“Major Strausser Has Been Shot. Round up the Usual Suspects”

—Claude Rains in Casablanca

“Casablanca”1 may have had a script fashioned on the fly, but some of its lines were epic. Unfortunately, rounding up the usual suspects has just been applied to the colossal failure of two banks, supported by their auditors very recently under current regulatory practices with a clean bill of health. How refreshing, to learn this after their prior equity holders were wiped out due to disastrous portfolio by their senior bank managers.

The continuing failure to write and administer proper financial regulation

The two usual “suspects” are the FED and the regulatory structure constructed after the disasters of 2001 and its recurrence of 2007-2009. Let’s get to the basics. Long ago, Milton Friedman told the JEC that his recommendations of a continual percentage increase in the money supply was not “theory.” It was practical advice to the FED not to behave as a counter-cyclical Central Bank. He argued for a stable monetary anchor. Instead, he told the Congress that the proper role of a Central Bank was to constantly focus on inflation and not to try to predict cyclical shifts in macro-economic behavior.

This FED, however, repeatedly shows itself to be politically astute at the expense of being a reliable monetary institution. It dramatically lowered interest rates to provide stimulus to an economy deeply troubled by Covid. Now, with the hindsight that the passage of time provides, many FED WATCHERS have told the FED that it was much too late in changing its zero-rate interest policy and got badly behind the curve in suppressing inflation. A poignant example of what Professor Friedman always warned us about once again. In theory, of course it would be a wonderful exercise if the FED could predict cyclical turning points and the appropriate lags in monetary policy so that the macroeconomy could avoid the ups and downs of the business cycle or the advent of a One-Off material shock like a pandemic. The evidence of that ability has yet to appear.

One might have supposed that the lessons of sending Bear Stearns into the arms of J P Morgan or subsidizing AIG’s failed portfolio management in 2008 might have changed the behavior of our Central Bankers—or that the monumental failure to bail out Lehman Brothers after the painful examples above—might have taught the FED and the Treasury about being late to the party. Sadly, regulatory “cures” such as Sarbanes-Oxley or Dodd-Frank were not good mentors to our regulators either.2 Those disasters were swept under the rug in the zeal of the Congress to fine-tune financial regulations that led to such poor results by external supervisors to monitor the financial sector of the economy. But again, we see that external monitoring is not timely and that auditing can be a paid-for service of “blessing” a client. KMPG was the auditor of both SVB and Signature Bank who gave these failed banks their approval. No doubt it was well paid for those efforts. Shades of 2008, once again depending on the auditing profession to miss the forest for the trees and get well paid while doing it.

Cardinal Talleyrand: Déjà vu

After Casablanca, my favorite reference is Talleyrand’ 1830’s summation of the French Bourbon rule leading up to the French Revolution. The witty Cardinal remarked, “They learned nothing and forgot nothing.”

We now hear the same nonsense from the Administration as it bails out unsecured demand depositors by creating a special provision to accept at face value the collateral of mid-term Treasury Bonds and Agency Debt taken on by the portfolio manager wizards. Those well paid managers thought they were maximizing shareholder value buying longer term debt with all the ‘fast money’ their depositor clients were taking in from Venture Capital. Monetary floods caused by FED-promoted zero interest rates seem wonderful until we see the damage caused at a later date. ‘Bourbonitis’ is a political virus for which our clever pharmaceutical manufacturers have not yet discovered a preventive vaccination. By the way, the disease is bi-partisan.

Bank Runs, Nash Equilibrium and Monetary Policy

The learning deficit in political economy is as long standing as the mordant humor of “Round up the Usual suspects.” Tax payers and voters should truly ask whether their governors in Congress and the Regulation Derby are doing the right job. And, it wouldn’t hurt for voters to be cynical over their answers or about the cost of bailouts.3

The monitoring process takes time and a random event intervenes to find the patient already suffering a fatal attack well before the monitoring process discovers and prevents the fatality. One wonders if the blame game will triumph over learning to be alert to the consequences of timing interest rate changes to perceived changes in macro-economic conditions. Some evidence of sales of equity stock awards by the managers at SVB prior to the huge bank runs that triggered their collapse will no doubt stimulate political accusations. Attempts to avoid such situations in the future would be more welcomed than current comments of our politicians. That is a minor lesson. The bigger lesson that surely will be too soon forgotten is how monetary policy can underwrite imprudent portfolio management.


  1. “Casablanca,” Warner Brothers, [1942] []
  2. As covered in my book, “Disorganized Crimes,” [2013]. []
  3. Diamond DW, Dybvig PH [1983]. “Bank runs, deposit insurance, and liquidity”. Journal of Political Economy91 {3}: 401–419. It is not to denigrate their contribution but to morn that our Congress and our bank regulators don’t seem to grasp the real lesson. The FED generally is late to the cyclical ups and downs of the economy, but so are the regulators. The Nobel citation is also humorous. “Their discoveries improved how society deals with financial crises”. Really? []

A Lawyer turned Politician: It sure would help if POTUS had taken some economics courses

When one listens to the President in a pre-arranged and canned News Conference, one is overwhelmed by political campaigning.   Equally, one is underwhelmed by Biden’s lack of knowledge of fundamental economics—both Micro and Macro.

Such was his distorted and Three Pinocchio press conference yesterday.   He gets the Three Pinocchio’s for his neglect of basic Macro and Micro.   It is possible he took economics while in college and just doesn’t remember any of it.  More likely, he is campaigning and uninterested in fundamental economics.

Macro:  POTUS claimed he was reducing the deficit.  Hardly.  This is simple:  Calculate G-T.  The latest data shows this is negative…ergo the deficit is growing, not shrinking.   But, maybe he meant the change in G-T?    This is the old “second derivative” problem that politicians confuse all the time…or maybe it isn’t an unforced error?  Perhaps, he has little regard for the intelligence of the average voter. Perhaps, he thinks they might rbuy his faulty economic reasoning?  The GDP data are essentially correct (plus-or-minus the revisions that will start next quarter and continue for quite some time).   If we have a deficit in the current period, however, then our total deficit is growing in the period in question, not shrinking. Sorry, POTUS, you fail Econ 1.

