is a staple of Muslim, Koranic war fighting doctrine. Israel and the United States–again–mirror imaged by thinking Hamas was motivated by the kinds of economic considerations that guide policy in their countries, and by ignoring Hamas’s adamant Muslim beliefs and tactics.
7. Post-7 October and during the period of threatened a massive Israeli move into Gaza there has been a virtually unanimous outcry for a renewed pursuit of the “Two State Solution.” The Two State Solution is a zombie idea advanced by zombie politicians. It will never live but it won’t die.
8. Those who matter in the Palestinian polity–the hardest men with the guns–have no interest whatsoever in the 2SS. None. Zero. Zip. Nada. They are interested only in a One State Solution, with the extermination of Israel and the creation of a Palestinian state “from the river [Jordan] to the sea.” And these maximalist goals are supported by a large majority of Palestinians. The refusal of Western politicians to listen to Palestinians’ openly stated goals is precisely why these poltiicans are utterly useless, and why this conflict persists. Denial ain’t a river in Egypt, and it is a disastrous basis for policy.
9. To the extent that various Palestinian interests do play along with a 2SS they are just reenacting Mohammed’s hudna with the Quraish–and at times have said that openly (e.g., Arafat). A means to buy time and gather strength for an ultimate resumption of a war of extermination.
10. All of the above implies that all of the conventional wisdom and shibboleths that have dominated Western discourse and policy for the past 50 plus years should be eliminated, with extreme prejudice. But the scales still obviously remain over Western eyes–and many Israeli eyes too. Politicians are loath to admit failure or to admit that they were wrong. They are loath to jettison the comforting belief that this is a conflict that can be resolved through some Westphalian negotiation between non-ideological sovereigns, rather than an intractable ideological struggle between implacable foes with utterly incompatible objectives. So the zombies carry on with their zombie policies, meaning that the horrors will carry on as well.
11. One wonders what Hamas intended to accomplish on 7 October. Perhaps an orgy of murder and rape was a sufficient end in itself for Hamas, because beyond that it accomplished nothing for Hamas and indeed may have put it in an existential crisis by greatly increasing the likelihood that Israel would respond by attempting to eliminate Hamas.
12. But there is no reason to believe that Hamas is primarily an independent actor. Looking at cui bono, the most likely beneficiary is Iran. These events occurred precisely when Israel and Gulf Arab states were on the verge of mutual recognition that would have created an anti-Iran axis. That rapprochement is now in shambles. Thus, one explanation for the Hamas attack, and its timing, is that it was intended to prevent this development.
13. If so, it has succeeded admirably–at least on the surface. If the Saudis et al do indeed back away from the normalization of relations with Israel, they will be handing Iran a victory. One can only hope that their public statements are a blind, and that in private they are actually continuing to move forward with Israel.
14. Iran is the center of gravity in this conflict. Financially and militarily it is the driving force behind the anti-Israel axis (which includes Hezbollah as well as Hamas and Islamic Jihad). Heretofore, Iran has been largely immune from direct attack because it can act powerfully through its proxies. A crucial question is whether Iran will remain merely the puppet master and paymaster if Israel succeeds in destroying Hamas. Its calculation will depend on its perception of the consequences of direct intervention (by, for example, launching missile strikes on Tel Aviv).
15. Minimizing this threat requires putting at risk things vital to the Iranian regime. The two most precious things are their own hides, and their nuclear program.
16. Russia has come out foursquare behind Hamas and against Israel. (A Hamas delegation is in Moscow as I write this). This despite the fact that Putin has had good relations with Israel historically. But the reason is readily understood–again, it is Iran. Iran is a major supplier of weapons (especially drones) to Russia in its war against Ukraine.
17. One would think that since everything and everyone remotely pro-Russian is an anathema in present day DC, the Russian-Iranian alliance would make Iran an anathema. Yet the US has been notably circumspect in its condemnation of Iran despite its obvious central role in fomenting anti-Israel violence. The administration has bent over backwards to say it has no evidence of “direct” Iranian involvement in the Hamas atrocities–although what short of Iranian missiles impacting Tel Aviv would constitute “direct” involvement remains unstated. In his statements Biden has avoided even saying the word “Iran.”
18. This is another baleful legacy of Obama’s obsession with treating with Iran and normalizing the Islamic republic. Taking his statements at face value (not that you should), Obama believed he was (and is, via his marionette successor) contributing to stability in the Middle East that would allow the US to pivot to Asia. How’s that working out, genius? Empowering Iran (via monetary payments, reintegrating them into the world oil market, restraining Israeli actions against it, etc.) has instead led to a situation in which substantial American military resources are being sucked back into the region. But the pro-Iran elements in the administration (and the State Department) still seem to be driving policy–yet another zombie policy implemented by zombie politicians and apparatchiks.

Federal Trade Commission chair Lina Khan has had her undies in a bunch about Amazon since she wrote an overly long and overly praised Harvard Law Review article about it. Now as a capo in the administrative state, Khan has the power to execute her vendetta, here in the form of a massive antitrust lawsuit against the e-commerce giant.

The case is a farrago of economic ignorance and idiocy. It brings to mind Coase’s remark (which I paraphrase) to the effect that a certain kind of mind sees a non-textbook contracting practice and immediately concludes it is an evil monopolizing practice.

