Streetwise Professor

August 13, 2021

The Land of Bones, Redux.

Filed under: History,Military,Politics — cpirrong @ 7:19 pm

Things are going pear-shaped, to put it mildly, in Afghanistan. A Taliban offensive launched on the heels of the American withdrawal has resulted in the fall of 12 provincial capitals, the collapse of the Afghan army, and the likely fall of Kabul within weeks if not days.

No doubt this will be framed as “who lost Afghanistan?” But maybe it should be framed as “should we have lost it later–or sooner?” Because it is likely that the loss was inevitable, and we only had control over the timing.

In 2009, I wrote a post about Afghanistan and my ambivalence about our continued presence there, a mere 8 years after our intervention (not 20). In that post, I suggested it might be best to come home–in 2009, mind. No doubt if we had, what we are seeing now would have been acted out then. Which could have been preferable to having it acted out now.

The real insight in that post was not mine, but that of a University of Houston colleague, Frank Holt, who wrote Land of Bones: Alexander the Great in Afghanistan. I again quote from his 2003 book:

[W]e must acknowledge that the wars waged in Afghanistan by Alexander, Britain, the Soviet Union, and now the United States share some salient features that may not bode well for our future.   For example, all these invasions of Afghanistan went well at first, but so far no superpower has found a workable alternative for the recipe for ruin in Afghanistan:

1. Estimate the time and resources necessary to conquer and control the region.

2. Double all estimates.

3. Repeat as needed.

Afghanistan cannot be subdued by half measures.   Invaders must consider the deadly demands of winter warfare, since all gains from seasonal campaigns are erased at every lull.   Invaders must resolve to hunt down every warlord, for the one exception will surely rot the fruits of all the other victories.   Invaders cannot succeed by avoiding cross-border fighting, since the mobile insurgents can otherwise hide and reinforce with impunity.   Invaders must calculate where to draw the line between killing and conciliation, for too much of either means interminable conflict.   Finally, all invaders so far have had to face one more difficult choice: once mired in a winless situation, they have tried to cut their losses through one of two exit strategies:

1. Retreat, as did the British and the Soviets, with staggering losses.

2. Leave a large army of occupation in the area, as Alexander did.

Neither option seems acceptable to the United States, which must therefore learn from its predecessors’ mistakes and seek another path.   (pp. 18-19).

Ignoring Holt’s injunction, we did not seek another path. We eventually retreated, and though our losses were not as staggering as those suffered by the British or Soviets, they were bad enough, the financial costs were high, and the damage to American reputation great.

Contrary to Holt’s warning, the US attempted to subdue Afghanistan by half measures (which was the main thing I cautioned against in 2009). We ended up “mired in a winless situation,” and eventually chose to exit rather than occupy indefinitely a la Alexander. (Although note that Alexander quickly went on to other things and left the dirty work to his subordinates.)

Holt was very prescient, because he wrote this in 2003 when the glow of the initial routing of the Taliban and al Qaeda brightened many an American cheek. But he saw ahead, by looking back at history. Somewhat later I read him, and agreed with his gloomy assessment.

So I was in the “sooner” camp over a decade ago. In poker, trading, and war, you need to know when to cut your losses, and stop doubling down.

Could we have lost it better, then or now? Perhaps. Rather than withdrawing after a long and rather desultory campaign against the Taliban, as we did, a robust attack on them that seriously degraded their capability immediately prior to withdrawal might have bought the Afghan government and army some time. Might. But the evident abject failure of our enormously expensive and time consuming efforts to create a stable, relatively uncorrupt government and competent military suggests that the end result would have been the same, just delayed by a few months–until next spring, most likely. Those few months would hardly justify the lives and treasure spent in firing such a Parthian shot.

The US track record on third world nation building and third world army building is dismal (recall the utter rout of the American trained and equipped Iraqi army before ISIS). There is no reason to believe a miraculous improvement in the Afghan government and military even given a respite from the Taliban bought by American blood and bombs.

In retrospect, the Colin Powell Pottery Barn assertion (“you broke it, you bought it”–he applied it to Iraq but it is apposite for how we approached Afghanistan as well) was incorrect. Yes, we broke it, and achieved fairly rapidly our objective of dispersing Al Qaeda and its Taliban supporters. But then we went all romantic, believed that we owned it, and thought we could transform Afghanistan into something it has never been: a stable, even moderately peaceful, polity. Remember the purple fingers? Yeah. Good times, good times.

We shoveled trillions down a rathole, lost thousands of American lives and damaged many others, and failed utterly to change Afghanistan in any meaningful way. Nor, realistically speaking, was there any prospect of doing so–nobody has succeeded in doing so in 2300 years. The attempt was hubris, and nemesis has duly arrived.

In retrospect, the appropriate policy would have been to break it in 2001-2002, and leave it in 2003. If a terrorist threat to the US analogous to bin Laden’s had reappeared, go in and break it again. There might have been the political will to do that. But now, the we-broke-it-bought-it-and-didn’t-fix-it policy of the past 20 years has created a situation where the American people have no appetite whatsoever to have anything to do with Afghanistan ever again.

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August 6, 2021

Dr. Walensky Blowed Up the Case For Vaccine Mandates Real Good

Filed under: CoronaCrisis,Politics,Regulation — cpirrong @ 6:29 pm

The whirling COVID dervishes have taken another spin:

Did you catch that? The “anymore” part?

