Streetwise Professor

One of the least savory aspects of human behavior is the tendency to exploit tragedy for personal or political ends. This low tendency was on display in spades in the aftermath of the Amtrak derailment in Philadelphia. Before the bodies of the dead were even cold, pundits and politicians were out in force moaning that the tragedy proved the lamentable decay of American infrastructure, and the lack of government spending on it. Remarkably (or maybe not), the lamentations have continued even after it was revealed that the train had been going more than twice the speed limit, thereby making it highly unlikely that shoddy track or a poorly maintained train was to blame. No tragedy should go to waste, apparently, and the facts shouldn’t get in the way of a politically useful narrative.

There are many examples of the mo’ guvmint types exploiting the deaths of 8 people in Philly, but for 99.9 percent pure, unadulterated stupidity, you have to read this screed by Adam Gopnik* in The New Yorker. Where to begin?

To leverage the Philadelphia tragedy into a justification for more government spending, Gopnik has to claim that railroads, and passenger railroads in particular, are public goods:

And everyone knows that American infrastructure—what used to be called our public works, or just our bridges and railways, once the envy of the world—has now been stripped bare, and is being stripped ever barer.

. . . .

This week’s tragedy also, perhaps, put a stop for a moment to the license for mocking those who use the train—mocking Amtrak’s northeast “corridor” was a standard subject not just for satire, which everyone deserves, but also for sneering, which no one does. For the prejudice against trains is not a prejudice against an élite but against a commonality. The late Tony Judt, who was hardly anyone’s idea of a leftist softy, devoted much of his last, heroic work, written in conditions of near-impossible personal suffering, to the subject of … trains: trains as symbols of the public good, trains as a triumph of the liberal imagination, trains as the “symbol and symptom of modernity,” and modernity at its best. “The railways were the necessary and natural accompaniment to the emergence of civil society,” he wrote. “They are a collective project for individual benefit … something that the market cannot accomplish, except, on its own account of itself, by happy inadvertence. … If we lose the railways we shall not just have lost a valuable practical asset. We shall have acknowledged that we have forgotten how to live collectively.”

Trains take us places together. (You can read good books on them, too.) Every time you ride one, you look outside, and you look inside, and you can’t help but think about the private and the public in a new way.

In point of fact, railroads are not public goods, as defined by economists. Not even close. I get no benefit whatsoever from your trip on a train, or a train that ships a good to you. The benefits of rail travel and rail transport are internalized by the traveler and the consumer of the transported good.

Further, what characterizes public goods is non-exclusivity. If you produce it, I get to consume it too, and you can’t exclude me from doing so. Not true of railroads. You have to buy a ticket to ride.

Meaning that if the value of the service exceeds the cost of providing it, market forces will lead to its provision, in approximately the efficient quantity. Yes, indivisibility and market power issues may lead to some distortions, but the gross under provision that Gopnik and Judt fear will not happen. Period.

Yes, trains take us places together-but they also take us places alone. And we internalize the benefits of the company-or the solitude. You internalize the benefit of the book you read or the view you see: it affects me not one whit.

Given these facts, there is no case here whatsoever for public provision of this service. If Gopnik or Judt get psychic benefits out of other people riding on trains, let them buy them tickets: why enlist the coercive powers of the state to subsidize what they value?

Perhaps-perhaps-there was justification for subsidizing transcontinental rail in the mid-19th century, but even that is doubtful: the success of the James J. Hill’s Great Northern, which received no government land grants,  is a great counterexample. Privately funded rail investment boomed starting in the 1850s, and soon roads criss-crossed the northeast and midwest. Indeed, it is arguable that there was over investment.

Gopnik has a theory why there is not more investment in railroads (underinvestment in his view, in fact). Anti-government libertarian fanatics. (Shhh. No one tell him that the protagonist of Atlas Shrugged runs a railroad.)

The reason we don’t have beautiful new airports and efficient bullet trains is not that we have inadvertently stumbled upon stumbling blocks; it’s that there are considerable numbers of Americans for whom these things are simply symbols of a feared central government, and who would, when they travel, rather sweat in squalor than surrender the money to build a better terminal.

No, actually. It is the fact that the high speed rail projects that so enamor leftists like Gopnik-and Jerry Brown and Obama-are colossal boondoggles that pass no cost benefit test whatsoever, even if you make dreamy assumptions about ridership or the value of carbon allegedly saved.

Consider the California high speed rail project, much beloved by Brown. For $6 billion, the first phase will connect . . . wait for it . . . Merced and Bakersfield.  North Nowhere to South Nowhere. Buck Owens would have been so proud. But it will be a white elephant that California cannot afford, and ironically, will divert resources from other infrastructure that California could definitely use.

If you want to find an era in which investment in rail was truly throttled, go back to the halcyon days of the 60s and 70s, when nearly a century of rate regulation, combined with the rise of air transport and the (government funded) creation of the interstate highway system brought the entire industry into severe financial distress, and drove many famous rail companies to bankruptcy. (It’s an irony, no, that government infrastructure spending undercut the left’s beloved railroads?) Investment in track and rolling stock plummeted, and the industry was truly decrepit. And that was almost completely the result of archaic and inefficient regulation. Government almost killed rail.

The freight industry was reborn starting in 1980, with the passage of the Staggers Act, which deregulated rates. As surely as day follows night, the freight rail industry was revitalized. The profit motive worked wonders. Economic forces were permitted to work, and routes were rationalized, resulting in the closure of uneconomic routes that the government had forced roads to retain. Economically viable routes were expanded.  Innovation, in particular the development of intermodal systems, led to dramatic improvements in efficiency and incredible integration between ocean, rail, and road freight.  The private enterprise that Gopnik and Judt believe cannot possibly lead to good except by accident (“inadvertence”) revived what their beloved government had almost strangled.

