Streetwise Professor

The recent controversies embroiling many corporations, notably Target, Disney, and Imbev (the owner of Anheuser-Busch) has brought the issue of stakeholder “capitalism”* to the center of American political discourse. These controversies demonstrate clearly why corporations and their executives should not indulge their own preferences or preferences of “stakeholders” other than shareholders, but should instead limit their efforts to what is already a very demanding task–maximizing shareholder value.

At its root, stakeholder capitalism represents a rejection–and usually an explicit one–of shareholder wealth maximization as the sole objective and duty of a corporation’s management. Instead, managers are empowered and encouraged to pursue a variety of agendas that do not promote and are usually inimical to maximizing value to shareholders. These agendas are usually broadly social in nature intended to benefit various non-shareholder groups, some of which may be very narrow (transsexuals) or others which may be all encompassing (all inhabitants of planet earth, human and non-human).

This system, such as it is, founders on two very fundamental problems: the Knowledge Problem and agency problems.

The Knowledge Problem is that no single agent possesses the information required to achieve any goal–even if universally accepted. For example, even if reducing the risk of global temperature increases was broadly agreed upon as a goal, the information required to determine how to do so efficiently is vast as to be unknowable. What are the benefits of a reduction in global temperature by X degrees? The whole panic about global warming stems from its alleged impact on every aspect of life on earth–who can possibly understand anything so complex? And there are trade-offs: reducing temperature involves cost. The cost varies by the mix of measures adopted–the number of components of the mix is also vast, and evaluating costs is again beyond the capabilities of any human, no matter how smart, how informed, and how lavishly equipped with computational power. (Daron Acemoğlu, take heed).

So what do climate-concerned executives do? Adopt simplistic goals–Net zero! Adopt simplistic solutions–deprive fossil fuel companies of capital!

Maximizing shareholder value is informationally taxing enough as it is. Pursuing “social justice” and saving the planet is vastly, vastly more so.

Meaning that even if corporate executives were benevolent–a dubious proposition, but put that aside for now–they would no more possess the information necessary to pursue their benevolence that does a benevolent social planner.

Instead, executives pursuing non-shareholder wealth objectives are almost certain to be Sorcerer’s Apprentices, believing they are doing right but creating havoc instead.

Agency problems exist when due to information asymmetries or other considerations, agents may act in their own interests and to the detriment of the interests of their principals. In a simple example, the owner of a QuickieMart may not be able to monitor whether his late-shift employee is sufficiently diligent in preventing shoplifting, or exerts appropriate effort in cleaning the restrooms and so on. In the corporate world, the agency problem is one of incentives. The executives of a corporation with myriad shareholders may have considerable freedom to pursue their own interests using the shareholders’ money because any individual shareholder has little incentive to monitor and police the manager: other shareholders benefit from, and thus can free ride on, any individual’s efforts. So managers can, and often do, get away with extravagant waste of the resources owned by others placed in their control.

This agency problem is one of the costs of public corporations with diffuse ownership: this form of organization survives because the benefits of diversification (i.e., better allocation of risk) outweigh these costs. But agency costs exist, and increasing the scope of managerial discretion to, say, saving the world or achieving social justice inevitably increases these costs: with such increased scope, executives have more ways to waste shareholder wealth–and may even get rewarded for it through, say, glowing publicity and other non-pecuniary rewards (like ego gratification–“Look! I’m saving the world! Aren’t I wonderful?”)

Indeed, we now have a highly leveraged agency problem, due to the ability of asset managers like Black Rock to vote the shares of their customers, thereby allowing the likes of Larry Fink to force not just one corporation to indulge his preferences, but hundreds if not thousands. Larry Fink and his ilk can influence the direction of sums of capital dwarfing anything in history to pursue their agendas.

The agency problem pervades stakeholder capitalism even when you dispense with the idea that the shareholders are the principals, and expand the set of principals to include non-shareholder interests (which is inherently what “stakeholder” capitalism means). And as discussed above, in stakeholder capitalism these interests conceivably encompass all life on earth.

The problem is that just as shareholders are diffuse and cannot prevent managers from acting in their interest, stakeholders are often diffuse too. And in the case of climate, All Life On Earth is about as diffuse as you can get. Furthermore, whereas at least in principle shareholders can largely agree that the firm should maximize their wealth, when one expands the set of interests, these interests will inevitably conflict.

So what happens? Just as in politics and regulation, small, cohesive minority groups who can organize at low cost will exert vastly disproportionate influence. It is not surprising, therefore, that companies like Target (to name just one) have responded to the interests of transsexuals–a decidedly narrow minority group–and given the finger to others who should be “stakeholders” as well, namely customers. Customers being a diffuse, dispersed, heterogeneous group that is costly to organize–precisely for the same reasons that it is costly for shareholders to organize.

(The Target and Bud Light episodes suggest that social media has reduced the costs of organizing diffuse groups, but even so, it is far costlier to do that than to organize ideological minorities.)

In other words, stakeholder capitalism inevitably creates a tyranny of minorities, and especially highly ideological minorities (because a shared ideology reduces the cost of organizing). Minority stakeholders will succeed in expropriating majority ones.

Minority tyranny is the big problem with democratic politics. Extending it to vast swathes of economic life is a nightmare.

So what is stakeholder capitalism, when you get down to it? A world of Sorcerer’s Apprentice executives (the Knowledge Problem) with bad incentives (the agency problem).

Other than that, it’s great!

Some libertarians have a peculiar take on this phenomenon. They view stakeholder capitalism as benign, because it is undertaken by private actors, rather than the government.

This take is gravely mistaken. It ignores fundamental principle, and commits at least two category errors.

The forgotten principle is that a liberal society should aim to minimize coercion.

The first category error is to believe that private actors cannot coerce–only governments can. In fact, private actors–including corporations and their managements–can clearly coerce. Come and see the violence inherent in the stakeholder capitalism system straight from the mouth of its primary exponent:

BlackRock CEO: “At BlackRock we are forcing behaviors… you have to force behaviors.” pic.twitter.com/2Q2H84GPC7

— Te?asLindsay™ (@TexasLindsay_) June 4, 2023

“We are forcing behaviors.” Coercive enough for you? Help, help, I’m being repressed:

That bit, by the way, concisely expresses the stakeholder capitalism movement, right down to the “shut up!” and “you bloody peasant!”