The “anymore” sticks out like a sore thumb. That implies that once upon a time vax could prevent transmission, but now it can’t. So . . . . what has changed to make vax suddenly ineffective against transmission?

I’m guessing “nothing.” If it can’t prevent transmission now (although it can mitigate symptoms), it didn’t before now.

So why the lie? No doubt to try to explain away the turn in the CDC’s mask recommendation. Before: vax, no mask! Now, vax–mask! Because transmission!

Dr. Walensky apparently doesn’t realize that she has now just totally blown up the rationale for vaccine mandates, or any social coercion for vaccination. (Or maybe she does, but figures that she’ll just come up with another BS rationale later in order to spin her way out of this.)

Specifically, if vaccination does not affect transmission, there is no “externality” from not being vaxxed. Your impact on others is exactly the same, vaxxed or not. Which implies that the benefits of vaccination are fully internalized, specifically, by reducing the severity of symptoms and the risk of death that you incur. Your decision to get vaxxed, or not, has zero impact on anybody else: the risk you pose to others is independent of your decision. Which means that getting vaxxed should be a completely personal choice even under a strict utilitarian calculus.

It should also be noted that if the vax protects one against severe adverse consequences of infection, the externality argument is weak anyways. Under this hypothetical, you can protect yourself against others by getting vaccinated, so you shouldn’t care what they do. You decide to assume the risk, or not. Either way, others are not imposing an external cost on you, so (a) you shouldn’t care what they do, and (b) you have no business or right demanding that they get vaccinated.

The externality argument is also weak (of course) if the vaccine doesn’t work.

To emphasize: the CDC, before whom we are supposed to cower in unquestioning obeisance, has just decreed that there is no justification whatsoever to mandate, coerce, or even suggest that you get vaccinated in order to protect others. But, no doubt, Dr. Walensky, the rest of the CDC, and the administration, will continue to demand, shrilly, that you get vaccinated, and will inch–or lunge–towards imposing mandates. The only justification for this is absolute paternalism, or (similarly) a belief that your body and soul belong to the state, and not to you.

Arguendo ad externality should always be viewed with skepticism in any event (as any close student of Coase should recognize): the concept is frequently sloppily invoked to justify various coercive policies. But here, there is not even an externality fig leaf for a mandate–by the CDC’s own admission.

Too bad John Candy has passed on. Otherwise he could host another Farm Film Report Celebrity Blow Up, starring Rochelle Walensky. It would have been a good’n.

She did it! She blowed it up good! Real good!

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August 4, 2021

Your Property Is Unsafe Because the Executive Never Sleeps

Filed under: CoronaCrisis,Economics,Politics,Regulation — cpirrong @ 6:35 pm

Sometime 19th century judge Gideon John Tucker opined: “No man’s life, liberty or property are safe while the Legislature is in session.”

Mr. Tucker’s opinion is sadly out of date. Now those things are not safe as long as the executive is in session–which is always.

If you’ve been like Rip Van Winkle, and haven’t noticed this, well the “Biden” administration has given you a wakeup call. The CDC–well known regulator of real estate markets–has extended its moratorium on evictions, for 90 percent of the country anyways. Because Covid.

Isn’t everything?

The Supreme Court has already indicated that this is flatly unconstitutional absent Congressional legislation. Which it clearly is. Though the Supreme Court should go further. Any Congressional legislation remotely similar to the CDC ukase should also be held unconstitutional under the 5th Amendment, which states that no person shall be “be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

Preventing someone from evicting them from his/her property is clearly depriving that person of his/her property. The defining feature of property is the right to exclude others from the use thereof. If you can’t keep others from using it, it ain’t yours.

Ironic, no, from a government that is ruthlessly pursuing those who trespassed on the Capitol on 6 January?

The CDC is not providing due process–this is a blanket ban. The CDC is not providing compensation. Any “law” that mimics the features of the CDC order would be a blatant infringement on 5th Amendment rights.

The justification for this given by the CDC’s director, Rochelle Walensky (one of the lying Walenskys?) is utterly appalling: “This moratorium is the right thing to do to keep people in their homes and out of congregate settings where COVID-19 spreads.”

Gee, I missed the “right thing to do” clause in the Constitution. I also missed the “congregate settings Covid” exception to the 5th.

It is particularly nauseating to hear this bilge from the “our sacred democracy” crowd. If unilateral expropriation of property with zero process whatsoever, and no compensation whatsoever, is the hallmark of “our sacred democracy” I say hard pass to democracy. Give me autocracy. Autocracy is functionally the same, but doesn’t add the insults of virtue signaling and preening hypocrisy to the injury of theft.

Biden and Walensky essentially caved to the leftist extreme in the Democratic Party, with the utterly loathsome Rep. Cori Bush (D(uh), MO) leading the charge. Go to Twitter to see the “rationale” advanced by the supporters of this. To summarize: Proudhon said it first (“property is theft,” so stealing it back is fine):

One of my followers asked how could someone so stupid get 480,000 followers. I said

Speaking of stupid, Maxine Waters got in the act, ironically channeling Andrew Jackson (or at least a possibly apocryphal statement attributed to him):

“Who is going to stop them?” That is, “the Supreme Court has made its ruling: now let it enforce it.”