Of course, the POTUS may yet be able to claim that G-T over the entire calendar year will be positive, or that the deficit (G-T)<0  is still not as large as last year or that the QI2022 deficit is smaller than Q12021, but the relevance of the comparison is another Pinocchio, at least 1, maybe more!

Unfortunately, the economic malapropisms continued while the POTUS exuded a whitewash of Federal Reserve behavior.   ‘They were doing their job’ and the President alleges Inflation is a Supply Side Problem:  The POTUS  answer: first Covid then the Putin attack on the Ukraine.   These claims are easy to dismiss.  Inflation was heavily stimulated by excess monetary ease, despite the early allegations of a poorly reasoned commentary in 2021 by Jay Powell that observed inflation increases were transitory (Jay Powell was also trained as a Lawyer: please, JAY, never use the word “transitory” again!).  Inflation was rising well before the Russian attack on the Ukraine.  The President also claimed most economists agreed about the “transitory” nature of inflation.  Total Hogwash!  Many economists spoke out against the Monetary expansion that accompanied the fiscal blow-out.

Perhaps Lawyer Biden never heard of Milton Friedman’s obiter dictum, “Inflation is always and everywhere a monetary phenomenon…  But, any good Econ1 course would have noted that quote or at least a reasonable summary of the monetary causes of inflation.   One suspects that Law School didn’t do much for the  economic education of the POTUS.

What about the other economic faux pas yesterday?  Beware.  Biden throws sinkers!

The Oil Price Rise:  Cause?  the gouging of Oil Monopolists.   He doesn’t get a formal Pinocchio, even though his timing of the GROWTH of oil monopolies would be questioned by most oil economists.  Secondly, the cutback in crude oil shipments from the OPEC members never gets mentioned or rising world oil demand as Covid lessened. Too complex for a campaigner?  Believe voters are stupid?

A few other politically correct but economically incorrect assertions include the 9000 Federal Leases that are not being drilled during the huge increase in Crude Oil prices?  Why not?  NIMBY? Not enough pipelines from the well sites to major pipeline interchanges? No new pipeline approvals and the unlikely granting of new pipelines going forward?  The whimsical nature of the current Administration posturing on the Climate Crisis that makes building new production capability an exercise in what oil producers think the next turn of the screw from DC might be?  The 9000 un-drilled Federal Leases that his Press Secretary has been instructed to ridicule at her Press Conferences that are not being drilled by the gouging Oil Industry?  Another dog that won’t hunt.  One has to wonder whether the Press Secretary understands the propaganda her coaches wish her to pitch. If the lease was so good that a leaseholder would drill it given $100/barrel prices, they would drill it.  Listeners should ask, what barriers are there are that the Leaseholder must overcome?   We suspect mostly Government restrictions. The whimsical nature of current posturing on the Climate Crisis also makes building new production capability an exercise in what oil producers think the next turn of the screw from D.C. might be?  It is unlikely to be support.  At best less attacks, but POTUS teed off pretty strongly over alleged gouging.

Of course, the fascination with warding off Global Warming ignores the misguided love affair certain politicians have with electricity. As if it is a ‘free good.’  They ignore that new base load power has to be generated either by that hated word—COAL— or use higher price petroleum products (Fuel Oil, Diesel, Natural Gas) …or perish the thought that the even more hated source (Nuclear Power) is advocated.   Here, the POTUS might have looked at the turn-around of of GREEN NONSENSE in Germany or why the French don’t complain as much because significant quantities of their base load power is generated by rather safe NUKES!

We will ignore the caveat uttered by the POTUS that “Americans are working 18 hours a day just to keep food on the table.”   Shucks, if you can’t tell a first derivative from a second derivative, maybe 8 hours and 18 hours are about the same!

Then, there are the ingenuous attacks on tax policy by  Right Wing Republicans…”they wish to raise your taxes, but my tax policy of raising Corporate Taxes and making the Rich pay Their Fair Share will lower your taxes!’  Of course, the POTUS ignores the generally acceptable Public Finance finding that raising taxes on capital LOWERS the return to LABOR!

When he finally allowed a few questions, he stumbled when he came to “lowering tariffs.”  They are just “under consideration.” Finally, what about some of the more obvious political solicitations that might help to lower gasoline prices by depleting our corn supplies (15% ethanol)?  Are there some real alternatives to this posturing?  At least a few that could work.

Here’s my list of easy ‘do’s.”

Suspend the Jones Act and allow cheaper transportation of crude and products around the US including Alaska by other than expensive U.S. flagged carriers.

Let the KEYSTONE XL Pipeline be finished so we don’t create more CO2 by rail and truck shipping while we expand crude output.

Permit quicker approval to new pipelines that will increase the flow of both natural gas and crude oil from the oil fields to the refinery or processing plants.

The above list will not be a ‘do’ in this Administration nor will meat prices go back to their pre-Covid levels unless grain prices fall or this Administration teaches cattle and pigs to hold onto to their own methane!

One other important comment comes from the Graph below, available from the vast quantity of St. Louis Federal Reserve data.  The key point is to show that expectations by the public of rising prices are not very well anchored anymore and haven’t been since 2021. That means the Fed has a much bigger job to do than it has been admitting.

Did today’s collapse in the Stock Market reflect investors suspicions that the Fed is much further behind than it has been admitting?  It is a plausible hypothesis, even if not easily proved.  The graph triggered some commentary from the nominally Democratic supporters at the New York Times.    If in fact expectations of rising prices are indeed growing, then it will take a lot more action by the Fed to choke off economic demand…and getting to a soft landing might be far more difficult.

The graph suggests a little relief at the end of the current time period, but we should expect that the little relief we got yesterday in the monthly change of prices may not continue against still rising food and gasoline prices.

Tough markets reflect poor policy choices in the past and the conflicts they pose for the present and the future.


Cold War II has begun: when is the U.S. going to recognize that?

Marx once said that history repeats, the first time as tragedy and the second time as farce.   Marx may have had it backwards.  The second Cold War has begun and it is clearly not a farce.   Ukraine is a tragedy of growing proportions and the U.S. is failing to recognize  a key aspect of revolutions: they are made by elites not by the masses.

Lenin knew that which is why after reading Marx’s treatment of the Paris Commune’s failure in 1871, Lenin took as his cardinal principal that a revolution must have a violent armed guard!  Ultimately, Lenin’s view led to the success of the Russian revolution.   America can learn that lesson too, but it must give up on current fantasies that limit its response to Russian aggression in the Ukraine.