The second category error is to believe that there is some sort of clear boundary between private entities (corporations especially) and governments. In fact, the true picture is like the Escher Hands:

Corporations influence government. Government influences corporations (cf., Twitter Files, etc.–the examples are almost endless). Governments often outsource coercion to corporations. Corporations induce the government to coerce for their benefit–and to the detriment of alleged “stakeholders” like customers, labor, and competitors.

Furthermore, as the Arrow Impossibility Theorem teaches, any coherent social welfare function (i.e., any theory of social justice) is inherently dictatorial, and thus inherently coercive. Thus, to the extent that stakeholder capitalism is intended to implement any particular vision of social justice, it is necessarily dictatorial, and hence coercive. It is antithetical to a liberal system like that envisioned by Hayek, that is, one in which a set of general rules is established under which people can pursue their own, inevitably conflicting, aspirations. (Less formally than Arrow, Hayek also argued that any system of social justice is inherently coercive and dictatorial.)

Stakeholder capitalism is therefore a truly malign movement, and an anathema to liberal principles. We need to drive a stake through its heart, before it stakes us to the ant hill.

*I put “capitalism” in quotes because stakeholder capitalism is an oxymoron. Recall that capitalism is an epithet devised by Marx to describe a system ruled in the interests of capital, i.e., shareholders. Stakeholder capitalism is a system intended to be ruled in the interest of everyone but capital. Hence the oxymoron.

** Jeffrey Tucker has also eloquently and rightly excoriated the response of many libertarians to COVID. Here again, these libertarians forgot that limiting coercion is the bedrock libertarian principle.

*

As the periodic debt ceiling game of chicken proceeds, you might read about the credit default swap (CDS) rate on US government debt. This is commonly (even by economists) used to quantify the market’s estimate of probability that the US government will default. Although it is related to this probability, it is not a direct measure of the “true” probability. So interpret with extreme care. Especially in the case of US government debt.

As a little background, a CDS is a contract that pays off if the underlying entity–in this case, the US government–defaults on its obligations. In that event, the purchaser of protection receives the face value of the debt minus the price of the defaulted security. If the defaulted security is worth 40 cents on the dollar at default, the “recovery rate” is 40 percent and the protection buyer receives 60 cents on the dollar.

If the protection currently costs X, you might reason that your expected payoff is p(1-R), where p is the probability of default and R is the recovery rate. Thus, you can estimate p=X/(1-R).

The problem with this logic is that p is not the real world–“physical measure” or “true”–probability of default. It is the probability of default in the so-called “equivalent measure.” Roughly speaking, this p includes a risk adjustment, a risk premium if you will. In theory the p estimated this way could be less than the actual probability of default, meaning that the premium is negative. But usually the p implied this way will be above the objective probability of default. Put simply, just like when you insure your car you will pay a premium that exceeds your expected claims, with CDS the protection purchaser will pay a premium that exceeds the expected payoff.

Indeed, the risk premium embedded in Treasury CDS is likely to be quite large. The reason is that this type of CDS will pay off in bad states of the world–and likely very bad states of the world. That is, if the US government defaults, economic chaos and a recession (perhaps a severe one) is a likely outcome. The marginal utility of income (or wealth) is high when income (or wealth) is low, as during a large recession. Thus, protection sellers are required to perform on their contracts when the marginal utility of income/wealth is higher, so they are going to charge a high price in order to assume such an obligation. The worse the economic consequences of default, the higher the risk premium, and hence the price, that they will charge.

That is, the USG CDS price must exceed the expected payout, likely by a lot, because the payouts occur in bad economic times.

Corporate CDS spreads tend to be “upward biased” measures of default rates for companies, precisely because payoffs tend to be more likely during bad economic times because that’s when companies default. This bias is likely to be especially great for USD CDS precisely because a default will likely cause a severe economic contraction.

Another way to visualize this is to realize that there is considerable “systematic risk” in USG CDS. The risk in CDS payouts cannot be diversified away, and are highly correlated with the overall financial markets. Put differently, a US government default is not really an insurable risk. Classic insurance works by diversification and pooling of independent risks. That is not possible with USG CDS.

There’s another factor at play here–counterparty risk. How much would you pay for insurance from a financially shaky insurance company? Probably not much, because it may not be around to pay when you need it.

Since a US government default is likely to have severe consequences for the financial sector, there is a material probability that the seller of protection will be unable to perform in the event of a USG default.

This would tend to work in the opposite way as the risk adjustment described earlier, that is, it would tend to reduce the cost of protection. The protection is worth less because of the risk it would not be there when you need it. This reduces your willingness to pay for it.

These risk adjustment and counterparty risk issues are likely to be particularly acute for US Treasuries, given the potentially serious economic consequences of a government default. Meaning that USG CDS rates are very unreliable measures of the likelihood of a government default: they are impacted by both the probability of default and the economic consequences thereof.

Yes, a rising CDS spread–like we’ve seen recently–likely reflects a rising estimate of the true probability of a default. But you just can’t back out that probability from the rate.

I’m often tempted to say that those in charge of our military are not serious people. But I catch myself. They are in fact very, very serious people–the problem is that they are serious about agendas that are inimical to military effectiveness and national defense.

The most virulently inimical agendas is of course DIE. The current Air Force Chief of Staff, Charles Q. Brown–leading candidate to be JCS Chair–is perhaps the most egregious example. Brown is a quota monger:

The topic of the Air Force memorandum was officer quotas set by race and gender.

Similar quotas had been issued by political appointees in a politically correct military, but they had focused on slowly boosting minority officers rather than calling for a purge of white men.

The 2014 quotas had looked for an 80 percent white, 10 percent black and 8 percent Asian officer corps. While choosing officers by any racial category rather than merit is racist, wrong and illegal under civil rights legislation, this fell short of Brown’s proposed racist purge.

Brown’s quotas limit the number of white officers to 67% and cut white men down to 43%.

The Air Force officer corps is currently 77% white: getting it down to 67%, a reduction of 10%, would require serious effort to purge white officers and bar the doors to any new ones.

That will improve military effectiveness how, exactly?

