Craig Pirrong's Blog, page 8

A Transactional President and The Transaction Cost Economics of Greenland

Trump’s Greenland obsession has attracted considerable ridicule (go figure) but increasingly some who cannot be considered reflexive Trumpists are stating that greater US control over the world’s largest island makes good geostrategic sense. In a nutshell, increasing American control over Greenland would enhance America’s strategic position in the Arctic, which is an increasingly important theater of jockeying between world powers. Russia has always been a rival in that region, but now the non-Arctic state of China is making moves there as well. (Come to think of it, Trump’s statements about making Canada the 51st state may reflect the same calculation, especially in light of the collapse of Canada’s military and the globalist, leftist tilt of its government in recent decades).

Note that I wrote “control” above. Ownership is sufficient to obtain control, but it is not always necessary to do so. Control rights can also be obtained by contract, which in an international context would be in the form of a treaty or similar inter-state agreement.

Thus, the real issue is what is the best way for the US to achieve its strategic objectives, via purchase or treaty/contract. That is, this is analogous to a firm deciding whether to vertically integrate to acquire inputs, or instead enter into a contract with a separate firm to do so. (In the IO literature, this is sometimes referred to as the “make or buy” decision).

The major advantage of purchase is that ownership confers exclusivity, and the right to exclude. This is of particular importance in the case of Greenland, where excluding a Chinese presence is essential to achieve US interests. This includes a presence in both facilities/bases and natural resource development.

Now it may be possible to formulate treaty language that would grant exclusivity to the US. However, (a) nations can renege on treaties, and (b) as the case in any contract, there can be ambiguity in treaty language that allows ex post opportunism. Thus, enforcing such exclusivity terms is likely to be costly and the risk of breach is non trivial.

Trump’s rhetoric in another controversial acquisition (re-acquisition, actually) proposal illustrates the issues with enforcing the right to exclude certain uses of an asset. Specifically, the Panama Canal Treaty–actually titled The Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal–required the canal to remain out of the control of any power and granted the US the right to defend the canal against threats to neutral operation and access. This has not prevented the development of massive Chinese port facilities at each end of the canal, facilities that have potential military uses that threaten the US’s access to the canal especially but not only in the event of a Sino-American war.

That is, a case can be made that the US has a right to intervene to eject China from the Canal Zone, or at least would have the right to do so under certain contingencies. The practical enforceability of that right is clearly problematic. It would not be so if the US still controlled the CZ.

Another example of the risks associated with obtaining rights to strategic territory via contract is also in the news, namely the UK’s apparently imminent transfer of control of Diego Garcia to Mauritius–a deal that Starmer is apparently panting to complete before Trump takes office.

Trump’s real estate experience no doubt makes him acutely aware of the trade-offs between leasing a property and owning it. These trade-offs are particularly important when development options are considered, and Greenland would be all about development options–transportation infrastructure, military facilities, and mines (for rare earths, specifically). Writing an even passably complete contract describing and allocating such development rights would be challenging in the extreme, and Trump no doubt understands this clearly.

Ironically, the biggest obstacle to development of a US-owned Greenland would be . . . US law. The entire panoply of environmental law that has throttled development in the US would presumably be applicable to Greenland. Certainly environmental groups (plausibly acting as cat’s paws for China and Russia) would engage in lawfare to restrict development. And a future president could do as Biden just did with respect to offshore energy development, and Biden other presidents have done by proscribing development on some federal land.

In sum, (a) some degree of US control of Greenland would advance American national interests, and national security interests specifically, and (b) obtaining that control via contract (treaty) would likely entail substantial transactions costs in specifying and enforcing those rights. In contrast, ownership would confer control and avoid these transaction costs. Thus, buying Greenland makes economic sense, not in the sense of American investments in Greenland are positive NPV projects, but in the sense that ownership is the most economical way to incentivize and secure those investments. Put differently, transactions cost economics strongly favor achievement of American objectives in Greenland via purchase. It is therefore not surprising that a ruthlessly transactional man who has decades of experience in dealing with the trade-offs involved with purchase and contract is pursuing that course.

The Left is On Fire: We Don’t Need No Water, Let the MF Burn

It is remarkable to watch the incineration of the left around the world. From California to Canada to Europe you can hear their shrieks emanating from the flaming pyre.

This is almost literally true in California, where the horrific fires in Los Angeles are a veritable bonfire of leftist vanities. For years the self-satisfied, sanctimonious, supposedly superior leftist “elite” has pursued a governing agenda that focused on everything but performing the basic functions of good government. Among these environmental wackiness and DEI have been most prominent.

The environmental wackiness includes privileging some marginal meaningless species of smelt rather than responsibly using and conserving precious water supplies or the construction of reservoirs necessary to supply water for, you know, fighting fires and other irrelevant stuff. (In an ironic twist, it didn’t save the smelt–you can’t make this shit up if you try).

It also includes grotesque forest management practices that create tinderboxes ready to explode due to acts of God, or more likely man (through arson or accident), all in the name of preserving other wildlife (which ends up being incinerated when the tinderboxes erupt), or even more absurdly, of reducing CO2 emissions. (Note to the stupid: letting dead timber rot instead of burn only affects the timing of CO2 release).

The left blames California’s chronic fire problems on climate change. Even granting that dubious premise, a perceived threat of the dire effects of climate change should have led California to redouble efforts at mitigating them, through better water and forest management. If it is as existential threat, as the California left insists, act like it! But they have not. To the contrary.

So what is it? Do they not really believe in climate change? Do they use it as an excuse to divert resources to their real priorities? To camouflage their totalitarian agenda? Or are they just dumb as dirt?

These are observationally equivalent. I’ll leave it up to you to make your own choice.

The DEI dumbness is epitomized by a LA Fire Department that gloats how its lesbian-dominated “leadership” has broken glass ceilings. In case you haven’t noticed, the signs on fire alarms and equipment don’t say “In Case of Fire, Break Glass Ceiling.” And when the alarms have been pulled, the response has been catastrophically incompetent.

In another example of its bad effect do goodism, insurance companies attempted to raise rates to reflect the greater risks and costs of fire (a rational response). To protect its citizens from such unconscionable price gouging, California said no. To which many insurers said, OK, we just won’t sell your citizens insurance, thereby making the cost of private insurance infinite. Thanks, California! (Which is what the insurers who left are now saying, because the fire-related claims ain’t their problem).

I could go on. And on. And on (repeat ad infinitum). Yet the California left presumes to assert its superiority of the rest of us in flyover country, and incessantly attempts to impose its regulatory and legal insanity on the rest of the nation.

The other major leftist vanity bonfire is in Europe and the UK. There the fire starter has been Elon Musk, with an assist from Mark Zuckerberg.

Musk has been holding Labour’s feet to the fire over the appalling Muslim child rape gangs, and especially the official coverup thereof. A coverup that has run for over a decade and has involved virtually the entirety of British officialdom from local Plods to the Prime Minister (in his current incarnation, and his previous one as Crown Prosecutor).

Musk’s X posts have indeed been incendiary, and Labour and its media lackeys have burst into incandescent rage.