Khan fanboi Matt Stoller provides a pithy summary of the FTC case, which simultaneously reveals its absurdity: “The overall point is that Amazon is degrading the shopping experience, raising prices, and yet somehow still gaining market share.”

Quite the mystery! I mean, maybe it’s possible but the “somehow” part seems rather miraculous. Ask the 1970s-80s Big Three about how degrading quality raising prices usually works out, market share-wise.

This theory brings to mind the Underpants Gnomes:

So yeah I’d really like some explanation how that works, exactly. Neither Stoller or the FTC provide it.

The specifics of the FTC case are hardly more persuasive. I’ll look at the ones they highlight in their press release.

Leading with their best?

Anti-discounting measures that punish sellers and deter other online retailers from offering prices lower than Amazon, keeping prices higher for products across the internet. For example, if Amazon discovers that a seller is offering lower-priced goods elsewhere, Amazon can bury discounting sellers so far down in Amazon’s search results that they become effectively invisible.

If so, God save them.

As background, Amazon used to have a contractual term that precluded such differential pricing across platforms. The Euros no likey, so Amazon did it by algorithm (which twists Matt Stoller’s undies).

Contract, algo, whatever. However implemented, this is basically a form of resale price maintenance (RPM). My thesis advisor and mentor, the late, great Lester Telser, wrote the seminal article on the subject when I was one (so maybe the FTC should have caught up by now). Telser argued that RPM is efficient when some retailers provide costly “special services”–notably information–to their customers. This creates a potential free riding problem. Sellers can free ride off the information/special services provided by some retailers/platforms and sell at a discount at stores/platforms that don’t offer the costly service.

Amazon provides a lot of information on products, including product reviews. Offering a product on Amazon, a seller’s potential customers can learn about the product there, and in the absence of the restriction that the FTC is attacking, can then go and buy it from a platform that doesn’t incur these costs, thereby free riding on Amazon’s information provision.

Next up is a real doozy:

Conditioning sellers’ ability to obtain “Prime” eligibility for their products—a virtual necessity for doing business on Amazon—on sellers using Amazon’s costly fulfillment service, which has made it substantially more expensive for sellers on Amazon to also offer their products on other platforms. This unlawful coercion has in turn limited competitors’ ability to effectively compete against Amazon.

For one thing, I don’t see how requiring use of Amazon fulfillment on sales via Amazon raises the cost of selling on other platforms. But even putting that head-scratcher aside, where is the “coercion” here? Amazon offers a bundle. They don’t put a gun to your head forcing you to take it.

Further, there is a very good efficiency reason for this bundling. Amazon offers a delivery guarantee. If it vertically integrates into shipping, it has considerable control over whether it performs according to the guarantee. If a seller uses another shipper, Amazon has no such assurance.

Again, there is a free rider problem. Seller gets sales from customers expecting speedy delivery. Seller uses a cheap but less reliable carrier. Goods arrive late, or in bad condition. Whom is the customer mad at? To whom does the customer look for recourse? Amazon.

Vertically integrating into shipping reduces the cost of providing the guarantee that buyers like.

The FTC also apparently doesn’t understand the basic point that if alternative carriers are cheaper than doing it in house, by forcing customers to use a higher cost service Amazon reduces the derived demand for its services and its platform. Since–as the FTC also whines about–Amazon apparently prices to extract large sums from sellers, in the absence of efficiency benefits like those just described, it would be able to, and find it more profitable to let sellers choose their putatively cheaper carrier and charge the sellers a higher price to sell on Amazon.

Next!

Degrading the customer experience by replacing relevant, organic [but are they vegan????] search results with paid advertisements—and deliberately increasing junk ads that worsen search quality and frustrate both shoppers seeking products and sellers who are promised a return on their advertising purchase.

This is basically the Stoller argument. I’ve already discussed its facial absurdity. But it’s also absurd when you dig deeper.

Search ranking is a scarce resource, and an extremely valuable one. Scarce resources have to be allocated somehow. Usually best way to allocate a scarce resource is to price it. (This is done all the time with online advertising, by the way.) So what is the best way to price this resource?

An auction? Possible–Amazon has no doubt considered that. But maybe pricing through advertising is superior. I don’t know, but given that advertising can serve a reputational branding role, and can provide information, it may well be the case that for selling information-intensive goods, or goods of uncertain quality, advertising is better than auction to prioritize search results.

What I do know is that Amazon internalizes the costs and benefits here. Meaning that they have the incentive to choose the best alternative. Lina Khan–not so much.

And I can guarantee that if Amazon allocated search ranking by auction or some other pricing mechanism, that would cause the FTC to have a meltdown too. They apparently believe that “organic” rankings (WTF are those?) sans pricing of any form are best.

Fine. Start your own platform, Lina.

And next:

Biasing Amazon’s search results to preference Amazon’s own products over ones that Amazon knows are of better quality. 

Preferencing in the absence of some other efficiency advantage is hard to rationalize–and certainly the FTC provides no such rationale. Again, since Amazon could extract the alleged quality advantage (and perhaps cost advantage) of the third party sellers by raising its prices to them, why offer lower quality products?

Here’s one reason: by offering its own products, and competing on price and perhaps visibility, Amazon is entering the market, creating competition, and inducing third party sellers to reduce prices. Which helps consumers and drives them to use Amazon. That is, by creating competition preferencing is pro consumer.