Putin can win in the Ukraine, only if the U.S. continues to operate on the fantasy that strength is a weakness because it might lead to unwinable wars, or worse, to nuclear war.  Why is this wrong?  Because elites make and win revolutions, not the masses.   The latter only enter the game after the elites have defined the rules.   The Russian masses, as their German predecessors were in WWII, have been cowed by the power of the Russian Thug State and its Oligarch allies.  Yes, there are protestors, but the strength of the Russian police state is such that the current masses are largely quieted by economic incentives along with brutal force and threats.  They cannot be our allies in putting Putin in his place. Waiting for a revolt of the masses in Russia against Putin is a fool’s task.  This is not a waiting game.  Aggression never is.

That said, Putin does have vulnerabilities. His inept attack on the Ukraine reveals that the Russian military conscripts are like all conscripts:  they have incentive and motivation issues.  It also appears they are not well-trained in the art and logistics of “combined arms.”  The invasion force is not up to the task Putin gave them.

Where else are Putin’s potential weaknesses?  Very simply, with his co-opted thugs, the Oligarchs he has made wealthy with the resources of the Russian state.  The Oligarchs run  oil, energy,  banking, mining, shipping, pipelines, etc.  These Oligarchs have made vast fortunes.  They have massive yachts, planes, multiple estates outside of Russia and bank accounts all across the globe, particularly in more hospitable climes!   They have benefited hugely from their support of Putin. They will continue to be his henchmen in aggression until such time as their assets around the world are taken away from them, or the enlarged prospects of a nuclear war threaten both their lives and their property.    They play a role similar to the Russian military who revolted against Khrushchev when that “madman” threatened the U.S. with the Russian Navy sailing to Cuba with nuclear-tipped missiles aboard on the way to Cuba in 1962.  When the U.S. finally applies really tough measures on those Oligarchs, we may begin to see some moderation begin in the Russia’s aggression.  Surely, Putin will hear about their confiscated assets.  The Oligarchs want they and their families to enjoy their Putin generated wealth.

The Thug-Oligarchs are corrupted by the rewards of Putin’s total control of the forces of discipline within Russia.   Corruption is legion in Russia.  It affects the Police, the Army and the Scientists who tool Russian military expenditures with new ideas and techniques.  That’s where U.S. pressure could be effective.  It is essential if the US is to fight COLD WAR II.  Nuclear destruction is two sided.  One side can’t rule the roost.

By the way, it is not different in China.  Corruption has a role there too. Remember Deng Hsiao Peng’s reply to the Peoples’ Army after they lost their attack on North Viet Nam in 1979.  North Viet Nam kicked the Chinese Army in the groin.  China lost more men in six weeks than the U.S. did in 10 years!   As the new leader in China, Deng told his military, ‘go into business and I will get you modern weapons for a modern army!’   The Chinese Army did exactly that and Deng kept his word as well.  So, their Generals are also part of the corruption-laden regime.

Corruption is like a pandemic.  It doesn’t stop with a certain group—it invades the entire country.  Chinese beneficiaries know that and that is why Ji Pin has been punishing some select beneficiaries.   He can’t afford to have his own Oligarchs revolt.  Consequently, selective punishment is meted out and that cows the rest of the corruption tribe.  He may indeed lessen his present support of Putin because he can read the tea leaves of a toughened American response.

The U.S. has a problem in the application of this “Punish the Thugs” strategy.  It involves a lot of very powerful people and their companies in the U.S.  Take Apple for example, or the mainstay financial houses of Wall Street.  They are beneficiaries of the global transfer of technology and capital to China (despite the hickeys now being taken in the Chinese Real Estate sector).  Globalization cuts many different ways.  Yes, it makes the supply chain more efficient.   By that token, however,  it creates industrial and commercial hostages who don’t want to lose their advantage, both from a corporate standpoint and from the personal rewards it brings to its major executives.  We have just sketched another problem in American diplomacy:  our own corruption with the Chinese experience.  In our view, it silences much of Washington and New York  intelligence that should know better!

The U.S. possesses a peculiar kind of Capitalism.  Nominally, we worship the efficiencies Capitalism brings to capital and labor markets by inducing innovation stimulated by the prospect of profits.   But, in dealing with a non-democratic state, all too often, American capitalists recruit the local, corrupt foreign politicians, generals, and advisors to the main foreign political heavyweights, in order to gain entry and advantage in the foreign country.  Deals get done by who you know rather than what you know.  Exports of our industries that can serve a market of a billion and a half people are important. Who gets there first with whatever special advantages the Chinese partners can bring, is often the most important aspect to a deal.

In such corrupted-market environments, real economic risk is also limited by who you know, not by what you know.  Concessionary capitalism is often the way of the world in the global market.  Breaking the backs of the already corrupted Chinese will be far more difficult than in Russia.  There are more than a few.  China is a much bigger economy and its tentacles into American industry and finance are far more intricate and run deeper.  Russia is a small boy with a big nuclear punch, but its economics are definitely small scale.   It is largely a raw materials producer with competitors.  Americans buy few if any final products from Russia and produce very little in Russia for export back to the U.S.  China is a different animal all together.

For this reason, the implications of Russian aggression into the Ukraine are highly important to understand when it comes to a possible Chinese takeover of Taiwan by military means.  The U.S. doesn’t have a lot of time to prevent that eventuality.  It most re-arm Taiwan to the teeth and make perfectly clear to the Chinese that Taiwan will be defended even if it takes American direct intervention.   Being coy with a Thug is not a good policy.  Be direct and clear, Washington!  Sanctions don’t prevent aggression.  Certainly, that follows from the Russian experience.

The U.S. may be getting negative feedback from its most important strategic partner in NATO:  Germany.  The Germans want to limit their response and ours too.  The Germans are already hostage to Russian corruption.  Half of their petroleum-based energy is Russian in origin and Germany has achieved (or should we say re-achieved) a huge presence in the current Russian economy.   The German counterpart companies will not easily disengage in their Russian adventures.  In fact, despite their sympathy with the suffering Ukrainians, they probably have to be pushed to disengage.