Under the CDC/Biden theory, there are no checks on the government’s authority whatsoever. Say the magic word–“COVID”–and anything is possible.

Which, by the way, is precisely why the ruling class is so hell bent on perpetuating the Covid scare. And which is why, when (if) Covid fades away, another “emergency” will be ginned up to take its place.

To the extent that he is conscious, Biden consciously acknowledged that this action is unconstitutional. But he obviously doesn’t care. Or, he cares more about protecting his political flank than about respecting his oath of office.

The purpose of the compensation clause is to force government to put its money where its mouth is: if a rental unit is more valuable in the hands of its current occupant, who is (allegedly) unable to pay, then go through the political process of appropriating money to pay the property owner to allow said occupant to continue to reside there. The idea is to approximate the outcome of voluntary arms length transactions when some transactions cost (e.g., holdup problems) make such voluntary transactions prohibitively expensive. A compensation requirement, properly implemented, helps ensure that property is allocated to its highest value use.

This process is imperfect, but at least it allows for some element of accountability for those who vote for it. Allow a government to take valuable property, without compensation, without process, and by an agency completely insulated from electoral accountability, and you will see it take and take and take and take. Because it pays no price. When someone pays no price, it consumes to satiation. And governments are never satiated.

Today it’s Covid. Tomorrow it will be something else. Legislature in session or no, your property will be unsafe as long as a bureaucrat can conjure up an “emergency” to justify taking it.

Forget the rule of law. We live under the rule of the lawless.

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Navy Runs Experiment. Gets Wrong Answer. Chooses to Discriminate.

Filed under: Military,Politics — cpirrong @ 5:44 pm

In 2020, Navy Secretary Mike Esper (one of Trump’s many, many horrible personnel choices) eliminated photo portraits from Navy promotion files, on the theory that this facilitated discrimination against African Americans. Presumably Esper believed that promotion boards were stacked with racists.

There is a clear testable implication of Esper’s theory of discrimination: elimination of photos should lead to an increase in promotion rates for African Americans.

The Navy ran the test. The results?

Promotion rates for African Americans fell after photos were removed.

Whoops! Hypothesis rejected! Apparently the promotion boards weren’t so racist after all. Or maybe they were.

There is a clear explanation of the results of this experiment: when photos were included, promotion boards favored African Americans. That is, the results are consistent with discrimination, just in the opposite direction hypothesized by Esper.

So what is the Navy (and perhaps the USMC) likely to do? Reinstate photos. So they can discriminate better. In the name of “diversity” and “equity.” Obviously not in the name of military effectiveness.

I predict that in the current environment, African American promotion rates will exceed those achieved when photos were included prior to 2020.

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August 1, 2021

Navy Blues–A Coda

Filed under: Military,Politics — cpirrong @ 4:00 pm

A few follow on thoughts.

The Navy had huge race problems especially in the late-Vietnam era. One of Elmo Zumwalt’s biggest challenges was dealing with that issue. He did so, fairly successfully.

Related to the post-Vietnam attempts to address racial tensions,I was a subject (victim?) of what I would characterize as CRT 1.0 when at the Naval Academy. Mids were subjected to various race- and gender-related struggle sessions. During Plebe Summer these were both brigade-wide and at the company level. The latter were rather embarrassing, given that they were led by the company officers who were clearly reading off a script and had instructions to crack down on Wrongthink.

My main memory of that is when a hapless (and remember, 18 year-old) company mate made the mistake of saying something about “Amazons” in reference to women (I groaned as soon as he said it knowing it would not end well), at which the company officer (a bubblehead who later became president of Electric Boat) jumped all over him: “You are a sexist AND a racist!” Why racist my befuddled classmate asked. Because people in the Amazon are dark skinned! (Apparently the lieutenant needed to brush up on Herodotus.)

I can only imagine that things are infinitely worse, and infinitely more cringeworthy and infinitely more Orwellian and oppressive, given the that the leftist march through the institution of the military hadn’t really even begun when I was at Navy, and is all but complete now.

Zumwalt’s reforms had pretty well tamped down the racial tensions by the time I was at Navy. I am convinced that what is going on now will ramp them up.

By way of trying to see the glass as not completely empty, one of the reasons I left the Academy was my experience during Youngster cruise. Seeing the dysfunctions aboard an active USN ship–low morale, heavy drug use (I remember smelling reefer wafting from the crew spaces when I was standing watch on the quarterdeck, and multiple E3’s and E4’s being put on report at morning quarters for having been busted for possession by Norfolk cops), borderline insubordination, and officers that held little sway over the crew–really served to concentrate my mind.

But I can hear you say–hey, I thought you were going to say something optimistic! Well, the optimistic statement is that things turned around dramatically (from what I understand, not from first-hand experience) in the 80s and early 90s. The Reagan defense spending boom and the rebound from post-Vietnam malaise led to considerable improvement on both the hardware and meatware side.

So it is at least possible that current trends can be reversed. That’s my optimistic take. But in order for that to happen, things must change soon. I am not so optimistic about that. The nation has changed dramatically in 30-40 years. But I hope I am wrong.

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July 31, 2021

Navy Blues

Filed under: Military,Politics — cpirrong @ 4:26 pm

Over Labor Day weekend I will be attending my Naval Academy class reunion (which one?–classified!). Although I punched out after my Youngster Year, having determined that I was better cut out to be a scholar than a boat driver/order giver/order taker (a wise judgment, in retrospect, especially for a 19 year old in the face of family pressure), I have kept an eye on the Navy. And its current situation brings a tear to that eye.