And finally:

Charging costly fees on the hundreds of thousands of sellers that currently have no choice but to rely on Amazon to stay in business. These fees range from a monthly fee sellers must pay for each item sold, to advertising fees that have become virtually necessary for sellers to do business. Combined, all of these fees force many sellers to pay close to 50% of their total revenues to Amazon. These fees harm not only sellers but also shoppers, who pay increased prices for thousands of products sold on or off Amazon.  

Oi. Amazon charges fees. Who knew? Amazon has market power that allows it to charge high fees. Also hardly a revelation.

But this would apparently be a revelation to the FTC: it is not an antitrust violation to exercise market power gained by “superior skill, foresight and industry.” Only nefarious acts to monopolize fall afoul of the antitrust laws.

This one should be a slam dunk for Amazon’s lawyers.

One thing that jumped out at me in the complaint that isn’t in the press release: Amazon’s pricing and policies make it difficult for “single-category ecommerce companies to achieve the scale they need to succeed.”

So, who says they should succeed? Amazon’s success and the success of other platforms (e.g., Walmart) suggests that there are strong economies of scope here, which would make “single-category” platforms inefficient. We don’t want inefficient platforms to survive. If the FTC were to get its way, and somehow handicap Amazon so that inefficient single-category platforms that can’t exploit economies of scope survive, we are worse off.

One interpretation of the anti-Amazon arguments are that it is essentially using its scale and scope economies to price below the cost of alternative platforms, so those platforms don’t enter. This is analogous to Demsetz’s theory of natural monopoly, or the behavior of a dominant firm in a contestable industry (a la Baumol, Panzar, Willig). In these theories, there is no entry, but that’s a good thing because entry would be duplicative (given the scale and scope economies). Moreover, the potential for entry disciplines the incumbent’s pricing, mitigating traditional monopoly triangle losses.

The FTC’s lament about the high prices charged to sellers on Amazon’s platform highlights a major lacuna in its attack: the failure to take into account that Amazon is a two-sided platform. Pricing in two-sided platforms is quite complex, and it is impossible to evaluate Amazon’s pricing justly without taking these complexities into account.

One thing missing from the complaint is one of Khan’s law review criticisms–that Amazon uses the information generated from its operation of the platform to identify profitable entry opportunities, i.e., to identify products that Amazon can produce (or procure) and sell in competition with third party sellers.

Entry is pro-competitive, dontcha know. It tends to lower prices. I’m sure that’s news to you.

Companies perform market research all the time to identify which markets they can enter profitably because they can make products better or cheaper than incumbents. If Amazon can perform this research low cost due to the information it sweeps from the platform–great! Let them use it. (I note that an early theory of vertical integration advanced by Ken Arrow was that such integration produces information that the upstream firm can use to make better decisions.)

In sum, the FTC case against Amazon is pathetic. I would characterize it as economics free. Or maybe more accurately anti-economics.

It is also entirely untethered to any credible theory of how Amazon’s actions harm consumers, or more importantly, how eliminating the practices that the FTC decries would benefit consumers. And as my foregoing arguments show, consumers would almost certainly be harmed if the FTC gets its way.

But this is not a surprise. The Khan FTC has explicitly rejected the Consumer Welfare standard that has guided antitrust since Robert Bork first mooted it in the 1970s.

Now I have my issues with the way courts have interpreted the standard–which, alas, is largely due to how Bork framed it. A close reading suggests that Bork interpreted “consumer welfare” to mean efficiency-enhancing. The courts have typically read it to mean “lower prices to consumers.” Now in many contexts, the courts’ Cliff’s Note version leads to the right results–but not all.

That is only a reason to refine the standard, not to reject it altogether. But reject it the Biden FTC and DOJ have.

Which is why, as a general matter, and in the specifics of the Amazon case (and other cases Khan’s FTC has filed), it is more than fair to say that “FTC” really means “F the consumer.”

Texas governor Greg Abbot has extended an invitation to the CME Group to relocate from Chicago to Texas. The exchange group may well be moveable because the city’s new mayor, Let’s Go Brandon Johnson, has mooted a $1 or $2 per transaction tax on futures, options, and securities transactions in order to fill the city’s gaping fiscal hole–despite the fact that this is currently illegal under Illinois law.

Now you might not think that a buck is a big deal, given that a T-note or crude oil contract has a nominal value of around $100 grand. But it is a big increment to the cost of executing a contract. For example, the bid-ask on a crude oil futures trade is usually about $10, and the brokerage commission adds on only a few bucks. So the tax would increase transactions costs on the order of 5 or 10 percent.

I note that the industry fought for years at efforts to impose a 15 cent futures transaction tax. What Johnson is proposing is substantially greater than that.

Now, if Johnson’s objective was actually to raise revenue, this would be an incredibly stupid idea. Rule one of taxation: tax what can’t move. Although in the floor days uprooting the exchange and taking it outside the city or the state would have been very difficult, that’s not the case in the electronic era.

Have servers, will travel. Yes, CME Group (and CBOE–which given recent developments might end up in CME) has corporate employees there, but if any city should understand that is no impediment to relocation, Chicago should given the exodus of several major corporate HQs from the Chicago area in recent years–Caterpillar, Boeing, and Tyson Foods being prominent examples.

Moreover, even before the CME says hasta la vista motherfuckers, it faces competition in some of its products from ICE, and a tax would shift business there.

