Streetwise Professor

The concept of “fake news” is running neck-and-neck with “Putin Did It!” as the leading explanation for the inexplicable (inexplicable to the self-identified elite, anyways). These explanations sometimes overlap, when the Russians are blamed for disseminating fake news, never mind the fact that what the Russians are primarily blamed for (the DNC and Podesta leaks) was anything but fake: it was all too real. Indeed, perhaps the most egregious example of fake news is the mantra that the leaks are fake news. (A new competitor for this dubious honor is the WaPoo’s and NYT’s repetition of the claim that the FBI and the DNI have endorsed the CIA’s claim that the Russians hacked to help Trump, based solely on the (ironically) leaked ipse dixit of the CIA.)

The idea that fake news is somehow, well, new, is farcical. All that has changed is the means of dissemination. I remember vividly poorly printed flyers distributed in Chicago making lurid accusations about Harold Washington. (Ironically, some of the people bewailing fake news now were quite likely involved in some of those old school Chicago antics.) But go back centuries: American political newspapers and pamphlets in the 18th and 19th centuries contained slanderous falsehoods.

But “fake news” has become a thing because Hillary et al are desperate for some excuse for Trump’s triumph. More sinisterly, they are panicking at the realization that they no longer control the flow of information, which once gave them a decided political advantage. They are all about narratives, and when people depended on traditional media channels for news, it was much easier to control the narrative. Now that control is slipping away, they are desperately trying to regain their dominance by enlisting major social media companies in a campaign to crack down on alleged fake stories on their platforms. In the case of Facebook, this involves employing allegedly independent fact checkers, who are in fact made members of the leftist media establishment.

What has obviously happened is that the Internet has disintermediated traditional news media. There are so many channels through which stories (true and false) can flow that the traditional gatekeepers, and the beneficiaries of a more controlled media environment (namely, the political establishment), have lost control. This is inducing hysteria and a panicked effort to regain it.

This reminds me of the Reformation, which disintermediated the incumbent religious hierarchy, and the rulers who relied on the Church to exert social control. Then, the establishment railed at false theology. Today, the establishment rails at false news. Then, the translation of the Bible into the vulgate allowed individuals to make their own theological judgments outside the authority of the institutional church: today, the ability of people to access myriad stories and opinion pieces allows them to make their own political and social judgments without the authority of media or political mandarins. Then, the phrase was “every man his own priest”: today, it could be “every man (or woman) his (or her) own editor.” In the 16th century, the elite–the Church and many secular rulers–reacted to the popularization of religion in by attempting to reassert their religious and social authority over the masses, at times with violence.  In 2016 what passes for an elite is attempting to reassert its ideological and social authority over the masses. As yet, there has been no violence. But it’s early days yet.

The Counter-Reformation ultimately failed because the underlying technological (e.g., printing) and social forces overwhelmed the ability of traditionalists to restore their authority. I expect that the same will be true in the case of the ongoing eReformation. What Facebook and other social media are attempting to do will likely be little more than a futile rearguard action. It is ironic, and somewhat pathetic, that companies which are themselves the product of the technology that disintermediated information are now trying to impose themselves as the new information intermediaries: they certainly like the profits that the technology has showered upon them (well, not Twitter), but are deeply frightened about how the that technology has liberated the reliance of the masses on the elite for their information. They want their cake, and to eat it to.

But this will fail. The contradictions here are so glaring that I am tempted to resort to Marxian language to describe them. I will resist the temptation, and merely conclude by saying that Facebook and Twitter and all of the other would be intermediaries will not be able to surmount these contradictions. And thank God for that.

Hillary Clinton is busy crafting a narrative to explain her crushing defeat. Not surprisingly, it is a narrative in which she bears no personal responsibility. Instead, blame attaches to bad men, namely the FBI’s James Comey and Vladimir Putin:

There were some unprecedented factors that I don’t think we can ignore, because to do so is at our peril. Now, don’t take it from me. Take it from independent analysts. Take it from the Trump campaign. Take it from Nate Silver, who’s pointed out that swing-state voters made their decisions in the final days, breaking against me, because of the FBI letter from Director Comey. And Nate Silver believes — I happen to believe this — that that letter most likely made the difference in the outcome. But we’re also learning something more every day about the unprecedented Russian plot to swing this election. And this is something every American should be worried about. You know, we have to recognize that, as the latest reports made clear, Vladimir Putin himself directed the covert cyber attacks against our electoral system, against our democracy, apparently because he has a personal beef against me.

Poor, poor victim Hillary. She had been such an amazingly successful and strong Secretary of State that Putin was going to stop at nothing to thwart her.

Sure. Whatever gets you through the night, Hillary.

The CIA is doing its best to bolster the narrative, by outrageously leaking the content of letters alleging that it knows that Putin personally directed hacks against the Democrats for the express purpose of electing Trump and defeating Hillary. Just how the CIA knows what went on in the inner sanctum of the Kremlin (and between Putin’s ears) must remain left to the imagination. The FBI and the DNI were not willing to agree with the CIA’s first claim about Putin’s intent. So the CIA leaked another letter, in which CIA Director Brennan allegedly told agency staff that the FBI and DNI now agreed with the CIA. However, neither Comey nor Clapper have stated this publicly. Instead, the WaPo and other mainstream outlets are treating Brennan’s unsubstantiated assertion (which contradicts the FBI’s and DNI’s previous denials) as fact.

This is beyond outrageous. First, the CIA should make its statements on matters of such gravity publicly and provide evidence. Ex cathedra statements released anonymously and devoid of any supporting evidence are clearly inadequate given the gravity of this situation, and the political ramifications of Brennan’s actions. Second, if the FBI and DNI agree, then Brennan, Clapper, and Comey should release a joint statement signed by all. Third, the forum for such disclosures is not leaks to the WaPo (apparently the designated mouthpiece for the agency) but in formal statements, and in testimony before the relevant Congressional committees.

But the CIA pointedly declined to make anyone available to meet with the intelligence committees, despite the fact that they had been asked specifically to do so. This is just appalling.

So why is Brennan doing this? The only plausible explanation is that it is an attack on Trump intended to de-legitimize the election and undermine his presidency before he even raises his right hand to take the oath of office. The CIA has much practice doing this abroad. It is a very siloviki, Chekist thing to do. Ironic, isn’t it?

Trump must act forcefully to submit this agency to presidential control. Given all the gnashing of teeth over the threat posed by Mattis to civilian control over the military, the silence from these quarters over the CIA is stunning–and telling.

There is still no definitive evidence that Wikileaks obtained the offending documents from the Russians: Assange claims that it was not a nation state. One of Assange’s friends, a former UK ambassador to Uzbekistan, claims that he knows who provided the information, and that it was an insider: as I noted from the outset, this is totally plausible. (Assange is apparently irritated at this claim.)

As for the claim (endorsed by Hillary) that the DNC and Podesta documents were released by the Russians specifically to harm her, then why were none of her missing emails leaked? Or are we supposed to believe the fairy tale that hers was the one computer in the entire US that was immune from cyberattack?

Further, this is all a sideshow. What harmed Hillary was the substance of the leaked documents, which showed her and the Democratic Party apparatus to be manipulative and corrupt. Comey’s letters were damaging because they drew attention to Hillary’s palpable dishonesty and high-handedness about her private server. It was the substance was fatal, but Hillary has not-and I warrant will not-addressed the issue of the substance in a serious way.