Germany’s Russian adventure is a century old.   It started in the early 1920’s when Germany was facing the draconian Reparations of the Versailles Peace Treaty.   And, it started up again after the fall of the Berlin Wall in 1989.  German business has strong connections and strong profit positions coming from its Russian agenda.   The Germans have in fact been stronger in their resistance to Russian aggression than many here in the US expected.  That is a pleasant surprise, but we should be warned, however, that such financial interests are powerful incentives to avoid a further Russian confrontation.

Perhaps more surprising is the extent of German cooperation with the U.S. in trying to tame Putin.  But, don’t bet on a long game in that arena from Germany.  It is now a major hostage of Russian energy resources as well as a continuing supplier of industrial materials to Russia.  The German nuclear power industry has largely been shut down.  Petroleum based energy counts more in Germany than in the U.S.  That mistake cannot be addressed in Germany for many years.

There are reports from Vienna showing a possibility of a new Iranian-nuclear control agreement and the release of sizable amounts of Iranian crude oil.  It might be a winner politically for the Biden Administration (in its efforts to slow inflation), but it works adversely in Cold War II. The Iranians have repeatedly shown that any such agreement offers them cover for refining more nuclear material and perfecting suitable delivery missiles.  Iranian ambitions in the Middle East have not changed, but the temporary allure of more crude oil and possible a lower price at the American gas station is alluring to some American politicians who will shortly have to face their voters.  Signing an agreement with the Iranians can make the U.S. a hostage to the Iranian Mullahs bent on mischief of their own making.

The characteristics of Cold War II should determine American Strategy.  The first characteristic is Time!  The war in the Ukraine will not be over quickly.  Russia is not going to just quit tomorrow and stop with its debilitated attempt to take over the Ukraine.  There are other Russian targets as well in their geopolitical gunsights.  All of the areas that used to be constituent parts of the old Soviet Union are up for grabs, now or in the near future.  The U.S. has to plan for a long war,  and it must start by arming its allies thoroughly with whatever they need to defeat a Putin attack.  The difficulties the Biden Administration has today are nothing they could face in the future, if American unwillingness to confront Russia now continues during this recent aggression.

Our national interest is for a complete stop of the Russian invasion as quickly as possible with the Ukraine being returned to its former free nation status.  Without forceful and immediate aid from the U.S., that is an impossibility.   This Administration cannot afford to lose this opening battle of Cold War II.


Learning from History: has the US failed again?

The World is witnessing a three-fold tragedy.  First, as we now appear to be just coming out of the Omicron variant, we are witnessing a terrible, inhumane, aggression against a sovereign nation by a Russian Thug.  Second,  rather than properly responding to the American security guarantees  given to an independent Ukraine by the Obama Administration in 2014 in exchange for giving up their nuclear weapons, the USA has basically said the Russian aggression is “0ff-Limits” to active American military forces.  Notwithstanding some help with armaments delivered now and over the course of 2021 and before and limited supplies of defensive weaponry since the Russian attack, the people of an independent and democratic state are being violently slaughtered and forced to run for their lives from Russian aggression.   Third, the Biden Administration, having botched the departure from Afghanistan, is sufficiently frightened of Putin’s threats that it has basically forgotten our history with the Russians.  Time to Remember Mr. President!

Relevant History

The history of dealing with aggression in Europe begins in the 19th century with the German attack on France, and  continues in 1914.  But, what is truly relevant is the September, 1938, Chamberlain concession to the Hitler regime. A misguided British Prime Minister allowed the Nazi’s to take over the Sudetenland, a largely German-speaking segment of the post WWI Czechoslovakian Republic.  Ironically, Chamberlain actually frustrated Hitler because, as we now know, Hitler actually wanted to march the Wehrmacht into Czechoslovakia thinking the British were too supine to resist.  Hitler was correct in his assessment of Chamberlain!   Chamberlain, of course, claimed he was preventing a war.  He did not succeed.  Rather,  he whetted tHitler’s appetite by allowing the take-over. (See Golo Mann’s brilliant history, “Germany since 1789.”

Britain and France might have been far better off to face the Nazi’s in 1938 rather than waiting until the tragedy of 1940 that gave the Nazi’s even more time to prepare their onslaught of Belgium and France accompanied by the Allies difficulty in sending supplies to Poland, next on the aggressor’s list of conquest.  In the meantime, Hitler got a respite from Communist Russia with the Hitler-Stalin pact and was able to carve up Poland (along with the Russians from the East, with the terrible consequences for the murder of so many people.  We need to remind ourselves what can happen when you stimulate the appetite of an aggressor!

Our relevant history, however,  is October, 1962, long before President Biden became a significant politician.  He was less than 20 years old when the Kennedy Administration had to face down the Russian Navy steaming toward Cuba with nuclear tipped missiles.   There was the risk of nuclear war then too, but the Kennedy ExCom Group stood its ground and the Russian military revolted against Khrushchev.  After the confrontation, we learned that the Russian military leaders were not willing to see whatever progress the Soviet Union had made since its second Revolution and its immense victory over Nazi Germany go up in a Nuclear Holocaust.  They essentially backed Khrushchev down and the Russian Navy turned back with its vicious cargo.  Of course, no one then (or now) can be sure what the Russians will do if confronted today, but certainly we have some intelligence to guide this Administration?  There is a precedent here, however much we have violated our Red Line in the Sand since 2014!

We may be witnessing the real decline of American power and prestige in our forlorn resistance to Vladimir Putin.  We are not willing to provide a No Fly Zone because combat between American-piloted aircraft against Russian invaders to Ukraine could be a pretext for Putin to ignite a Nuclear War.  One can’t blame this Administration for being cautious, but post-Afghanistan, we look weak, disordered and unwilling to exert the power that we have.   Will it whet the Aggressor’s appetite?  History speaks on this issue, in a very troubling manner.

Democratic countries worry about the next election, but our forbears,  just four years out of war with their former Ruler,  highlighted the two major tasks of our Republic in 1787.   Those two primary tasks were internal peace and quiet and external security.   We are now failing at both, lost in the Woke aspirations of saving Humanity from a climate future that is more scientific conjecture than reliable and tested climate theory. (Try running the climate models backward and see if you can predict current results!)