BREAKING:

The Mirror reports that the UK government’s counter-extremism unit has launched a probe in Elon Musk’s posts about the coverup of the migrant rape gang scandal in the country.

?The Home Office has stepped up extra monitoring to assess content and the reach of what is… pic.twitter.com/lfSD7e1Pct

— Visegrád 24 (@visegrad24) January 9, 2025

Yes, terrorism. That’s it.

Musk’s real crime is lese majeste. How dare he scorn such eminentos as Starmer and Phillips!?!?! How dare he broadcast our failures?!?!?!

But as is his wont when challenged, Starmer is unleashing the entire state apparatus to go after his critic.

Methinks that he will find the world’s richest man who is tight with the soon-to-be-President of the US a little more of a challenge than a few Southport yobs.

Maybe Starmer should challenge Musk to a fight.

On second thought.

This panties-in-a wad bunch is threatening to end the US-UK “special relationship” over Musk’s insolence (and Trump’s dogpiling).

Oh, would that mean that the CIA couldn’t use MI5 and MI6 to spy on Americans? Your terms are acceptable!

And since the UK military is imploding, just who will defend them, especially against the Russians that the UK claims will rampage to the North Sea if not stopped in Ukraine?

The EU is also going up in flames over Musk. Germany, for example, is on fire because Musk had the audacity to interview the head of the AfD.

ELECTION INTERFERENCE!!!!! OUR PRECIOUS DEMOCRACY IS UNDER THREAT BECAUSE PEOPLE MIGHT FIND OUT THAT THE AFD LEADER IN FACT SOUNDS MORE REASONABLE THAN EVERY MAINSTREAM GERMAN POLITICIAN!!!!

Speaking of precious democracy, the EU admittedly engineered the cancelation of Romania’s presidential election because there was a risk that benighted Romanians might elect a promulgator of Wrongthink.

Former EU Commissioner admits that the EU was responsible for the cancellation of the elections in Romania

"We did it in Romania, and we will do it in Germany if necessary."

– Thierry Breton pic.twitter.com/RsiVG8sOy3

— Daily Romania (@daily_romania) January 10, 2025

The world left is also in hysterics over Zuckerberg’s termination of “fact checking” (or, as I call it, “fact” fuckery). Again, the benighted cannot be exposed to possible Wrongthink! They must have their information curated and spoonfed to them by known liars and partisan hacks, as long as these are made men and women in the establishment. Otherwise, who knows what ideas will get through the hoi polloi’s thick skulls!

(NB: Zuckerberg’s statement is an implicit admission that the allegations of US government censorship of social media are 10000 percent true).

The threat emanating from evil American social media giants may result in the erection of the Great Firewall of Europe.

French former EU bureaucrat Thierry Breton says that “X could be banned in Europe.” https://t.co/exBRAc5886

— Uzay Bulut (@bulutuzay_) January 10, 2025

Good luck with that.

By the way, why are there no European social media giants? Or tech giants generally?

Just curious.

Here’s Europe’s real problem (and the left’s generally):

The truth that the leftist project is going down in flames because it is an abject failure, always and everywhere. All the censorship in the world can’t conceal that fact. There are too many fires of dissent for them to put out.

Unlike LA, we don’t need no water. Let the motherfucker burn. To the ground. Because if it isn’t destroyed, it will destroy us.

The Kumbaya Phase Is Now Over. Back to Our Regularly Scheduled Chaos.

The euphoria over the collapse of the Assad regime lasted, oh, a good two weeks. Now the meet-the-new-boss-different-than-the-old-boss-but-still-really-bad reality is rearing its ugly head, and the war of all-against-all is returning with some combatants basically reversing roles.

Specifically, the old Ins–the Assadists/Syrian Arab Army–are the new Outs, and the old Outs–the jihadists including most notably the HTS–are the new Ins. The new Outs have fled to ethnic enclaves to resist the new Ins. The roles are reversed, and the locations changed, but the fundamental nature of the conflict is eerily similar.

?? Intense clashes rage into their second day in Tartus, Syria, between Syrian Arab Army resistance cells and forces loyal to the new government.

Footage captured by a local woman from her home offers a close-up view of the chaos, showing militants exchanging fire directly below… pic.twitter.com/jtsokMHdqO

— DD Geopolitics (@DD_Geopolitics) December 26, 2024

There’s plenty more like that. What happened in Iraq post-2003 is a good template for what will happen in Syria, namely, regime “dead enders” (in Donald Rumsfeld’s description) will burrow into ethnic enclaves (Alawites in the case of the SAA) and wage a brutal guerrilla/terror campaign against those who ousted them. And those who ousted them will not respond with the same scruples that the Americans did in Iraq.

The Alawites will see this as an existential conflict. It is likely that they will either hold on and wage a protracted war, or will be wiped out. Either way, the exit of Assad will not usher in a new Kumbaya era, but more war to the knife.

Meanwhile, the United States and other western powers are rushing to make nice with the leader of the new Ins, Abu Mohammad al-Julani. Julani has a long al Qaeda pedigree, on the basis of which he achieved the great distinction of being named as a “Specially Designated Global Terrorist.” Not just a designated global terrorist mind you, a specially designated one, and one with a $10 million bounty on his head, no less. His parents must have been so proud.

But the US has indicated that he is someone they can work with, and has removed the bounty.

Apparently because he now wears western style suits and says anodyne things about his plans for Syria and because he’s not Assad.

NB: Assad wore really nice suits too.

I’m also reminded of when westerners cooed over Yuri Andropov because he drank scotch and liked jazz.

Suckers.

All of this is wishcasting. Leopards don’t change their spots, and snakes that shed their skins are still snakes.

And even in the unlikely event that the Face (Julani) has really had a road-to-Damascus conversion, what about all those heavily armed people under him? Will they get with the program, or view Julani as a sellout whom they will eliminate and replace with someone more congenial? Congenial to their jihadist agenda that is, not to humanity generally or the Syrian people specifically.

The Russians are still clinging to their bases on the coast. No doubt the bazaar is open and their are negotiations going on between them and the new Ins over the terms to keep them. It is no coincidence, however, that the aforementioned conflict between the SAA remnants and the HTS is taking place in Tartus–where the Russian naval base is.

Russia has every incentive to support these Alawite elements, meaning that the latter will have strong logistical support, possibly air and ground support, and a relatively secure enclave. Probably more secure than HTS’s was in Idlib. Iran also has an incentive to provide support though this will be somewhat more challenging given HTS’s control over Iran’s old overland supply routes. But overall, I seriously doubt the new Ins will be able to eliminate the new Outs, and the war will continue.

And don’t forget that the Assad collapse has helped ISIS, which has been an enemy of the new Ins when they were the Outs. In response, the US is bombing the shit out of ISIS, but that will not destroy them.

And Turkey is is continuing its onslaught against the Kurds in the northeast. Julani has said that an independent Kurdish enclave in Syria is unacceptable, thereby signaling collaboration with Turkey.