A recent AF “experiment” suggests that “how much” is a negative number:

As part of the larger military-wide effort to promote diversity in the service’s pilot ranks, the 19th Air Force command near San Antonio, Texas, “clustered” racial minorities and female trainees into one class, dubbed “America’s Class,” to find out if doing so would improve the pilots’ graduation rates. However, not only did the effort fail to boost minority and women candidates’ success rates, but officers involved say they were ordered to engage in potentially unlawful discrimination by excluding white males from the class, documents show.

Excluding white males will help how, exactly? Specifically, how will it build unit cohesion?

Obviously, it won’t. It is inimical to unit cohesion. Military units need to suppress differences to succeed, not accentuate and emphasize them. I mean, I can’t even.

What was traditional boot camp all about? Suppressing individual differences. Making everyone believe he was just a soldier or a sailor or a Marine. One of thousands.

Some of the quotes in the Front Page article just leave me shaking my head:

“I am a Black man who happens to be the Chief Master Sergeant of the Air Force,” Kaleth Wright, now retired, had tweeted  “You don’t know the anxiety, the despair, the heartache, the fear, the rage and the disappointment that comes with living in this country… every single day.”

Uhm, you have reached the highest enlisted rank in the US Air Force. Yeah, I’m sure that happens a lot in racist countries. Damned white supremacism.

Or this:

Anthony Cotton, the Commander of US Strategic Command, had claimed that, “when I see what happened to Ahmaud Arbery, Breonna Taylor, George Floyd, Rayshard Brooks—and the list goes on and on… that could be me.”

No, General-Successor-of-Curtis-Lemay, it couldn’t be you. What would be more likely to be you is the 10,000+ blacks murdered in Chicago, Philly, DC, St. Louis, etc., etc., etc. Why don’t you talk about that? Why don’t you do something about that.

There’s also a vignette in the article about Brown whining about the cosmic injustice of being questioned about a parking spot.

Three people who are living proof of the lack of discrimination against blacks in the Air Force whining about how oppressed they are.

But this should not be surprising. Today, victimhood is status, and people compete intensely to prove how victimized they are, rather than to count the blessings that they have. Just another of the fucked up aspects of 2020s US culture.

Another illustration of the Diversity Cult: Air Force Assistant Secretary for Manpower and Reserve Affairs Alex Wagner proves–PROVES I TELLS YA–the power of diversity. Because of diversity, the AF avoided the incredible faux pas of handing out the wrong kind of socks as swag at SXSW! OMG! To think that the fate of the country’s defenses were rescued by such a brave woman!

Air Force Assistant Secretary for Manpower and Reserve Affairs Alex Wagner, shares a personal story about socks…yes socks… to explain why the military needs Diversity, Equity and Inclusion (DEI).

We are not a serious country. pic.twitter.com/HYKJ7qbRXV

— Charlie Kirk (@charliekirk11) March 24, 2023

But how does diversity help when the shit really goes down, Alex? Can you give me an example of that? I’d say I wait, but I’m not into reenacting Waiting For Godot.

(As an aside, recruiting at SXSW is itself a testament to idiocy and cluelessness. It’s leftish, hipster central.)

The repeated invocations of the benefits of diversity, like Wagner’s, are catechisms. Statements of a faith. NOT empirical truths. In fact, social science research (since at least Putnam) suggests the opposite: diversity undermines trust. And there is no environment where trust is more essential than in battle. None.

I could go on.

And then of course there’s the trans obsession in the military, e.g., the Navy thinking that a drag queen is totes what is needed to rescue plummeting recruiting numbers:

I guarantee, even if it does boost recruiting numbers, it will reduce the number of recruits that the Navy should want to attract: it would be subtraction by addition.

FFS, couldn’t they have just rebooted the Village People?

Again, I could go on. . .

And there’s the green angle. And no, I don’t mean green as in the Marines are the mean green machine. No–green as in environmentalism, and specifically the climate change cult.

I’ve written before about the SECNAV prioritizing climate change. (How will that beat China, Mr. Del Toro?) But it’s a Whole of Government effort. For example, the Energy Secretary, Canadian-born Jennifer Granholm, endorsed Joe Biden’s pledge to make all US military vehicles electric by 3030. Sorry! Sorry! By 2030.

This idea is cosmically stupid on more dimensions than I could possibly explore in a lifetime–even if I was 40 years younger.

Say, just how big and heavy would a battery on an M1AE (for electric!) Abrams have to be? And, pardon my impertinence, but how would you charge it, exactly? And boy won’t it be fun for the crew when that sucker gets hit and cooks off!

Again, I could go on . . .

Although the exempli gratia are virtually endless, I think you get the point. Those in charge of the US military are serious about just about everything except fighting and winning wars.

Meanwhile, recruiting is in the toilet and the Navy is a shitshow.

If the shit does get real, these termite years of race and gender and climate obsessives will result in the loss of wars, and mass casualties.

But the corpses (especially the officers’) will be diverse. And isn’t that what really matters?

In response to the liquidity crunch in the commodity trading sector (especially in energy trading) last year, the European Union is looking to regulate commodity traders more like banks:

For decades, Europe’s commodity traders have avoided being regulated on par with other financial firms. A new proposal currently working its way through the European Union legislative system could change that.

To close “loopholes,” dontcha know:

The loophole allows industrial companies like utilities and food processors — but also commodity trading houses — to take derivative positions without the scrutiny facing investment firms. Designed to reduce the burden of managing price risk, it also means that traders aren’t subject to rules on setting aside capital or limiting positions the same way banks and hedge funds are. 

2022 certainly saw unprecedented liquidity pressures in the commodity trading sector, as firms that had sold derivatives (especially on gas and power) to hedge their exposures from supplying the European market saw huge margin calls that greatly strained credit lines and led a coalition of traders to request ECB support (which the ECB declined).

The crucial part of the previous paragraph is “to hedge.” The danger of restricting or increasing the cost of such activities through regulation of the type that is apparently under consideration is that it will constrain hedging activities, thereby (a) making these firms more vulnerable to solvency, as opposed to liquidity problems, and (b) raising the costs of commodity intermediation.