Passenger rail did not experience a similar revival, but that too was driven by economics. Rail cannot compete with air on long distance travel, especially when the value of time is considered. For shorter trips, the point-to-point convenience and flexibility that cars offer means that driving typically dominates rail.

Gopnik claims “We all should know that it is bad to have our trains crowded and wildly inefficient—as Michael Tomasky points out, fifty years ago, the train from New York to Washington was much faster than it is now.” We know no such thing. Indeed, the massive subsidies necessary to keep passenger rail operating in the US tell us the exact opposite: that it is economically unviable.

It is beyond funny that liberals consider passenger rail a “symbol and symptom of modernity.” In 1880, maybe. In 2015? Seriously? Now it is an anachronism.

In brief, there is no “plot against trains.” If anything conspires against passenger trains, it is economic reality, and they have survived only by coercing you and me to pay for it. Economic reality is quite congenial to freight rail, and it has thrived as a result, without us being compelled to subsidize it.

Gopnik’s economic illiteracy is annoying, but his supercilious tone and East Coast superiority makes his ignorance almost unbearable: he fits in perfectly at the New Yorker, and personifies the famous cover depicting the view of the US from 9th Avenue. A condescending ignoramus. Not an appealing combination.

In sum, it’s appalling enough that Gopnik, like others, leaped to use the Philadelphia tragedy to advance his pet political cause.  It’s even worse that this pet political cause is economically retarded.

*Gopnik’s name cracks me up, because in Russia the term “gopnik” (го́пник) refers to lower class street punks known for their drinking, loutish behavior, petty criminality, and stylish dress, usually consisting of Adidas track suits and dress shoes. In other words, го́пники are pretty much the antithesis of Manhattan prog Adam Gopnik, and no doubt the typical го́пник would take great pleasure in beating the snot out of the likes of Adam Gopnik.

This administration has a well-documented track record for making delusional statements, but this one by Samantha Power (in an interview with Charlie Rose) is in the running for Most Delusional:  “I think you’re going to see a push on diplomacy in the coming weeks, and it is our hope that perhaps also, if the nuclear deal can go forward and we get the terms that we need in that space, that you’ll start to see a shift in Iran’s posture [on Syria].”

Why? First, because “Iran is stretched” by its commitments to Syria, Iraq, and Yemen.

Um, the $50 billion “down payment”, with more to follow, will unstretch Iran quite a bit. It will provide a lot of wherewithal that they can pump into Syria, and elsewhere. That Iran has spent such large sums on Syria at a time when it is desperately burdened by sanctions demonstrates clearly the high strategic value that the mullahs place on Assad, and controlling Syria. The deal which Powers is flogging will increase Iran’s capability to achieve its strategic objectives. The clear implication is that Iran will increase dramatically its support for Assad once a deal is done, not withdraw it as Powers fantasizes.

Second, she claims that Iran “wants to be part of the international community.” Typically idiotic transnational progressive projection. No. The mullahs don’t crave to be liked by Samantha and the transnatprog set: countries that screech daily about exterminating Israel aren’t all that concerned about their image in the West. Indeed, these theocrats despise the West. That they say they want to be part of the international community just tells you that they have figured out that Western elites lap up that bilge.

Iran wants to be free to pursue its objectives without constraints from the international community. Its role in Syria has nothing to do with the constraints it currently faces, and once the sanctions are lifted, there is zero possibility that other constraints will be imposed because of its role in Syria.

Now let’s turn to reality. There are reports that Assad’s chief of the National Security Bureau has been arrested. Why? For plotting a coup. The reason for his dissatisfaction? Iran’s increasing control over the Syrian government:

The role being played in the war by Iran, Syria’s regional ally, is said to be at the heart of the arguments, with some of the “inner circle” afraid that Iranian officials now have more power than they do.

Iran’s influence has been crucial in bolstering Syria’s defences against the rebels, but even that has been crumbling in the face of recent rebel advances in the north.

So Iran is just going to drop Syria because it wants to be popular at Davos? Obviously not. It is intent on controlling Syria, and a nuclear deal will enhance its ability to do so.

Like with so many other things, this administration’s view of reality is totally inverted. Obama and his minions say the Iran deal will cure every ill in the Middle East. In fact, it will exacerbate almost all of them because it will dramatically enhance the resources and capabilities of a revisionist power that threatens virtually every other nation in the region. The conflict in Syria will become more intense and protracted, not less, when Iran gets its hands on billions with the potential to make billions more. And conflicts with Gulf countries are much more likely in a post-deal world. It is also likely that a resurgent Iran would raise deep alarm in Turkey, especially given that Turkey is adamantly anti-Assad. Thus, conflict with Turkey is more likely too.

This deal is a Pandora’s Box. With one difference. I don’t think that hope is inside of it.

It has been a hellish few months for Gazprom. It’s profits were down 86 percent on lower prices and volumes and the weak ruble. Although the ruble has rebounded, the bad price news will persist for several months at least, given the lagged relationship between the price oil and the price of gas in the company’s oil-linked contracts. The company has been a die-hard defender of the link: another example of be careful what you ask for.

Moreover, the EU finally moved against the firm, filing antitrust charges. Although many of the European Commission’s antitrust actions, especially against US tech firms, are a travesty, the Gazprom brief is actually well-grounded. At the core of the case is Gazprom’s pervasive price discrimination, which is made possible by its vertical integration into transportation and contractual terms preventing resale of gas. Absent these measures, a buyer in a low-price country could resell to a higher price country, thereby undercutting Gazprom’s price discrimination strategy.