Which puts both on a collision course with the US, which has supported and protected the Kurds, primarily because the latter have been the main boots on the ground in the conflict against ISIS. Will that support continue under Mr. Unpredictable’s presidency? Despite his rhetoric, i’m betting it will, for several reasons. First, because of the aforementioned reactivation of ISIS, whom Trump fought viciously. Second, because that’s where the oil (such as it is) is, and who can forget Trump’s “we’re keeping the oil” statement (made to the accompaniment of much harrumphing around the world). Third, because I doubt Trump is will believe the new Ins have shed their terrorist spots. Fourth, because I doubt he wants to empower Erdogan–especially given the latter’s ambition to assume leadership of the anti-Israel movement.

And as for Israel, they are certainly not putting any faith in Julani and the gang, so they are merrily blowing up any and all weapons that the new Ins might think about using against them. Further, they are amassing a security perimeter on Syrian territory–which will inevitably lead to tension and conflict with the new Ins.

All this means that the situation today isn’t all that different than it was a month ago. Some of the players have switched places, but all the players are still playing. There was a sectarian and ethnic war in Syria for the last decade, and every indication is that there will be a sectarian and ethnic war there for the next decade. At least.

Race Based Admissions at Service Academies: Bad Arguments in Service of Bad Policies

A federal court in Annapolis recently ruled against the plaintiffs in a suit challenging race-based admissions at the United States Naval Academy (of which I am an alum). Writing in Stars & Stripes Harvard Law professor Noah Feldman defends the decision. If his piece is representative of Harvard Law’s logical and legal rigor, then God save us.

Sayeth Feldman:

The court’s decision is legally defensible. The military needs a racially balanced officer corps, and the academies play a crucial role in training officers, especially those who make it to the highest ranks, and the academies play a crucial role in training officers, especially those who make it to the highest ranks.

Rather conclusory, wouldn’t you say? And the reasoning behind the conclusion is fundamentally flabby.

At most “the military needs a racially balanced officer corps” is a proposition. A hypothesis. And also an incomplete one.

Critically, this bald assertion ignores trade-offs. Using race as a criterion for admission to a service academy (or promotion) necessarily means that some individuals with superior qualifications that the military deems relevant for officers’ performance are denied admission to an academy. That is a cost. Is the cost worth the benefit? Feldman does not even raise the question, let alone answer it.

Saying “X is good, ceteris paribus” is a vacuous statement if ceteris ain’t paribus. And it ain’t here. And if it ain’t you have to compare the good of X with its costs.

And just what amount of “racial balance” is optimal? At what level of preference is the right trade-off between “racial balance” and performance-relevant qualifications (or signals of such qualifications) struck? Just saying “the military needs a racially balanced officer corps” does not even attempt to grapple with that question.

And there is another trade-off to be considered which Feldman ignores. Namely, such racial “balancing” undermines the no-discrimination principle which is and has been valued highly by many Americans. Martin Luther King, to name one.

Feldman (and apparently the judge) ignores whether the challenged means of achieving “racial balance”–racial preferences in admission to a service academy–is necessary, or even the best way, to achieve the stated goal of “racial balance.” There are other pathways into the US officer corps, notably ROTC and OCS. Those are likely less selective than the service academies but that is irrelevant if minorities who desire a career as a military officer can do so via these alternatives. This also has the benefit of avoiding the mismatch problem which is a baleful effect of racial preferences in higher education.

Along these lines, Feldman is factually incorrect when he insinuates that academy graduates are disproportionately represented “in the highest ranks.” True once upon a time, but today “ring knockers” no longer have a pronounced advantage over OCS or ROTC types.

In defending the lawsuit, the government argued the following, apparently to some effect:

Where things start to look very different is in the government’s explanation of why it needs a racially diverse officer corps. The government provided, and the federal court credited and cited, extensive evidence of racial violence in the military in the decades before and during the Vietnam era, including race riots aboard naval vessels. The court noted the history of racial discrimination in the armed services, especially in the Navy. Reviewing this context, the court accepted the government’s argument that a racially diverse officer corps is mission-critical.

Talk about a whopping non sequitur. Where to begin?

When reading that, I asked myself “What about the Trojan War?” because that war is about as relevant as the cited history, meaning that the sins of the past cannot justify the challenged policies of the present.

The racial strife in the military–and the Navy in particular–during the Vietnam era was not the product of too few minority officers. It was part and parcel of the racial strife that plagued the United States at that time. It was also a result of the problems within the military stemming from the Vietnam War, the draft, and the ending of the draft: as a result of these factors, if anything it was the result of too few minorities the the Navy’s enlisted ranks. That is, it was highly historically contingent, and those historical contingencies are absent today.

Moreover, at least until the rise of wokeness (to which, ironically, the academies have succumbed, big time) those tensions had abated substantially. As for “the history of racial discrimination”, the official discrimination against blacks ceased long ago and cannot justify discriminating in their favor decades later.

Put differently, there is absolutely no reason to believe that striking down race-based admissions at the service academies in 2024 would throw us into the bad old days of October, 1972 or anything close.

(As an aside, when I was at Navy in 1977-8 Admiral Elmo Zumwalt’s Memoir On Watch was assigned reading. Zumwalt was the Chief of Naval Operations that had to deal with the wind down of Vietnam, and in particular with the racial turmoil that plagued the fleet. On Watch discussed that history in some detail).

It actually speaks volumes about the weakness of the government’s case (and the judge’s reasoning in accepting it) that it had to go into the wayback machine to justify policies that have been found unconstitutional for private universities. (It’s also worth noting that private universities were also hotbeds of racial strife during the late-60s and early-70s).

Perhaps a case can be made for racial preferences for service academy admissions. But Feldman and the government go nowhere even close to making it.

This is serious business. The better the officers, the fewer the number of people who get killed in wars. If academy admissions standards are not related to the quality of the officers they produce, then adjust those standards. If they are related to the quality of the officers they produce, then given the vital importance of good officers in matters of life and death (not to mention national survival) then there had better be very, very, very good reason for making exceptions. Just saying “diversity is mission critical” like a mantra and citing to ancient history to support it doesn’t cut it.

SecDef nominee Pete Hegseth (criticism of whom has quieted substantially of late) has made elimination of DEI a major priority precisely because he believes not only is it not mission critical, it is mission detrimental.* And if you read things like this you realize that his argument is much stronger and much more currently relevant than that made by the government in the Naval Academy case.

Diversity at the academies is just one element of the diversity culture that has poisoned the military. And ironically, that culture is more racially fraught than that of the 80s, 90s, and 00s. It is more likely to recreate strife like that that plagued the military in the early-70s than to prevent it. I therefore hope that Trump and Hegseth make the court’s decision in the Naval Academy case moot by eliminating the policies that it challenged.

*As an illustration of how woke culture has penetrated the service academies, West Point colluded with the leftist ProPublica in a hit piece on Hegseth. ProPublica was going to report that Hegseth lied about being admitted to the USMA, and West Point confirmed–twice–that he had not been admitted. Hegseth then produced a copy of his acceptance letter. If you think West Point made a mistake, I have a bridge to sell you.

About Syria, Don’t Get Your Hopes Up

The request line is open! Responding to Ex-Global Super-Regulator on Lunch Break, here are some thoughts on Syria.

The big picture: it was a shitshow, it is a shitshow, and it will continue to be a shitshow. Just under new management.