Numerous trading firms (notably Citadel) have fled Chicago for reasons–namely the marked decay of the city. (And I do mean marked: even in the last two years the decline has accelerated dramatically.) The CME has certainly already put those factors on the scale when making its decision, and a sizable transaction tax would almost certainly tip the balance heavily in favor of joining the exodus.

Notice that I framed my analysis as a conditional statement: if Johnson’s objective was actually to raise revenue. One cannot be too sure these days. Mayors of city after city have taken actions, or failed to take actions, that seem designed to drive out all but the underclass and turn the polities they govern (I use the term loosely) into crime-ridden, drug infested wastelands. In fact, it’s hard to name a big city whose elected officials haven’t done that or aren’t doing it.

American Spectator writer Scott McKay calls it “weaponized government failure:” “deliberate refusal to perform the basic tasks of urban governance for a specific political purpose.” The “specific political purpose” being to drive out middle class voters who pose the main political threat to the Brandon Johnsons and their ilk.

Framed as a hypothesis, I’m hard pressed to come up with contrary evidence.

Whether that’s the true purpose behind Johnson’s transaction tax brainwave, if he moves forward with it it’s a near lock that CME will hit the road. An electronic exchange is footloose and fancy free and not beholden to any place. Where once there were “locals” whose physical presence was necessary to operate an exchange, there are now what may be called “globals” who can and do supply liquidity from anywhere.

And if it moves, Texas is a good place. No income tax for one thing. Reasonable housing costs. And as for the weather, as I told my late mom when she fought coming here: “Look, you spent four months a years indoors in Chicago. You’ll spend four months a year indoors in Houston. Just different months.”

So come on down, Terry Duffy. I’ll be here to greet you. With bells on.

Speaker of the House Kevin McCarthy has announced the initiation of an impeachment “inquiry” against Joe Biden.

On the substance, I’m ambivalent. Many crosscurrents here. Perhaps the most intriguing is that this might be turnabout: just as the indictments against Trump are plausibly a strategy to boost his popularity among the Republican base to ensure his nomination (in the belief he can’t win the general–though maybe they should ask Hillary about that), the House impeachment move is plausibly an effort to force the Democrats to stick with Biden (in the belief he can’t win the general–though maybe they should ask Trump about that).

The Democrats’ reaction is quite amusing, and telling in many ways. It also suggests that if this is a turnabout play, it’s working.

The main response is that this inquiry is totally unjustified, because there is no evidence that Biden is corrupt. For one thing, McCarthy announced an inquiry–which is a process to develop evidence. Justification of an inquiry faces a (much) lower hurdle than an actual impeachment, or a conviction and removal from office. Moreover, there is far, far more evidence in plain sight here than the predicates for the first Trump impeachment or the Mueller investigation. The former was based on allegations regarding a phone call between Trump and Zelensky which turned out not to be an accurate representation of the actual content of the call. The latter was based on the Steele Dossier and some extremely dubious hearsay (e.g., the alleged Papadopolous revelation). The Dossier was facially absurd–as I wrote immediately upon its release: the Putin gifted Trump 10 percent of Rosneft via Carter Page was obviously complete and utter bullshit.

With Biden there is: Hunter’s laptop; information from a trusted FBI source; undisputed and indisputable business dealings between Biden’s son and brother and corrupt companies (CEFC and Burisma) and oligarchs around the world; documented large flows of money through a labyrinth of shell companies; well over 100 suspicious activity reports related to Biden family members filed by US banks; testimony of Biden associates (Archer and Bobulinski in particular); contemporaneous US and European documents regarding the Ukrainian prosecutor Shokin whom Biden bragged about getting fired; Shokin’s statements; Biden’s bragging; and the now indisputable fact that Biden lied repeatedly about the absolute wall between him and Hunter’s business dealings; the fact that Hunter and Jim had nothing–zero, zip, nada–to offer Burisma or CEFC or corrupt Kazakh or Romanian oligarchs other than access to Joe Biden. And that’s just what pops immediately to mind. More than enough smoke to justify looking for a fire.

But but but . . . there’s no proof that Joe benefited personally from Hunter and brother Jim’s foreign dealings!!! the Democrats squeal. In unison.

Er, that’s the point of an inquiry, isn’t it? To determine whether Joe indeed realized a benefit. There is certainly more than enough evidence to create a reasonable suspicion of such a quid pro quo.

And ironically, one of Biden’s–and the Democrats’–primary justifications proves the existence of such a benefit. JOE LOVED HUNTER! Biden did what he did not out of greed for personal pecuniary gain, but because of his deep, abiding love for his troubled son. (Why is Hunter troubled if he had such a loving father? you might ask. And if Joe’s love is unconditional and without any strings or expectation of payback, why did Hunter sometimes express bitterness at what he had to give his father, e.g., half of his income?)

Well, let’s taken the deep, undying, unconditional love as given. That would imply that Joe benefited any time his son profited. Even if a single dime that rained on Hunter never touched Joe’s hands, all those dimes (100s of millions of them) would have given Joe immense pleasure.

Bribery involves performing an act in an official capacity in return for consideration. The showering of blessings on a son upon whom the sun supposedly rose and set in Joe’s world certainly counts as consideration for Joe.

Consider an analogy. Any corporate CEO that arranged or facilitated deals that benefited a family member would be fired, and perhaps prosecuted. Further, many government corruption allegations (I’m from Chicago, so I know!) involve actions by a government official that benefit a family member or members, without the necessity of showing that the official received any direct compensation.