Note that the companies that received state support that are mentioned in the article are not commodity traders qua commodity traders, e.g., Vitol or Trafigura or Gunvor. They are energy suppliers who were structurally short gas and did not hedge, and hence were facing serious solvency issues when gas prices exploded in late-2021 (before the Russian invasion) and winter and spring 2022 (when the invasion occurred). That is, firms that didn’t hedge were the ones that faced insolvency and received state support. (Curiously, Uniper is missing from the list of companies in the Bloomberg article, although Fortum Oyj was collateral damage from Uniper’s collapse.)

The relevant issue in determining whether commodity trading firms should be regulated like banks or hedge funds is not whether the traders can go bust: they can. It is whether (a) they are financially fragile like banks, and (b) whether they are systemically important.

These are exactly the same issue I addressed in my Trafigura white papers in 2013 and especially 2014. To summarize, commodity trading firms engage in completely different transformations than banks and many hedge funds. Commodity traders transform commodities in space, time, and form: banks engage in liquidity and maturity transformations. The difference is crucial.

Liquidity and maturity transformations are inherently fragile–they are the reasons that bank runs occur, as the recent failures of SVB, First Republic, and Signature Bank remind us. That is, the balance sheets of banks are fragile because they finance long term, illiquid assets with liquid short term liabilities.

Commodity traders’ balance sheets are completely different. The “pure” asset light traders especially: they fund short term (“self-liquidating”) relatively liquid assets (commodity inventories) with short term relatively liquid liabilities. Further, hedging is a crucial ingredient in this structure: banks are willing to finance the inventories because the price risks can be hedged.

This is not to say that commodity traders cannot fail–they can. But they do not face the same kinds of fragility (vulnerability to runs) that entities that engage in maturity and liquidity transformations do. It is this fragility that provides the rationale for bank capital requirements and limitations on the scope of their activities. This rationale is lacking for commodity trading firms. They are intermediaries, but not all intermediaries are alike.

Further, as I also pointed out almost a decade ago, major financial firms dwarf even the largest commodity trading firms. Even a Trafigura, say, is not remotely as large or systemically important as, say, Credit Suisse. Yes, a bankruptcy of a big trader would inflict losses on its lenders, but these losses would tend to be spread widely throughout the global banking sector given that most loans and credit lines to commodity traders are widely syndicated. And the potential for these kinds of losses are exactly reason that banks hold capital and that it is prudent to impose capital requirements on banks.

As I noted in the 2014 study, virtually the entire merchant energy sector in the United States imploded in 2002-3. Lenders ate losses, but the broader economic effect was minimal, the assets of the failed firms continued to operate, and the lights stayed on.

In sum, analogizing commodity traders to banks is seriously intellectually flawed, and what’s good or justified for one is not necessarily for the other because of the huge differences between them.

Pace Bloomberg, the events of 2021-2022 did not “expose” some new, unknown risk. The liquidity risk inherent in hedging has long been known, and I analyzed it in the white papers. Indeed, it’s been a focus of my research for years, and is the underlying reason for my criticism of clearing and collateral mandates–including those embraced enthusiastically by the EU.

Thus, a more constructive approach for Europe would be not to apply mindlessly regulatory restrictions found in banking to commodity firms, but to investigate ways to facilitate liquidity supply to commodity traders under extreme situations. Direct access of commodity traders to central bank funding is inadvisable, but central bank facilitation of bank supply of margin funding to commodity traders during such extraordinary circumstances worthy of investigation.

Recall that the Federal Reserve’s response to a funding crisis originating in the Treasury futures markets was instrumental in containing the systemic risks arising from COVID in March 2020 (as described in my Journal of Applied Corporate Finance article, “Apocalypse Averted“). The Fed’s actions were extemporized (just as they were during the 1987 Crash). The EU and ECB would do well to use that experience, and that of 2021-2022, to devise contingency arrangements in advance of future shocks. That would be a more constructive approach to the risks inherent in commodity risk management than to impose regulations that could impede risk management.

It is important to note that making hedging costlier instead of making it cheaper increases the risk of extreme price disruptions. Constraining risk management means that commodity traders will supply less intermediation especially during high risk periods. This will swell margins and make commodity supply less elastic, both of which will tend to exaggerate price movements during periods of stress.

I always wonder about the political economy of such regulatory proposals. Yes, no doubt regulatory reflex is a driver: “We have to do something. Let’s take something off the shelf and make it fit!” But my experience in 2012-2014 also motivates a more cynical take.

The genesis of the Trafigura white papers was an abortive white paper I wrote for the Global Financial Markets Association, a banking industry group. The GFMA approached me to investigate the systemic riskiness of commodity trading firms, and I came up with the wrong answer, so they spiked the study. Somehow or another Trafigura got wind of this, and that was the genesis of the influential (if I do say so myself) papers I wrote for the firm.

The point being that in 2012 the banks were pushing to regulate commodity trading firms with capital requirements and the like in order to raise the costs of competitors, and were looking for intellectual cover for that endeavor–cover I did not provide after a deep dive into the commodity trading sector.

Hence, I wonder if this reprise of the ideas that were largely shelved in the mid-2010s is an example of “let no crisis go to waste,” i.e., whether there are interests in Europe pressing to regulate commodity firms for shall we say less than public spirited reasons.

The proposals are apparently very protean at this stage. But it will be interesting to see where they progress from here. And I’ll weigh in accordingly.

The big news in the Russo-Ukrainian war transpired not in Bakhmut or anywhere else on the battle lines, but in Moscow where a drone struck a flag flying over the dome of the Kremlin:

1000x more embarrassing as Matthias Rust landing a Cessna in Red Square. Moscow allegedly has the most formidable air defenses in the world. Apparently not. https://t.co/KTKFGQC9K6

— streetwiseprof (@streetwiseprof) May 3, 2023

Like all things Russia that have occurred over the last year plus (e.g., the Nordstream explosions, the Darya Dugin assassination) no one knows for sure who is responsible, or why. Hence, the theories and accusations fly fast and furious, but with no facts by which to evaluate, only competing theories of motive exist, and people make judgments based on their prejudices and their beliefs (largely shaped by their prejudices) of what motive sounds most plausible.

