Monday, February 28, 2022

The U.S. and NATO must fight

The U.S. and NATO must fight

(Coauthored with Elizabeth Fama)

Why are we — the U.S., NATO, the civilized western world — not fighting for Ukraine? If we do not fight in Ukraine now, we will fight there later, or in the Baltics, Poland, or Taiwan, at much greater cost. If we do not forcefully reverse this invasion, larger ones will follow.

The next few days and weeks are vital. If the government of Ukraine falls, President Zelenskyy and other leaders of the legitimate government will be jailed or murdered. Russia will annex Ukraine, or install a puppet government with a defense treaty. It will declare Ukraine under the Russian nuclear umbrella. Freeing Ukraine after the fact, re-creating a government, will be much harder and riskier.

Sanctions will not save Ukraine. Sanctions were intended as a deterrent. Sanctions are a punishment. Sanctions are not an effective way to fight a war. They will do little to stop Russia from winning in the next month or two. Sanctions will not achieve what must be our goal: Russian withdrawal, Ukrainian sovereignty, a return to the borders we pledged to uphold in 1994. Cuba, Iran, and North Korea withstood sanctions for decades. So will Russia. 

Now that sanctions have failed to deter Putin, what is the plan? On the current course, if we don’t provide more help, Ukraine loses, the country is destroyed or partitioned, and we settle in for decades of deciding just how much energy Russia sells to Europe, what Europe sells in return, and how much tut-tutting we do about Russia trading with China, Iran, and others. While Putin turns his roving eye to the Baltics.

To save Ukraine, to save its democratically elected government, to save its people, to stop this from happening over and over, allies must  fight.

We have the means. Russia does not have the power of the old Soviet Union, or of Nazi Germany. Russia spends $62 billion a year on its military. The US spends $788 billion. Germany and France spend $53 each, and the U.K. $59. NATO as a whole spends about $1.2 trillion a year on defense, almost twenty times what Russia spends. Our armies are larger, better equipped, and better trained than Russia’s. We lack only the will.

News from Ukraine already suggests unexpected Russian weakness: deficiencies in advanced weapons, tactics, training, supplies, and intelligence. There is a good chance that Russia needs this to be over quickly. If this is true, it is all the more important for us to help Ukraine to hold on.

What can be done in practical terms? NATO can immediately declare a Russian no-fly zone over Ukraine. Denying Russia the skies would critically hamper their invasion. NATO can launch missiles, drones, and airstrikes at Russian army assets. NATO should move invasion forces to the Ukrainian borders. Allies could work closely and directly with the Ukrainian Army, and support their intelligence. The U.S. could unleash our own cyber capabilities. We should protect President Zelenskyy and his government. (The man is a hero.)

We cannot fight, many say, because any engagement of NATO and Russian forces could provoke a nuclear escalation. It’s a legitimate worry. Putin is already capitalizing on this fear by placing nuclear forces on alert in response to sanctions. First, Putin knows the retaliation that would follow. Second, our goal is freedom for Ukraine, not invasion of Russia or regime change in Russia. Nuclear weapons exist to defend a country, not to prosecute aggressive wars, and even Putin knows that. That’s why the potential for nuclear war is higher if we try to free Ukraine after Russia has already subsumed it into its sovereign territory. Most of all, if we cannot ever use our conventional military to stop an unprovoked invasion, we surrender now and watch the Century of Invasions unfold.

We must not fight, others say, in “forever wars” in far-away countries. But in Ukraine we would not be toppling a regime, or “nation-building.” We would be defending and preserving an elected government and its civil society. 

We did this before. In 1990, Saddam Hussein conquered and annexed Kuwait. A coalition of thirty-five nations fought, forced Iraqi troops back to the border, and left. Why did we fight over such a distant piece of land? To stop the next invasion.

We two are not habitual hawks. We recognize that the history of U.S. foreign interventions has included failures. We know that our military cannot rescue millions of people trapped in misery by despots. But the U.S. and our allies must  send a message to those despots that we will not return to a world of naked territorial aggression, and that we will fight, if need be, to stop it.


Update.  Bottom line: We must not let Ukraine lose. Do what it takes, calibrate responses, sure, maybe we don't have the right strategy. Maybe big sanctions will do it. Maybe Putin will be overthrown, But letting  Ukraine lose and then settling in for a sanctions negotiation is an unacceptable outcome. Do not let Ukraine lose. 

Tuesday, February 22, 2022

Important questions unasked of the Fed

This weekend's WSJ essay "How the Fed Averted Economic Disaster"  by Nick Timiraos finally brings into public discussion the second question we should all be asking of the Fed. What happened in the grandest bailout of all time in the covid crisis, and, more importantly, having done it twice, how are we going to avoid massive bailouts becoming the normal state of affairs? (The first question, of course, is "how did you miss inflation so drastically and when are you going to do something about it?") 