It is also amazing to watch the schizo behavior of the Democrats and anti-Trump fellow travelers (e.g., Tom Nichols). They are reacting with fury to criticism of the CIA’s behavior. How dare we question these patriots? They are consummate government professionals, working hard to protect us! Yet at the same time they want us to believe that the FBI are partisan hacks, and that the Bureau is a virtual Trumpland that wanted to see Hillary go down in flames.

So let’s see. CIA=non-partisan professionals and patriots. FBI=unprofessional partisan hacks. How does that work, exactly? How do two agencies of the US government develop alpha and omega cultures? The intellectual incoherence here is beyond belief. But those pushing these utterly incompatible stories apparently see no contradiction.

It is also beyond bizarre to see the Democratic Party unabashedly defend the CIA and treat any criticism of it as near treason. Frank Church must be rolling in his grave.

Although there is an element of absurdity to all this, it is a very dangerous set of developments. Hillary and the Democratic Party are crafting something analogous to the Stab in the Back narrative that the German militarists pushed in the aftermath of WWI. Just like Erich von Ludendorff et al, Hillary et al are denying any responsibility for their defeat. Instead they blame it on malign forces that deprived them of the victory that they deserved. Such denial prevents an honest reckoning with the past, and feeds bitterness and resentment. It poisons politics, divides Americans, undermines respect for existing institutions, and will feed extremism. Moreover, Hillary’s narrative basically insults tens of millions of Americans because she insinuates that they were either unwitting dupes of a malign plot hatched abroad, or enthusiastic supporters thereof. This will make any rapprochement in the US impossible, leaving both sides daggers drawn for the foreseeable future. Call it The Deplorables vs. The Better Thans. This will not end well.

That is, Hillary’s indulgence of her amour propre will prevent any political reconciliation in the United States. This is an act of incredible selfishness and destructiveness. But considering who she is, this comes as no surprise.

For his part, Obama spoke on the alleged Russian interference in the election in a press conference today. He said that he told Putin to “cut it [hacking] out.” That’s telling him. Did Obama draw a red line? That’s always a sure winner. Obama also channeled his inner Dean Wormer, and put Putin on Double Secret Probation. That is only a slight exaggeration: Obama said that the US would retaliate, but won’t say how:

President Obama said the U.S. must retaliate against Russia for the election-season hack into Democrats’ emails and that his administration will do so on its own time frame — perhaps in secret.

“Some of it may be explicit and publicized, some of it may not be,” Obama said during an interview that aired on National Public Radio on Friday morning.

“I think there is no doubt that when any foreign government tries to impact the integrity of our elections … we need to take action,” Obama told NPR host Steve Inskeep. “And we will, at a time and place of our own choosing.”

Dude. You are only going to be in office for 35 more days. You don’t have a lot of time to choose from.

Proving that he has learned nothing and forgotten nothing, Obama continued his old habit of belittling Putin and Russia:

After unleashing a string of putdowns about Russia, describing America’s Cold War adversary as “a weaker country” that “doesn’t produce anything anyone wants to buy except oil and gas and arms,” Obama conceded the country could exploit political divisions in the United States.

“They can impact us if we lose track of who we are. They can impact us if we abandon our values,” Obama said.

Yes. Because the putdown strategy has worked so, so great in the past several years. (What, no comments about Putin’s posture?) Talk about the antithesis of speak softly and carry the big stick. This approach will only encourage Putin, and earn his disdain.

In the years after 911, the phrase “if we do X the terrorists will have won” became common and the subject of ridicule–and justly so. Well, in the present case by obsessing over Putin, he does win. Exaggerating his influence in order to absolve oneself of responsibility, and to avoid coming to grips with the repudiation of large numbers of Americans–as Hillary and most Democrats and NeverTrumpers are doing–will sow strife in American politics and bolster Putin’s standing both in Russia and abroad. And as a result, the biggest winner from this 21st century counterpart to waving the bloody shirt will be one Vladimir Vladimirovich Putin.

About six weeks ago I wrote a post on the strains put on clearing by Brexit. This informative post by Clarus’ Tod Skarecky provides some very interesting detail about the mechanics of the LCH’s margining mechanism.

One way to summarize it is to say that the LCH was a liquidity black hole. Not only did it collect intra-day and end-of-day variation margin from losers that was paid out to winners only with a delay, it also collected Market Data Runs, which were effectively intra-day initial margin top-ups. A couple of perverse features. First, a position that initially had a loss that triggered an MDR outflow had to pay out, but if the market turned in its favor intra-day, it didn’t get that money back until the following day. Second, a firm that had a loss that triggered an MDR outflow had to pay out, and if the position incurred a loss on the day, it still had to pay variation margin, and didn’t receive the MDR back until the next day: that is, there was”double dipping.”

Tod puts his figure on the logic (crucially, the logic from LCH’s perspective): “Heck if I managed credit risk at a firm, I’d always choose to be paid now rather than later.” Definitely. That minimizes credit risk. But look at how much liquidity was sucked up in order to do this.

Variation margin is bad enough: despite the (laughable) claim of the BIS some years back, the fact that variation margin is recycled does not mean that it does not create liquidity strains. After all, (a) liquidity demand arises due in large part to differences in timing between the receipt of cash and the payment thereof, and the clearing mechanism (in which the CCP pays out VM some hours after it receives VM) creates such timing differences, and (b) even absent payment timing differences, the VM receivers would have to lend to the VM payers, which is problematic especially during stressed market conditions. But the LCH IM top up exacerbates the problem because the cash is stuck in the clearinghouse overnight, and therefore cannot possibly be recirculated. More liquidity becomes less accessible.

Again, this is understandable from LCH’s microprudential perspective: it reduces the likelihood that it will become insolvent or illiquid. But just because this is sensible from a microprudential perspective does not mean it is macroprudentially sensible. In fact, it is anything but sensible: it greatly adds to liquidity demand, particularly during periods of time when liquidity is likely to be scarce, and when liquidity freezes are a serious risk.

This is a perfect example of the “levee effect” I’ve written about for years: raising the levee around the LCH increases the chances of its survival, but just redirects the stresses to elsewhere in the system.

Note the irony here. Clearing mandates were sold on the idea that there were pervasive externalities in uncleared derivatives markets, due primarily to the potential for default cascades in these markets. But clearing (supersized by mandates, in particular) creates externalities too. Here LCH does things that are in its interest, but which impose costs on others. It has a contractual relationship with some of these (FCMs), so there is some potential that externalities involving these parties can be mitigated through negotiation and changing contracts. But there are myriad parties not in privity of contract with LCH, and which LCH may not even know of, who are impacted, perhaps severely, by a liquidity shock exacerbated by LCH’s self-preserving actions.

In other words, clearing mandates don’t internalize all externalities. They create them too. And given the severe dangers of liquidity crises, the liquidity externality that clearing creates is particularly troubling.

Outgoing CFTC Chairman Timothy Massad says, don’t worry, be happy!:

Brexit’s Impact on Clearing Activity

Let’s first look at the impact on clearing activity. It’s important to remember first that clearinghouses mark all products to market every day, and require that participants with market losses post margin every day, sometimes more than once a day. Margin payments must be paid promptly because for every payment made to the clearinghouse, the clearinghouse must make a payment to another participant who has gains. The clearinghouse always has a balanced or “matched” book.

