Friday, March 20, 2009

Mmmmm, Purina (Nestle)

When I first lived in Denver with Malcolm and Mollie, my collies, I pretty much spent my first six months or so goofing by camping in the various national forests within about a 200 mile radius to the west of Denver. Doggies weren’t so welcome in national parks and I rarely got in trouble when I violated the leash laws in the national forests.

About half of those excursions resulted in our returning to Denver from the west on I-70. The descent into Denver is one of those long grades where truckers are always cautioned to gear down lest they gain too much speed. Depending on the weather, sometime after passing Golden but always before I hit Denver proper, Malcolm and Mollie would start drooling. The first time making that trip back into town I had no idea what was going on, thinking the dogs might be sick.

Then, shortly after passing I-25, I got my first whiff, looked around and figured it all out—I was passing Purina’s factory just north of downtown Denver.

Chauncey Gardiner

James K. Glassman is the president of the World Growth Institute, which promotes global economic development. I used to read him a lot when he wrote for Tech Central Station (now TCS Daily), an online magazine he founded in 2000.

I found this bit in Commentary Magazine yesterday and couldn’t help thinking of the movie Being There:

On being presented the Nobel Prize in economics in 1974, Friedrich von Hayek devoted his Stockholm lecture to acknowledging the severe limitations of his profession. “It seems to me,” he said, “that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences—an attempt which in our field may lead to outright error.” … Said Hayek:

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants [emph. mine.]

What is that environment? First, it provides a confidence that, in a crisis, bank deposits are safe and insurance policies will be paid in full. Such confidence can be provided only by the government of the United States in its legitimate and essential role as the lender of last resort. Second, the environment supports, rather than denigrates or browbeats, productive members of society. The U.S. will not emerge from a serious recession unless businesses and investors lead it out. Third, it recognizes that Americans have undergone a financial calamity and that we need time to adjust; we cannot, like a car battery, be shocked back to life, and we aren’t in the mood to have someone blow in our ear.

Buy Nestle today

Let's all buy some Nestle products today to make sure their conscientiousness pays. They inspected the facilities of the Peanut Corporation of America and chose not to buy peanuts from them. Kellogg and others didn't bother to do such an inspection and used PCA as a supplier.

On a related Nestle note, Karma the dog has had a couple bouts of pancreatitis. Diet plays a role in pancreatitis. Her first episode was clearly the result of a massive dose of fatty turkey leftovers during the holidays. But the second had no clear cause, so I have been trying to look into dog food nutrition. I am sure some dog foods are significantly more nutritious than others but good information on them is hard to find. The labels don't help much. For one thing, they give only guaranteed minimums for protein and fat, but no maximums, so if you set out to find a low fat food, you can't really. Sure, you can rely on their claim to be low fat, but there's no way to be sure one brand's low fat version is lower fat than some other brand's regular version. Price is no guarantee of quality. Vet recommendations are considered suspect by some because vets get a commission on the food they sell in their offices. What's a dog owner to do? I got a consultation with a vet at the University of Minnesota Veterinary Hospital, a research and teaching facility that doesn't sell dog food. She recommended Purina Dog Chow or Purina One, saying that Purina products are high quality because Purina comes at the pet food business from the world of prescription food for treating medical conditions. My own vet had said the same thing.

Purina is a Nestle brand.

And by the way, giving your dog fresh "people" food is fraught with dangers in achieving proper nutritional content. The vet said the only time they ever have to deal with malnourished dogs (excluding neglect) is when owners tried to cook for them.

Oh, those votes of confidence

"Outstanding job" is eerily reminiscent of "heck of a job" albeit without the slang.

Thursday, March 19, 2009


to UT fans.

Shame on The Superior Gold Group

The radio is filled with ads from various gold groups hawking their wares in light of this economy. I've got no truck with folks trying to make a buck but shame on The Superior Gold Group. Their ads are full of Great Depression alarms--failing banks, terrible stock market, etc....

I suspect the ads are specifically targeted at the old, infirm and poorly-read.

I own gold as a small percentage of my sad portfolio but would never buy from these guys.

Feast-or-Famine Cycle of Security Funding

Another derivative post by me from Stratfor because they say it's ok:

By Fred Burton and Scott Stewart

Two years ago, we wrote an article discussing the historical pattern of the boom and bust in counterterrorism spending. In that article we discussed the phenomenon whereby a successful terrorist attack creates a profound shock that is quite often followed by an extended lull. We noted how this dynamic tends to create a pendulum effect in public perception and how public opinion is ultimately translated into public policy that produces security and counterterrorism funding.

In other words, the shock of a successful terrorist attack creates a crisis environment in which the public demands action from the government and Washington responds by earmarking vast amounts of funds to address the problem. Then the lull sets in, and some of the programs created during the crisis are scrapped entirely or are killed by a series of budget cuts as the public’s perception of the threat changes and its demands for government action focus elsewhere. The lull eventually is shattered by another attack — and another infusion of money goes to address the now-neglected problem.

On March 13, The Washington Post carried a story entitled “Hardened U.S. Embassies Symbolic of Old Fears, Critics Say.” The story discussed the new generation of U.S. Embassy buildings, which are often referred to as Inman buildings” by State Department insiders. This name refers to buildings constructed in accordance with the physical security standards set by the Secretary of State’s Advisory Panel on Overseas Security, a panel chaired by former Deputy CIA Director Adm. Bobby Inman following the 1983 attacks against the U.S. embassies in Beirut and Kuwait City. The 1985 Inman report, which established these security requirements and contributed to one of the historical security spending booms, was also responsible for beefing up the State Department’s Office of Security and transforming it into the Diplomatic Security Service (DSS).