They were offering nearly unlimited cheap debt to keep the wheels of finance turning, and when that didn’t help, the Fed began purchasing massive quantities of government debt outright.

Translation: When dealer banks weren't buying treasury debt fast enough, the Fed lend the banks money to buy the debt, and quickly bought up the massive amount of debt themselves. 

The Fed followed by bailing out money market funds, buying state and local government debt, buying exchange-traded funds that held junk corporate debt, and announcing a do whatever it takes pledge to keep corporate bond prices high. It worked

It worked. The Fed’s pledges to backstop an array of lending, announced on Monday, March 23, would unleash a torrent of private borrowing based on the mere promise of central bank action—together with a massive assist by Congress, which authorized hundreds of billions of dollars that would cover any losses.

...Carnival Corp. , the world’s largest cruise-line operator. Its business had collapsed as Covid halted cruises world-wide. Within days of the Fed’s announcement, Carnival was able to borrow nearly $6 billion from large institutional investors...If the hardest-hit companies like Carnival, with its fleet of 104 ships docked indefinitely, could raise money in capital markets, who couldn’t?

Let's be clear who is bailed out here: Creditors. People who lent lots of money to shaky businesses, earned nice high yields in good times, now have the Fed and Treasury bail them out in bad times. 

It worked. 

Today, nearly two years later, most agree that the Fed’s actions helped to save the economy from going into a pandemic-induced tailspin.

I agree. A crisis was imminent, a toppling of a vastly over-leveraged house of cards was in the works. As "just in time" supply chains discovered they needed a bit of extra inventory around, just in time debt financing falls apart at the slightest shock, needing a bit of cash inventory and equity buffer. 

The Fed’s initial response in 2020 received mostly high marks—a notable contrast with the populist ire that greeted Wall Street bailouts following the 2008 financial crisis. North Carolina Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, gave Mr. Powell an “A-plus for 2020,” he said. “On a one-to-10 scale? It was an 11. He gets the highest, highest marks, and deserves them. The Fed as an institution deserves them.”

I also agree, almost. But  

The question now is what will be the long-term costs and implications of that emergency activism—for the Fed, the financial markets and the wider economy. 

This is the question. Why did the economy get into a situation once again, so soon, that the Fed had to engineer this massive bailout? What are you going to do to make sure you don't have to do it again and again? 

Saturday, February 19, 2022

More infrastructure snafu

Just as I hit publish on my last post, the Wall Street Journal publishes a much better essay by Ted Nordhaus on the impossibility of building infrastructure in the US, even if it is green alternative energy climate-change infrastructure.

In Nevada’s Black Rock Desert, local environmentalists and devotees of the Burning Man festival are using the National Environmental Policy Act (NEPA) to oppose a geothermal energy plant. Further south, the Sierra Club has joined with all-terrain vehicle enthusiasts to stop development of what would be the nation’s largest solar farm, which it says threatens endangered tortoises. ... proposals to develop wind energy in American coastal regions have also faced a constant barrage of NEPA and Endangered Species Act (ESA) lawsuits designed to stop them.

The Nantucket wind farms are the classic example. Wind farms, yes, but not if it spoils the view of uber-wealthy greens. Sue! On whale-disturbance grounds. 

Friday, February 18, 2022

Drowning in paperwork

The US, and New York State in particular, are embarked on a decarbonization agenda. Canada has a lot of hydropower to spare, which emits no CO2. (Though large hydropower is rather hilariously not deemed "renewable" by California, among others.) All we need is a big extension cord from Canada down to NYC, and we can save the climate, right? How long can that take? 

More than 17 years, as The Wall Street Journal reports

By late 2025, a 339-mile high-voltage transmission line is expected to deliver enough hydropower from Quebec’s remote forests to supply about 20% of New York City’s needs. The first electricity will finally flow 17 years after developers set out to bury a power line along the bottoms of Lake Champlain and the Hudson River, assuming they clear one last regulatory hurdle and encounter no further challenges.

Well, I'm glad climate is not a "crisis," "emergency" or "catastrophe" needing quick attention. 

Thursday, February 17, 2022

Free to transact

What rights do we need to guarantee our political freedom. Well, the right to speak freely, of course. The right peaceably to assemble, and to petition the government for a redress of grievances. Even in trucks. 

But without economic freedom you cannot have political freedom. The right to work, which requires the right to hire. If the government, or political pressure groups, can stop you from being hired, you cannot speak, you cannot assemble, you cannot act politically. Communist countries didn't need to put people in jail. They could just stop them from working. 