It is also true that there is considerable cant coming from Congressional electees who wish to suspend the sales of Russian crude oil around the world, to penalize Putin for his catastrophic adventure.   Based on the news clips, there is apparent misunderstanding, (perhaps deliberately?) over Congressional views on the nature of the global oil market.   Taking Russian’s approximately 10 mmbbls/day off the market would definitely tighten the current world supply of crude oil.  The mere threat has escalated crude oil to $130 bbl, and collapsed the Equity Market.  Such a policy will definitely impact inflation here and abroad, lowering real incomes.  But that vulnerability is also part of the Wokism that inhabits this Administration.

The U.S. has a lot of not yet developed crude oil supplies that will only begin gradually to come into the market if crude oil trades above $100/bbl as it now does.  It will take time to address the current price path of finished petroleum products.  Sadly,voters in many Blue States have elected politicians who parade Climate Worries and ignore national security.  In addition, countries like Germany, which discarded most of their nuclear generating capacity have made themselves unambiguous hostages to Russian oil and gas. Their financing and  build-out of NordStream 2 to make themselves integrated with a threatening supplier was the triumph of politicians wishing election and a denial of history.  Maybe the delay in certification of NordStream 2 will be longer than next year…but one never knows.  German politicians are also addicted to re-election and they have long believed that investment in Russia and exports to Russia were vital to their prosperity.  They are vigorous advocates of an Iranian deal, despite considerable evidence that this will not stop a nuclearization of Iran nor Iranian attempts to implement their own geopolitical aims in the Mid-East.

Maybe the Germans will learn what they once knew prior to 1989 when the Berlin Wall came down and the former Communist East Germany was successfully integrated into the West.  Thoughtful Geopoliticians in the US and Germany might understand, but German politicians ignore history as well to our collective discomfort.

So, Folks, as the President likes to say, there we are.  Stuck in a huge dilemma: whether to come to the aid of a vital, democratic country, resisting Thugs from the East who threaten the rest of us with a Nuclear War, or draw a line that we mean to enforce?

The Chinese “alliance,” with Russia is an additional geopolitical dilemma, worse so,  because so many American firms having been profitably “selling the rope by which we will hang them” (to use Lenin’s more than appropriate quip) dealing with China, despite their own inhumane behavior.  Are we tempting them to finally follow Putin’s path and invade Taiwan?   Rome burned while Nero fiddled, but the clock is running fast now for the U.S. and its democratic allies are fiddling while the Ukraine is burning.

The bottom line of many analysts is that our immense discontinuity in Presidential elections, our withdrawal from Afghanistan and our indecisiveness over what measures we will utilize to help the Ukrainians maintain their freedom is being seen by our Thuggish opponents as weakness.  They seem to think  we will not resist which makes their threats so real!  Its time to make the Thugs do a re-think on their own.

No one wants to see our young men and women perish again in a “foreign” war…but is it really a “foreign war, or is it a precursor to our own external security worsening even more?




An enduring truth of economics is that by and large, people consider their own financial fortunes more seriously than they do when they are caring for other people’s money, Sadly, that is also true of our political governors. They systematically are patently stupid when handing out government funds, particularly when the appropriation is based on a claimed national emergency.

In a rush to show that Government is the source of the peoples’s welfare, not only are legislated appropriations accompanied by imprudent controls against fraudulent disbursement, but this pattern persists over time through many Administrations. Markets do a far better job of punishing inadequate controls on fraud by punishing corporate executives once the fraud becomes a public matter. CEO’s and CFO’s are regularly fired and entire Boards can be replaced if the scandal is big enough. What about Government? Hardly ever!

Even when a Government is attacked by its own watchdogs, little is done to the failed Administrators who allowed or worse participated in the fraud. We should expect such exposés when the massive appropriations stimulated by Covid come to be matters of future election campaigns. Watch for them. They are the next attraction in Political Theater in your local election district.

The problem with ex post revelation and punishment is that the next national emergency will feature a similar lack of financial prudence regarding “other peoples’ money.” Legislators applaud themselves for simply passing emergency funding and clearly not for prudential financial watchman-ship, They leave that to the administrative bureaucracy which suffers “agency” issues like all other delegated activities in Government,

Primarily, when disbursing funding to the public suffering from an involuntary emergency, the main criteria for legislation succor are size, timeliness and the description of beneficiaries. If Government functionaries regarded the protection of tax revenues, (the People’s Money), one might expect more care of such resources. That some unqualified individuals or fictitious firms are able to obtain these funds is a sign of woeful neglect and awful political governance. It is a major failing of US political governance over the vast resources generated by taxation.

When news stories such as this referenced story in THE WASHINGTON POST appear, one has to wonder about the activities of the senior Senator from Massachusetts? She is constantly trying to introduce regulations to protect citizens from the alleged rapaciousness of private financial companies? Where is this Senator on the issue of protecting the resources of the public weal?

We know the answer, It is not a meaningful inducement to her political campaign. As an aside: Senator Warren widely announced on television that she wouldn’t vote for the renomination of the current Chairman of the Federal Reserve because of his alleged neglect of the poor and needy! It will be interesting if she reverts to the political consensus among Senate Democrats when Powell’s reconfirmation is voted on again. My skepticism is unbounded.

The Evil of Two Lessers

Many Americans today are doubly distressed. First, the obvious setback to a “normal” life in a free country are the Government lockdowns to defeat COVID-19. Second, the impending November election in a very badly divided country forcing a choice between the extremist views of the two leading candidates. Both candidates exhibit seemingly less in leadership qualities than what is truly needed.

We need not dwell extensively on the rank statements of the current President and his frequent feuds with the media nor on the rather strange remarks of the likely Democratic nominee. We merely observe that either candidate is likely to heighten the distress of Americans who believe in limited but cooperative government that is nonpartisan in the best sense of the term. It goes without saying that the politics of surviving the onset of COVID-19 in a meaningful way has been hardly nonpartisan. The “helicopter money” approach so far provided is an effort largely devoted to political optics not economics. To state the obvious in a country that needs to go back to work: does it make sense to pay an unemployed worker more to stay unemployed than to have that worker gainfully and permanently employed even at a lower wage? That is what both parties agreed to under the duress of the Virus War. It is not a tribute to rational government policy. It is a device used by both parties to appear to get something done when they fail to agree on an overriding strategy.