Yes, the Ukrainians have a motive. But they deny any involvement. You could also argue that realizing the possible reactions in Russia, they would not do this–or at least the government would not. (See below.). But there are hotheaded elements in Ukraine who would not be so restrained, and who might even want to provoke an escalation.

Putin might also have a motive–a false flag operation to blow up the flag on the Kremlin, as it were. In order to justify escalation, as wildly hypocritical as that would be: “We can invade you, bomb your capital (and many other cities), attempt to assassinate your president, but how dare you fling a few drones at us!”

Track record gives this theory credence–there is a reasonable likelihood that Putin orchestrated the apartment bombings in Ryazan in order to justify the Second Chechen War. Further, the catastrophic failures of the past 14 months mean that the regime needs to do something to distract from the disasters and the death, and to feed the narrative of Ukraine as an existential threat to Russia that must be vanquished regardless of the cost.

The hysterical Russian reaction gives further credence to this theory. A plot to assassinate Putin!!!!! FFS, to say that a couple of drones carrying the kind of explosives depicted in the video could pose a threat to Putin buried deep in the bowels of the Kremlin (even assuming that he’s there) is farcical: this was the Mouse of All Bombs, not the Mother thereof. (And he could hide under that huge table! A table saved Hitler, right?) But noted narcoleptic and boogie master Dimi Medvedev is saying that as a result of this assassination attempt Russia has now no choice but to “annihilate” Zelensky:

Oh the narcoleptic with the awesome dance moves is acting tough again. Maybe he should show Zelensky the video: he might die of laughter. https://t.co/jGylG4UaMb

Russia has no choice but to annihilate Zelensky—Medvedev https://t.co/TunFKBUGMx

— streetwiseprof (@streetwiseprof) May 4, 2023

But if so, this is a sign of true desperation. Admitting that Ukraine is able to penetrate what is supposedly the most formidable air defense of any city in the world with drones would be a confession of military ineptitude that makes the failure to prevent German teenager Matthias Rust from landing a Cessna in Red Square in 1987 look like a military triumph. (The Russian military claimed that the drones had been disabled by electronic measures–sure as hell doesn’t look like it in the video.). Would Putin/the Russians really be willing to look this weak to provide a justification for doing something extreme? Has he ever needed a justification before? FFS, he just made shit up (denazification!!!!) before he invaded last year. He could just make shit up again. And certainly will.

But . . . going further down the Russian rabbit hole, maybe someone in the siloviki did this precisely to discredit rival factions in the military in order to justify a purge.

Really, whenever dealing with Russia I have to stop myself to prevent becoming like this:

Suffice it to say that under any theory one can think of, this does not bode well for Putin. Taken at face value, the event is further demonstration of Russian military incompetence. Switching to riddle-enigma-mystery-dogs-fighting-under-the-carpet mode, the event smacks of desperation and/or internal feuding and chaos. Regardless, it bodes a continuation of a futile, pointless war until Putin goes tits up, one way or another.

About six weeks ago, the NY Times ran a long story about election interference. From about the time of the Trojan War. Well, not quite that long ago–but a long time ago: the 1980 election. In its story, the NYT resurrected the “October Surprise” allegation that the Reagan campaign persuaded the Iranians not to release American hostages before the election, thereby torpedoing Jimmy Carter’s chances.

The sources? Well, the plural is not appropriate here: there is a single source, a certain Ben Barnes who allegedly accompanied John Connolly on a tour of Middle Eastern capitals “to deliver a blunt message to be passed to Iran: Don’t release the hostages before the election. Mr. Reagan will win and give you a better deal.”

Insofar as confirmation is concerned, the NYT talked to four people. All of whom said that Barnes told them the same story he told the Times.

What could be more solid than that, right? A single source plus an echo chamber. Journalism!

Let’s look at the last sentence of what I just quoted: “Mr. Reagan will win and give you a better deal.” So, just what was that better deal? What evidence is there of such a deal? In fact, there is no evidence of such a thing in 1981, 1982, etc. It wasn’t until Iran’s proxies kidnapped Americans while Reagan was in his second term that he made a deal with them.

The hostages were released right when Reagan was inaugurated: I remember vividly watching the split screen of the inauguration and the release of the hostages. This was plausibly more of an FU to Carter, whom the Iranians loathed and disdained, than it was some gift to Reagan–and again, there is no evidence of any reciprocal benefit redolent of a “deal.”

Barnes’ story would have been more credible had he said that the “blunt message” was: “If you don’t release the hostages when Reagan is president, we will bomb the living shit out of you.”

The NYT’s dedication of extensive ink and pixels to this story is particularly striking given its complete–and I mean complete–lack of ink and pixels to a story of far more relevance and news value, and which is much more firmly sourced than the recollections of the 85 year old Mr. Barnes: specifically, the revelation that ex-CIA Deputy Director Michael Morell said–under oath–that he had organized the creation of the letter signed by 51 ex-US intelligence officials suggesting that the Hunter Biden laptop was “Russian disinformation.” Moreover, that Mr. Morell testified–again, under oath–that had done so after being prompted by current Secretary of State, and then Biden campaign official, Anthony Blinken.

Pretty explosive stuff, especially given that according to polls a large majority of Americans say that the truth about the laptop–namely that it was 1000 percent real, and not the creation of the dreaded Russkies–would have impacted their vote. Given the closeness of the election, it is abundantly clear that absent the letter prompted by Blinken and organized by Morell, the outcome of that election would have been different. Talk about your election interference, and tampering with our “precious democracy [sic].”

But apparently this does not fall under the category of “all the news that is fit to print.” Instead, it falls under the category of “all the news that is fit to memory hole,” while items of merely antiquarian interest, such as the 1980 “October Surprise” emerge from the memory hole and wind up on the front page of the Times.

If you want evidence of the utter corruption and partisanship of the elite “news” media, you need look no further.

Those elite sources who have deigned even to mention the story attempt to downplay its significance by saying that Morell also testified that Blinken did not order or direct the letter.

Yeah, and Henry II did not order or direct his knights to murder Thomas á Becket: a mere “will no one rid me of this meddlesome priest?” sufficed.

Blinken suggested, and Morell immediately organized an effort to bash the story on the skull and leave its brains on the floor, a la Beckett’s.