Reading the stories of the assault through Aleppo, then Hama, then Homs, and finally Damascus, I thought of the scenes in Lawrence of Arabia in which the Arab irregulars rampaged past a collapsing regular army and took Damascus on 1 October 1918, which soon plunged into tribal bickering and chaos under their rule.

If anything, the ethnic, sectarian, and ideological divisions of the 2024 conquerers are more extreme and latent with violence than the tribal divisions of 1918. Thus, the current euphoria over the fall of the truly odious Assad will prove as fleeting as the euphoria over the fall of the odious Khaddafy. Libya’s recent history is therefore a useful reference in evaluating Syria’s likely future. (The main difference is that Libya has relatively large amounts of oil to fight over).

There are numerous armed groups in Syria with wildly conflicting agendas. The group that has gotten the most attention, HTS, is widely portrayed as a Turkish proxy, but this is wrong. Turkey’s player in the game (a game with a very complex scorecard, even with which you might not be able to identify all the players) is the Syrian National Army, but it was not aimed primarily at the Assad regime. Instead, it (and hence Erdogan) has launched its main effort against the Kurdish (YPG) forces in northeastern Syria. The Kurds were instrumental in the defeat of ISIS–with a considerable assist from the US. Meaning that Turkey’s proxies are attacking US proxies.

Won’t that be fun. What the rump US administration will do is unknown, and that is presumably why Erdogan is in such a hurry, trying to change the facts on the ground before Trump takes office.

So post-Assad Syria is at least a 3-sided conflict, akin to the climatic scene of The Good, the Bad, and the Ugly (minus any Good character a la Clint):

Probably more in fact because the Jihadi and Jihadi-adjacent HTS is itself a coalition of many Islamist groups who could well fall out. And because it would not be surprising if Assad regime elements go underground a la Saddamites post-2003 and wage a guerrilla/terror war. And because Iran will almost certainly attempt to employ Hezbollah elements to retain a shred of influence in the country.

A quick take on the losers and winners.

Losers:

Iran. Clearly the biggest loser, and the worst in a string of defeats in the last year. Assad’s Syria was the essential logistical lynchpin and staging area for Iranian support to Hezbollah. That’s basically gone, leaving an already reeling Hezbollah to wither on the vine. Further, Israel has moved rapidly to destroy Syrian military infrastructure (which Iran used) and to seize “buffer zones” that will make it difficult for Iran to utilize even smuggling operations to sustain Hezbollah. In retrospect, October 7 may look like Pearl Harbor. A seeming smashing surprise attack that set off a chain of events that ended ultimately in defeat. Hezbollah. For the same reasons as Iran.Russia. His regime’s collapse makes Assad’s other major patron looks like a giant with clay feet. Russian troops in the interior are bugging out to the coast: the serpentine routes of some convoys looks like some mini-Xenophon Anabasis. As for the bases that these troops are fleeing to, they still remain in Russian hands although the anti-Assad forces have evidently surrounded them. These bases are so vital that I expect Russia will cut some deal with the victors to retain them. They are essential to supporting Russian operations in Africa. Moreover, without the naval base at Tartus Russia has no ability to support a presence in the Mediterranean, a prestige item for Russia. The Turkish Straits are closed to them so they can’t operate in the Med from Black Sea bases. Given that most of the Russian fleet now consists of short-legged frigates and the like, it’s not operationally feasible to show the flag in the Med from the Baltic or Arctic. (Not to mention if the Russians are forced out of Tartus, the frigates and patrol craft it has there now would have a hard time to get back to St. Petersburg. A winter voyage would be particularly fun!) So Russia will probably hang on with its fingernails, but its position will be tenuous and its reputation damaged further. Hamas. Another loser as a result of Iran’s emasculation.

Winners:

Israel. The biggest winner by far. Iran’s and Hezbollah’s losses are its gain. It has moved with remarkable speed to exploit the opportunity by (a) obliterating virtually all Syrian military assets (aircraft, ships, depots, arms production facilities) thereby depriving any successor state/statelets of them, and (b) establishing the aforementioned buffer zone east of the Golan Heights. Israel’s security situation in the north is better now than probably ever. The US, though the picture is far more mixed than for Israel. Although the Biden-Obama administration is likely to differ, Iran’s strategic defeat is a gain for the US. (Biden-Obama’s approach to Iran is one of the most baffling and stupid foreign policies in American history). As noted above, a conflict with Turkey over the Kurds looms. A jihadi regime in Syria (or more realistically, parts of Syria) is not ideal, and may be worse from a realpolitik perspective than an Assad regime. The greatest benefit to the US would be a serious retrenchment by Iran, which would reduce the strategic risks for the US in the Middle East (given that Iran is the main source of those risks).Other Arab regimes, especially in the Gulf. Again due to the Iranian losses. Some are saying the Saudis and Qatar will be the big winner because Assad’s fall will permit the building of a gas pipeline through Syria (and Jordan) to Turkey and then Europe. This would exacerbate Russian losses and be a win for the Gulfies, but I think it is an unlikely outcome. The chaos that is likely to reign for years in Syria will make this pipeline as chimerical as the oft-vaunted claims about pipelines through Afghanistan.

TBD:

Turkey. Again, it’s main interest is not in Syria per se, but in the Kurds. I expect the US will prevent Erdogan from achieving the destruction of the Kurds that he seeks, so it is likely that Turkey will not achieve the victory it seeks. Many in Turkey greeted the news of Assad’s fall by saying: “Great! Now all the Syrians can go home!” Unlikely, for reasons I discuss shortly.Lebanon. The weakening of Hezbollah should be a great boon to Lebanon. But it’s Lebanon. The Syrian people. Assad’s regime was monstrous. The country has been devastated. (I think GNP has fallen by something like 90 percent). But the likelihood of continued strife means that Syrians are unlikely to harvest the fruits of peace. And being ruled by Islamists will not be fun times–especially for minorities like Christians and Alawites. So contrary to the hopes of the Turks (and the Europeans who have also found Syrian immigrants to be pestilential) I doubt there will be a flood of people back to Syria, and indeed there might be another exodus. Ukraine. Ukrainians are crowing over Putin’s humiliation. But how Putin will react is unclear. Having lost and made to look ineffectual in Syria he may decide to amplify his efforts in Ukraine. And will logistic complications lead him to redeploy assets from Africa to Ukraine? Who knows?

So that’s my hot take on Syria. The basic takeaway is that it is the end of a regime but not the end of wars in Syria. And that from a geopolitical perspective it redounds to the benefit of all those at odds with Iran.

Those Celebrating Brian Thompson’s Death Are Moral and Mental Defectives

The celebrations in some quarters over the cold blooded murder of health insurance company CEO Brian Thompson are beyond sick. Thompson has become dehumanized, and transformed into nothing more than the face of an industry that many despise. The man accused of his murder, Luigi Mangione, a Ted Kaczynski (Unabomber) admirer and radical anti-capitalist evidently believed that his supposedly humanist ideology justifies taking a human life.