It is interesting to note that the main rationale for Gazprom’s vertical integration is one which was identified long ago, based on basic price theory, rather than more elaborate transactions cost economics or property rights economics theories of integration. Back in the 1930s  economists identified price discrimination as a rationale for Alcoa’s vertical integration. There was some formal work on this in the 70s.

Gazprom is attempting to argue that as an arm of the Russian state, it is not subject to European competition rules. Good luck with that. There is therefore a decent chance that by negotiation or adverse decision that Gazprom will essentially become a common carrier/have to unbundle gas sales and transportation, and forego destination clauses that limit resale. This will reduce its ability to engage in price discrimination, either for economic or political reasons.

The company is also having problems closer to home, where it is engaged in a battle with an old enemy (Sechin/Rosneft) and some new ones (Timchenko/Novatek), and it is not faring well.

Gazprom and Putin have always held out China as the answer to all its problems. There were new gas “deals” between Russia and China signed during Xi’s visit to the 70th Victory Day celebration. (Somehow I missed the role China, let alone the Chinese Communists, played in defeating the Nazis.) But the word “deal” always has to be in quotes, because they never seem to be finalized. Remember the “deal” closed with such fanfare last May? I expressed skepticism about its firmness, with good reason. There is a dispute over the interest rate on the $25 billion loan that was part of the plan. Minor detail, surely.

Further, Gazprom doesn’t like the eastern route agreed to last year. It involves massive new greenfield investments in gas fields as well as transportation. It has therefore been pushing for a western route (the Altai route) that would take gas from where Gazprom already has it (in western Siberia) to where China doesn’t want it (its western provinces, rather than the more vibrant and populous east). The “deal” agreed to in Moscow relates to this western route, but as is almost always the case, price is still to be determined.

If you don’t have a price, you don’t have a deal. And the Chinese realize they have the whip hand. Further, they are less than enamored with Russia as a negotiating partner. Who could have ever predicted this? I’m shocked! Shocked!:

Chinese and Russian executives and advisers said that in addition to the challenge of negotiating prices acceptable to both sides, energy deals between the countries have also been hampered by mutual distrust and Chinese concerns about antagonising the US.

“The Russians are unreliable. They are always flipping things around for their own interest,” said one Chinese oil executive.

Who knew?

Putin is evidently losing patience with the company, and its boss Alexei Miller, is far less powerful than Sechin and Timchenko. When it was a strategic asset in Europe, and offered real possibilities in Asia, it could defend itself. Now that leverage is diminishing, its future is much cloudier.

The impending new supplies of LNG coming online in the US and Australia dim its future prospects further.

In sum, Gazprom is beset by many agonies. Couldn’t happen to a better company.

A few words about Garland.

First, the traffic cop who blew away two Islamist would-be mass murders is a total badass. He took out two guys who surprised him and were spraying him with assault weapon fire: pictures from the scene show dozens of evidence markers on the ground, most of which are likely indicating ejected brass from their assault weapons. His assailants were wearing body armor, which means he took them out with freaking head shots while taking rifle fire. With a service pistol. If that isn’t coolness and courage under fire, I don’t know what is.

I wonder if the guy has a military background, because most cops are not noted for their marksmanship. That was some serious shooting under the most disadvantageous and stressful conditions possible. He must spend a lot of time at the range, and must be thanking God that the freaks who attacked him apparently didn’t, going with the tried-and-true Muslim spray and pray thing. There are a lot of Salafists pushing up rocks in Iraq and Afghanistan because of that. I hope they keep it up.

Second, the American-born leader of this suicide mission had been convicted of a terrorism-related offense, and was on a watch list. So how the hell was he able to get his hands on weaponry that was fortunately too powerful for him and his Pakistani buddy to handle? The FBI watched this guy about as well as he watched Tamerlan Tsarnaev. (So yeah, Al Sharpton. Let’s federalize all law enforcement. Here’s a case-excuse me, another case-where the feds fucked up, and the local yokel saved the day.)

Third, this event has provoked the left into paroxysms of rage . . . at Pamela Geller and Geert Wilders, for having the audacity to engage in politically incorrect speech. As in the aftermath of Charlie Hebdo, I’ve lost count at the number of talking heads and pixel stained wretches who condemn the violence but . . . The “but” involves some variant on the theme that Geller engaged in hate speech, and had it coming, or at least the government should constrain such offensive speech to prevent such unfortunate events from recurring.  Indeed, the “buts” are more frequent and insistent here, because the Hebdo staff were hard core leftists, and Geller and Wilder are most definitely not.

As my father would say when I would try to talk my way out of something: No buts. Period.

I will not spend a millisecond discussing Pamela Geller’s words or beliefs, because they are utterly irrelevant. Utterly, completely irrelevant. The government’s powers to limit speech are extremely limited, and rightly so. Geller’s speech and actions are clearly within the protected zone, and for good reason, particularly for speech with political or religious content.

What is “hateful” or “offensive” is inherently subjective. Giving the government the power to censor or silence or punish speech because someone might be offended, or because he or she might deem words to be hateful, is to give it virtually unlimited power to oppress its political opponents. It is an instrument of social and political coercion and control.

As surely as day follows night, when being offended is grounds to call on the government to silence those who oppress those giving offense, the ranks of the offended and aggrieved will metastasize like the most virulent cancer. The ins will use “hate speech” as a club to bludgeon the outs. It will stifle all public discourse, as the circle of offensiveness will grow ever wider, like a drop of oil on still water. The most insistent and fanatical and politically driven-who are the most easily offended, and the most willing to opportunistically claim to be offended-will have a veto over what can be said, and will use it ruthlessly to enhance their power.