The Navy faces serious hardware and meatware issues.

The surface fleet is dwindling. The Ticonderoga class cruisers are reaching the end of their useful lives. The Arleigh Burkes have proved to be an excellent platform whose capabilities have been increased steadily, but they are being stretched to their limits, both operationally and in terms of the ability to expand their capabilities.

Two of the Navy’s recent surface ship programs–the Littoral Combat Ship and the Zumwalt class–have proven to be total disasters. With regards to LCS, Strategy Page tells the dismal tale. A snippet (and alas there’s much more):

The ensuing endless equipment and operational problems led the navy to cut LCS production from the 52 originally planned to no more than 35 ships. As of May 2021 only 23 LCS are in service and four are to be retired by late 2021, one of them after only seven years of service.

The LCS was intended to replace 30 larger Perry class frigates and 26 smaller mine warfare ships. That did not work out as planned because of delays in completing the task-specific mission modules that enabled an LCS to quickly install specialized equipment, which was accompanied by a team of specialists to operate it. This enabled an LCS to handle mine warfare, surface combat, air defense and so on. While the first LCS entered service in 2008, the first Mission Modules didn’t arrive until 2018 and none of these modules worked as originally planned. Not only were the modules all late, some were cancelled and all were way over budget because of a variety of problems navy planners did not anticipate, but could have if they had paid more attention to all the potential problems with developing these modules.

The Zumwalts (of which 32 were originally planned, but only 3 will see the sea) were designed to be stealthy ships specialized for shore bombardment. The shells designed for the 155mm (6″) guns turned out to be unreliable and expensive, so were scrapped. So much for shore bombardment. Further, the reemergence of peer competition (notably from China, and to a lesser degree Russia) reduces the priority of the shore bombardment mission and increases the priority of anti-ship, anti-aircraft, and anti-missile capability which Zumwalts are relatively unsuited for (unable to carry Aegis radar, for example). The Zumwalts are thus an orphan class, and a dead end.

So billions of dollars and more than a decade have basically been wasted on two classes of ships that are not fit for purpose, especially in confrontation against a peer competitor.

New carriers of the Ford class are coming online. Over budget, of course, and with some teething problems (especially related to elevators and the electric catapults), but at least those ships appear to offer considerable improvements over the stalwart Nimitz class.

New ships for the Gator Navy (amphibious ships) are superior to their predecessors, but numbers and cost are major issues.

Submarines are a relative bright spot. The Virginia class boats are highly capable, and are improving substantially with every new Block (Block V currently). But numbers are a serious concern, and as Stalin said, quantity has a quality all its own. The Navy talks big about the new Columbia class boomers (ballistic missile subs) but it remains to be seen whether the big talk about cost and deadlines will be realized in fact. History suggests otherwise. There is also the issue of whether the US has the capability to build enough Virginias and Columbias simultaneously, not even considering cost.

The Navy also faces serious constraints in shipyards. Ships need to be repaired, and such constraints are causing delays in repairs and increases in their costs.

With respect to aircraft, it all depends on the much maligned and much touted (depending on who you listen to) F-35. The program seems to have turned a corner but it remains to be seen whether the theory of stealth fighters winning battles from a distance will turn out this time–as it didn’t with the F-4 in Vietnam. Moreover, relatively short range makes aerial refueling imperative, which will be difficult in a contested environment until stealth drone refueling aircraft become a reality.

Meatware is also a serious concern. The Navy suffered several serious accidents attributable to poor training, poor leadership, and excessive demands on ships and crews necessitated by hull numbers not keeping pace with operational commitments. Knock-on-wood there haven’t been any major incidents lately, presumably because lessons have been learned and corrective measures taken, but some of the underlying issues remain.

Moreover, morale is low. In part this is due to the operational demands. But it runs deeper than that, and the problem starts at the top. The Navy is in woke step with the rest of the US military. This is demoralizing, and time and effort spent on woke activities is time and effort that can’t be devoted to mission critical activities:

“I guarantee you every unit in the Navy is up to speed on their diversity training,” said one recently retired senior enlisted leader. “I’m sorry that I can’t say the same of their ship-handling training.”

The zero fault tolerance mindset that prevails today also saps initiative, induces extreme risk aversion, and is conducive to Bligh-like vertical chop discipline all down the line, which creates a “the lashings will continue until morale improves” mindset. Many years back I wrote about how US Navy icons such as Nimitz and Halsey experienced serious mishaps as junior officers, with Nimitz’s career surviving a ship grounding for example. That would never happen today.

These are all extremely deep problems with no easy fixes. In theory, the ship numbers can be fixed with money. But this administration is loath to spend that money. Moreover, the Navy’s wretched procurement record means that even though money is necessary to fix the problem, it may not be sufficient: as the LCS and Zumwalt experiences prove, the Navy can blow a lot of money–a lot of money–and get very little operational capability in return.