That’s wrong regardless of the particulars of the supposed systemic sin he really wants to destroy. It therefore seems somewhat invidious to examine the merits of his motivation. But given that he has received such widespread accolades it is unfortunately necessary.

Take it as given that there are massively dysfunctional elements and intense conflicts in the US healthcare system. But what is the source of those dysfunctions and the resulting dissatisfactions, with respect to insurance in particular?

The fundamental problem inheres in the nature of insurance, and third-party payment for healthcare generally (whether via private insurance or government provision).

Insurance incentivizes moral hazard. In healthcare, part of that moral hazard in due to the insured: they have insufficient incentive to take actions to reduce bad health outcomes. This leads to greater demand for healthcare services. But a big part of the moral hazard problem relates to providers: they have an incentive to overtreat. And facing low marginal cost for additional treatments, the insured have an incentive to overconsume.

Due to moral hazard, risks are not insured completely. One way of limiting insurance coverage is through deductibles–a major source of complaints in our current system. In healthcare particularly, another especially despised way of limiting coverage is to deny some claims–another source of great discontent, and supposedly one of Mangione’s specific grievances (as indicated by his writing “Deny” on at least one of his casings). Especially given the severe information asymmetries between the insurer, the insured, and the provider, in many cases these denials are arbitrary, and would not occur in a Nirvana where information is complete and free. But we don’t live in Nirvana. (And note that denials, and anger about them, are a feature of every type of insurance, be it auto or home or what have you).

That is, there is inherently an adversarial relationship between the insurer and the insured. When the stakes are high–as they are with health–this adversarial relationship is inevitably extremely fraught.

Don’t like denials? Well, if you outlaw them, or even substantially restrict them, you definitely won’t like what insurance costs.

This is not something that moving to a government-run system changes. Medicare and Medicaid also limit coverage and deny coverage for treatments. And look at systems like the UK or Canada where treatments are rationed in large part by waiting, or not getting treated at all.

It is no coincidence, comrades, that Canada and now the UK have implemented “right to die” legislation, which in reality is “right to kill”: offing granny is a very efficacious–and cost effective!–way of denying treatment. Both countries’ systems have proved incapable of providing care at cost that taxpayers can afford, so they are reducing demand through such Orwellian measures, as much as they try to deny that.

So it is not an issue of insurer “greed” or the evils of capitalism. It’s baked into the cake, regardless of the baker.

In countries with socialized medicine, years of government propaganda have helped to diffuse anger at the inadequacies of the health system. In the United States, insurers have been the targets (quite literally in the case of Mr. Thompson), and this has only increased since Obamacare was adopted.

This was effectively a devil’s bargain for the industry. Forcing people to obtain insurance increased the demand for the insurers’ products, but effectively shielded the government from hostility. Given that the insurance industry was a major booster (and in fact author) of Obamacare, it is clear that this was a trade-off that they were quite happy to accept. Although Brian Thompson might beg to differ. If he was alive.

The conflict in healthcare is inherent in the nature of the product, but the conflict has been exacerbated by, and the system hugely distorted by, government policies adopted over the decades.

The original sin is the tying of health insurance to employment, an artifact of labor union lobbying and taxes. The tax-favored nature of paying compensation in the form of benefits rather than wages/salary incentivized employer-provided insurance. This had several malign effects, notably the linkage of insurance with employment, and also the encouragement of excessive coverage (and hence excessive demand for healthcare services) by distorting relative prices.

Other distortions include restricting choice by mandating that insurers provide coverage that individuals don’t want or need. This inflates cost by yet again distorting relative prices. Broader coverage also inevitably leads to more denials, increasing resentment among the insured.

Healthcare insurance is hard. Insurance is hard generally due to information asymmetries, but those generic difficulties are exacerbated by the emotional salience of sickness and health. As a result, insurers will never be loved, and indeed, will almost always be reviled.

Meaning that those whose sickness is a moral rather than physical one who celebrate the death of Brian Thompson are not just moral defectives but mental ones. They attribute the defects of the healthcare and healthcare payment systems to the greed of private enterprises, or the supposed systemic evils of capitalism. The seen vs. the unseen. The things that they hate are inherent in the nature of the service, and can be worse when private enterprise and capitalism don’t deliver it. Don’t believe me? Move to Canada and find out the hard way.

Regulator Hands Are the Devil’s Workshop

Until I read this post by Nasdaq chief economist Phil Mackintosh I was unaware that the SEC wants stock exchanges to adopt cost-based pricing. Even by regulator standards–and Gensler-era SEC standards in particular–this pegs the Dumb-o-Meter.

It is dumb on many levels. Full spectrum dumb.

For one thing, why would the SEC want cost-based pricing? Presumably because it believes that exchange prices are too high. Why would that be? Market power presumably.

But in the electronic era, and ironically especially in the post-RegNMS era, there is substantial competition between exchanges, and between exchanges and the OTC market. Here’s a chart of trading volume and shares by venue for the last 5 days (found here).

Note that exchanges account for less than half of total volume, with a majority of trading taking place on the OTC market. Even among exchanges, volume is fairly well split, with the NYSE having the biggest share (roughly 1/3 of exchange volumes).

This volume split reflects the competition that resulted from RegNMS in an electronic environment. Given this competition, excessive exchange profits should be the least of the SEC’s worries.

Even if market power was a concern, the idea of cost-based pricing would be inane. Exchanges have fixed and variable costs. Price structures must cover both, but average cost pricing leads to inefficiencies: the price of the marginal trade should equal marginal cost, but marginal cost is virtually impossible to measure. And with fixed costs, it can be efficient to utilize variants of Ramsey Pricing in which prices deviate from marginal costs, and for multi-product firms the deviations between price and marginal cost vary by product. (Exchanges are multi-product firms, offering transaction services, data, listing, and other services). (The SEC might also want to catch up with the economics literature, starting with Coase’s The Marginal Cost Controversy, which is only 78 years old).

Moreover, as Mackintosh notes, exchanges are platforms–though he doesn’t explicitly point out the key fact that they are two sided platforms, as most matching systems are. A crude taxonomy of the two sides in the exchange context is liquidity suppliers and liquidity demanders.

As has been known since two sided platforms became a thing (post-Internet, basically) optimal platform pricing structures can be very complex, and optimal pricing structures are not cost-based. To generate the mix of customers that maximizes platform value it is typically the case that one side pays below cost prices (and may indeed pay a zero price or receive a subsidy). In the exchange context, this is most readily seen in maker-taker or taker-maker pricing structures where the exchange fee differs depending on whether you are the active or the passive side of a transaction.

One aspect of inter-exchange competition is that they compete on price structures in order to optimize platform value. Some exchanges even offer different platforms with different pricing structures. This differentiation accommodates the heterogeneity of traders, some who prefer one structure and others who prefer another. In essence, the platforms are competing for different clienteles.

The idea of imposing a cost-based cookie cutter pricing structure on exchanges is therefore beyond absurd. Not only is it unnecessary to constrain market power, any cost-based structure would be wildly inefficient and completely at odds with the basic economics of exchanges as two-sided platforms.

But I guess that’s what you should expect from an agency dominated by lawyers and accountants.