Cliff Asness asked on Twitter where the leftists who were die-hard advocates of free speech back in the ’60s and ’70s went. The answer to that question is almost trivial. When the left was seeking power, free speech served its interests as a way of undermining the establishment that it hated and wanted to displace. As its power grew, its interest in free speech contracted accordingly. What was a weapon that it could employ against the establishment became a threat as it became the establishment. Put differently: the left’s interest in free speech varies inversely with its power.

This can be seen in the time series, but particularly in the cross section. The institutions that the left dominates are the most hostile to free speech. Just look at any university if you doubt this. Conversely, they are most insistent about contrarian voice and speech in those institutions that they do not control, such as churches.

Insofar as those whom the left is rallying to defend in the Geller/Garland affair-that is, Muslims-are concerned, they outdo themselves. In defending Muslims, they infantilize and patronize them: apparently they believe Muslims are so incapable of self-control that they must be shielded from any hateful words, because they are liable to go on a murderous rampage if they hear them. And since when was the left so solicitous of the sensitivities of the religious? Well never, actually, including now. Muslims, and the phantom phenomenon of “Islamaphobia”, are merely battering rams that the left can use to attack its real enemies, i.e., anyone to their right, religious Christians (n.b., one of whom I am most definitely not) and Jews, Jacksonian Americans, traditionalists, libertarians, etc. (The left’s “other” is quite diverse.)

The fact that a local traffic cop was the only thing that saved hundreds from the homicidal plans of two Islamist fanatics (one of them a native born American citizen) is deeply concerning. But what is far more disturbing is that this isn’t what disturbs what I would wager is a clear majority of the chattering class. What disturbs them (or what they opportunistically claim disturbs them) is speech that they disagree with, and which they are hell-bent on limiting the rights to engage in such speech. They are not targeting hate speech: they are targeting speech and speakers that they hate.

Fine. As we say in Texas: Come and take it.

The US military’s credibility is at serious risk due to its don’t-worry-be-happy disclosures about the war against ISIS. Much independent reporting today strongly suggests that ISIS is in control of a substantial portion of the Baiji refinery, and that the small Iraqi garrison is in danger of being overrun: and you know what ISIS does when that happens. But the military’s Kevin Bacon-esque take couldn’t be more different:

 While Beiji and Ramadi in Iraq remain contested between Iraqi security forces and extremist Islamic State of Iraq and the Levant militants, ISIL is experiencing setbacks, a U.S. Central Command spokesman said Friday.

If things are going so swimmingly  in Baiji, why the relatively intense air activity there today?:

Near Bayji, eight airstrikes struck one large and five small ISIL tactical units, destroying five ISIL fighting positions, three ISIL buildings, an ISIL command and control facility, an ISIL mortar system, and an ISIL VBIED.

Remember Chairman of the Joint Chiefs Dempsey (who can’t leave soon enough to suit  me) declared that Baiji (in contrast to Ramadi) is strategically important. Then why are there only 200 Iraqi police and special forces there, hanging on for dear life?

Further, the military has been extremely slow in responding to accusations by the very dodgy Syrian Observatory for Human Rights (which appears to be one guy in a flat in London who is a conduit for Islamist agitprop) that US airstrikes had killed 64 civilians in a town near Kobani. All coverage of this event takes Syrian Observatory’s account as gospel. This is a very damaging charge, and the US should have responded quickly and authoritatively immediately, rather than letting this portrayal go around the world unchallenged. The military should also investigate the Syrian Observatory very closely and report what it learns about its sources, methods, and connections. If, as it appears, it is an information war outlet, it is unconscionable that we are letting it go unchallenged as the authoritative source on events in Syria that independent reporters cannot observe.

It’s not just me that is appalled by the Pentagon’s performance. The authoritative and respected analyst Anthony Cordesman rips the Pentagon’s recently released report on the progress of the “counter-ISIS” operation. This sentence suffices, but read the whole thing:

To put it bluntly, it seems to be far more of a public relations exercise than a serious attempt at reporting on nature and success of Operation Inherent Resolve.

We need to be honest and be real, and not repeat the self-defeating performance of the “Five-O’Clock Follies” of Vietnam infamy. Credibility is vital, and methinks it is being squandered to protect an administration that is only half-heartedly  (if that) committed to destroying ISIS. Reality will rear its ugly head sooner or later, and better to confront it now when something can be done about it.

Former CIA Deputy Director Michael Morell made a rather stunning admission that the US intelligence community believed that the Arab Spring would be the death knell of Al Qaeda:

“We thought and told policy-makers that this outburst of popular revolt would damage al-Qaeda by undermining the group’s narrative,” Morell wrote in the book, a copy of which was obtained by The Washington Post ahead of its release later this month.

Instead, “the Arab Spring was a boon to Islamic extremists across both the Middle East and North Africa,” he said. “From a counterterrorism perspective, the Arab Spring had turned to winter.”

Do they also believe in unicorns and faeries at the CIA? Revolutionaries exploit political turmoil: the vast majority of political upheavals in the developing world have empowered radicals, rather than neutered them. And since when did a revolutionary situation in the Middle East in particular result in the emergence of a stable, peaceful state? The region’s nations have see-sawed between anarchic strife and repressive regimes. The region’s history is fodder for cynicism and world weariness, not flights of political fancy.

Neocons were rightly savaged after the Iraq invasion for their naive belief that Saddam’s overthrow would lead to the creation of a stable, peaceful, and democratic Iraq, and that this in turn could provide the foundation for a democratic Middle East. We all know how that worked out, which makes the naiveté of the CIA almost a decade later astounding.

Arab societies are deeply broken, and as Iraq demonstrates, throwing off the shackles of an authoritarian regime is almost certain to result in chaos and anarchy that provides opportunities to Islamist radicals. Indeed, the failure of the CIA in 2011 is more damning than the neocon failure in 2003 because the former had the benefit of the sad example of Iraq, which should tempered greatly any temptation to indulge in flights of optimism.