Even though margins were increased in advance of the vote, the volatility resulted in very large margin calls on June 24.

Clearing members paid $27 billion dollars in variation margin across the five largest clearinghouses registered with the CFTC. This was $22 billion dollars greater than the previous 12-month average—over five times larger. The good news is no one missed a payment, no one defaulted.

Supervisory Stress Tests

The results after Brexit confirmed what we recently found in our own internal testing: resilience in the face of stressful conditions. Last month, CFTC staff released a report detailing the results of a series of stress tests we performed on the five largest clearinghouses under our jurisdiction, which are located in the U.S. and the UK. Our tests assessed the impact of stressful market scenarios across these clearinghouses as well as their clearing members, many of whom are affiliates of the world’s largest banks.

We developed a set of 11 extreme but plausible scenarios based on a number of factors, including historical price changes on dates when there was extreme volatility. By comparison, our assumed price shocks were several times larger than what happened after Brexit. We applied these scenarios to actual positions as of a specific date. And we looked at whether the pre-funded resources held by the clearinghouse—in particular, the initial margin and guaranty fund amounts paid by clearing members as well as the clearinghouse’s capital—were sufficient to cover any losses.

Still not getting it. The discussion of stress tests essentially repeats the same mantra as LCH: it is a decidedly microprudential treatment that focuses on credit risk, not liquidity risk. The discussion of margins is perfunctory, despite the fact that this is what gave market participants serious worries on Brexit Day. No discussion of what extraordinary efforts were required to ensure that all payments were made. No discussion of whether this would have been possible during a bigger–and unanticipated–price shock. No discussion of the liquidity externalities. No discussion of what would happen if operational difficulties (e.g., a technology problem in the payments system like the failure of FedWire on 10/19/87) interfered with the completion of payments. (More payments increases the likelihood that such an operational failure will jeopardize the ability of FCMs to complete them. And a failure to meet a call triggers a default.)

This “what? Me worry?” approach sounds so . . . 2006. And it is exactly this kind of complacency that makes me worry. The nature of the liquidity issue still has not penetrated many regulatory skulls.

This is most likely due to a severe case of target fixation. Clearing mandates were motivated by a desire to reduce credit risk, and all efforts have been focused on that. That is the target that regulators are fixated on, and in the pursuit of that target their field of vision has narrowed, with liquidity risk being largely outside it. It is obviously the target that CCPs are focused on. This is why I take little comfort in the belated efforts to make CCPs more resilient. The recipe for resilience is to demand MOAR LIQUIDITY. Which is also the recipe for a broader market crisis.

Analogous to the dangers of high powered incentives with multi-tasking when some activities can be measured more accurately than others, the mandate to reduce derivatives credit risk has led regulators and market participants–particularly market utilities like CCPs–to devote excessive effort to mitigating credit risk, even though it exacerbates liquidity risk.

I doubt the clearing portions of Title VII of Frankendodd will be eliminated altogether, but the incoming administration should seriously consider a major re-evaluation to determine how to address the serious liquidity issues that clearing mandates create.

Current reports suggest that Trump will select ExxonMobil CEO Rex Tillerson as his Secretary of State. Like many things Trump, this creates substantial uncertainty. For despite the fact that Tillerson has been a public figure for years, he has not been part of the foreign policy community, and hence his view on specific issues (China, the Middle East, and on and on), and his philosophical/ideological/doctrinal orientation are unknown.

As for the fact he has not been part of the FP community–good! It’s not as if it has covered itself in glory in the past couple of decades. Chin pullers moan that Tillerson’s appointment would represent the biggest discontinuity in US foreign policy in years. Again–good! We’re in a rut. Discontinuity has potential.

Others fret that as the mere CEO of one of the largest (if not the largest) corporations in the world, which invests in highly complex technology, operates in virtually every country on the globe, and which must navigate complex political issues in these myriad countries, is just not up to the job of managing the complexities of international diplomacy:

Some former officials said it was an open question whether Tillerson could make the transition from running Exxon, a vast company that explores for oil and gas on six continents, to the even greater complexity of being secretary of state.

“Negotiating a real estate deal or an oil contract with Saudi Arabia is not the same thing,” said Aaron David Miller, a former State Department Middle East specialist now at the Wilson Center think-tank in Washington.

“It’s not a complicated summit where you are trying to reconcile historical woundings, religious identities, sectarian tensions.”

“I’m not arguing that he can’t make this conversion. I just don’t think we know.”

Because ex-pols and career diplomats like John Kerry, Hillary Clinton, Warren Christopher, Cyrus Vance, James Baker, etc., are such towering geniuses that they are much better able to manage the complexities of foreign affairs.

Please.

In today’s hysteria over Russia, of course Exxon’s and Tillerson’s relationship with Russia and Putin has been the focus of much angst and criticism. He received the “Order of Friendship” from Putin! XOM was going to invest zillions in Russia but sanctions prevented that! Sanctions cost Exxon billions! He’ll go easy on Russia to help Exxon!

Tillerson ran an oil company. Oil companies look for oil. Russia has oil. Tillerson’s company looked for oil in Russia. Not that complicated.

Further, XOM was not nearly as dependent on Russia as other majors, such as BP or Shell. Consider the billion or so that Exxon had at risk in joint ventures with Rosneft, but which were scuppered by sanctions. Well, a billion is real money, it’s not nearly as big a deal for Exxon because, well, Exxon is so damn big. Even at the depressed values due to low oil prices, $1 billion is .25 percent of XOM’s market cap. The other numbers bandied about–$400-$500 billion in investments in the Arctic over decades–are highly speculative, and dependent on many contingencies. Indeed, the main source of these numbers is hype by Igor Sechin, and should be discounted accordingly.

But even going beyond that, oil exploration and development is a highly fraught and unpredictable endeavor, especially in harsh natural environments like the Arctic, and harsh political environments like Russia. Seemingly promising finds can turn out to be disappointing. Numerous technological hurdles must be overcome. Political difficulties must be surmounted. Take a look at the Shtokman saga to see how these things can bedevil big Arctic projects.

Most importantly, development economics depend on prices, and prices are highly volatile. The initial XOM-Rosneft deals were negotiated in 2011-2013 when oil prices were north of $100/bbl, and were expected to stay there for, well, pretty much forever. A mere year later, oil prices cratered, and now the conventional wisdom is that $100/bbl oil is not on the horizon, even the distant horizon. Even absent sanctions, there would have been a massive re-evaluation of the scale and scope of the Rosneft-XOM cooperation.

Look at Shell. The technological challenges and costs of the Arctic, plus low prices, have led it to pull the plug on its once vaunting ambitions there.

Here’s something else that should provide this perspective. One of Tillerson’s most important moves as CEO was the acquisition of shale operator XTO Energy, for which Exxon paid $31 billion. This dwarfs the commitment to Russia, and shows that Tillerson was investing bigger dollars  in a technology that actually reduced the need for access to Russian resources.

To some, any involvement in Russia inevitably makes one beholden to Putin. Consider this from one of the lead hysterics, Julia Ioffe:

What does that kind of friendship mean? Past experience suggests it is not a relationship of equals. It means that, at the drop of a hat, the Kremlin might discover serious environmental violations at your Sakhalin plant and drive you out of the country, as it did to Royal Dutch Shell, and then give the lucrative access to a better, domestic ally. It might decide to harass you with lawsuits to force you out, as it did to BP. And it might even throw you in jail, as it did to powerful Russian oligarch Vladimir Yevtushenkov in order to take a small oil company, Bashneft, away from you and give it to Sechin. Putin would even arrest his largely popular economics minister, as he did on November 15, to help Sechin retain it.