And the New York Times is perpetuating the lie–the disinformation, something it allegedly deplores repeatedly, accompanied by frenzied chin pulling–by failing to cover the story, not even running a column inch or two next to the obituaries.

And if Ben Barnes is telling the truth, I say thank God, if that spared us four more years of Jimmy Carter and brought us the most successful and beneficially impactful presidency since FDR’s. I am sure that Morell is telling the truth now–as rare an event as that is–and I say damn him and all of his co-conspirators (including the elite media, social media companies, etc.) to hell, because through their manipulations they have visited upon us the worst and most balefully impactful presidency on us since . . . James Buchanan’s? John Tyler’s? Or more likely–ever.

Further, unlike the Homeric retelling of long ago events, the laptop letter story is of great importance now, given that The Senescent One has announced his candidacy for 2024. Reagan ain’t running again. Biden is. The dishonest machinations of his 2020 campaign are obviously relevant in evaluating his 2024 effort.

Which is precisely why the NYT, and most of the rest of the elite media, is burying the Morell confession.

NYT delenda est. Hell, the entire elite media delenda est.

“Equity” is one of the three legs of the iniquitous DIE gallows. It is a driving force behind a variety of policy proposals, two of which have surfaced in recent weeks. They illustrate the fundamental depravity of such “equitable” policies generally.

The first is the Federal Housing Finance Agency’s policy to reduce rates and fees for homebuyers with low credit scores who put down relatively little on a house, and to raise them for those with higher scores, especially those who make a downpayment of between 15 and 20 percent of value. In other words, good credits are being forced to subsidize bad credits. In the words of the FHFA director, this is intended to “increase pricing support for purchase borrowers limited by income or by wealth.”

In other words, it is a purely redistributive policy. And excuse me, but where have I seen this movie before? Oh, that’s right. During the last financial crisis, which was in large part the consequence of policies designed to, well, “increase pricing support for purchase borrowers limited by income or by wealth.”

It isn’t rocket science to figure out where this will go. More low credit quality households will buy houses they can’t afford. A loss of a job, or a downturn in the real estate market, or one of myriad of other things means that they won’t be able to repay the loan, resulting in default, foreclosure, and a credit loss to the lender. Most likely followed by class action law suits alleging predatory lending.

Wealth redistribution via housing policy and housing finance policy has always been a bad idea plagued by unintended–but totally predictable–consequences. But it’s like a bad drug, and one that the United States government just can’t quit for long.

The other policy, smaller in scale but similar in design comes from California. There the three major state regulated utilities have proposed implement two part tariffs, consisting of a fixed monthly fee and a per unit usage charge. The fixed fee will be based on income, with low income households paying $15/month and higher income households paying as much as seven times that amount. Further, the utilities will reduce the rate per kwh.

Now you can make an economic case for a two part pricing structure in an industry (like electricity) with high fixed costs, but that doesn’t appear to be the motive here: instead, it is an attempt to use electricity tariffs to redistribute income and wealth. It is also somewhat ironic that California, which faces chronic electricity shortages and constantly strives to reduce consumption because climate change is introducing a policy that encourages consumption. I am sure that will work out swell.

If you believe in redistribution, there are better and worse ways to achieve that objective. The better ways are through lump sum transfers or something like the negative income tax. The worse ways are through messing with prices. It’s fair to say that the worst ways are through messing with prices.

And that’s exactly what these two policies will do. The FHFA policy messes with the price of credit. The California electricity policy messes with the price of power.

Messing with prices distorts decisions on a variety of margins.

For example, distorting the price of credit (i.e., charging borrowers rates and fees that do not reflect default costs) encourages overborrowing by those with poor credit and underborrowing by those with better credit. As we saw in 2006-8, such policies can have systemic consequences. Even absent systemic consequences, they will lead to greater financial distress costs, deadweight bankruptcy costs, reduction in housing values due to the effects of foreclosure, etc.

Both policies also increase effective marginal tax rates, which distort labor supply decisions. In California’s case, the redistributive policies represent one more straw on the camel’s back of those debating where to locate, and due both to the direct effects and the signal sent regarding the extractive nature of California policies will add to the exodus of the middle class from the state.

The means by which these redistributive policies are being imposed is also pernicious. This is redistribution via regulatory fiat. The administrative state is already too large and too unaccountable. Giving it a license to redistribute income and wealth–or to engage in more such redistributive schemes–in the name of “equity” will result in a proliferation of such ghastly schemes, and the deadweight costs they entail due to their distortions of prices. Make elected politicians make the case for and take responsibility for redistributive schemes rather than delegating them to the unelected and the unaccountable. Especially those who can only implement redistributive policies through destructive distortions in the prices of the goods and services they regulate.

The United States desperately needs pro-growth policies, not redistributive ones–not least because growth is essential to prevent a debt crisis. These redistributive policies are decidedly anti-growth.

They are also divisive, and are being implemented at a time where social divisions are already acute.

I wish I could say that these two policies were outliers. They are not. They are representative of today’s strongest policy current: the Biden administration’s “whole of government” plan for “environmental justice” is another. Such policies are a recipe for stagnation, and taken collectively and together with lavish government spending bear the seeds of future economic crises. And not far into the future either.

Biden was recently in Ireland, where he reveled in his Irish roots.

I only exaggerate slightly when I say that if you ate Lucky Charms for breakfast, you are about as Irish as Joe Biden. He is more Irish than Elizabeth Warren is Native American, but not by much.

Biden has two Irish great-great-grandparents. As do tens of millions of Americans. By that standard, I am as Irish as Joe Biden. Exactly the same: a great-grandfather had two parents who immigrated from Ireland. Meaning that my mother and uncle–of Biden’s generation–are twice as Irish as he. But they never went on babbling for years about returning to the auld sod.

Interestingly, Biden’s last and middle names are of English origin. You know, the “Brits” that he has denigrated for years and gratuitously insults today. Biden–English name. Robinette (his middle name)–also English.

Biden’s celebration of his thin Irish roots goes back years. His Secret Service code name was “Celtic,” for God’s sake.

This is all quite revealing about Biden, and part of a longstanding pattern. And revealing of a hollow man, always grasping for power, and creating a facade to achieve it.