And God spare us from anyone who bases policies on “narratives,” or believes that the roots of Salafism in the Middle East are so shallow that it will wither and die because a few aging dictators are overthrown. Islamism is deeply embedded in Arab societies, and to believe that the fall of a Mubarak or a Khaddafy will transform Islamists into Jeffersonians is delusional.

It must also be noted that this benign view of the effect of the Arab Spring on Al Qaeda was very politically convenient for the administration. Especially in the aftermath of the elimination Osama, it supported Obama’s campaign pitch that “Al Qaeda is on the run.” This raises the possibility that the CIA slanted its analysis to benefit its political masters.

In brief, this is an intellectual failure of the first order. What confidence can we have that the mindset that led to this failure is not still exerting a baleful influence on intelligence analysis today? The CIA’s intellectual failure is particularly troubling given the extremely fraught situation in the Middle East. We need all the penetrating analysis we can get, and the thought that those charged with providing such analysis have very recently have proved to be naive fantasists is deeply troubling.

During the Cold War, Reagan’s dissatisfaction with the analysis provided by the CIA led him to form a Team B to give an alternative viewpoint about the USSR. In light of Morell’s admission, something similar is desperately needed now. But we all know that the likelihood we will get it is somewhere between zero and nil.

I have read and re-read these remarks by Brett McGurk, “deputy special presidential envoy to the Global Coalition to Counter ISIL” (counter?-that tells you all you need to know) more times than I can count, and I still can hardly believe my eyes:

 Well, you certainly hope for such a tipping point, but our plan is for a long, steady, slow-burning campaign against Daish.

I have read more military history than I should have, and I cannot recall ever reading anything like this. I keep shaking my head. The closest thing that comes to mind is the Johnson-McNamara “gradual escalation” strategy, and if that’s the best comparison, it’s very bad news.

“Slow-burning” is the antithesis of pretty much every basic military principle. I remember one quote from Reef Points from my days at Navy, from Bull Halsey: “Hit hard, hit fast, hit often.” We are doing the reverse: hitting ineffectually, hitting slowly (by McGurk’s admission) and hitting infrequently. I further remember Napoleon: “The reason I beat the Austrians is that they did not know the value of five minutes.” Speed and initiative put the enemy on his heels. “Slow-burning” gives him the opportunity to prepare an dig in and marshal resources.

And that’s exactly what ISIS is doing, especially in Mosul. It is delusional to think that the Iraqi Army will be able to take Mosul, especially the way that ISIS has burrowed itself, literally and figuratively,  into every nook and cranny of the city. The Iraqis had a helluva time taking Tikrit, which was held by a few hundred ISIS fighters. Mosul will be orders of magnitude more difficult, no matter how many excavators we blow up.

The chance to keep ISIS out of Mosul was lost last June, when ISIS was exposed on the roads and deserts around the city. But Obama stayed his hand.

“Slow-burning” also allows ISIS to slaughter at its leisure, including hundreds of Yazidi prisoners who were massacred yesterday. By the time our slow-burning is over, will there be anyone alive left to save?

ISIS is actually on the offensive in places like Baiji and Ramadi. The US military is trying to spin that this is the last gasp of a force facing defeat:

While Beiji and Ramadi in Iraq remain contested between Iraqi security forces and extremist Islamic State of Iraq and the Levant militants, ISIL is experiencing setbacks, a U.S. Central Command spokesman said today.

Speaking to reporters in the Pentagon via teleconference, Air Force Col. Patrick Ryder provided a weekly update on Centcom’s operational highlights in the fight against ISIL in Iraq and Syria.

In central Iraq, Iraqi security forces continue to conduct operations to secure the city of Karmah, and they have retaken territory around the Tigris River canal, Ryder said.

“We’ve seen these efforts help isolate ISIL fighters who are in the town, and this has helped choke off their lines of communication,” he said, adding that from an operational perspective, such gains help to secure ISIL approaches to Baghdad.

Iraqi Forces Hold Ramadi

There have been no significant changes from last week’s operations in Ramadi, a city in western Iraq, where Iraqi forces continue to hold onto key ground while ISIL forces try to keep territory they captured in the eastern part of the city. “We expect Ramadi to remain contested,” Ryder said.

ISIL also continues to contest the Iraqi forces’ hold on Beiji’s oil refinery, he said.

“ISIL has shown that Beiji and Ramadi are strategically important to them, and they are committing a significant amount of limited resources to secure these locations,” Ryder said.

ISIL wants to “score a win” after suffering numerous recent setbacks, most notably in Tikrit, he added. “Because of this, both cities are expected to remain contested for some time,” he said.

Sorry. Not buying it. Most other information strongly suggests that the Iraqis are hanging on by their fingernails in both places. The initiative is with ISIS, not Iraq. At best, US airpower is keeping ISIS at bay and saving the Iraqis from another massacre. That’s not defeat, but it sure as hell ain’t victory. It’s sad to see the the military spinning so pathetically in defense of a campaign that you know deeply offends their professional and patriotic sensibilities.

In other embarrassments, the United States is telling citizens in Yemen: “Good luck! You’re on your own!”

That’s not true, exactly. The State Department is setting up the equivalent of a ride sharing program. Not exactly civis romanus sum, is it?

And there’s more! Iran seized a cargo ship in one of the most strategically important waterways in the world, the Straits of Hormuz, during a period of heightened tensions in the region: indeed there is an ongoing proxy war between Iran and the Saudis in Yemen. The Iranians are using some flimsy legal pretext to justify the seizure, but we all know that Iran is sending a message.