Meaning that the no-direct-personal-benefit-and-he-did-it-all-for-love defense does not cut it. Even if it is true. Which is highly dubious (as the above litany of the supposedly non-existent evidence demonstrates), and which regardless is a fair subject of inquiry.

There is obviously some serious cognitive dissonance at work here. On the one hand, publicly Democrats are circling the wagons around Joe. On the other, there are clear signs of concern, and perhaps panic, in the Government Party about Biden’s electability, especially in light of his undeniable cognitive decline–from a not-too-high-to-start-with level.

As evidence of the latter, CIA sockpuppet moonlighting as WaPo columnist David Ignatius called upon Biden not to run in 2024. I also believe that the White House’s rather remarkable issuing of marching orders to the mainstream media to “ramp up scrutiny” of the House Republicans’ investigations reveals fear of an internal push–or putsch. It hardly screams confidence. Indeed, it betrays concern that the media may turn on Joe.

So we can expect more gaslighting on this. Because that is what the Government Party does best. We are gaslighted 24/7 on just about everything–not just Biden’s dealings. For example, we are told that the economy is just GREAT. Bidenomics is the BOMB, man!

But the attitude of most Americans about the economy is decidedly sour even though the data is allegedly “surreally good.” What a strange disconnect, eh, Paul Krugman?

“The economic data have been just surreally good. Even optimists are just stunned,” says Nobel Prize-winning economist @paulkrugman. So why do polls show most Americans don’t think the economy is doing well? “There’s a really profound and peculiar disconnect going on.” pic.twitter.com/MNFhzZ2hh3

— Christiane Amanpour (@amanpour) September 12, 2023

Who you gonna believe, Paul Krugman or your lying bank account? Median household income has fallen three straight years. Note: the decline has continued the last two years, after the COVID shock. This is mainly due to the “transitory” inflation that we were told we shouldn’t worry our little heads about.

Perhaps household income figures aren’t included in the data that Paul scrutinizes. If he did pay attention to it, or did and actually told the truth, he would realize that there is no “profound and peculiar disconnect.” Household income is what people care about, and what drives their evaluation of their economic circumstances. The connect is very, very clear.

I mean, duh.

But the whole-of-government (and government pilot fish e.g., Krugman and media) propaganda/gaslighting effort never stops. You are just too stupid to know whether you are living better this year, right? Pay attention to your betters, prole! They’ll tell you how you’re doing!

Thus, the “no evidence” gaslighting on Joe’s guilt is just a piece with a broader, and indeed ubiquitous, phenomenon. We are lied to 24/7. They have to know we know they are lying. But they continue to lie. And that is the essence of gaslighting. And there are many, many fronts in the gaslighting war, of which the Joe is the personification of innocence is just one.

Elon Musk is taking a lot of heat from the Ukraine Amen Corner over his decision not to extend Starlink internet service to cover Crimea–Sevastopol in particular–because of fears that Ukraine would launch an attack on the Russian fleet based there, and this would spur a massive retaliation by Russia. Musk has claimed in particular that he feared the possibility of a nuclear retaliation.

There are conflicting stories. The one is that SpaceX turned off Starlink coverage to Crimea precisely when Ukrainian submersible drones were inbound. Denied navigational assistance and control provided by the satellites, the drones went stupid and the attack failed. The other–which Musk laid out himself on X–is that Starlink did not cover Crimea, the Ukrainians asked him to activate its coverage there, and he declined.

The second story is more plausible than the first. How would Musk know that an attack was on its way? And there has been no evidence of any such attack: in more recent drone strikes, the Russians have provided images of beached drones and video of drones being sunk by Russian gunfire.

The umbrage from the usual quarters–illustrated by the rant from Jake Tapper–is over the top, as is the response by Ukrainian official Mykhailo Podolyak: “By not allowing Ukrainian drones to destroy part of the Russian military (!) fleet via #Starlink interference, @elonmusk allowed this fleet to fire Kalibr missiles at Ukrainian cities.”

For one thing, this assumes that the drone strike would have inflicted devastating damage on the fleet. Subsequent strikes (guided how?) have inflicted some damage, but have hardly posed a major threat to the striking power of the Russian Black Sea Fleet.

For another, since when is an American company obligated to make its resources available to a foreign country to commit an act of war against a nation with which the US is not at war, and which has the world’s largest force of nukes to boot? Indeed, do we want CEOs making those kind of choices, given that especially when dealing with someone like Putin the target would immediately attribute responsibility to the United States? Such would be a major national security policy decision and should be made by those Constitutionally responsible–although given the current government, they may not be constitutionally fitted. But even given the dubious judgment of the current administration, it is they who should be making such decisions, not corporate CEOs.

If anything, it should go the other way. Companies should be prohibited from making such clearly belligerent moves on their own hook.

Indeed, note that US law requires approval of arms sales by US companies:

The FMS sales process begins when a country submits a formal Letter of Request (LOR). Ideally, this includes both a desired military capability, and a rough estimate of what the partner is able to spend.  Sales are approved following U.S. government review and, when required, after Congressional notification. After the sale is approved, the DSCA issues a Letter of Offer and Acceptance (LOA) specifying the defense articles, training, and support being offered for delivery.  Major FMS sales formally notified to Congress are publicly announced on the DSCA website

Providing an asset complementary to things that blow up–and which are indeed necessary for the use of the things that blow up even if they don’t blow up themselves, as Starlink supposedly was in this instance–should be subject to the same strict scrutiny and approval.