On the other side of the coin are the efforts of the Federal Reserve to operate a monetary regime that is as much fiscal as it is monetary policy. The Fed is “applauded” by both parties but the larger term components of massive Fed intervention in the debt markets are left relatively unexplored. The most recent is the Fed’s deployment of buying privately issued loans to unrated public and private companies.1 It is at best an experiment, but it takes our central bank far beyond anything ever contemplated or truly understood as central banking policy measures.

“Do Something Now” is the ruling guidelines of American politicians of all stripes. This is an optics game not a well-engineered policy strategy with appropriate cost-benefit qualifications. It also runs the risk of saddling the country with a monumental debt overhang without necessarily providing the economics of sustainable growth to liquidate that debt. World War II aviators often spoke of flying back from their missions holding their damaged planes together with “chewing gum and baling wire.” That was a necessity.

Flailing government policy to fight the Virus War is surely not optimal policy, but when the politicians have dramatically different purposes for Government, that is what you get. One can only hope that the State does not run out of gum!

“A republic if you can keep it,” as Benjamin Franklin once said, but can we keep it in a war where the politicians do not agree what kind of government we should have?2 One side clearly believes in throwing massive amounts of money out from a vast armada of currency-laden helicopters is a solution while the other side fears that the present economy cannot recover under the set of disincentives now or likely to be established.

Next comes the Presidential and Congressional Elections. What can we expect from such a contest in which each side has assembled a set of Generals to run the war with totally divergent strategies? One is reminded of Lincoln’s three-year struggle with inadequate military leaders until Grant proved willing and able to defeat the Confederacy? Then the country had a national purpose and a leader whose unifying principle was to save the Union. Can we expect the same in November? On the basis of the evidence so far, it seems highly unlikely. Both presumed candidates have waffled on a “needed national purpose.” Both are frightened by health and medical experts whose own models of the pandemic have given and still give conflicting predictions about the course of the Virus War.

Good strategy in war begins with a defined objective and a multiplicity of tactics evaluated with common tools. It is impossible to discern the strategy of each party or its presumed candidate at this point. One observes such a variety of changing tactics that hardly any military historian would infer a high likelihood of success. STUMBLECONOMICS might be a better description of either Party’s strategy?

Like Lincoln, we are still looking for our General.

  1. The Main Street New Loan Facility, authorized under Section 13(3) of the Federal Reserve Act, can purchase loans in a SPV made to all kinds of businesses including corporations, partnerships, LLC’s, trusts, associations, cooperatives, and joint ventures or tribal businesses, where the initial lender is a financial intermediary that will take a minority risk interest in the loan. []
  2. Quoted in Walter Isaacson, Benjamin Franklin: An American Life (New York: Simon & Schuster Paperbacks, 2003), 459. []

Impediments to Rational Policy Choice on Covid-19

Fauci has become an impediment to rational policy choice. He is talking his book and his book was and is wrong.

The data pretty clearly show that for those under 45 (the principal cadre of industrialized country work forces) the true mortality rate is not going up nor is it hugely high.  But expectations of testing and hospitalization have been pushed up way out of line with what the current state of treatment availability and success rates can do.

(I ignore developing countries with high density cities whose public resources are badly limited.  That is an issue more closely aligned with underdevelopment and resource limitations of the state, both financial and physical).

Distancing and working on hotspots are a legitimate strategy which should be promoted along with a careful statement by health care and political leaders that policy has to be one of triage — treating heavily those most likely to recover.  Lockdown is not a strategy that can promote recovery. Lockdown may work to save Grandma, but at whose expense? Re-opening is not heartless.  It is fighting back.  It is doing what we have to do to survive and prosper once again.  There will be casualties, and some will die.  That is what happens in war.

It is “Heartless” but not “Headless”. It is a health truth, but our Politicos lack the courage to tell the public what the current state of medical arts can do. We have a political aversion to truth that is totally bipartisan.   Churchill understood that in 1940 but we have no Churchill to lead the public.

We have dealt with and can deal with the physical capacity issues of medical treatment. NYC proved that.  But we are going to have death loss in the + 45 age group. Not high in % terms but a family that loses a parent or a grandparent will not be easily consoled.

Those are the facts.  Until we have a viable set of treatments (forget about a quick vaccine answer this year), our major focus is recovery for those most likely to recover.  In the meantime, we will have casualties and death loss.  That is what triage means in war and this is a war.

Political lying only encourages bad policy.

Now, the real risk is the economic recovery. And wringing tears from Fauci are an obstacle course. They can only promote bad policy as is evident in Democratic Helicopter Money proposals today.  The talking heads all criticize markets and public firms about being so short run focused on next quarter’s earnings.  From what I read public firms are adapting very quickly and considering how to operate with the virus going forward.

I don’t see that same degree of adaptability and innovation in the public sector — take the Tesla Tantrum as an example or closing the Fall semester at CSU! The right public strategy is to work out a plan that allows some reopening, and not stand on ceremony!  By the way non-elected permanent bureaucrats rule with as much foresight as George III once did!  They are not accountable!

And adaptability and innovation are the critical strategic aptitudes of winners in war and again this is a war!

Unfortunately Trump is not a believable leader so I am at a loss as to  how to get thoughtful strategy into the public arena over the crying towels of the public sobbing heads of the media or non-elected bureaucrats with fixed ideas and agenda.

The Troubling Return to Central Controls

No one ever claimed that the path to freedom was untroubled by rocks in the road, but the corona pandemic has put added potholes and big detours in freedom’s path. We need to be observant of the risks that have now been created by the massive “step-in” of Government. Perhaps, the most amazing aspect has been the willingness of so many Americans to give over their personal responsibilities and ambitions to the cabal of politicians who in recent years they had learned to distrust. This is a bi-partisan, if misguided, delusion–––by the voters. They had previously demonstrated extreme disgust with the antics in Washington (and in many State Capitols in 2016), but the virus has thrown an unexpected curve ball at that stance. Fear of the unknown is a great mobilizer for giving up one’s personal controls over the conditions of life. More problems than additional infections and deaths is the current willingness to surrender control over our lives, and this terror has not been confined to individuals. Many corporate leaders, not seeing an immediate way out of the morass that lockdowns have created, are now on a pleading platform hoping to save what is left of their companies and their own power.