The institutional and cultural issues will be much harder to fix. Institutional cultures take longer to turn around than an aircraft carrier with disabled steering gear. Senior officers who rise in a particular culture are the ones who have to change it, but the very fact that they were selected in that culture means that they are often the least capable of doing so. They are the problem, or products of the problem, and are hence ill-disposed or ill-equipped to fix the problem. Political pressures to focus on mission-irrelevant or mission-inimical issues, such as diversity and phantom extremism, are potentially insuperable barriers to necessary change.

The Navy has faced budgetary, cultural, political, doctrinal, and institutional tempests before. If you read about the Navy’s performance early in WWII, especially in the Guadalcanal Campaign, and you’ll learn that arguably the only reasons it overcame, or even survived, its leadership, cultural, and doctrinal challenges in 1941-1942 were the presence of a couple of exceptional admirals (King and Nimitz), and the fact that the Japanese had even more crippling leadership, doctrinal, and cultural handicaps. That, and the fact that American industrial capacity to rebuild its fleet and expand it far outstripped that of its foe–something that is almost certainly not the case today.

We can’t count on being so lucky again.

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July 29, 2021

Timmy!’s Back!

Former Treasury Secretary Timothy Geithner–better known as Timmy! to loooooongtime readers of this blog–is back, this time as Chair of the Group of 30 Working Group on Treasury Market Liquidity. The Working Group was tasked with addressing periodic seizures in the Treasury securities market, most notoriously during the onset of the Covid crisis in March 2020–something I wrote about here.

This is a tale of two reports: the diagnosis is spot on, the prescription pathetic.

The report recognizes that

the root cause of the increasing frequency of episodes of Treasury market dysfunction under stress is that the
aggregate amount of capital allocated to market-making by bank-affiliated dealers has not kept pace with the very rapid growth of marketable Treasury debt outstanding

In other words, supply of bank market making services has declined, and demand for market making services has gone up. What could go wrong, right?

Moreover, the report recognizes the supply side root cause of the root cause: post-Financial Crisis regulations, and in particular the Supplemental Leverage Ratio, or SLR:

Post-global financial crisis reforms have ensured that banks have adequate capital, even under stress, but certain provisions may be discouraging market-making in U.S. Treasury securities and Treasury repos, both in normal times and especially under stress. The most significant of those provisions is the Basel III leverage ratio, which in theUnited States is called the Supplementary Leverage Ratio (SLR) because all banks in the United States (not just internationally active banks) are subject to an additional “Tier 1”leverage ratio.

Obviously fiscal diarrhea has caused a flood of Treasury issuance that from time to time clogs the Treasury market plumbing, but that’s not something the plumber can fix. The plumber can put in bigger pipes, so of course the report recommends wholesale changes in the constraints on market making, the SLR in particular, right? Right?

Not really. Recommendation 6–SIX, mind you–is “think about doing something about SLR sometime”:

Banking regulators should review how market intermediation is treated in existing regulation, with a view to identifying provisions that could be modified to avoid disincentivizing market intermediation, without weakening overall resilience of the banking system. In particular, U.S. banking regulators should take steps to ensure that risk-insensitive leverage ratios function as backstops to risk-based capital requirements rather than constraints that bind frequently.

Wow. That’s sure a stirring call to action! Review with a view to. Like Scarlett O’Hara.

Rather than addressing either of what itself acknowledges are the two primary problems, the report recommends . . . wait for it . . . more central clearing of the Treasury market. Timothy Geithner, man with a hammer, looking for nails.

Clearing cash Treasuries will almost certainly have a trivial effect on market making capacity. The settlement cycle in Treasuries is already one day–something that is aspirational (don’t ask me why) in the stock market. That already limits significantly the counterparty credit risk in the market (and it’s not clear that counterparty credit risk is a serious impediment on market making, especially since it existed before the recent dislocations in the Treasury market, and therefore is unlikely to have been a major contributor to them).

The report recognizes this: “Counterparty credit risks on trades in U.S. Treasury securities are not as large as those in other U.S. financial markets, because the contractual settlement cycle for U.S. Treasury securities is shorter (usually one day) and Treasury security prices generally are less volatile than other securities prices.” Geithner (and most of the rest of the policymaking establishment) were wrong about clearing being a panacea in the swap markets: it’s far less likely to make a material difference in the market for cash Treasuries.

The failure to learn over the past decade plus is clear (no pun intended!) from the report’s list of supposed benefits of clearing, which include

reduction of counterparty credit and liquidity risks through netting of counterparty exposures and application of margin requirements and other risk mitigants, the creation of additional market-making capacity at all dealers as a result of recognition of the reduction of exposures achieved though multilateral netting

As I wrote extensively in 2008 and the years following, netting does not reduce counterparty credit risk or exposures: it reallocates them. Moreover, as I’ve also been on about for more than a fifth of my adult life (and I’m not young!), “margin requirements” create their own problems. In particular, as the report notes, as is the case in most crises the March 2020 Treasury crisis sparked a liquidity crisis–liquidity not in terms of the depth of Treasury markets (though that was an issue) but liquidity in terms of a large increase in the demand for cash. Margin requirements would likely exacerbate that, although the incremental effect is hard to determine given that existing bilateral exposures may be margined (something the report does not discuss). As seen in the GameStop fiasco, a big increase in margins in part driven by the central counterparty (ironically the DTCC, the parent of the FICC which the report wants to be the clearinghouse for its expanded clearing of Treasuries) was a major cause of disruptions. For the report to ignore altogether this issue is inexcusable.