And again ironies and idiocies abound here. Those who consistently condemn Putin as evil and perhaps irrational dismiss Musk’s concerns about nuclear retaliation. Those who routinely attack Musk’s actions–and his management of Twitter in particular–want to delegate war making decisions to him.

Elon making decisions about waging war on Putin. Yeah, nothing unpredictable or frightening about that, right?

It should also be noted that the United States has been extremely circumspect about supplying weapons that Ukraine could use to strike at Russian territory, and at Crimea. The hemming-and-hawing about F-16s is one example, as is the continued reluctance to supply long-range ATACMS missiles. Even approval of main battle tanks–which pose little threat to Russian territory proper–occurred only after much debate and indecision. And for years–even following Russia’s invasion of Donetsk in 2014–the US was incredibly stingy about providing even clearly defensive weapons (like ATGMs) to Ukraine.

Meaning that those who attack Musk for not facilitating Ukrainian offensive capability into Russian- and Russian-claimed territory should really direct their fire at the administration. It’s their call, not Musk’s, and they have been just as cautious–if not more–than Elon.

The utter ingratitude of Ukraine to Musk is truly astounding. He kept Starlink operational over Ukraine for months on his own tab, and it was vital to its military operations. Yet since he doesn’t cater to their every whim–even potentially very ill-considered ones that implicate the United States–they demonize him incessantly. I believe that if Musk was not so dependent on the US government generally, and the security state in particular (especially insofar as SpaceX is concerned) he would tell them to GFY.

I have been very critical of Musk on some things, more favorably disposed on others. Here is a case where he is clearly in the right.

In 2010, along with my UH colleagues Victor Flatt and Praveen Kumar, I taught what I believe was the first academic carbon trading course in the world. My lectures in the course related to the economic challenges of creating traded commodities, specifically the challenges of merely defining what the commodity is and monitoring adherence to the standards so established.

Now, this may seem trivial, but even something like “wheat” poses challenges due to heterogeneity related to quality (even within a given variety, such as soft red winter wheat) and monitoring whether the wheat traded under a contract adhered to the relevant terms agreed to by the parties. Indeed, as I noted in an early article of mine, the genesis and early development of commodity exchanges like the Chicago Board of Trade and the Liverpool Cotton Exchange was not driven by the desire to trade futures: these were cooperative, private efforts to define property rights and to create a mechanism to standardize commodities and to adjudicate contractual disputes primarily over quality. Only after these challenges were met was it possible to trade futures. Standards (and their enforcement) are obviously a necessary condition for trading standardized instruments like futures.

The major intended takeaway from my lectures in 2010-11 was that the problems of standard definition and especially standard enforcement were even more daunting in carbon than in traditional commodities like wheat or cotton, and that this was especially true with respect to carbon offsets–things like contracts to plant trees to capture carbon.

How do you define what is being bought and sold? How do you monitor whether the offset contracted for performs as agreed? How do you address contract performance failures? The Chicago Board of Trade struggled for years to overcome these issues in wheat and corn and oats in the post-Civil War era, even though the trade was relatively geographically concentrated, the contracts were of relatively short duration (typically for a single consignment), and the commodity was relatively simple.

All of these challenges are far greater for carbon, let alone for offsets. Sources of carbon emissions are numerous and diffuse and costly to monitor. With respect to offsets, they are highly heterogeneous; have very long lives; require continuous investment and upkeep; and have highly unpredictable performance (e.g., the forest that you plant may burn down, or be ravaged by insects). These contracts are far more complex than a deal to buy 10,000 bushels of SRW winter wheat for delivery in Chicago next month. Moreover, many offsets are located in countries with weak–and sometimes close to non-existent–legal systems.

Furthermore, the incentives of the parties to these agreements can be perverse, especially for “voluntary” offsets. A buyer who pumps its ESG score by purchasing offsets that turn out not to perform seldom suffers serious adverse consequences (although there is some backlash against “greenwashing”), and the seller has a strong incentive to collect the cash and not make the necessary expenditures to ensure that the offset performs as promised.

I taught the class in the immediate aftermath of the Global Financial Crisis, and I suggested that there were a lot of similarities between offsets and the kinds of deals that wreaked havoc in the banking system in 2008-2009, where bankers paid their bonuses upfront based on imagined profits predicted by highly speculative models to be realized over several years churned out garbage securities.

In 2010 I was therefore extremely skeptical about the viability of markets for offsets. And the defects that I talked about have been increasingly recognized in the last year or so.

I believe that the actions of Shell during the last week represent an authoritative recognition that these predictable–and predicted–problems have come to pass. Like other (especially European) energy firms. Shell made ambitious carbon reduction pledges that it intended to meet largely through the use of offsets. But reality has reared its ugly head, and Shell is all but abandoning this strategy. Other companies (e.g., Microsoft) say that they are still committed, but if they are even remotely interested in spending their shareholders’ money wisely, they will eventually have the same come to Jesus moment as Shell.

A Shell-funded mangrove restoration project in Senegal (Bloomberg).

This represents another grievous blow to the ambitions of the Net Zero fanatics. Offsets are a major component of Net Zero plans. Renewables are another part–and reality is catching up with that too (as the travails of Danish renewables developer Orsted and German turbine manufacturer Siemens demonstrate).