We also know that Obama is pretending not to hear. Again the Pentagon carried his water, issuing several mealy-mouthed statements to the effect that we aren’t sure whether the Maersk ship was in international waters, and that the US is under no obligation to defend a Marshall Islands flagged ship, despite the fact that the US has treaty obligations to that nation:

The Government of the United States has full authority and responsibility for security and defense matters in or relating to the Republic of the Marshall Islands. (b) This authority and responsibility includes: (1) the obligation to defend the Federated States of Micronesia and its people from attack or threats thereof as the United States and its citizens are defended;… (c) The Government of the United States confirms that it shall act in accordance with the principles of international law and the Charter of the United Nations in the exercise of this authority and responsibility

And even if the US had no treaty obligation, for centuries-and especially since WWII-it has been a stalwart defender of the freedom of navigation. Twice (in 1981 and 1986) Reagan dispatched carrier groups to the Gulf of Sidra when Khadaffy claimed that these waters were off-limits to foreign ships. When the Libyans insanely challenged the carriers, F-14s splashed several of their fighters. When the Iranians began attacking tankers in the Persian Gulf in 1987, foreign tankers were put under the US flag, and escorted by US ships. Later, the US shelled and destroyed oil platforms that the Iranians were using as command and control facilities to coordinate their attacks on tankers.

By the way, the Iranian seizure of the Maersk Tigris has to be viewed against the background of this history.

But Obama is hell-bent on doing a deal with Iran, and he will sacrifice pretty much any American policy principle and alliance to get it.

All of this has me doing a slow burn.

The CFTC released its civil complaint in the Sarao case yesterday, along with the affidavit of Cal-Berkeley’s Terrence Hendershott. Hendershott’s report makes for startling reading. Rather than supporting the lurid claims that Sarao’s actions had a large impact on E Mini prices, and indeed contributed to the Flash Crash, the very small price impacts that Hendershott quantifies undermine these claims.

In one analysis, Hendershott calculates the average return in a five second interval following the observation of an order book imbalance. (I have problems with this analysis because it aggregates all orders up to 10 price levels on each side of the book, rather than focusing on away-from-the market orders, but leave that aside for a moment.) For the biggest order imbalances-over 3000 contracts on the sell side, over 5000 on the buy side-the return impact is on the order of .06 basis points. Point zero six basis points. A basis point is one-one-hundredth of a percent, so we are talking about 6 ten-thousandths of one percent. On the day of the Flash Crash, the E Mini was trading around 1165. A .06 basis point return impact therefore translates into a price impact of .007, which is one-thirty-fifth of a tick. And that’s the biggest impact, mind you.

To put the comparison another way, during the Flash Crash, prices plunged about 9 percent, that is, 900 basis points. Hendershott’s biggest measured impact is therefore 4 orders of magnitude smaller than the size of the Crash.

This analysis does not take into account the overall cumulative impact of the entry of an away-from-the market order, nor does it account for the fact that orders can affect prices, prices can affect orders, and orders can affect orders. To address these issues, Hendershott carried out a vector autoregression (VAR) analysis. He estimates the cumulative impact of an order at levels 4-7 of the book, accounting for direct and indirect impacts, through an examination of the impulse response function (IRF) generated by the estimated VAR.* He estimates that the entry of a limit order to sell 1000 contracts at levels 4-7 “has a price impact of roughly .3 basis points.”

Point 3 basis points. Three one-thousandths of one percent. Given a price of 1165, this is a price impact of .035, or about one-seventh of a tick.

Note further that the DOJ, the CFTC, and Hendershott all state that Sarao see-sawed back and forth, turning the algorithm on and off, and that turning off the algorithm caused prices to rebound by approximately the same amount as turning it on caused prices to fall. So, as I conjectured originally, his activity-even based on the government’s theory and evidence-did not bias prices upwards or downwards systematically.

This is directly contrary to the consistent insinuation throughout the criminal and civil complaints that Sarao was driving down prices. For example, the criminal complaint states that during the period of time that Sarao was using the algorithm “the E-Mini price fell by 361 [price] basis points” (which corresponds to a negative return of about 31 basis points). This is two orders of magnitude bigger than the impact calculated based on Hendershott’s .3 return basis point estimate even assuming that the algorithm was working only one way during this interval.

Further, Sarao was buying and selling in about equal quantities. So based on the theory and evidence advanced by the government, Sarao was causing oscillations in the price of a magnitude of a fraction of a tick, even though the complaints repeatedly suggest his algorithm depressed prices. To the extent he made money, he was making it by trading large volumes and earning a small profit on each trade that he might have enhanced slightly by layering, not by having a big unidirectional impact on prices as the government alleges.

The small magnitudes are a big deal, given the way the complaints are written, in particular the insinuations that Sarao helped cause the Flash Crash. The magnitudes of market price movements dwarf the impacts that the CFTC’s own outside expert calculates. And the small magnitudes raise serious questions about the propriety of bringing such serious charges.

Hendershott repeatedly says his results are “statistically significant.” Maybe he should read Deirdre McCloskey’s evisceration of the Cult of Statistical Significance. It’s economic significance that matters, and his results are economically miniscule, compared to the impact alleged. Hendershott has a huge sample size, which can make even trivial economic impacts statistically significant. But it is the economic significance that is relevant. On this, Hendershott is completely silent.

The CFTC complaint has a section labeled “Example of the Layering Algorithm Causing an Artificial Price.” I read with interest, looking for, you know, actual evidence and stuff. There was none. Zero. Zip. There is no analysis of the market price at all. None! This is a piece of the other assertions of price artificiality, including most notably the effect of the activity on the Flash Crash: a series of conclusory statements either backed by no evidence, or evidence (in the form of the Hendershott affidavit) that demonstrates how laughable the assertions are.