Relatedly, the report touches only briefly on the role of basis trades in the events of March 2020. As I showed in the article linked above, these were a major contributor to the dislocations. And why? Precisely because of margin calls on futures.

Thus, the report fails to analyze completely its main recommendation, and in fact its recommendation is based on not just an incomplete but a faulty understanding of the implications of clearing (notably its mistaken beliefs about the benefits of netting). That is, just like in the aftermath of 2008, supposed solutions to systemic risk are based on decidedly non-systemic analyses.

Instead, shrinking from the core issue, the report focuses on a peripheral issue, and does not analyze that properly. Clearing! Yeah, that’s the ticket! Good for whatever ails ya!

In sum, meet the new Timmy! Same as the old Timmy!

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July 25, 2021

Anglosphere RIP

Filed under: CoronaCrisis,Politics — cpirrong @ 3:45 pm

Post-911, the idea of the “Anglosphere” gained some traction. The English speaking nations, the UK, US, Australia, Canada, and New Zealand, were held out as the last bulwarks of liberty in the world.

This idea has not aged well. In the Age of Covid, the Anglosphere is now the cutting edge of repression and fascism and active hostility to the ideals of individual freedom that were allegedly its hallmark.

Look at them.

Australia: entire states are locked down–hard–in response to single digit “case” numbers. People who protest are set upon by truncheon and club wielding police.

Canada: adopting a panoply of highly restrictive policies and restrictions on free speech.

New Zealand: locked down hard for months. And recently, the Skeletor-resembling PM instructed the proles that the government was the “sole source of truth.” Oh thank you so much Big Sister! Governments have been so so so omniscient in the past 20 months!

UK. Locked down until just recently. The “Freedom Day” (19 July) is a simulacrum of real freedom because numerous restrictions remain, and even that has freaked out the establishment, including most notably the Orwellian-named “SAGE.” Even though case numbers have declined since the lockdown was eased, SAGE is issuing dire warnings. No doubt because they have been wrong so often that they need to cover their sorry asses by keeping up the scare.

US. There are some bright spots, including Florida and Texas, but the “elite” is panting to reimpose mask mandates (to make us pant) and forced vaccination and lockdowns because Delta variant. Or something.

I’m not anti-vax. I’m vaccinated. But the externality argument is so abused. The costs and benefits of vaccination are almost completely internalized.

(Although ironically I bet dimes to donuts that Jim Carey and Jeff Daniels (a neighbor for several years) would love to mandate vaccines.)

Australia is particularly sad, and almost inexplicable to me. It used to be a bad ass, fuck-it-all kind of place. A similar ethos to Texas. But not now. Incredibly authoritarian, with a largely craven and submissive populace. Crocodile Dundee? Watching that is like Charlton Heston finding an almost completely buried Statue of Liberty. A relic of a dead era.

Continental Europe–the supposed antithesis of the Anglosphere–has actually demonstrated more of the spirit of liberty than any English-speaking country. Check out today’s protests in Paris.

A la Bastille! (And note that in Louis XVI fashion, Macron is doubling down. I hope the past is prophecy.)

No. The vaunted Anglosphere has proved to be ruled by authoritarians and populated by submissive and insanely risk averse cattle. It would be wrong to say that the ideal of freedom is dead. It is more accurate to say that the ideal of freedom is reviled, at least by the elites–and far too many of the non-elite have proved to be ovine in their submissiveness to their soi disant (but not really) betters.

Speaking of things that did not age well. This from a decade ago is a (sick) laugh:

I do not mean that English speakers act any less extravagantly than speakers of other tongues, but rather that English generally acts to tether thought to the empirical world. This is something Bishop Thomas Sprat dilated on in his History of the Royal Society (1667): “The general constitution of the minds of the English,” he wrote, embraces frankness and simplicity of diction, “the middle qualities, between the reserv’d subtle southern, and the rough unhewn Northern people.”

English, Bishop Sprat thought, is conspicuously the friend of empirical truth. It is also conspicuously the friend of liberty. 

If there is one thing that is conspicuous about the events of the past 19 months it is that for all of the strident commands to “follow the science!” public policy has been completely untethered from “the empirical world.” Instead, an arrogant priesthood has imposed a cultish, unscientific, evidence-free orthodoxy and branded as heresy any skepticism–even after the skeptics have been proved right time and again. Empirical reality is not just ignored–it is anathematized.

Perhaps you can explain the collapse of the Anglosphere to its infection by Continental ideas (Derrida, Foucault, etc.). But that is merely by way of a post mortem. The fact is that practically speaking, the Anglosphere is as dead as Hector. Perhaps “palimpsests of freedom” (to use Paul Johnson’s chapter title from Modern Times) still exist in the English speaking world, but they are under siege and definitely not in command. Enemies of freedom–the antitheses of traditional “English liberties”–are in the saddle and wielding the whip.

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July 23, 2021

FBI Delenda Est-But No Cato or Scipio Are In Sight

Filed under: Civil War,Politics — cpirrong @ 6:58 pm

The Babylon Bee, as usual, nails the idiocy and absurdity of the FBI:

This refers, of course, to the FBI’s and DOJ’s weighty pronouncement that one of the 1/6 arrestees was in possession of–wait for it!–an assembled Lego model of the Capitol. Except it wasn’t actually assembled. It was still in the box. But still! Obviously he was planning dastardly deeds with Legos! It’s amazing the Republic survived. Thank God the FBI is there to protect us!