But will the fanatics be deterred? Alas, it appears not. Indeed, they appear to be doubling down, as illustrated by lunatics like Michael Gove:

Michael Gove has insisted the UK needs 'big, hairy, audacious' environmental goals such as the ban on the sale of new petrol and diesel cars from 2030, during a live debate at #ftweekendfestival https://t.co/jD1bEkY8c0

— Financial Times (@FinancialTimes) September 2, 2023

Net Zero and the policies intended to bring it about–including extensive reliance on renewables and offsets–are a guaranteed recipe for an impoverished future. This was predictable–and predicted–more than a decade ago. But when will the madness end? I am guessing not before these policies cause economic catastrophe.

Last week Russian warlord/PMC impresario Yevgeny Prizoghin met his demise, as his plane plummeted from the skies near Tver, killing him and several other high ranking Wagner personnel.

Two theories of the cause of the takedown of his aircraft (it is not a crash, per se) are in play: (1) his Embraer corporate jet was taken down by SAMs, or (2) a bomb was planted on the plane and detonated in flight.

The second theory has been pushed by Russian sources, which is reason enough to discard it. When the theory was first advanced, skeptics pointed out that the plane fell with the fuselage intact but minus a wing, whereas a bomb in the passenger or cargo compartments would have seriously damaged the fuselage. The Russian sources then pivoted to say the bomb had been planted in the wheel well, located in the wing, which would explain its loss. Subsequent photos of the detached wing show it to be intact, however,and crucially, the landing gear and tire are pristine and bear no signs of fire or explosion.

Support for the first theory comes from (1) the observation of smoke or vapor trails pointing skyward in videos of the plane’s descent, and (2) photographs of plane pieces with many small holes, characteristic of the shrapnel jettisoned with the explosion of a SAM warhead. (FWIW, there are rumors that the corpses of the victims also contained shrapnel wounds.). It should also be noted that the takedown occurred close to a military base at Tver where SAMs are stationed.

So I’m strongly leaning towards the shoot down theory.

So whodunit, and why? Well, of course the near lock primary suspect is Putin. Prigozhin’s/Wagner’s Kornilov moment exactly two months before Yevgeny et al bit the dust was a threat to Putin, and worse, an insult (despite Progozhin’s protests he wasn’t targeting Putin) led virtually everyone to believe he was a dead man walking. The only question was how? Tea that would break a Geiger Counter? A window? “Suicide”?

Indeed, the most confusing thing about the entire episode is that not only did Prigozhin live so long, he was apparently traveling to, from, and within Russia with impunity. This led some to hypothesize that the entire June “coup” was some sort of scheme drawn up by Putin and Prigozhin, others to conjecture that Putin was too intimidated to move against him.

Or more likely, Putin figured revenge is a dish best served cold. And further, he needed to destroy not one man, but to decapitate Wagner altogether–and Prigozhin and his confederates did not provide the opportunity to do so until they boarded the plane this week.

One can only consider Prigozhin as a fool. He fucked up–he trusted Putin.

He was also a fool because he forgot the old adage–if you strike at the king, you must kill him. By recoiling at the last minute, he sealed his fate.

Now of course we’ll never know if Putin gave an explicit order. Perhaps it was a hint, hint, nudge, nudge will no one rid me of this turbulent boyar kind of thing. But it’s extremely unlikely that this happened without Putin’s approval.

Of course, like Murder on the Orient Express, many had a motive to kill Prigozhin. Most notably the Defense Minister Shoigu and the Armed Forces Commander Gerasimov, both of whom Prigozhin had attacked furiously and whose removal he demanded. But I seriously doubt they have the stones to do something like this on their own hook. Indeed, their sad-sackiness is exactly what drove Prigozhin nuts and which endears them to Putin.

What now? The hardcore nationalist factions in Russia are furious, and Wagner rank-and-file could pose a threat. But they are leaderless, and no doubt the FSB and GRU are sweeping up and eliminating the most dangerous of them. No doubt some hardcore elements will survive, perhaps fleeing to Africa, and attempt to move against Putin a la how French paratrooper veterans of Algeria tried to snuff De Gaulle. But the very public De Gaulle represented a much easier target than the reclusive Putin, and even then the disgruntled French soldiers failed in their attempts.

Presumably the event has also scared straight anybody else thinking of mounting a challenge against Putin. Indeed, the very extravagance of the killing–much more lurid than a mere fall from a high place–puts an exclamation point on the assassination, and sends a very strong message.

But it’s not immaterial that Putin felt it necessary to engage in such extravagance and send such a message. A confident leader, like Caesar in many instances, can show mercy. A shaky or fearful one cannot. And perhaps it was the lesson of Caesar that convinced Putin that longtime colleagues can be extremely dangerous. “Et tu Yevgeny” were not words Putin was going to utter, if he could help it. And he could.

A current topic of debate by allegedly serious people in Germany is whether to ban Alternative for Germany (AfD), a nationalist political party which has been surging in opinion polls. Surging to such an extent that it currently out-polls the ruling Social Democrats and is in shouting range of the Christian Democrats. Those mooting the ban include Thomas Haldenwang, the head of the Federal Office for the Protection of the Constitution and German president Frank-Walter Steinmeier. These elite worthies label the AfD as extremist, enemies of the constitution, and threats to democracy.

The utter moral panic is palpable.

The irony of banning a political party in the name of “democracy” is beyond obvious.