CFTC enforcement routinely whines at the burdens it faces proving artificiality, causation and intent in a manipulation case. Here they have taken on a huge burden and are running a serious risk of getting hammered in court. I’ve already addressed the artificiality issue, so consider causation for a moment. If CFTC dares to try to prove that Sarao caused-or even contributed to-the Crash, it will face huge obstacles. Yes, as Chris Clearfield and James Weatherall rightly point out, financial markets are emergent, highly interconnected and tightly coupled. This creates non-linearities: small changes in initial conditions can lead to huge changes in the state of the system. A butterfly flapping its wings in the Amazon can cause a hurricane in the Gulf of Mexico: but tell me, exactly, which of the billions of butterflies in the Amazon caused a particular storm? And note, that it is the nature of these systems that changing the butterfly’s position slightly (or changing the position of other butterflies) can result in a completely different outcome (because such systems are highly sensitive to initial conditions). There were many actors in the markets on 6 May, 2010. Attributing the huge change in the system to the behavior of any one individual is clearly impossible. As a matter of theory, yes, it is possible that given the state of the system on 6 May that activity that Sarao undertook with no adverse consequences on myriad other days caused the market to crash on that particular day when it didn’t on other days: it is metaphysically impossible to prove it. The very nature of emergent orders makes it impossible to reverse engineer the cause out of the effect.

A few additional points.

I continue to be deeply disturbed by the “sample days” concept employed in the complaints and in Hendershott’s analysis. This smacks of cherry picking. Even if one uses a sample, it should be a random one. And yeah, right, it just so happened that the Flash Crash day and the two preceding days turned up in a random sample. Pure chance! This further feeds suspicions of cherry picking, and opportunistic and sensationalist cherry picking at that.

Further, Hendershott (in paragraph 22 of his affidavit) asserts that there was a statistically significant price decline after Sarao turned on the algorithm, and a statistically significant price increase when he turned it off. But he presents no numbers, whereas he does report impacts of non-Sarao-specific activity elsewhere in the affidavit. This is highly suspicious. Is he too embarrassed to report the magnitude? This is a major omission, because it is the impact of Sarao’s activity, not offering away from the market generally, that is at issue here.

Relatedly, why not run a VAR (and the associated IRF) using Sarao’s orders as one of the variables? After all, this is the variable of interest: what we want to know is how Sarao’s orders affected prices. Hendershott is implicitly imposing a restriction, namely, that Sarao’s orders have the same impact as other orders at the same level of the book. But that is testable.

Moreover, Hendershott’s concluding paragraph (paragraph 23) is incredibly weak, and smacks of post hoc, ergo propter hoc reasoning. He insinuates that Sarao contributed to the Crash, but oddly distances himself from responsibility for the claim, throwing it on regulators instead: “The layering algorithm contributed to the overall Order Book imbalances and market conditions that the regulators say led to the liquidity deterioration prior to the Flash Crash.” Uhm, Terrence, you are the expert here: it is incumbent on you to demonstrate that connection, using rigorous empirical methods.

In sum, the criminal and civil complaints make a Matterhorn out of a molehill, and a small molehill at that. And don’t take my word for it: take the “[declaration] under penalty of perjury” of the CFTC’s expert. This is a matter of magnitudes, and magnitudes matter. The CFTC’s own expert estimates very small impacts, and impacts that oscillate up and down with the activation and de-activation of the algorithm.

Yes, Sarao’s conduct was dodgy, clearly, and there is a colorable case that he did engage in spoofing and layering. But the disparity between the impact of his conduct as estimated by the government’s own expert and the legal consequences that could arise from his prosecution is so huge as to be outrageous.

Particularly so since over the years CFTC has responded to acts that have caused huge price distortions, and inflicted losses in nine and ten figures, with all of the situational awareness of Helen Keller. It is as if the enforcers see the world through a fun house mirror that grotesquely magnifies some things, and microscopically shrinks others.

In proceeding as they have, DOJ and the CFTC have set off a feeding frenzy that could have huge regulatory and political impacts that affect the exchanges, the markets, and all market participants. CFTC’s new anti-manipulation authority permits it to sanction reckless conduct. If it was held to that standard, the Sarao prosecution would earn it a long stretch of hard time.

*Hendershott’s affidavit says that Exhibit 4 reports the IRF analysis, but it does not.

At a couple of conferences recently, people asked me what Gary Gensler is up to? I said “I don’t know. It’s not like GiGi and I are buddies.” (True fact: he had me banned from the CFTC building.) Well, now we all know what he’s up to: Gensler has landed as the CFO of Hillary’s presidential campaign.

When Gensler was CFTC chair, I surmised he had ambitions to replace Timmy! as Secretary of the Treasury. But that went to a Rubinoid, Jack Lew. There was also talk of Gensler running for the Senate from Maryland, and Mikulski has announced her retirement, but more well-known Dem pols in the state are poised to run, so that’s not an option.

Taking the campaign CFO job probably does give Gensler an inside track on the coveted SecTreas job. If Hillary wins. If.

Yes, I know she is the odds on favorite. But she was shopping for Oval Office curtains in 2008, and we know how that turned out.

Hillary’s problem is, well, Hillary. A lot of people like the idea of Hilllary. It’s the real person that is the problem.

This has been illustrated by her slow-motion-train-wreck of a campaign kickoff. There’s an old expression: if you can fake sincerity, you have it made. Hillary hasn’t quite mastered that yet. The launch and the comically contrived “spontaneous” road trip to Iowa were about as authentic as Velveeta. It was a remarkable act of will, because you can just tell how much Hillary hates to be with actual people. Further, she has operated in a bubble, protected by some Harry Potteresque charm that repels all serious questions from serious people.