The FBI has of course been going all out to apprehend the trespassers, gapers, gawkers, and other assorted invaders of the Capitol. They announced with pride some weeks back that they had made 535 arrests. (Gee. Why that number?) (And none for sedition. Why is that, if this was a greater threat to “our democracy”–which it ain’t–than the Army of Northern Virginia?)

But of course the FBI had advanced warning. So why didn’t they stop it?

Why do I say that they had advanced warning? Because I guarantee that every remotely open access organization or ad hoc grouping is penetrated by the FBI. FFS, the FBI has surveilled the “Concerned Women of America,” as if it’s the ISIS Women’s Auxiliary. What next? Red state sewing circles?

A necessary–but not sufficient–condition to prevent being infiltrated by the FBI is a classic cell structure. But take-all-comers groups like Proud Boys or Oath Keepers or Concerned Women of America or a bunch of idiots bragging on Twitter will attract FBI agents and/or assets like a dog attracts fleas.

Oh. And not joining any organization won’t help. The FBI is also deeply concerned about “lone wolf” white extremists. Damned if you do, damned if you don’t. (I’m sure I’m already damned, so this post won’t make any difference.)

So was the FB I complicit in 1/6, or just incompetent in not stopping it?

One cannot rule out the latter. After all, the FBI had advanced warnings about the Pulse nightclub shooter, the Parkland HS shooter, the Fort Hood shooter, and the San Bernardino shooters. Yet they all blazed away unmolested by our vigilant Federal dicks. (I also wonder about the Las Vegas shooter, whom the FBI cannot even figure out ex post. Or supposedly can’t. Maybe their ex post befuddlement is an attempt to conceal ex ante knowledge.)

Although I do not rule out incompetence, I lean towards complicity. Why? This sick-making statement by the current FBI Douchenozzle*, Christopher Wray:

“Darn tootin'”? Are you effing kidding me? “Golly gee willikers Mr. G-man! I’m sure glad we have you to protect us!” “Aw shucks, Jimmy. Just doin’ my job.”

That performance was so transparently phony that Wray would have earned an F in any community college acting class. But our “elite” eats it up.

And that’s the point, exactly. The FBI operates as the elite’s political police. Not the president’s–as demonstrated by its concerted campaign to get Trump. The elite’s/oligarchy’s/ruling class’/administrative state’s political police.

(The FBI also shanked Nixon, BTW. Cf. Mark Felt.)

What is the FBI good at? Setting up mouth breathers to commit crimes, whom it can then arrest and then claim with great fanfare to have protected us from. If you look at most of the high profile terrorism cases the FBI prosecuted post-911, they were low-IQ losers cajoled by FBI informants (operating, of course, at the direction or at least strong suggestion of FBI agents) into committing crimes.

Most recently, the hair-on-fire claims about the allegedly dastardly plot to assassinate Wretched Gretchen Whitmer, governor of Michigan, appear to be less than a real threat than another prêt-à-porter FBI setup, with 12–12!–FBI informants/provocateurs outnumbering the actual dim bulb alleged conspirators.

But this is just one part of the bill of particulars against the FBI. It has also proved shockingly inept (to give it the benefit of the doubt) or complicit in some horrible crimes.

For example, in addition to the terrorism fails mentioned above, it let serial sex offender Larry Nasser operate with impunity for years. Its response to the revelations by the DOJ IG? Not even a “whoops, my bad.” It had copious information on Jeffrey Epstein whom it also allowed to continue his romps for years. (Given Bill Clinton’s and others’ involvement with Epstein, this may have been part of its political police function.) And just recently, FBI agent David Harris was arrested by Louisiana authorities–n.b. state authorities, not the FBI itself–for a sickening trail of child sexual abuse.

Again, in each case: incompetent, or complicit?

In the Nasser case (and others) an FBI agent lied when being questioned. If you or I lie when the FBI questions us–hard Federal time. They lie? No biggie!

Some on the right have called for the “reform” of the FBI. Spare me your naivete. The FBI is unreformable because of its deep internal rot, and the fact that anyone who would be in a position to “reform” it no doubt quakes in terror at the prospect of FBI blackmail or slanderous leaks. (Cf. MLK.)

No. The only peace we could obtain from the FBI is a Carthaginian one. But there’s no Cato or Scipio in sight.

*Four years ago I referred to James Comey as a douchenozzle, for which I apologized profusely, for having insulted douchenozzles. But “Douchenozzle” is clearly a much more descriptive title than “Director.”

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July 21, 2021

Travis Putin

Filed under: History,Military,Politics,Russia — cpirrong @ 1:28 pm

Vladimir Putin penned–or at least posted–a long disquisition about how Russia and Ukraine really, really, really belong together. They are meant for each other. They are one soul ripped apart in a great historical injustice.

The most charitable way I could characterize it is that it reminds me of Pepe LePew (Putin LePew?) trying to sweet talk a reluctant female feline into falling for his historical charms. But that would trivialize what is really a weird and creepy and threatening missive. More Travis Bickle than Pepe LePew.

Putin portrays Russia and Ukraine as being spiritually connected and wrongly separated by malign Western actors (the Lithuanians, Poles, and Austrians at one time, the EU and US today), and misguided Bolsheviks who dismembered Holy Russia. Thus, they belong together. They need to be together. They are a single soul separated by cruel fate, who need to be reunited. And Putin is just the man for the mission.