The lesson of Putin’s 16-year tenure is a lesson that all businesspeople, foreign and domestic, have learned: to do business in Russia, you have to be on good, personal terms with Putin and Sechin. And you have to understand that those two gatekeepers to Russia’s riches are fickle and sadistic, and, as former KGB operatives, know little of real friendship. To do business in Russia—both for Exxon Mobil and for Tillerson’s own massive retirement fund whose fortunes would rise significantly if a Trump White House lifted sanctions—you have to dance to Putin’s tune, and take whatever favors and humiliations he sends your way. Putin may act a friend and pin state medals on your breast, but he is, ultimately, a cynic. And to play ball with him, you have to be a cynic, too. Forget your honor, your rule of law, your independent judiciary, your human rights, your international law, and focus on the gold coins he throws to your feet. And forget looking dignified as you gather them up.

Note that none–NONE–of Ioffe’s examples involve ExxonMobil. Consider Shell’s travails in Sakhalin. ExxonMobil had a project in Sakhalin as well–Sakhalin I. Gazprom tried for years–years–to muscle its way in on that the way it muscled in on Shell’s Sakhalin II. It failed miserably. XOM swatted them away. And note that Gazprom and the Russian government didn’t pull the crap with Exxon that they pulled with Shell, or with BP in Kovytka or with TNK-BP. That’s a very big dog that didn’t bark. You think the Russians were just being nice to Exxon? Hardly. They respond to strength, and knew better than to confront Exxon.

When Rosneft and Exxon were negotiating their deals in the 2011-2013 time frame, Sechin wanted an arrangement similar to that he extracted/extorted from BP: an XOM investment in Rosneft combined with a big Rosneft equity stake in XOM. This went nowhere. Instead, Exxon negotiated a set of joint ventures that limited its exposure and gave it a lot of optionality and off-ramps, thereby limiting its vulnerability to Russian extortion. As further protection, it also exchanged hostages, namely JVs in the GOM. (These were ironically terminated last week, due to bad economics and unfavorable exploration results, thereby demonstrating the tenuous nature of these kinds of ventures.) Sachin was the supplicant, and was rejected.

All of this reveals that ExxonMobil, and Tillerson personally, were quite aware of the nature of the Putin regime, and the dangers in dealing with it. He hardly needs instruction from Julia Ioffe on these things. Indeed, he has more schooling in these matters that pretty much anyone alive, and has far fewer scars to show for it than pretty much anybody else who has tried to deal in Russia (Bob Dudley, for instance). He has fewer scars because he had more power to fight back than even behemoths like BP. Because Exxon is the behemoth among behemoths.

XOM/Tillerson were clearly aware of the lack of property rights in Russia, and the vulnerability to expropriation. They were the industry leaders at structuring contracts to reduce their risk to this. Further, they had the economic heft to stand up to Russia and Putin: Exxon’s market cap is almost equal to the market cap of the entire Russian market. What’s more, Exxon used this economic heft to get good deals out of Russia. If anything, Russia needed Exxon more than Exxon needed Russia–something that BP or even Shell could not say.

In other words, Tillerson is a man who understands Russia well, is intimately aware of its dysfunctions, understands relative power, and is willing to negotiate from a position of strength in order to obtain positive outcomes that limit the risk of exposure to these dysfunctions.

This is a problem why, exactly? That sounds like the perfect skill set. I know those still in shock after losing an election want to blame Russia for all their misfortunes and are (insanely) seeking open confrontation. That’s idiocy. He will have the resources of the most powerful nation in the world at his disposal, and he will know that American power vastly exceeds Russia’s. Tillerson has taken Putin’s measure, knows the players, and knows how to deploy power to reach mutually beneficial outcomes. Sounds good to me.

Also, incentives matter. As CEO, Tillerson was accountable to shareholders, and his compensation largely aligned his incentives accordingly. He was not (directly) accountable to the US government or the American people, and therefore it is expected that he would sometimes make decisions that benefited Exxon but which were not necessarily aligned with American policy or even American interests. (Though no one has provided a compelling example of that.*)

As Secretary of State, however, his incentives will be far different, and his interests will be far less aligned (if aligned at all) with his former employer. However imperfectly, the incentive structure of democratic politics will lead him to make choices that will differ substantially from those he would have made as CEO of Exxon. I would note that there are many, many instances where what people do in office is very different from what they did or said previously. This is because they face very different incentives. To go out on a limb, I would not be surprised if Tillerson becomes a Strange New Respect winner.

I have no idea how Tillerson will perform as Secretary of State. But I am highly confident that his long experience in Russia does not represent a serious concern: in fact, I would venture that it is his greatest attribute.  He dealt with the Russians for years, and didn’t get run over, and indeed, negotiated some pretty favorable deals with them. That speaks volumes.

Further, I would note that Russia is obviously an important policy challenge, but as a declining power that faces some rather daunting geopolitical and economic handicaps, I do not consider it our primary policy threat. The political class’ recent obsession with Russia, to the exclusion of more important countries–China, most notably–reflects the narcissistic rage of a part of the political class that was thwarted in its ambitions, and which is casting about for a scapegoat. These people didn’t give a damn about Russia before last summer, and indeed, to the extent they mentioned it at all it was to scorn those (e.g., Romney) who raised alarms about it. These are not serious people and their hysterics should not be taken seriously. Fixating on Tillerson’s Russian experience and dealings will distract attention from inquiries about his policy thinking on more important issues.

*In the comments Tim Newman mentions ExxonMobil’s dealings with Kurdistan in defiance of US government policy. That’s a good example, though I do find American policy in this regard problematic. Another example that comes to mind is Tilleson’s decision to terminate drilling in Ukrainian waters around the time of the Crimean crisis.

Today’s Daily Freak Out relates to a WaPoo story claiming that a “secret” (not any more!) CIA study has concluded that Russians with “links to the Russian government” provided Wikileaks with the hacked DNC and Podesta emails. (I only note in passing the irony of leaking a document to stoke outrage about leaks. Evidently judgments about leaking are instrumental and situational.)

If the CIA has identified individuals who at the very least are accessories, presumably the FBI and DOJ will launch criminal investigation and (if the evidence is a rock solid as the CIA claims) indict them. Unless that happens, I put the credibility of this report somewhere around the level of Curve Ball and aluminum tubes.

Even the “secret” report acknowledges that the CIA has no evidence that these purported individuals were directed by the Russian government. Instead, the CIA infers that the Russian government intended to influence the election based on the (alleged) fact that the RNC was also hacked, but its communications were not leaked.

Can the CIA actually be this stupid? (Rhetorical question alert!)

If the DNC and Podesta emails were damaging, it was because they revealed highly unflattering information about Hillary Clinton and her legions of flying monkeys in Democratic Party circles. The leaked documents revealed that the DNC was actively partisan in its support for Hillary, and took active measures to rig the process against Bernie Sanders. (Which is why I still wouldn’t rule out that a disgruntled Bernie-ite in the DNC played a role here.) Individually and collectively, the emails cemented the narrative of a corrupt Hillary and a corrupt party establishment rigging the system against Sanders: the narrative was already out there, with plenty of evidence to back it up, and these emails just put the cherry on the sundae. They revealed that Hillary and the Democratic National Committee were actively anti-democratic.