Midwits defending a ban make arguments like, well, the Nazis came to power by democratic means, so it is necessary to protect democracy against the new Nazis–which they obviously believe the AfD to be.

This is historical idiocy. For one thing, the Nazis were declining in popularity when Hitler was invited by German President Paul von Hindenburg to become Chancellor, at the behest of Franz von Papen. Von Papen was a member of the conservative elite, which despaired of defeating the left without the Nazi base. He came up with the brilliant plan of bringing the Nazis into the government on the theory that the conservative elite would dominate Hitler and use him: “We’ve hired him” von Papen told Hindenberg.

Yeah, that worked out great!

Moreover, Hindenburg had to exercise his emergency powers under the Weimar Constitution to install Hitler as Chancellor since the Nazis did not have a majority or a majority coalition in the Reichstag. Again, he did so under the theory that by doing so he would prevent the left from obtaining power and install a puppet that his minority faction could control.

So no, the Nazis did not take power by democratic means. They had a considerable voting bloc, yes, but it was the arrogant and blundering machinations of a faction of the German elite that put them in power.

Soon thereafter, Hitler ran roughshod over those who thought he was their hireling. One of his first acts, in the aftermath of the Reichstag Fire, was to persuade Hindenburg to issue the Reichstag Fire Decree which suspended most civil liberties. This was followed by the passage of the Enabling Act that effectively allowed Hitler to rule by decree, and which ultimately resulted in . . . the effective banning of all political parties other than the Nazis.

More irony for you.

Other historical facts fundamentally differentiate the AfD from the Nazis. The Nazis had a vast paramilitary organization (the SA, and the SS, which was much smaller when Hitler took power) that could intimidate opponents and carry out violence against those that posed a political threat to the Party: the AfD does not. The Nazis obviously had a mesmerizing and messianic leader who attracted a mass personal following. The AfD does not.

The AfD are not my cup of tea, in large part because they are anti-American, although I can understand and sympathize with some of the positions that have made them a political force, namely their anti-EU stance, and their anger over the immigration policies that Merkel and the German political elite forced on the country.

But that’s neither here nor there. What’s particularly fascinating about this to me is how it validates something I pointed out before the 2016 election in the United States, namely, the utter inability of the western “elite” to comprehend–or even consider the possibility–that they created the thing that now terrifies them to the point of wanting to ban it.

AfD’s popularity is due completely to the failure of the German ruling class of all parties–SPD, CDU, Greens. Or maybe not its failure, but it’s Borat-like success of imposing its will despite popular opposition, and its demonization and cancelation of those who express their dissatisfaction.

In other words, the German establishment is reaping what it has sown, and doesn’t like it one bit. But instead of stepping back and asking why supposed Nazis have re-emerged in modern Germany, and considering whether maybe, just maybe, the enemy is them, and that they are primarily responsible for this malign development, they presume their righteousness and react by attempting to demonize and crush what they have created, Sorcerer’s Apprentice-like.

And again, this is not a phenomenon unique to Germany. It is ubiquitous in the west, where populist fires lit by the ruling classes are burning, and the ruling classes cannot even countenance the thought they they are the arsonists.

The Trump phenomenon in the US is one example. Brexit in the UK. (Both of these were prominent in my 2016 post.) But not just them. Look at France (Le Pen) or the Netherlands (Farmers’ Party) or Meloni in Italy.

Or Melei in Argentina. This clip is wildly entertaining, but not just for Melei’s volcanic rant or his Austin-Powers-Meets-the-Late Elvis hairdo: the look on the interviewer’s face is priceless:

“Argentinian Trump” Presidential candidate Javier Milei leaves reporter in STUNNED silence— WATCH

REPORTER: "Why do you call Leftists shit?"

MILEI: "BECAUSE THEY ARE SHIT!”

REPORTER: ?

MILEI: “If you think differently they will kill you!”

pic.twitter.com/rybDuYtZN3

— Benny Johnson (@bennyjohnson) August 17, 2023

A smaller example is the freak out over “Oliver Anthony” (real name Christopher Anthony Lunsford), whose “Rich Men North of Richmond” dominates iTunes –along with several of his other songs. Anthony’s (who would be a spitting image of me at his age if he was about 15 lbs. lighter–I mean, a near doppelgänger) success has caused a moral meltdown among the establishment. Yes, the left in particular, but also the elitist right (e.g., National Review).

Again, the Other frightens these people no end, but they cannot come to grips with the fact that the Other is a reaction to them, 10000 percent.

In a typically supercilious and condescending way, New York Times columnist David Brooks (whom I have a vague recollection of encountering a few times during our shared time at the University of Chicago) tiptoed up to the precipice and looked over. But in the end he chooses to be a “card-carrying member of his class” (his words).

The populist forces shaking virtually the entire west will not abate until the ruling classes engage in self-reflection, self-criticism, and humility. But that is not in their nature. They KNOW they are better than you, and if you disagree with them that’s because you are the unwashed reprobate who doesn’t know his/her place. Which means that the populist backlash will not abate. Especially in Jacksonian America.

And when it does not abate, authoritarian responses are inevitable. Germany’s serious consideration of banning the AfD is just the harbinger of such responses. And that will look mild compared to what is brewing in the United States. The Sorcerer’s Apprentices of our ruling classes have unleashed forces that they cannot control, and are indeed redoubling their spells. Chaos is inevitable.