Eventually, though, her personality will shine through. And that’s the problem. Playing word association, if you say “Hillary”, I say: shrill, angry, bitter, entitled, strident, rigid, ideological, dishonest, hyper-partisan, vengeful, arrogant, paranoid, and . . . I could go on. And on. And on. And she’s not that bright: whoever calls her “the smartest woman in the world” is a virulent misogynist, with an obviously low opinion of women. I on the other had, think so highly of women that I would prefer to select the next president by lot from America’s 150 million or so adult females, than by an election in which Hillary is the Democratic Party standard bearer. 150 million-to-one: I’ll take those odds over better than even any day.

She is also an awful politician. She has no political instincts whatsoever. You can see the gears grinding behind her phony grin, trying to figure out what would be the politically advantageous thing to say. Today’s persona is Class Warrior. She recently said the one percenters must be “toppled.” Actually, I could kinda go for that, because despite her past protestations of being as poor as a church mouse, she is definitely in that class now.

In other words, she’s no Bill, who was if nothing else, a natural politician that had a magnetism and suppleness that could overcome his other deficiencies.

Which brings up another issue: the psychodrama between Hillary and Bill. You would think that Bill is a major asset, but I wonder. She wants to win on her own, and has put up with decades of humiliation from him to advance her ambitions: will she put herself in a position where she has to accept his help to win? Nor are Bill’s incentives unmixed. Will he want to play second fiddle as the first First Husband? Hillary’s campaign in 2008 was a soap opera: will 2016 be any different?

Then there’s the old baggage, which Hillary has more of than the lost and found at JFK. (I contributed, in a modest way, to that collection, many years ago, as detailed in the Senate Whitewater Report and the Congressional Record.) It is quite a remarkable record, stretching into the distant past, when she was fired from the Watergate Committee staff, to Arkansas skullduggery, to various White House scandals, to her service as Secretary of State (Benghazi, preventing naming Boko Haram as a terrorist organization, the Reset), to the very present (the stench of cronyism and influence peddling at the Clinton Foundation, and the Immaculate Abortion of her private email server).

Further, she’s not getting any younger, and it shows.

So she has many liabilities. What about the assets? They are formidable, particularly a national media that may not like her, but hates Republicans more. They can be counted on to avoid criticizing her, to form a defensive phalanx around her, and to attack her Republican adversary relentlessly. That didn’t help her in the primaries in 2008, when the fickle press found someone even more attractive. But there is no Barack Obama on offer in 2015-2016.

She also has a relentless fundraising machine, a reliable and experienced party and campaign apparatus, union support, and a solid base who would vote for Godzilla over a Republican.

Thus, she has great institutional advantages that will go far in overcoming her severe personal deficiencies.

But her biggest asset is that you can’t beat somebody with nobody, and right now the Republicans are offering up national nobodies. Maybe a somebody will emerge, but I wouldn’t count on it.

All meaning that although Hillary is a flawed person, and a flawed candidate, she has many advantages. So, as much as it pains me to say so, GiGi’s wish may come true. And as bad as a Gensler Treasury would be, it pains me even more to say that it likely would be one of the best parts of a Hillary Clinton Administration.

Trolls are characters from Scandinavian folklore who inhabit desolate islands, so it only seems fitting that Rogozin the Ridiculous trolled Nato from a desolate Norwegian island. Rogozin, who is banned from traveling to Norway due to sanctions, showed up on Svalbard (formerly Spitsbergen), which is sovereign Norwegian territory (though Russians have residence and commercial rights there under the Svalbard Treaty). Rogozin obnoxiously (but I repeat myself) tweeted that “the Arctic is Russian Mecca.” The Norwegians are not amused. Nor should the US. But we seem unfazed.

Wouldn’t you know, the United States is assuming the chairmanship of the Arctic Council from Canada. In the face of Russia’s quite in-our-face assertion of control over the Arctic (of which the Ridiculous One’s “Russian Mecca” Tweet is just an example), and its dramatic increase in its military activities and presence in the Arctic, what is John Kerry’s priority for the Council? You guessed it: climate change. You know, for the polar bears.

Back to Rogozin, last seen here performing so marvelously in his role as commissar of the Vostochny Cosmodrome. His intervention into the management of the troubled project (including threats to “rip off the heads” of those holding up construction) has worked wonders. Well, mainly, it has resulted in a spread of strikes protesting lack of pay. And to save costs, the construction of infrastructure to support manned launches is being deferred, resulting in at least a two year delay in the use of the facility for such purposes. Well played, Bozo! The mind boggles at the thought of what you’ll accomplish in your icy Mecca.

Believe it or not, Rogozin has intense competition for the title of most insane Russian official today. His competition is Nikolai Rogozhkin, Putin’s representative in the Siberian Federal District. (Hey. Rogozin, Rogozhkin: pretty similar! Lame attempt at a pseudonym? Or is “Rogoz” a Russian prefix meaning “moron”?) Siberia is beset by wildfires already, and there are fears that this summer will make 2010 look like child’s play. So whom does Rogozin-sorry, I mean Rogozhkin-blame? Saboteurs, of course! Wreckers! Fifth Columnists! Oppositionists! As for his reasoning, check out the most outrageous flouting of Occam’s Razor I have ever seen:

Rogozhkin said he had flown in a helicopter and seen fire sites in “places where a normal person cannot go, even one who is well-prepared.”

“A specially trained person would be needed for this, and it would take at least 24 hours,” he said.

So rather than reason: “It is nearly impossible for a normal person to set these fires, so they must have a natural cause”, Rogozhkin the Almost as Ridiculous concludes that it isn’t a normal person after all. It is a specially trained person.

You literally cannot make up this stuff.