It is quite possible that RNC emails would have also revealed a party apparatus intent on undermining an insurgent candidate. Who would have been Trump. That is, whereas the DNC and Podesta emails showed Hillary and her minions to be the perpetrators of an offense, the most likely scenario is that the RNC documents would have shown Trump to be the target and victim of a campaign to disable his candidacy. That would have actually played to Trump’s benefit! It would have fit right in with his narrative of a man fighting the system and the establishment. It would have confirmed all of the criticism he had leveled against the party during the primaries.

Can you see the difference here? If your IQ is above 85 or thereabouts, I presume so. But then apparently you would be disqualified for working as a crack analyst at the CIA.

And let’s always keep one fact in mind. Those who decry the impact of the leaks are effectively taking the position that it would have been better for the American people to have cast their votes in ignorance. That the problem with the leaks wasn’t that they were lies: it was that they revealed unpleasant truths. The provenance of the documents, and how they came to light is secondary or tertiary: the content is primary. If your defense is “it’s an outrage I got caught and those who caught me are dirty bastards”, you deserve no deference or sympathy.

This controversy is the ad hominem fallacy run amok, that it is the speaker (or the source) not the substance that matters.  If revelations about your conduct contributed to the election of a mercurial political neophyte, your conduct, not the party that brought it to light (no matter their motives) is to blame.

Ever since Gen. James Mattis (USMC Ret.) had been suggested as a possible candidate for Trump’s Secretary of Defense, I was fervently hoping that he would be chosen, and that hope was realized. Mattis has a long and storied career as a warrior–a true warrior–and is widely acknowledged as a thoughtful, scholarly man who thinks deeply on strategic issues. He also has a long history of blunt outspokenness, which is sorely needed in these PC times–and in particular, is sorely needed in a Pentagon in which PC rot spread deeply during the Obama administration.

Mattis is a throwback in many ways, not least in that he has the kind of background and biography more typical of 19th or early-20th century figures. No over-credentialed Ivy Leaguer he. He grew up in the wheat fields of Washington state, enlisted in the Marines at 19, and attended Central Washington University. He then worked his way up through the Marine Corps, earning promotion to four star rank on the basis of performance.

Mattis’ appointment has drawn almost universal praise in DC and the media centers, including from the New York Times. Truth be told, this is the only thing that makes me temper my enthusiasm for him.

The one possible objection that has been raised by the usual array of chin-pullers is that he only retired from the USMC a little over three years ago, thereby requiring Congress to pass a waiver to circumvent a 1947 law that requires seven years between the time an officer retires and he (or she) can become SecDef. Mattis’ appointment, the chin-pullers intone, threatens to undermine civilian control of the military.

Really? Dwight Eisenhower retired from the Army on May 31, 1952, and assumed the presidency in January, 1953. Ulysses S. Grant remained as Commanding General of the US Army while running for president in 1868, and only resigned shortly before assuming office in 1869. Neither turned into Caesars. (By the way, did you know that in 1789 Congress passed a law that prevented those who had been engaged in commerce from becoming Secretary of the Treasury?)

Further, I would note that the principle of civilian control of the military is drilled into US military officers from day one of their service–as I experienced personally at the Naval Academy. What’s more, any officer whose commitment to that principle comes into question is never going to make it to flag rank. Nor would Donald “You’re Fired!” Trump–of all people–brook mutiny at the Pentagon.

But it is best to hear Mattis out on this in person. In this 2015 interview–recorded before his appointment was even a remote possibility, and indeed, would have been reckoned to be a zero probability event, not least of all by him–his commitment to the principle comes through loud and clear. He states forthrightly that an officer’s duty is to give his civilian superiors his honest opinion, but that it is also his duty to defer to the authority of those civilian superiors. This was clearly not a calculated statement intended to help secure an appointment (which was hardly imaginable, let alone on offer), but a reflection of his beliefs.

In sum, the thought that James Mattis is a threat to civilian control of the military is inane.

The entire interview is worth watching, because it shows Mattis to be an articulate and thoughtful man who speaks frankly, with an almost world-weary mien. He speaks with authority on a variety of strategic, military and geopolitical issues, is persuasive, and has Trump’s respect and ear. He gave evidence of this even before being nominated, when he convinced Trump to backtrack on the torture issue. This is exactly the kind of man we need in office. The fact that he will be an articulate advocate and explainer of administration policy is also invaluable. (Mattis is far more articulate than General Flynn, in particular.)

Some have also questioned Mattis’ ability to handle the challenges of managing the vast Pentagon bureaucracy. Here the interview is also instructive, because it shows that Mattis has observed the closely managerial and process dysfunction in Defense, and in particular how the mega-contractors have warped the system. No babe in the woods he. Fixing the Pentagon is a Herculean task, and I doubt that Mattis can do it, but he can probably make more progress than anyone with a more conventional resume for the job could.

As commenter aaa noted, one blot on Mattis’ record is his role as a director at Theranos, which has proved to be a colossal con. In his defense it can be said that he was hardly alone: the list of directors and big money investors who were taken by Elizabeth Holmes’ shtick is a who’s who of American business and politics (e.g., George Schultz). This endeavor was outside of Mattis’ expertise, and the main criticism he deserves is for taking a position for which his training and experience did not particular suit him. That’s not the issue at Secretary of Defense.

In sum, “Mad Dog” Mattis is exactly the kind of figure the US needs at the Pentagon right now, and poses no threat to the institutions of the Republic. To the contrary, he is uniquely qualified to serve as an intermediary between the citizenry and the uniformed military, particularly given that he knows the uniformed military, and those in the military know and respect him. The country will be stronger with him serving in a civilian role so close in time to the end of his 44 years of active service.

In the nearly 4 weeks since Trump’s election, we’ve seen a daily freakout on this issue or that. Every day, we hear about another statement or appointment or Tweet that is apparently going to result in the impending arrival of the end times. For those thinking about career moves, becoming a Pfizer manufacturer’s rep in a blue state is a sure winner, because Xanax sales are certain to skyrocket.

Yesterday’s Freak Out by the Trumpharrumphers–which is spilling over into today–is that their bête noire took a phone call from the president of Taiwan. How this call came about is somewhat obscure. CNN reported that a former Cheney advisor now working the Trump transition, Stephen Yates, arranged it. Yates denies it.

That’s really neither here nor there. The issue is whether this is some grave blunder on Trump’s part. The immediate reaction by many is that this was thoughtless and rash, but I wouldn’t be so sure. It could very well be calculated to send a message to China that Trump does not accept the status quo that has developed over the past decades. China has challenged this status quo, particularly through its construction of artificial islands in the South China Sea. This could be Trump’s way of pushing back. Sending a message to the revisionist power that revisions can be a two way street.

It is a low cost way of sending that message. Unlike some alternatives, it is not latent with potential for an immediate confrontation. China would have to make an aggressive countermove. Consider an alternative way of sending a signal: sending US ships or aircraft to challenge Chinese claims in the South China Sea. That presents the potential of immediate conflict, due either to the decision of the leadership in Beijing, or a hotheaded commander on the spot. Recall that soon after Bush II took over that the Chinese forced down a US EP-3 aircraft off Hainan.