Biden has no fundamental convictions, and no real, organic identity. Irishness is an assumed identity. He assumed it at a time when it was politically advantageous. In his era, every Democrat with presidential aspirations posed as the next JFK (cf. John Kerry, Gary Hart, and on and on). Instead of “Kiss me, I’m Irish” it was “Vote for me, I’m Irish–just like JFK.” And no doubt Biden also found dancing the political jig was a great way to suck up to Teddy Kennedy in the Senate to work his way up the greasy pole there.

In other words, Biden’s Irish persona is just another biographical construction, a fabrication, a piece with all the other lies about his life that he has told–and continues to tell even long after they’ve been proven lies. There is no there, there. Just a hollow vessel festooned with fantastical decorations.

(It is nauseating how the press to a large extent bought into and amplified Biden’s Irish fantasy.)

Joe Biden has always been a hollow, convictionless, ambitious man. And now he is a husk of a man as well. His trip to Ireland was littered with the now familiar confusions and muttering of an old man: on one occasion, Hunter had to explain a small child’s question to him. The cringe moments came one after another.

But he swears he is going to run again. We had better hope that Bismarck was right.

The Texas legislature meets every other year, meaning that 2023 is the first session in which legislation to address the issues that became apparent with the near death experience of the Texas power grid during Winter Storm Uri in February 2021 can be considered. The Texas Senate has passed two bills. Senate Bill 6 mandates the building of 10,000 MW of thermal generation (with on-site fuel storage), to be paid for via an “insurance” mechanism that guarantees a 10 percent rate of return to be funded by uplift charges to transportation and distribution utilities. Senate Bill 7 effectively creates an ancillary services market that allows dispatchable generation to sell reserves (e.g., spinning reserves) on a day ahead basis.

Opponents of the legislation state that it represents backsliding from the ideal of competitive energy markets:

Opponents immediately created the false narrative that the Texas bills are proof that Texas politicians “no longer have faith that competitive markets can adequately and economically satisfy the electricity need of Texas citizens,” said Beth Garza, a consultant for the think tank “R Street Institute.”

Well, the bills do represent major departures from Texas’ “energy only” market design. But this raises the question of what undermined the energy only market in the first place. And the answer to that is clear: subsidies for renewables. Past subsidies have wreaked havoc for years. Future subsidies, especially those in the Green New Deal in Drag, AKA the Inflation Reduction Act, threaten to wreak even more havoc in the future.

As I’ve written, this problem was evident years ago, in the mid-2000s. Even then, the penetration of renewables was undermining the economics of thermal generation, leading to exit of such capacity, thereby pressuring reserve margins and compromising–seriously–reliability. The process has continued inexorably in the past 15 years or so, leading to the precarious situation that culminated with Uri–and which has led to chronic concerns about blackouts during every cold snap and heat wave since.

The upshot of the process is an electricity system with a decidedly suboptimal generation mix. Too much intermittent, non-dispatchable renewables, too little dispatchable thermal. The Senate bills are attempts to address that distortion.

This is a great example of the “theory of the second best,” in which one policy that would be suboptimal in the absence of any distortions is welfare-improving in the presence of other distortions. The massive past, present, and prospective subsidies for renewables have distorted the operation of an energy only market. The past subsidies cannot be undone, and the future subsidies are also largely out of the control of Texas and ERCOT. So subsidies for thermal generation that would otherwise be objectionable can improve economic efficiency because they counterbalance the effects of these other subsidies.

It is clear that persisting with the EO market would be a recipe for future disaster. Subsidy to offset subsidy is a second best approach, but the first best is unattainable due to the renewable subsidy induced distortion.

Are there other policies that might be preferable? The only real alternative I can see is a capacity market (another departure from energy only), with capacity obligations clearly directed at dispatchable resources. I am skeptical about the credibility of capacity commitments, and the ability to tailor them to address reliability concerns in particular. Furthermore, political economy considerations threaten capacity markets: renewables operators will lobby to qualify for capacity payments.

SB6 is focused on encouraging investment in dispatchable, reliable capacity. It is likely the MW will be forthcoming. The main challenge is whether the MWh will be there when needed, that is to ensure that the new generation is maintained so as to be able to supply surge demand with a high probability. To provide the incentive to make it so the EO market has to allow generators to earn high prices when supplies are tight. Political economy may again be the main obstacle to this. The new generation will earn high returns–perhaps well above 10 percent–during the periods they are most needed. This will create political pressure to claw back these profits: “windfall profits tax,” anyone? The prospect for clawback undermines the incentive of the new generation to be optimized to supply power in times of short supply.

In sum, renewable subsidies distorted the EO market. Some second best measure (the first best being no renewable subsidies) is necessary. These must effectively subsidize investment in reliable, dispatchable, thermal generation. Between the two main alternatives on offer–guaranteeing a return on investment on such generation, or a capacity market–the former seems superior. But regardless of which is chosen, it is essential to keep in mind what requires the choice: the distortion that compromised the reliability of the Texas grid in the first place, namely, renewables subsidies.

Progressivism is destroying the United States military and putting the nation’s security at a grave risk.

I could probably write a book on the subject–a long book–but two examples provide chilling illustrations of the general thesis.

The first is the military’s obsession with climate change:

Secretary of the Navy Carlos Del Toro said he sees fighting climate change as a top priority for the Navy as the Biden administration proposes shrinking the fleet by two ships and worries grow about how the U.S. Navy stacks up to China’s.

“As the Secretary of the Navy, I can tell you that I have made climate one of my top priorities since the first day I came into office,” Del Toro said March 1 in remarks at the University of the Bahamas.

And this:

“We view the climate crisis much the same way as damage control efforts on a stricken ship. This is an all-hands-on-deck moment,” he added.

An all-hands-on-deck moment? Well, that’s exactly the problem. At the rate of decline in the ship count in the United States Navy, there won’t be any decks for the hands to stand on.

The Navy’s job is not to save the world environment, let alone save it from a highly speculative (and arguably chimerical) danger–as if it can do anything about it anyways. The Navy’s job is to secure control of the seas, and deny that control to its enemies. That requires ships and trained sailors and officers and logistical support and munitions.