And the right to transact, freely and anonymously. If the government can monitor your transactions, freeze your assets, "sanction" you, or freeze your ability to transact, to buy or sell anything, it can quickly silence you, stop your political participation, undermine political movements or even aspiring individual politicians. 

This is playing out in Canada right now. I have stated the principle before, but now we have a good example before us of just what the danger is. I don't care how you feel about the truckers, but look at the power the government has used to silence their political protest. The government can use the same power to silence individuals. Or protests from the left. 

Reports that there are bank runs and outages as Canadians try to quickly take money out of banks are an interesting consequence. 

This is going to be a hard question as we move to electronic transactions, whether fintech or crypto. If we have arbitrary, cheap, completely anonymous transactions, tax evasion, theft (ransomware), fraud, can go haywire. If we have complete surveillance and control, political  liberty goes out the window. 

Friday, February 11, 2022

Is the Fed really clairvoyant?

 Fed Pick Raskin Tries to Mollify GOP Critics on Climate Stance is the headline. 

I previously praised Raskin for the clarity of her statements. Unlike most others in this game, she straightforwardly advocated the Fed starve fossil fuel companies of money in the name of climate. For example  

“We must rebuild with an economy where the values of sustainability are explicitly embedded in market valuation,” she wrote. This will require “our financial regulatory bodies to do all they can—which turns out to be a lot—to bring about the adoption of practices and policies that will allocate capital and align portfolios toward sustainable investments that do not depend on carbon and fossil fuels.”

Good. Let's stop pretending there is some "climate risk" and talk honestly. 

As Bloomberg reports, she is furiously backpedaling 

“The Federal Reserve does not engage in credit allocation and does not choose the borrowers to whom banks extend credit,” she wrote.

But she did see some potential for the Fed to act, particularly in analyzing the climate risks facing supervised institutions. 

Those financial risks “might include disorderly price adjustments in various asset classes; potential disruptions in proper functioning of financial markets; and rapid changes in policy, technology, and consumer preferences that markets have not anticipated.”

This seems like more climate-risk boilerplate. 

But the last paragraph here caught my eye, and is the point of this blog post. Read it closely. This is supposed to reassure us? Forget climate. The future head banking regulator thinks the Fed actually has the capacity and mandate to try to foresee and do something about "disorderly price adjustments" in "various asset classes" -- that means all over the financial system including stocks -- "potential disruptions" and best of all  "rapid changes in policy, technology, and consumer preferences that markets have not anticipated"

Really? This is, remember, the same institution that was completely surprised by inflation, completely surprised by a pandemic (we've never had those before, have we?) and completely surprised that mortgages and mortgage backed securities might melt down. 

The gap between aspiring technocrats' view of their all-seeing knowledge, control,  and reality seems pretty large! If the stability of the financial system depends on Fed appointees clairvoyantly foreseeing "rapid changes in policy, technology, and consumer preferences" that banks don't even consider as risk-management possibilities... heaven help us. 

Meanwhile Green Stocks Stumble reports WSJ

Electric-vehicle startups and other green tech companies soared early last year. Now a wave of investigations, outside allegations and growing investor skepticism have sent shares down 75% or more for many of them.

If we were going to be honest about "asset classes" that might have "disorderly price adjustments" due to "rapid changes in policy" (subsidies end, midterm elections,) and consumer preferences, should we just maybe look at vastly over-priced, no revenue in sight, heavily subsidized, ESG labeled, regulator-approved green stocks, bonds, venture, and bank lending? Are we not even possibly heading towards another Fannie and Freddy, only this time subsidized green boondoggles? If "markets" aren't "valuing" green investments correctly, isn't it remotely possible that they are valuing them too much?


I should have added: there is no such thing as an "orderly" price adjustment. If you know prices are going down tomorrow, you sell today. One of the most classic policy fallacies is the idea that we can have a slow steady price decline. 

Friday, February 4, 2022

Covid tests parable

The saga (WSJ) [link now works] of "free" Covid testing is a great parable for many things wrong with the American health payments system. 

... On a recent Sunday my family got tested at a pop-up tent outside a gasoline station. The sign on the tent advertised “free Covid testing.”

...The cost is billed to my health insurance. A few days ago, I received a routine letter from my insurance company summarizing what it paid: $1,140 a month for my daughter’s weekly PCR test. That comes to about $285 per test, 20 times the cost of an at-home rapid test.

Policy makers at both the state and federal levels have opted to finance Covid testing through private health insurance. ...Insurers must reimburse testing providers, even out-of-network ones, and the state places no restriction on the amount reimbursed.

"We'll make the insurance companies pay for it," rings the standard-issue progressive policy-maker. Except, as should be obvious to anyone who has ever heard the word "budget constraint," 

...Insurance companies will inevitably pass the costs on to policyholders through either higher premiums or reduced benefits.