Not to say that Trump will not order freedom of navigation missions after becoming Commander in Chief. Just pointing out that taking the phone call certainly gets China’s attention, and gets it to think about what the new administration’s posture will be, without putting US and Chinese military forces in close contact in a way that could result in a disastrous incident.

One thing that is very striking about the hysterical reaction to The Call is that many of those responding most hysterically that it raises the risk of World War III have also favored a much more confrontational approach with Russia, especially in Syria. Gee, you’d think that declaring a no fly zone over Syria would create a far greater risk of an armed confrontation between nuclear superpowers than taking a phone call from the Taiwanese president.

This asymmetric approach to Russia and China makes no sense. Yes, Putin has a zero sum view of the world; wants to revise the post-Cold War settlement; nurses historical grievances; and believes that the United States is hell-bent on denying Russia its proper place in the world (or worse yet, overthrowing its government). But the Chinese have a zero sum view of the world; want to revise the balance of power in Asia; nurse historical grievances; and believe that the United States is hell-bent on denying China its proper place in the world. Russia hacks. China hacks. Indeed, if anything, Chinese hacks have been far more threatening to US national security than the alleged Russian hacks that have generated the greatest outrage, namely the DNC and Podesta email lacks. For instance, the Chinese hack of the Office of Personnel Management database likely caused grievous harm to US security: the DNC and Podesta hacks only embarrassed, well, political hacks. (Which probably explains the intensity of the outrage.) Insofar as Russian propaganda is concerned, if RT (which does not even register on the Nielsen ratings) and fringe internet sites gravely threaten US democracy, we have bigger problems to worry about: we will have met the enemy, and he is us.

The key issue is capability. With the exception of nuclear weapons, Russian capabilities are declining and limited, whereas Chinese capabilities are increasingly robust. The Soviets were big on “the correlation of forces.” The correlation of forces is strongly against the Russians at present. They have limited ability to project power beyond their immediate borders, and then only (in a persistent way) against ramshackle places like the Donbas and Abkhazia. The Russian Navy is a shambles: its current deployment off Syria would make Potemkin blush. The Navy faces the same problem that it has faced since the time of Peter I: it is split between inhospitable ports located at vast distances from one another. The submarine force has made something of a comeback, but its surface units are old and decrepit, and fielded in insufficient numbers. The potential for expansion is sharply constrained by the near collapse of Russian shipbuilding: even frigate construction is hamstrung because of the loss of Ukrainian gas turbine engines.

Russia is also in an acute demographic situation: during his recent speech, Putin crowed that fertility had increased from 1.70 live births/woman to 1.78–still well below replacement. This problem manifests itself in the form of increasing difficulties of manning the Russian military. It still relies on conscription for about 1/2 of its troops, and those serve for an absurd 12 months. After 8 years of reform efforts, 50 percent of the personnel are now kontraktniki, but the Defense Ministry’s refusal to release information on the number of contract soldiers who leave each year (while touting the number of new volunteers) suggests that there is considerable turnover in these forces as well. There is still no long-term cadre of non-commissioned officers, and the force structure is still very top heavy.

Moreover, this military rests on a very shaky economic foundation. In particular, Russian military manufacturing is a shadow of what it once was, and the fiscal capacity of the state is sharply limited by a moribund economy. This makes a dramatic expansion in Russian military capability impossibly expensive: even the modest rearmament that has occurred in the past several years has forced the government to make many hard tradeoffs.

In contrast, Chinese military power is increasing dramatically. This is perhaps most evident at sea, where the Chinese navy has increased in size, sophistication, and operational expertise. Submarines are still a weak spot, but increasing numbers of more capable ships, combined with a strong geographic position (a long coastline with many good ports, now augmented by the man-made islands in the South China Sea) and dramatically improved air forces, long range surface-to-surface missiles, and an improving air defense system make the Chinese a formidable force in the Asian littoral. They certainly pose an anti-access/area denial threat that makes the US military deeply uneasy.

In contrast to Russia, China is actually in the position of having a surfeit of military manpower, and is looking to cut force numbers while increasing the skill and training of the smaller number of troops that will be in the ranks after the reforms are completed.

Policy should emphasize capability over intentions. Intentions are hard to divine, especially where the Russians and Chinese are involved: further, the United States’ record in analyzing intentions has been abysmal (another argument for gutting the CIA and starting over). Moreover, intentions change. It must also be recognized that capabilities shape intentions: a nation with greater power will entertain actions that a weaker power would never consider.

Taking all this into consideration, I would rate Russia as a pain in the ass, but a pain that can be managed, and far less of a challenge to US interests than China. Putin has played a very weak hand very well. Indeed, as I have written several times, we have actually fed his vanity and encouraged his truculence by overreacting to some of his ventures (Syria most notably). But the fact remains that his is a weak hand, whereas China’s power is greater, and increasing.

I am not advocating a Cold War: East Asia Edition. But when evaluating and responding to capabilities of potential adversaries, China should receive far greater attention than Russia. Certainly there is no reason to risk a confrontation over Syria, and pique over embarrassing disclosures of corrupt chicanery that the perpetrators should damn well be embarrassed about is no reason for a confrontation either. A longer term focus on China, and managing its ambitions, are far more important. That is a relationship that truly needs a revision–a Reset, if you will. And methinks that Trump’s taking the phone call from the Taiwanese president was carefully arranged to tell the Chinese that a Reset was coming. A little chin music to send a message, if you will.

A more provocative thought to close. Realpolitik would suggest trying to find ways to split China and Russia, rather than engage in policies like those which currently are driving them together. A reverse Nixon, if you will. I am by no means clear on how that would look, or how to get there. But it seems a far more promising approach than perpetuating and escalating a confrontation with a declining power.

PS. This is fitting in many ways:

I was somewhat surprised that OPEC came to an agreement. I will be more surprised if they live up to it: that would be not just going against history, but against basic economics. The incentives to cheat are omnipresent (as the Saudi’s ex-Minister of Petroleum of Petroleum Naimi acknowledged in the aftermath of the announcement). Further, what is the enforcement mechanism? Retaliatory output increases/price cuts (i.e., price wars)? Moreover, given that many OPEC nations are facing acute budgetary strains, the present looms and the future looks very, very far away: consequently, getting some additional revenue today at the risk of losing some revenue a year or two from now when a price war breaks out looks pretty attractive.

The breathless TigerBeat-style reporting of the meeting states that Russia’s last-minute intervention rescued the deal. A few things to keep in mind. Russian oil output has surged in the last few months, meaning that its promise to cut 300,000 bbl/day basically puts its output back to where it was in March. This is in fact pretty much true of the OPEC members too: the deal very much as the feel of simply taking two steps back to reverse the two steps forward that major producers took in the past 9 months (and the two steps forward were no doubt driven in large part to improve bargaining positions in anticipation of the November OPEC meeting).

Moreover, the timing of the Russian commitment is rather hazy. Energy Minister Alexander Novak said Russia would cut “gradually.” That can mean almost anything, meaning that the Russians can say “the cuts are coming! Trust us! We said it would be ‘gradual!'” and that there will be no hard evidence to contradict them.

The most amusing part of this to me is that many are interpreting Putin’s personal involvement as proof that the Russians will indeed cut. “If Putin tells Russian oil companies to cut, they’ll ask ‘how deeply’?”

Seriously?