Coronaviruses–––there have been more than a few–––have crippling effects precisely because developing proper pharmaceutical treatment, let alone efficacious vaccines, has been a monumental task for even the best of the “biopharmas.”1 Believers in the efficacy of Government over Markets can point to the Manhattan Project and the claims that DARPA created the Internet as evidence that a properly marshaled government can perform wonderful magic when pressed into service. But is that a question of organization or an unlimited budget, untroubled by the personal concerns of private business for an adequate return to investment capital? Surely, we should distinguish between a war mentality that pits our survival as a nation as justification for Government takeovers and what we truly face, ugly though it may be, with COVID-19? Our national survival is not at stake.

No one should ignore the deaths that the virus has caused or is likely to cause before this particularly ugly pandemic has receded. As we currently approach some 70,000 deaths in the US caused by COVID-19, we are unpleasantly reminded that an ounce of prevention is better than a pound of cure. That said, adequate preparation for rare events is not particularly a virtue that Government has demonstrated. On the contrary, Government has been caught out more frequently than not when confronted with a rapid change in geopolitics, pandemics, or rapid technological change. That is in the nature of a free state governed by modest checks and balances. There will always be new dangers and questionable responses. Freedom is not a free lunch. We pay for our freedom by allowing multiple sources of information…and the threat that is insidious is to suppress the vast amounts of information that markets provide merely by their operation. Government may be a poor example of a first responder.

There are always post event claims of the “gurudom,” voices unlistened to at an early time, but Government is always and anywhere a late starter and then an information suppressor. Risk management occurs in private business because of the necessity of a budget restraints and the claims of equity and debt holders on current earnings coupled to the limits of corporate saving. That is how it should be. Failure in corporate or personal business is a great, even if unplanned, source of innovation. Yet, innovation is the mechanism that produces a better life for our specie. We learn, often through tragic circumstances, where not to reside, which natural flora and fauna are dangerous to our health, and which devices are likely to help us when we are surrounded by dangers to our survival. We do it piecemeal, and the uphill road to knowledge and control is fraught with many setbacks. However, the human condition is built on learning and progressing diversified by our experience in many different environments. That cumulative learning curve is our human history..

In military affairs, the State is often the driver of technology change, but there too, the State stumbles and often goes down roads to dead ends. In the worst of cases, we see the State collapse when it cannot marshal sufficient technologies or manpower or bureaucratic organization to overcome its adversaries. That is an important historical marker that should caution us to rely solely on the State organization of science, technology, production, and distribution. There is simply no way centralized government planning can duplicate the massive information production and distribution that a myriad of private markets provides nor the ever-present incentives to innovate when sufficient information is available. State planning often relies on very imperfect information and then commits vast quantities of resources chasing down roads to nowhere.

While it is true that there some counterexamples to these State-generated failures, it is more often than that States bury false moves and strategies until the light of historical research finally highlights them…often generations later. Sometimes, we attribute these cover-ups as the result of poor leadership, but that is truly another kind of error. With the power to marshal State resources, most leaders that go down false paths do not willingly provide evidence of their errors and there is no market response that normally would be self-correcting when error produces loss. In the most violent examples, States that find individuals who disagree with policy or judgment calls on the direction of technology or strategy use State violence to suppress alternative interpretations of facts and policies. Stalin murdered Tukhachevsky—his erstwhile former leading general of WWI—-prior to the advent of WWII. While the US doesn’t murder dissident military leaders, it does punish those out of step leaders who want to pursue alternatives not endorsed by the current ruling military clique. Hello Billy Mitchell, and George Patton—-you have great company with Winston Churchill.

That is the nature of Government—-it severely punishes dissenters within. Furthermore, it is hard for Government to finance and nurture alternative paths under the duress of military survival—-precisely what markets do every day. Great discoveries come from mavericks who throw out conventional wisdom because their failures are personal, not societal. Government failure can be societal precisely because once we hand over markets to Government, there are few outside alternatives to the Government ”truth!”

That is where the real danger lies today. Ironically, in spite of manifold distortions of truth and information, even this much criticized Administration has created, albeit by default, some remedy to overall Government takeover. Our Federal system allows, in fact, commands, many sources of alternative information and activity. Those politicians who demand a National Policy for fighting the corona virus miss the virtue of multiple attempts by State and local leaders—-and that provides an unending stream of useful information over what works and what fails. This administration has stumbled into the virtues of multi-pronged efforts by State governments probably because of its own lack of risk management much earlier in the game. Unfortunately, the current wisdom was that Lockdown was the appropriate death-mitigation model. That may turn out to be a half-truth if we find that restarting the American economy becomes a painful experience.

In the long postmortem on failed Viet Nam strategies, many military historians concluded that the massive firepower of the Westmoreland approach was inappropriate and devastatingly counterproductive. Early attempts at small local groups invested in the local communities—-a strategy vigorously asserted by our then chief of the Marine Corp—was squelched by the Johnson administration in favor of massive aerial bombing and huge suppression of the Viet Cong by tanks and napalm.2 Protecting the people from the Viet Cong was abandoned by a fixation on body counts. That massive kill strategy ignored the politics of collateral damage.

The US has finally learned that massive power projections often have countervailing downsides. We now try with small groups of tactically distributed forces in Iraq, Afghanistan and Syria, with much better results and much lower collateral costs. We do learn—-but it is a painful learning experience for both for our military forces and for the residents of countries torn apart by conflict.

Somehow, whether because of crony capitalism or national leadership failure, it seems there are now prospects of utilizing markets to deal with the treatment and vaccine development to fight COVID-19. By default, we are unleashing many non-governmental firms to search out the myriad of possible pharmaceutical answers to this pandemic. It is highly probable that we will learn more quickly with less direct expense than by a massive single effort by our national government agencies. That is what markets are good at. They sort out multiple paths. They follow small bits of information that possibly can be profitable as well as efficacious.

Sadly, some of the current drift toward collectivization is suffused with claims that profits will interfere with efficacy—-nothing is further from the truth than this canard. Bureaucratic collectivization is the long trod path of singular direction. The next battle will be the socially powerful claim to controlling the profits of the pharmaceuticals taking the risks ancillary to developing treatment and vaccines. This is the old story of Government trying to control the distribution of outcomes (income and wealth) through mechanisms with massive dis-incentives. When it comes to profits, politicians invariably forget old lessons. Killing the goose doesn’t produce new eggs. If the Government wishes to subsidize the cost of treatment or vaccine, it must do it in a way that does not punish the creators of these silver bullets. We don’t need to provide more examples of the Bourbons “learning nothing and forgetting nothing.”