It is ironic that the SEC apparently doesn’t recognize the benefits of one of its major regulatory initiatives of the past two decades–RegNMS. That regulation led to substantial inter-exchange and inter-platform (exchange-exchange, exchange-OTC) competition. One result of that competition is non-cost-based pricing that reflects the fundamental nature of trading venues as two-sided platforms. Thus, exchange pricing is something that the SEC doesn’t have to worry its pretty little head about.

There is a bigger lesson here, relevant to our DOGE era. Parkinson’s Law says that in a bureaucracy work expands to fill the time available. An agency that has the time to pursue such daft initiatives is obviously over-resourced and over-staffed.

Put differently, idle regulator hands are the Devil’s workshop.

Apropos an earlier post scourging Tyler Cowen’s lament that cutting regulator headcount would harm businesses who rely on regulators’ guidance, there have been numerous articles appearing in the post-election days similarly arguing that regulators are really businesses’ friends. They’re from the government, and there to help you! Really!

But as I noted in that post, much of that “help” is necessary only because regulators create the need for helpers by implementing wasteful, complicated, and intricate rules. Cost-based pricing of exchange services could be a poster child for that. It would be economically unnecessary (because competition constrains pricing) and inherently result in absurdities that would have the regulated running to the regulators for guidance and clarification. Regulators creating jobs for regulators, and justifying their existence thereby.

Ms. Magoo on Tour

Angela Merkel is currently on a world tongue bath tour. The occasion is the release of her evidently quite turbid memoir.

A recent stop was in DC, where she was interviewed by Barack Obama. If held at Gitmo, this would be considered a Geneva Convention offense, but people actually stood in line for and paid for the privilege of attending. Of course, they are swamp denizens, and Merkel is a kindred species and Obama is their lord.

In her memoir confesses to not a single error in her long tenure. Zero. Kein!

The lack of self-awareness here is staggering. Germany is currently a basket case. Its economy has been in a prolonged recession. It is in political chaos and social ferment, due in no small part to the mass immigration of recent decades. The phrase “Germany is the sick man of Europe” has considerable currency.

Virtually all of Germany’s current travails can be laid directly at Angela Merkel’s feet. The two biggest problems besetting Germany are energy (which is a major cause of the broader economic malaise) and immigration, both of which are the direct result of Merkel policies. Energiewende (which I have pilloried for over a dozen years) with its renewables obsession and the closing of nuclear plants due to (checks notes) a tsunami in Japan has made German energy among the most expensive in the world. Not a good thing for an energy intensive manufacturing economy! The perversities of the post-Syrian War immigration wave are impossible to ignore–although the German government strives mightily to suppress opposition on the issue.

These were signature Merkel policies. Bad in substance, they were also served up with a huge dollop of supercilious sanctimony. Merkel condemned (and continues to condemn) anyone who opposed them as intellectual and crucially moral inferiors.

In brief, Angela Merkel is the Ms. Magoo of German politics (and world politics, given how she was and is lionized outside of Germany). A blind bumbler who left a trail of chaos and destruction behind her, all the while touting her achievements. “Merkel, you’ve done it again!”

The adulation she is currently receiving suggests she is an exception to Enoch Powell’s dictum that “All political lives, unless they are cut off in midstream at a happy juncture, end in failure, because that is the nature of politics and of human affairs.” And that may be Merkel’s true genius. That she saw what was coming and stepped aside to let others clean up the mess and take the blame. If so, well played!

But that would require a degree of self-awareness that Merkel apparently does not possess. She seems utterly sincere in her belief that she did no wrong, and indeed, did everything right.

But a lack of self-awareness is the most prominent trait of her class. As I’ve written since Trump emerged on the stage in 2015 the establishment/elite/ruling class is completely unaware of the baleful consequences of their overlordship, ignorant of how much they are despised by the hoi polloi, and clueless about their impending doom. Even as it stares them in the face, as evidenced by Trump’s decisive victory and the political chaos in France, Germany, and the UK.

Yet on and on they go, as supercilious and sanctimonious as ever.

We see it in the US in spades, with the Democrats’ complete inability to comprehend or come to grips with the massive repudiation they received a month ago. Obama is the best illustration of this, projecting on Trump and his voters all the horribles (e.g., vote rigging, lawfare) his party has committed, and failing to acknowledge that DEI, wokeness, mass immigration, climate extremism, etc., etc. etc., are widely detested.

These people need to go away. But they never will leave voluntarily. In their narcissistic self-regard they view themselves as God’s gift and their legacies as glorious.

So do to them what they hate most: mock them. Mercilessly. And start with Ms. Magoo.

Dissatisfied With Financial Regulation?: Go to the Roots of the Problem, And Fragmentation Ain’t It

The structure of financial market regulation has been a source of dissatisfaction since at least the time of the birth of the SEC in the 1930s, and maybe even dating back to the first regulation of futures markets in 1922. Don Wilson of DRW is only the latest of those to express this dissatisfaction.

Since derivatives markets first emerged from their niche in the commodities, and especially agricultural commodities, a lot of the criticism has focused on the bifurcated nature of US regulation, with separate securities and derivatives regulators, the SEC and the CFTC respectively. Why not just have one regulator given the substantial overlaps between securities and derivatives markets? Whereas previous “reform” proposals have been to merge the agencies, Wilson suggests scrapping them both and creating a new unified regulator.

This idea is a hardy perennial and has always struck me as mere org chart shuffling, or furniture rearranging. And that’s the best case. Worse outcomes are very possible.

For one thing, the relevant laws–the Securities and Exchange Acts, and the Commodity Exchange Act–would remain in place, with one commission in charge of implementing both. Many of the conflicts, tensions, and contradictions involving the SEC and the CFTC are rooted in the underlying laws, and would remain post-merger (or replacement with a super agency). The conflicts would become intramural rather than intermural as it were, but would not go away.

For another, I generally favor functional regulation and given the myriad functions of financial markets and institutions subsuming all regulatory oversight to a single agency may well impede functional specialization.

The SEC already represents a good example. In broad strokes the Securities Act relates to securities issuers (e.g., disclosures) and the Exchange Act relates to the trading of securities. Those are two very different functions and only tangentially related. Yet a single regulator oversees both.

The CFTC also has authority over trading per se on some venues.

Both agencies have authority over intermediaries (e.g., broker-dealers, FCMs) and clearing.

Maybe there would be some reasonable rationale for splitting off regulation of issuers from regulation of trading, trading intermediaries, and clearing, and putting these last three in a single silo. But even that is problematic due to path dependence.

We are not starting with a blank slate. The pre-existing statutory division is one historic fact. Another is that derivatives and securities markets have evolved very differently, and that could very much reflect the longstanding regulatory bifurcation.

Is it desirable to move toward uniformity in how derivatives and securities markets are organized and governed, and in essence ignore the historical process that created the current market structures? That’s not immediately obvious given how wrenching and unpredictable the process of achieving uniformity would be–and how rife the unexpected consequences would be.

Moreover, how would the political economy work? There’s no guarantee that the politics of a unified regulator would lead to a more efficient regulatory structure.