But this begs the question: why don’t Ukrainians feel the same way? If the historical and spiritual ties are so deep, so mystical, why aren’t most Ukrainians equally desperate to be reunited with their Russian soulmate?

Putin’s answer, such as it is, is that malign forces–again Western–are conspiring to keep them apart. They have bewitched Ukrainians, or somehow fascistically intimidated them (which seems like a clear case of projection). Moreover, the underlying Western purpose of separating Ukraine from its spiritual kin is to attack Russia itself. And thus, Russia is justified in using force to unite Ukraine and Russia–it is an act of self-defense!

Yes, Putin and Travis Bickle have a lot in common. The paranoia and obsessions and delusions in particular. Except Travis only had Smith & Wessons and Walthers, not tanks, Buks, and nukes.

Putin goes on and on about how history, over a thousand years of it, means that Ukraine and Russia are destined to be as one. This argument is apparently quite persuasive to him, but not to most Ukrainians. Nor is anyone else in the world likely to be persuaded. Such historical arguments–especially ones stretching back to well before the First Millennium–are almost never persuasive or even plausible to those not steeped in that history. What seems self-evident to Putin seems bizarre to anyone who does not already believe in the Third Rome view of history. And especially so to anyone who views Russia as a historically predatory, imperial power.

Which would include Poland. Yes, Poland attempted to exploit Russian (Muscovite, actually) weakness during the Time of Troubles, but examining the sweep of history one must conclude that Poland has been far more the victim of Russia than the victimizer thereof.

Poland comes in for much criticism from Putin, but look at the benign way that he characterizes Russian connivance at the dismemberment of Poland:

After the partitions of the Polish-Lithuanian Commonwealth, the Russian Empire regained the western Old Russian lands, with the exception of Galicia and Transcarpathia, which became part of the Austrian – and later Austro-Hungarian – Empire.

The partitions just happened, I guess. And for someone who emphasizes the importance of language and religion, it is striking how Putin somehow happens to overlook that the partitions brought in Polish-speaking Catholics into the Russian Empire when it “regained the western Old Russian lands.” I would love to hear historian Putin’s explanation of say the January 1863 insurrection in the Polish parts of “Old Russian lands.” Somehow he left that out. Huh.

Indeed, reading this, I would say that not only Ukrainians should be put on notice as to Putin’s ill intent: Poles should be as well.

Another example of Putin’s selective history:

I would like to dwell on the destiny of Carpathian Ruthenia, which became part of Czechoslovakia following the breakup of Austria-Hungary. Rusins made up a considerable share of local population. While this is hardly mentioned any longer, after the liberation of Transcarpathia by Soviet troops the congress of the Orthodox population of the region voted for the inclusion of Carpathian Ruthenia in the RSFSR or, as a separate Carpathian republic, in the USSR proper. Yet the choice of people was ignored. In summer 1945, the historical act of the reunification of Carpathian Ukraine ”with its ancient motherland, Ukraine“ – as The Pravda newspaper put it – was announced.

Yes, elections held in the presence of Soviet tanks and bayonets and NKVD executioners are clearly an expression of the will of the people.

And if we want to go all historical, it is also sickly amusing that Putin’s tract was published 550 years to the month after Muscovy won a decisive victory that culminated it its subjugation of Novgorod the Great, which sort of harshes the entire image of the deep fraternal, linguistic, historical, and spiritual bonds between Russian peoples.

The question is whether Putin intends to reprise Ivan III, this time in Ukraine. The threatening tone surely suggests this. He gives the impression of trying to persuade Ukraine to embrace Russia willingly. But he is abundantly clear that should his advance be rejected, it is due to the fact that the country is ruled by local stooges of malign Western powers who threaten Russia, hence reunification may only be accomplished by force, which is (according to him) fully justified and which he is willing to use.

Empty threat or real? It would be unwise to discount it. Operationally and logistically, it would be difficult, and would likely result in a stalemate and vicious guerrilla warfare (as occurred in the aftermath of World War I during the Russian Civil War, and in the aftermath of WWII) that could well stop any Russian drive well before it reached Kiev/Kyiv. It would sharply increase tensions between Russia and the West, far more than the Crimean anschluss did. Poland and the Baltics–Nato members–would clearly consider such an invasion a mortal threat. This sharply raises the odds of a Russia-Nato confrontation.

But despite these obstacles and risks, Putin is clearly obsessed with Ukraine. He has been throughout his presidency. He clearly views the 2004-2005 Orange Revolution and the 2014 Maidan as devastating personal defeats. Megalomania and the knowledge that he is aging and thus doesn’t have long to achieve what he believes to be a historical mission may push him to act, sooner rather than later.

Ukraine is hard to love. It is the most Sovok of the Soviet successor states–a painful illustration of how decades of Soviet oppression wreaked havoc on psyches and institutions. Some of Putin’s criticisms of it have more than a grain of truth. But that does not mean that it should be consigned to Putin’s tender mercies. Especially since there is no guarantee that Putin’s pining for Russian lands will stop in Ukraine.

The situation is fraught. A man obsessed with a messianic mission, be he Travis Bickle or Vladimir Putin, is not easily deterred.

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