Sadly, the talk in Washington has a punitive theme: “don’t let the drug companies profit from our misery.” Will politicians ever learn how disastrous such a policy can be? Subsidies for use of a drug are one thing. Suppression of pharmaceutical pricing is quite another. This is not a panegyric for unlimited monopoly pricing power. We should expect that private pharma will have a number of remedies for treatment. We want many approaches. Hopefully each will be thoughtfully vetted by good statistical practices and early use limited to medical emergencies until suitable validation is obtained. We will make mistakes. Drugs with subtle contraindications will occur and we will never be perfect in eliminating hard to discover side effects. We can take reasonable precautions, but we should not promote the illusion that there are risk-free treatments or perfect vaccines. In medicine, it is also true that perfect is the enemy of good. To offer such false illusions—-even by well-meant Governmental health officials—-is another road to nowhere.

Ultimately, herd immunity must be the outcome or we will have to live with future episodes of corona virus emergence. What we should demand of Government is rapid response to local upsurges and a willingness to allow multiple paths in emergency situations. We will not be perfect. We never are. But we can do much better than we have done, as long as the learning path is not so obstructed by the “good intentions” of politicians who fail to make necessary cost-benefit calculations. Doing better is a worthwhile goal. Doing it perfectly is an errand for fools.

  1. Swine fever, another coronavirus, is decimating pigs around the world. Known since 1907 it still has no known vaccine or for that matter a successful treatment. []
  2. Victor Krulak []

Trump’s China Wrecking Ball Express

The recent arrest in Canada, under a request from the US, of the CFO of Huawei, the leading Chinese telecom equipment manufacturer, doesn’t seem to be an accident. In the context of the growing commercial dispute between China and the US, it will undoubtedly inflame the Chinese. In our view, it is a catastrophic strategic error. Was it merely an agency of the US government acting without Presidential instruction? Was this bad political governance or just an errant bureaucratic mistake? Either way, the consequences seem horrendous. Continue reading

Can Mudville Be Fixed?

In a previous essay, we lamented that Mighty Casey had struck out. Maybe what is needed is not another Casey, but fixing Mudville. That means changing our expectations of good governance and then doing something about a reduced menu of expectations. There are many sources of our disaffection with government. Our political fragmentation, however, assures us that there is not a single silver bullet. As a country we have very different expectations concerning what our Government should provide for us.

From an historical perspective, what we wanted in 1776 and later in 1787 was that Government should insure our liberty and our freedom. Those were simpler times and the Founding Fathers prescribed a stronger national government that could marshal the resources to defend our nation and protect us from violent uprisings internally. The Philadelphia convention of 1787 was highly fearful of the outbreak of domestic uprising, coming as it did shortly after Shays Rebellion was put down only through a massive effort by the State of Massachusetts.

The Founders wanted an orderly state, hopefully not torn apart by faction. Federalist #10 (Madison) was devoted to just that issue: factionalism, and how the separate sovereignty of the 13 States coming together in a Union would provide a protection against factionalism. The Fathers were also strongly aware of the precarious nature of our finances. The Continental Congress had made long-term sufferers out of its own Army by its failure to raise sufficient resources to pay the Army and its officers. After the Constitution was written, Hamilton, as the first Treasury Secretary, federalized the separate States’ debt thereby creating a viable financial system that could support the new Government and its armed forces. Tax revenues then came largely from taxes on trade—tariffs! It would not be until the 20th century that the US turned to personal income taxation. In spite of the brilliance of our Founders, history must judge their failure to place term limits on the legislature as a strategic error.

Term limits were thoroughly discussed during the deliberations in Philadelphia and while some limits had been in effect under the Articles of Confederation, they disappeared completely in the final draft of the Constitution. Even from Madison’s voluminous notes, it is unclear how this omission was contrived. Government was smaller and stayed smaller, absent the Civil War, until the advent of the Great Depression. Perhaps the small size of the actual government and the limited scope of its interests at the Federal level dictated that outcome? We cannot be sure.

The size and extent of Government’s intervention into private endeavors is very much at the source of the observed cronyism and corruption that so disfigures our current governance. It might seem strange that government size would be a source of corruption, given that smaller states also suffer the malady. Consider, however, the nature of any Government effort, either through specific legislative enactment or through the rules of a government agency designated by that legislation.

The bureaucracy writes the rules and largely interprets them even though the formal legal structure comes from the Congress and is signed by the President. Each activity that is so described by the legislation both prohibits or directs that private actors, firms, households, individuals, associations, NGO’s —all domiciled in the private sector—are to undertake an activity or to forsake an activity under the sanction of a Government regulation.

Each such regulation sets up incentives to abide by the directives but the regulation also implicitly sets up a shadow price that measures the value of non-compliance to the regulation. Thus, regulations set up incentives for behavior of agents in the private sector and clearly these agents respond to these incentives. Then comes the investigation of such deviations and the enforcement by the specific government bureau or agency designated to compel private behavior. How do markets respond to these incentives?

Largely, in the US, it is first by lobbying efforts paid for by affected private agents. The lobbying can take place in the designated bureau and/or it can take place in front of particular legislators. Here a quid pro quo often occurs. Private agents want a “seat at the table,” and they are wiling to purchase the necessary admission tickets. They can contribute directly to a sympathetic legislator’s campaign to purchase that seat at the table.

The absence of term limits has created many permanent politicians, each of whom requires resources to maintain his elected status. Markets work—often all too effectively—and we then observe special interests buying tickets to the cronyism and corruption circus. The circus never pulls down its tent. It is a permanent fixture of expanding government interference in the affairs of the private sector.

Now Mudville complains that its true wishes are not heard, that no one in Washington really hears what they want. That’s tinder for a political candidate willing to state he hears the cries of the disaffected. Sound familiar? Clearly, no joy in Mudville. Instead, we have frustrated grievances by a great many angry voters. Can representative government survive this tumult? One has to wonder?