Indeed, to me it’s more likely that that rent seeking would rule, and efficiency would be damned. There’s actually a strong argument to be made that competition between regulatory agencies disciplines the rent seeking to some degree. And it can also discipline the ideological fervor of someone like Gary Gensler.

The ongoing drama over crypto regulation is an example. I’m not a crypto evangelist by any means but overall I favor letting market processes determine the outcome. If GiGi was king, or even merely the sole regulator of crypto, that would never happen. Regulatory competition (with the CFTC) constrained Gensler and the SEC, so the market will have the chance to have the final vote.

Indeed, one of Don Wilson’s beefs is very specifically with Gary Gensler. (And oh boy, do I get that!) A regulatory structure with one regulator would make some future GiGi far more dangerous.

Why should regulatory monopoly be looked upon more favorably than private monopoly? Indeed, regulatory monopoly is more dangerous because it cannot be disciplined or undermined by entry. Only the naive who believe in the public interest theory of regulation (and regulators) could believe that a single regulator would act to enhance efficiency rather than exploit its power for often malign reasons.

I have often written that there is a multitude of ways for executing financial transactions that have some common elements because transactors and transactions are heterogeneous. One size does not fit all. (Gensler was something of a one size fits all fanatic at the CFTC). Even though any division will lead to anomalies, conflicts, and regulatory arbitrage, there is enough distinctiveness between say derivatives markets on the one hand and security markets on the other to make separate regulators a better outcome. The division of labor is limited by the extent of the market. The scope of financial markets is so huge that there is considerable division of labor in them, and a division of regulatory labor makes considerable sense too.

Further, although the term “regulatory arbitrage” is typically used as a pejorative, it is not necessarily a bad thing. Indeed, it can be a good thing when market participants use regulatory fragmentation to introduce beneficial innovations that a particular regulator would prevent.

It should also not be forgotten that the SEC and the CFTC are not the only regulatory players in this game. The banking regulators and the Fed are also quite involved, especially on issues relating to intermediaries (who are banks or deeply enmeshed in the banking system) and clearing. Some regulatory fragmentation is inevitable as a result. Just mashing together the SEC and the CFTC will not make the fragmentation disappear.

I say only slightly facetiously that the best effect of regulatory consolidation is that reduced specialization would increase the cost of regulation, leading to less of it. There are no economies of scale, and are in fact diseconomies of scale, at the commissioner level. The bandwidth of the commissioners who are the final arbiters of rules is limited. As a rough estimate, a single commission responsible for double the statutes will have the capacity to produce half the rules as two commissions would. Sounds good to me!

(And no, doubling the number of commissioners would not help. Each commissioner has to weigh in on each proposed rule).

(Less factiously, doubling the workload would empower staff as commissioners would be more reliant on staff to craft rules, and explain them, so rule “output” might not decline that much as the commissioners just end up spending less time on each proposal).

Proposing agency merger or creation of a super agency is almost always a symptom of overall dissatisfaction with regulatory outcomes. But those bad outcomes are usually the result of bad regulators or bad underlying statutes. As noted above, consolidating regulators would increase the power of the bad regulators who will inevitably come along, so be careful what you ask for. And redrawing the regulatory org chart won’t address the statutory problems.

So if you don’t like current regulatory outcomes, don’t focus on the number of agencies and the names on the buildings they occupy: focus on the laws that determine what regulators can do and how they can do it.

Frankendodd was full of bad things, so start with that. Go to a slimmer legal framework that focuses on force and fraud rather than one that attempts to micromanage market macrostructure. Work towards a framework that disempowers would be Gary Genslers rather than the reverse.

Recent Supreme Court decisions, especially Loper, will help by constraining the ability of regulators to go beyond the authority explicitly delegated to regulators by statute. But many of the delegated powers are already too broad, so that needs to be addressed too.

In sum, to fix regulation it is necessary to get to its roots. Its roots are in legislation. Shuffling around who implements the legislative mandates is a superficial response to a deeper problem that originates in the Capitol.

PS. My friend Jeff Carter has a Substack on the same issue. Check it out.

Give Trump a Chance? The Biden Administration Says No

Last week marked the 1000th dreary day of the Russo-Ukrainian War. It also saw a new, and disturbing, phase in the conflict.

Specifically, the Biden Administration (not the non compos mentis Biden, of course, but some shadowy cabal of aides) granted permission to Ukraine to utilize Army Tactical Missile Systems (ATACMs) to attack targets on some Russian territory, specifically Kursk oblast and environs. In response, the Russians launched a nuclear capable experimental intermediate range ballistic missile (IRBM) into Ukraine: the missile was topped with six non-nuclear (and in fact non-explosive) warheads.

In many respects the western response to Russia’s launch was overwrought. It was obviously a signal of escalation dominance that reminded me of Crocodile Dundee and the knife:

“That’s not a missile. That’s a missile.” I see your tactical missile and raise you a ballistic missile. I call.

Regardless of the merits of unleashing the ATACMs (which I will discuss below) it was utterly irresponsible for a lame duck administration to do so. It will not have to deal with the consequences. The incoming Trump administration will. And it can only complicate Trump’s already daunting task in Ukraine. Given how clearly disruptive this move was, it could only have been undertaken with malign intent. An “if we can’t rule, nobody will,” spiteful decision.

Regarding the merits. On the one hand ATACMs do not represent a substantial escalation: Ukraine has for months launched attacks on Russia using drones, and on soil Russia has claimed its own (notably Crimea) using various western-made cruise missiles. However, and ironically, by previously pointedly refusing to permit the use of ATACMs on targets in Russia the administration effectively deferred to Putin’s declaration that doing so would cross a red line. Thus, the volte face can only be interpreted as a deliberate flouting of said line, and therefore a deliberate escalation.

And for what? ATACMs, especially in the limited numbers that the US has supplied to Ukraine, cannot have a decisive effect on the war. (Nor can Storm Shadows, or SCALPs, or Taureses, or JASSMs). At most they can disrupt to some degree Russian logistics (e.g., by blowing up munitions depots) or command and control (by striking headquarters). (The fact that the administration made this argument to justify its previous denial of permission for using ATACMs in Russia demonstrates that it recent reversal was an act of spite rather than a reasoned military judgment).

But Ukraine’s military problems so fundamental that inconveniencing Russian operations in these ways will not be decisive.

Ukraine’s first fundamental problem is manpower. Yes, Russia is suffering far larger casualties, but the bloody minded Putin has shown his willingness to tolerate them, and Russia can absorb them far more readily than Ukraine.

Ukraine’s second fundamental problem is air defense, which has both a tactical and a strategic dimension. Tactically, after almost two years of complete ineffectualness, the Russian air forces finally found a way to influence the battle zone by dropping large numbers of FAB glide bombs (some weighing 3 metric tons) on Ukrainian positions from beyond the range of Ukrainian air defenses. Yes, ATACMs can be used to strike the airfields hosting the SU-34s that drop the bombs, thereby forcing the Russians to base them further away and reducing the number of sorties they can launch, but this effect is at the margins. Strategically, through drones and missiles (like iskander, which is more capable than ATACMs) Russia has devastated Ukraine’s energy infrastructure. Whether Ukraine can survive another winter of concerted attacks on its power grid is debatable.