Call me cynical (yeah, I know), but I find this scenario far more plausible: Putin sweet-talked the Saudis and Iranians to overcome their differences to cut output in order to raise prices, all the while planning to sell as much as possible at the (now 10 percent) higher prices. Breezy promises cost nothing, and even if eventually OPEC members wise up to being duped, in the meantime Russia will be able to sell to capacity at these higher prices. Yes, the OPEC members will be less likely to believe him next time, but Putin’s time horizon is also very short, for a variety of reasons. He’s not getting any younger. And more immediately, the Russian recession is dragging into its third year, and budgetary pressures are mounting (especially since he is committed to maintaining a high level of military spending). The Russian Wealth Fund (one of its two sovereign wealth funds) has been declining inexorably: the rainy day fund is almost empty, and the skies still haven’t cleared. And the presidential election looms in 2018. For Putin, the future is now. The future consequences of making and breaking a promise are not of great importance in such circumstances. But more money in the door today is very, very important.

Russia isn’t like other OPEC producers, which have national oil companies that respond to government orders. Although government-controlled Rosneft is the biggest producer in Russia, there are others, and even Rosneft and Gazpromneft have more autonomy than, say, Saudi Aramco. Yes, Putin could, er, persuade them, but a far more effective (and credible) tool would be to adjust taxes (especially export taxes on both crude and fuels) to give Russia’s producers an incentive to cut output (and especially exports, which is what OPEC members really care about). A tax boost would be a very public signal–and reversing it would be too, making it harder to cheat/renege. (Harder, but not impossible. The government could give stealth tax cuts or rebates. This is Russia, after all.) But I have not seen the possibility of a tax rise even be discussed. That makes me all the more skeptical of Putin’s sincerity.

So my belief is that Putin is stepping into the role that Sechin played in 2009, that is, he is being Lucy beckoning Charlie Brown/OPEC with the football. And Charlie Brown is attempting a mighty boot. We know how that works out.

Even if Putin lives up to his pinky-swear to cut output, Russia has cut a much better deal than the Saudis. The promised Russian cut is about 60 percent of the Saudi cut, yet both get the same (roughly 10 percent) higher price, meaning that (roughly speaking) Russian revenues will rise 40 percent more than than Saudi revenues do–assuming that both adhere to the cuts. The disparity will be greater, to the extent that Russia cheats more than the Saudis.

Time will tell, but what I am predicting is that (a) Russia will not cut anything near 300kbbl/d, and (b) cheating by OPEC members will snowball, meaning that next November’s OPEC meeting will likely be another rancorous effort dedicated to repairing a badly tattered deal, rather than a celebration of the anniversary of a successful and enduring bargain.

As goes China, so go the commodity markets. The problem is that where China goes is largely driven by a bastardized form of central planning which in turn is driven by China’s baroque political economy. In past years, China’s rapid growth conferred on the government a reputation for wisdom and foresight that was largely undeserved, but now more people are waking up to the reality that Chinese policy engenders tremendous waste, and that the country would actually be richer–and have better prospects for the future–if its government tempered its dirigiste tendencies.

Case in point: Morgan Stanley’s Chief China Economist uses the ham-fisted intervention into the coal industry to illustrate the broader waste in the Chinese system:

These reforms entail the necessary reduction of excess capacity, particularly in state-owned enterprises (SOEs) and industries where overproduction issues are often the most acute.

While economists agree that a reduction of excess capacity, particularly in heavy industry, is key to the nation’s efforts to get on a more sustainable growth trajectory, China’s supply side reforms bare little resemblance to the “trickle down” Reaganomics of the 1980s, which seized upon tax cuts and deregulation as a way to foster stronger growth.

In Morgan Stanley’s year-ahead economic outlook for the world’s second-largest economy, Chief China Economist Robin Xing uses the coal industry to detail two key ways in which supply-side reforms with Chinese characteristics have been ill-designed.

“The state-planned capacity cuts and the slow progress in market-oriented SOEs reform have come at the cost of economic efficiency,” laments the economist.

In a bid to shutter overproduction and address environmental concerns, Beijing moved to restrict the number of working days in the sector to 276 from 330 in February.

But in enacting these cuts, policymakers employed a one-size-fits-all approach.

“The production limit was implemented to all companies in the sector, which means good companies that are more profitable and less vulnerable to excess capacity are affected just as much as the bad ones with obsolete capacity and weak profitability,” writes Xing.

This is largely true, but begs the question of why China adopted this approach. The most likely explanation is that the real motive behind the cuts has little to do with “environmental concerns”, though those are a convenient excuse. Instead, forcing the most inefficient producers out of business–or allowing them to go out of business–would cause problems in the banking and (crucially) the shadow banking sectors because these firms are heavily leveraged. Allowing them to continue to produce, and propping up prices by forcing even relatively efficient firms to cut output, allows them to service their debts, thereby sparing the banks that have lent to them, and the various shadow banking products that hold their debt (often as a way of taking it off bank balance sheets).

If the goal was to reduce pollution, it would have been far more efficient to impose a tax on coal-related pollutants. But this tax would have fallen most heavily on the least efficient producers, and would caused many of them to fail and shut down. The fact that China has not pursued that policy is compelling evidence that pollution–as atrocious as it is–was not the primary driver behind the policy. Instead, it was a backdoor bailout of inefficient producers, and crucially, those who have lent to them.

Morgan Stanley further notes the inefficiency of the capital markets which favor state owned enterprises:

As such, this misallocation of production serves to amplify the already prevalent misallocation of credit stemming from state-owned firms’ favorable access to capital. That arguably undermines market forces that would otherwise help facilitate China’s economic rebalancing.

But this too is driven by politics: SOEs have favorable access to capital because they have favorable access to politicians.

The price shock resulting from the output cuts hit consuming firms in China hard, which has led to a lurching effort to mitigate the policy:

This month, Beijing was forced to reverse course to allow firms to meet the pick-up in demand — another case of state dictate, rather than price signals, driving economic activities.

“In this context, we think the more state-planned production control and capacity cuts cause distortions to the market and are unlikely to be sustainable,” concludes Xing.

“Beijing was forced to reverse course” because utilities consuming thermal coal and steel producers consuming coking coal pressured the government to relent.

The end result is a policy process that owes more to the Marx Brothers than to Marx. A cockamamie scheme to address one pressing problem causes problems elsewhere.

Methinks that Mr. Xing is rather too sanguine about the ability or willingness of the Chinese government to sustain such highly distorting policies. They have done so for years, and are showing no inclination to change their ways. Efficiency is sacrificed to achieve distributive and political objectives, and the bigger and more complex the Chinese economy the more difficult it is for the authorities to predict and control the effects of their policy objectives. But this just induces the government to resort to more authoritarian means, and attempt to exercise even more centralized power. This is costly, but these are costs the authorities are willing and able to bear. Inefficiency is the price of power, but it is a price that the authorities are willing to pay.

Retired General Michael Flynn, fired as head of the Defense Intelligence Agency by President Obama, has become a lightning rod for criticism. This was true during the campaign, where he was an early and outspoken Trump supporter, and it has become doubly true since the election and his appointment as National Security Advisor designate. This criticism is largely unfair, and relies on the typical distortions and dishonest tactics that have become the norm for the “elite,” and the “elite” media.