All of those things have been eroding relentlessly in recent years, and the Biden administration wants to accelerate the decline:

This year, the Biden budget called for the decommissioning of 11 ships and the construction of just nine ships, for a net loss of two vessels. That budget proposal was met with skepticism from members of Congress, which has acted in the last two years to spare the Navy from cuts to the fleet proposed by the Biden administration.

All hands should be on deck to stop and reverse those troubling and extremely dangerous trends.

But no, we have a gasbag SecNav blathering about greenhouse gasses:

“There is not a trade-off between addressing climate security and our core mission of being the most capable and ready Navy-Marine Corps team,” he said. “The exact opposite is true. Embracing climate-focused technologies and adopting a climate-informed posture strengthens our capability to stand by our partners and allies.”

Del Toro said worrying about climate change would lead to new technologies that the Navy can use to create a “virtuous cycle of energy efficiency, cost savings, maritime dominance and climate security.”

This are merely unsupported assertions–and wildly implausible ones to boot. Just how does “embracing climate-focused technologies and adopting a climate-informed posture strengthens our capability to stand by our partners and allies”? Just how will “embracing climate-focused technologies and adopting a climate-informed posture” improve our ability to win a naval conflict against China in the western Pacific?

And anyone who says “there is not a trade-off” is either a liar or an idiot–or more likely both. There is always a trade-off. Every dollar spent on climate unicorns is a dollar that doesn’t go to a ship or a sailor or a missile.

The other example is DEI in the military, especially at the academies.

It’s bad–really bad–at all the academies. When I attended the Superintendent’s call at my USNA reunion a few years ago it was diversity this and diversity that. That was clearly the Supe’s overriding concern (other than bragging about managing COVID, especially the issue of disposing of all the extra trash from packaging of the meals that Mids were forced to eat in their rooms–Bravo Zulu, dude!).

Navy is bad, but I think Air Force is the worst. USAFA has embraced CRT and is all in on the trans agenda.

A diversity and inclusion training by the United States Air Force Academy in Colorado instructs cadets to use words that “include all genders” and to refrain from saying things like “mom” and “dad.”

The slide presentation titled, “Diversity & Inclusion: What it is, why we care, & what we can do,” advises cadets to use “person-centered” and gender-neutral language when describing individuals.

“Some families are headed by single parents, grandparents, foster parents, two moms, two dads, etc.: consider ‘parent or caregiver’ instead of ‘mom and dad,'” the presentation states. “Use words that include all genders​: ‘Folks’ or ‘Y’all’ instead of ‘guys’; ‘partner’ vs. ‘boyfriend or girlfriend.’”

When confronted about this, Superintendent LG Richard Clark executed a classic motte-and-bailey maneuver:

“The recent briefing on diversity and inclusion is being taken out of context and misrepresented; the slide in question was not intended to stand alone,” Clark said. “First and foremost, the briefing centered on respect for others and the warfighting imperative of leveraging diverse perspectives to solve our nation’s most difficult national security problems. Our strategic competitors are doing the opposite. Our American diversity is a strategic advantage and opens the door to creative solutions, providing a competitive edge in air, space, and cyberspace.”

“The slide on ‘inclusive language’ was intended to demonstrate how respect for others should be used to build inclusive teams, producing more effective warfighting units,” Clark continued. “Understanding a person’s context shows respect. Until you know a person’s situation, we should not make assumptions about them.”

Clark smoothly retreats from the bailey (don’t say “mom or dad”) to take refuge in the motte of vacuous blather that asserts rather than proves the warfighting utility of these endeavors: “The slide on ‘inclusive language’ was intended to demonstrate how respect for others should be used to build inclusive teams, producing more effective warfighting units.”

These assertions–del Toro’s and Clark’s–unsupported by any evidence are characteristic of justifications of these progressive policies. Clark is especially prone to asserting things like “diversity is a strategic advantage and opens the door to creative solutions” but alas he is not alone. And saying it doesn’t make it true.

If diversity–as used by Clark and others–is so effective at creating “strategic advantages,” why was the really, really “diverse” Austro-Hungarian army the worst (by far) among major combatants in WWI, rather than the best? Why was the decidedly and almost uniformly pallid United States Navy able to wage the most stupendous and victorious naval campaign in history 1942-1945?

Given the demographics of the United States, the military will inherently be “diverse,” and especially after the tumult of Vietnam, it worked assiduously to address that diversity in the proper way: to find ways to create a cohesive fighting force. But the crucial thing about this effort was that it was avowedly meritocratic in nature, and focused on reversing the non-meritocratic elements of an explicitly and then implicitly segregated military.

The progressive version of diversity is inimical to this. CRT–which the USAFA, the other academies, and other elements within the military have embraced to one degree or another–creates division, not cohesion, and therefore poisons military culture: it segregates rather than unites, and drawing invidious distinctions between people based on race, caste, or class undermines the effectiveness of military units at every level. It is avowedly anti-meritocratic, viewing any “disparities” as the result of some “systemic racism” that only the gnostics who practice it can see it.

In short, one could not think of a better way to undermine the effectiveness and lethality of a combat organization–except its lethality to itself. Cf. the Austro-Hungarian army mentioned above.

The fact is the del Toro and Clark and far too many in the civilian and uniformed hierarchy are unduly focused on progressive political agendas that not only fail to contribute to America’s war fighting capability, but are positively antithetical to it. If del Toro is so intent on going to battle stations, how about doing so to fix, say, the Navy’s utterly dysfunctional procurement process? Or the serious recruiting issues the service faces? Instead he establishes as a priority something that the Navy can’t do jack shit about–except, perhaps, by devastating the world’s largest emitter of greenhouse gases. The capability to do so, alas, is eroding by the day.

The lapsing of the Soviet threat allowed the military and the civilians who control it to indulge their ideological fancies, and to use the military as a laboratory for social experimentation, in contravention of its real purpose. The post-Cold War reverie is clearly over. The military is insufficiently prepared for a return of peer competition, and the unmilitary priorities of the likes of del Toro and Clark will undermine the nation’s ability to restore the capabilities that have atrophied so dramatically over the past 30 years.

Churchill lamented the 1930s as the “locust years” when feckless politicians and military officials failed to recognize rising threats and consequently failed to prepare against Hitler’s Germany. Today the United States is experiencing something worse: termite years, where destructive ideologies are eating at the American military from the inside.