Zelensky has been screaming for more anti-aircraft missile systems (especially Patriots) and some have been forthcoming, especially from Europe. But the need far outstrips the capacity of the US to provide more.

Ukraine’s third fundamental problem is its military command, starting with Zelensky himself, his military chief Syrski, and his general staff (“GenStabU”). The excellent Sarcastosaurous substack is the go to source on this, but its critique is echoed by Ukrainian troops that bear the consequences of the command’s incompetence.

The problems are myriad. The underlying problem is that old Soviet habits die hard. Most notably, command is overly centralized, leading to slow responses to battlefield crises, and a shocking indifference to information coming from those on the front lines.

The centralization has also led to an extremely defective organizational structure. The Ukrainian army has brigades which control battalions, but it has no divisions that control brigades, or corps that control divisions.

Supposedly because divisions are too expensive. Getting brigades and battalions destroyed due to command and control problems isn’t?

The lack of divisions leads to poor coordination between adjacent brigades, and the Russians have learned to exploit these seams. (Seams between units are always a vulnerability. Multiplying the seams multiplies the vulnerabilities). Moreover, Syrski et al control the brigades and even battalions directly, and shuttle them around willy-nilly in response to the latest front line crisis. This has created numerous opportunities that the Russians have exploited, for example by attacking when a new unit is shuffled into line without adequate preparation, or by putting units with no communication channels next to one another, making coordinated response to Russian attacks almost impossible.

When you see reports of this brigade or that being in some place, it is often not an intact brigade, but just a few battalions (and sometimes only one) from that brigade. Meaning that Ukrainian lines are held by jumbles of units controlled (or pretended to be controlled) by generals in Kyiv with minimal operational awareness. It makes the (often exaggerated) Chateau Generalship of World War I look good by comparison.

The Ukrainian command has also exhibited at times a Hitleresque (or Stalinesque) tendency to demand that units fight to the last and not withdraw when caught in an untenable situation, leading to pointless casualties (including the loss of prisoners who are executed by the Russians). This is particularly disastrous when manpower is in precious short supply–as it is.

Ukraine’s only saving grace is that Russian command is even more incompetent. The difference is that Russia has the material resources to compensate for this incompetence. Ukraine does not.

Ukraine has also made some incomprehensible decisions on how to allocate its scarce resource. Most notably, despite the demonstrated effectiveness of the Russian prepared defenses (and in particular the use of heavy minefields) in stopping the much vaunted but failed Ukrainian counteroffensive of 2023 (the Surovkin Line), time and again Ukraine has failed to fortify obvious targets of Russian offensives.

So as it is, Ukraine is barely hanging on. It’s not losing yet, but it certainly is not winning. And definitely not by Zelensky’s definition of victory: regaining all occupied Ukrainian territory. That is the pipe dream to end all pipe dreams.

Yet he insists on it.

The situation now is that both sides need an end to the fighting, but neither is willing to acknowledge it. Ukraine’s dire circumstances are evident, and although Russia’s aren’t quite so dire, they are bad, and the cost Russia is incurring is certainly not worth the possible gain–adding another string of shitholes to Putin’s collection. Eastern Ukraine was a shithole before Russia invaded: now it is a depopulated shithole buried under rubble.

And the economic consequences for Russia have been baleful. Speaking of rubble, that describes the ruble now: it is now worth less than a penny. Official Russian statistics tout the strength of the Russian economy, but it is a war economy. Shoveling massive resources to the military, to be blown up in Ukraine, props up GDP, but people don’t consume aggregates. The economic circumstances of Russians have degraded substantially in the past 1000 days, and will only degrade more every additional day the war goes on. The Portuguese living standards that Putin once promised are a bad joke now.

Neither side can achieve victory as they have defined it. Heretofore neither side has been willing to acknowledge that.

Trump has boasted that he will end the war. Given the intransigence of the parties, this boast seems unrealistic. But perhaps he can exploit the fact that neither side gains from continuing the war to to cobble together something resembling peace.

The most likely path: another frozen conflict in which Putin will get de facto control of what he has grabbed in the past two plus years.

The biggest obstacle to this outcome is Zelensky. I think he is genuinely dead set (emphasis on the dead) on driving the Russians from Ukrainian territory. But that is a delusion.

Zelensky, apparently not realizing that he who pays the piper calls the tune, has demanded that the west supply the resources to achieve his objective. For one thing, such resources don’t exist, and meeting even a fraction of Zelensky’s demands would denude the US’s already scanty stocks of missiles and shells. The US has more pressing concerns than eastern Europe: eastern Asia in particular. Moreover, the real binding constraint on Zelensky’s ambitions is not hardware but meatware. Ukraine has too few soldiers, a large fraction of its military-age population is unwilling to serve, and it is even more of a demographic basket case than Russia.

In brief, Zelensky played a vital role at the outset of the war, and his conduct then was exemplary. But it has quite clearly gone to his head, and he is now a delusional autocrat who is an existential threat to the people he claims to represent. Not to mention a military incompetent (as discussed above).

The establishments in the United States and Europe inveigh against a settlement that leaves Putin in control of even a sliver of Ukraine. They invoke the ghost of Munich, and claim that Putin will use the respite to rearm and will then set his sights on Nato’s eastern flank.

As if. If this war has shown anything, it has shown that Russia’s ability to project conventional military power beyond its borders is virtually non-existent. Further, the army that went into Ukraine was supposedly the product of serious reforms that addressed the flaws exposed in Georgia in 2008. In the event, it wasn’t. Given the systemic defects of the Russian system (of which corruption in the military is just one symptom) any future “reforms” are almost certain to be as tragicomic as the previous ones.

And how long would they take? Years. The establishments obsess on Putin, who is already 72. He will be well past his sell by date (especially by Russian male standards) by the time his allegedly reformed military will be capable of doing anything. And that is time that the Europeans can use to put on their big boy lederhosen and pantalons and create something other than Potemkin militaries that Putin (or more likely his successor) would be unwilling to confront.

That is, deterrence of Russia is completely in European hands. And if they decide to forego it, that’s their choice and their problem.

So Trump has a chance to realize his boast by negotiating (a la Teddy Roosevelt perhaps) an outcome that satisfies no one. But war is politics by other means, and politics is the art of the possible. The dreams of Putin, Zelensky, and the establishment are impossible. If Trump can get them to accept that, an imperfect peace is possible. And an imperfect peace is far preferable to the current nightmare.

The biggest challenge to achieving this is making it clear to Putin that he cannot prevail. Abandoning Ukraine altogether now would undermine that. So, rhetoric and I think genuine belief notwithstanding, to get his peace Trump will have to hold his nose and continue to fund Ukraine to some extent. The delicate balance to be found is between providing enough support to persuade Putin that continuing the war is futile, but not so much as to refill Zelensky’s pipe of dreams.

The acts of the dying Biden administration are certainly no help. The road to a settlement is torturous enough as it is without its malign actions.

Give Trump a chance. The odds are against him, given the characters involved in the conflict. But the Biden administration seems hell bent on stacking the odds against him and denying him–and hence those dying in Ukraine–that chance.