For instance, Flynn has been excoriated for his alleged sympathies for Putin and Russia. These allegations rest on (a) his appearances on RT, and (b) the fact he sat at Putin’s table during an RT dinner. They also ignore the truculently anti-Russia, anti-Putin statements that Flynn made in his book. In a Politico piece that at least lets the man speak for himself, at length (although it also includes a typical dose of MSM snark), Flynn gives his opinions on these subjects:

Yet at times Flynn still struggles to reconcile his views with some of Trump’s most extreme positions, including his persistent praise of Putin.

“Putin is a totalitarian dictator and a thug who does not have our interests in mind. So I think Trump calling him a strong leader has been overstated, I’ll give you that,” Flynn said. “But Putin is smart and savvy, and he has taken actions in Ukraine and elsewhere that have limited our options, and the U.S. and NATO response has been timid. I think Trump’s strength lies in being a master negotiator, and he wants as many options as possible in dealing with Russia.” (Still, Flynn himself may have image problems here, since he appeared with Putin last year at an anniversary party for the Kremlin-controlled RT television network in Moscow.)

Yeah. A real Putin lover, that dude. This echoes what Flynn says in his book (co-authored by Michael Ledeen). This was out there for anyone interested in a fair portrayal of the man’s views to read, but no. Instead all we heard about was Flynn being pro-Putin because he sat with him once in Moscow.

Flynn has also drawn fire for his blunt statements about Islam. Well, get this. They are based on an up-close-and-personal view of our Islamist enemies. A view, it should not need mentioning, but does, that absolutely no one in the media and no one in the Obama administration and pretty much no one outside the US intelligence community has. Here again the Politico piece is informative:

As JSOC’s director of intelligence, Flynn interrogated the senior Al Qaeda commanders at length. Sitting across from them at the detainee screening facility at Balad Air Base, Iraq, Flynn wondered why such obviously educated and intelligent people were devoting themselves to tearing their country apart, regardless of the horrendous toll in innocent lives. Some of the men had electrical engineering and other advanced degrees, but instead of building a bridge or helping establish a functioning government, they applied their talents to attacking vulnerable governing institutions in order to terrorize and intimidate civilians. He could understand their hatred of American interlopers, but the vast majority of their tens of thousands of victims were fellow Iraqis.

During the course of those interrogations and hundreds of others in both Iraq and Afghanistan, Flynn concluded that what united the terrorist warlords was a common ideology, specifically the extremely conservative and fundamentalist Salafi strain of Islam. Salafis believe the only true Islam is that version practiced by the Prophet Muhammad and his followers in the seventh and eighth centuries. They reject any separation of church and state in favor of puritanical interpretation of Islamic Sharia law. They are intolerant of other religions or sects, and at least in terms of Salafi Jihadists, their ideology is violent and expansionist by its very nature. The terrorist leaders he interrogated on a regular basis—whether they marched under the banner of Al Qaeda, the Taliban or ISIS—were true believers, every bit as committed to their ideology and skewed moral universe as Flynn was to his own.

“Over the course of all those interrogations, I concluded that ‘core Al Qaeda’ wasn’t actually comprised of human beings, but rather it was an ideology with a particular version of Islam at its center,” Flynn said in the recent interview. “More than a religion, this ideology encompasses a political belief system, because its adherents want to rule things—whether it’s a village, a city, a region or an entire ‘caliphate.’ And to achieve that goal, they are willing to use extreme violence. The religious nature of that threat makes it very hard for Americans to come to grips with.”

He has looked the enemy in the face. Literally looked them in the face. Hundreds of times. He has interrogated them at length. You think perhaps he just might–just!–have a better understanding of what drives ISIS and Al Qaeda than 99.99999 of the people venting about his unacceptable, radical–and politically incorrect–views about the nature of Islamic terrorism?

The Politico article also details what led to Flynn’s disillusionment with the Obama administration and his criticism of its policies while he was head of DIA. In a nutshell: Flynn thought, based on his deep, personal knowledge of the Islamist enemy both in Iraq and Afghanistan, that Obama’s declaration of victory after Osama’s death was wildly premature. He was dismayed at the administration’s firing of Stanley McChrystal for having the temerity to push back on Obama’s Afghanistan policy. He was also furious at the sanitizing of intelligence about Islamist terrorism:

Worst of all from Flynn’s bird’s-eye perch at the DIA, intelligence reports of a growing threat from radical Islamist terrorism were often expunged as the intelligence stream worked its way up to the president’s desk. Flynn suspected part of the problem was National Security Adviser Susan Rice, who chaired many of the NSC deputies meetings and seemed uninterested in reports out of Iraq. But other intelligence bottlenecks have also come to light. After more than 50 intelligence analysts at U.S. Central Command complained to the Pentagon inspector general that their intelligence reports on the war against ISIS were consistently watered down, a recent House Republican task force report—written by members of the House Armed Services and Intelligence committees—concluded that intelligence on the ISIS threat was systematically altered by senior U.S. Central Command officials to give it a more positive spin.

I can say with metaphysical certainty, that if Flynn had been fired for blasting the distortion of intelligence in the Bush administration, he would have been the toast of all the best parties in DC and New York, and lionized on the pages of the NYT and WaPo. But this telling truth to power thing is a one way street in DC.

Tell truth to the Bush administration: Righteous! Hero!

Tell truth to the Obama administration: Renegade! Loose cannon! Dangerous bigoted wacko!

I wrote about DIA’s truth telling about what became ISIS circa-2012. Another example of no truth goes unpunished.

There is currently a lot of tut-tutting about Flynn’s outspokenness and political advocacy from ex-military types, such as Admiral Mullen. Let’s just say that one should always be somewhat skeptical of those who achieve positions like Mullen did, especially in an administration like Obama’s (or Clinton’s), but Bush’s too. They are usually chosen for their biddability and political reliability, especially in times of (relative) peace.

Some of the things Flynn has said are puzzling, his apparent flip-flop on the coup in Turkey, for instance. But I would not leap (as many have) to the conclusion that he did so for mercenary reasons.

Flynn is obviously a strong willed individual unafraid to speak his mind. He also has deep knowledge of certain issues that none–yes 0.0000 percent–of his media or political critics have. So is it too much to ask to judge him on the substance of his views, and the basis for them, rather than on issues that are less than trivialities?

That question was purely rhetorical. The Lie Swarm gonna swarm.

I fear that a similar fate awaits General James Mattis, in the event that Trump nominates him for SecDef. (This would be a livin’ the dream moment for me, because Mattis is someone whom I deeply admire. But the fact that he would have to get a waiver to serve in this post tempers my hopes.) Mattis was another man who called out the intellectual flyweights in the Obama administration foreign poliicy apparatus, and who was unceremoniously defenestrated for his temerity. (Even Tom Ricks, an Obama-friendly voice, found this episode incredibly shabby and disturbing.)

Flynn’s appointment–and Mattis’, in the happy event–reveals something about Trump. He is willing to have outspoken subordinates. This represents a stark contrast with Obama, who surrounded himself with unimpressive toadies and political partisans (Ben Rhodes–are you effing kidding me? Susan Rice?), and who refused to tolerate any internal dissent (as the fates of Flynn, Mattis, and McChrystal demonstrate). Whether Trump endures internal opposition remains to be seen: the fact that he is at least willing to risk it is admirable, and deserves some praise, rather than the ankle biting of people like Flynn by the apparatchiks and careerists who dominate what passes for America’s political and media culture.