It has been 11 years since a U.S. Embassy has been reduced to a smoking hole in the ground, and the public’s perception of the threat appears to be changing once again. In The Washington Post article, Stephen Schlesinger, an adjunct fellow at the Century Foundation, faults the new Inman building that serves as the U.S. Mission to the United Nations in New York for being unattractive and uninviting. Schlesinger is quoted as saying: “Rather than being an approachable, beckoning embassy — emphasizing America’s desire to open up to the rest of the globe and convey our historically optimistic and progressive values — it sits across from the U.N. headquarters like a dark, forbidding fortress, saying, ‘Go away.’” When opinion leaders begin to express such sentiments in The Washington Post, it is an indication that we are now in the lull period of the counterterrorism cycle.

Tensions Over Security

There has always been a tension between security and diplomacy in the U.S. State Department. There are some diplomats who consider security to be antithetical to diplomacy and, like Mr. Schlesinger, believe that U.S. diplomatic facilities need to be open and accessible rather than secure. These foreign service officers (FSOs) also believe that regional security officers are too risk averse and that they place too many restrictions on diplomats to allow them to practice effective diplomacy. (Regional security officer — RSO — is the title given to a DSS special agent in charge of security at an embassy.) To quote one FSO, DSS special agents are “cop-like morons.” People who carry guns instead of demarches and who go out and arrest people for passport and visa fraud are simply not considered “diplomatic.” There is also the thorny issue that in their counterintelligence role, DSS agents are often forced to confront FSOs over personal behavior (such as sexual proclivities or even crimes) that could be considered grounds for blackmail by a hostile intelligence service.

On the other side of the coin, DSS agents feel the animosity emanating from those in the foreign service establishment who are hostile to security and who oppose the DSS efforts to improve security at diplomatic missions overseas. DSS agents refer to these FSOs as “black dragons” — a phrase commonly uttered in conjunction with a curse. DSS agents see themselves as the ones left holding the bag when an FSO disregards security guidelines, does something reckless, and is robbed, raped or murdered. It is most often the RSO and his staff who are responsible for going out and picking up the pieces when something turns bad. It is also the RSO who is called before a U.S. government accountability review board when an embassy is attacked and destroyed. In the eyes of a DSS special agent, then, a strong, well-protected building conveys a far better representation of American values and strength than does a smoldering hole in the ground, where an “accessible"; embassy once stood. In the mind of a DSS agent, dead diplomats can conduct no diplomacy.

This internal tension has also played a role in the funding boom and bust for diplomatic security overseas. Indeed, DSS agents are convinced that the black dragons consistently attempt to cut security budgets during the lull periods. When career foreign service officers like Sheldon Krys and Anthony Quainton were appointed to serve as assistant secretaries for diplomatic security — and presided over large cuts in budgets and manpower — many DSS agents were convinced that Krys and Quainton had been placed in that position specifically to sabotage the agency.

DSS agents were suspicious of Quainton, in particular, because of his history. In February 1992, while Quainton was serving as the U.S. ambassador to Peru, the ambassador’s residence in Lima was attacked by Shining Path guerrillas who detonated a large vehicular-borne improvised explosive device in the street next to it. A team sent by the DSS counterterrorism investigations division to investigate the attack concluded in its report that Quainton’s refusal to follow the RSO’s recommendation to alter his schedule was partially responsible for the attack. The report angered Quainton, who became the assistant secretary for diplomatic security seven months later. Shortly after assuming his post, Quainton proclaimed to his staff that “terrorism is dead” and ordered the abolishment of the DSS counterterrorism investigations division.

Using a little bureaucratic sleight of hand, then-DSS Director Clark Dittmer renamed the office the Protective Intelligence Investigations Division (PII) and allowed it to maintain its staff and function. Although Quainton had declared terrorism dead, special agents assigned to the PII office would be involved in the investigation of the first known al Qaeda attacks against U.S. interests in Aden and Sanaa,Yemen, in December 1992. They also played a significant role in the investigation of the World Trade Center bombing in February 1993, the investigation of the 1993 New York Landmarks Plot and many subsequent terrorism cases.

Boom-and-Bust Funding

One of the problems problem created by the feast-or-famine cycle of security funding is that during the boom times, when there is a sudden (and often huge) influx of cash, agencies sometimes have difficulty spending all the money allotted to them in a logical and productive manner. Congress, acting on strong public opinion, often will give an agency even more than it initially requested for a particular program — and then expect an immediate solution to the problem. Rather than risk losing these funds, the agencies scramble to find ways to spend them. Then, quite often, by the time the agency is able to get its act together and develop a system effectively to use the funds, the lull has set in and funding is cut. These cuts frequently are accompanied by criticism of how the agency spent the initial glut of funding.

Whether or not it was a conscious effort on the part of people like Quainton, funding for diplomatic security programs was greatly reduced during the lull period of the 1990s. In addition to a reduction in the funding provided to build new embassies or bring existing buildings up to Inman standards, RSOs were forced to make repeated cuts in budgets for items such as local guard forces, residential security and the maintenance of security equipment such as closed-circuit TV cameras and vehicular barriers.

These budget cuts were identified as a contributing factor in the 1998 bombings of the U.S. Embassies in Nairobi and Dar es Salaam. The final report of the Crowe Commission, which was established to investigate the attacks, notes that its accountability review board members “were especially disturbed by the collective failure of the U.S. government over the past decade to provide adequate resources to reduce the vulnerability of U.S. diplomatic missions to terrorist attacks in most countries around the world.”

The U.S. Embassy in Nairobi was known to be vulnerable. Following the August 1997 raid on the Nairobi residence of Wadih el-Hage, U.S. officials learned that el-Hage and his confederates had conducted extensive pre-operational surveillance against the U.S. Embassy in Nairobi, indicating that they planned to attack the facility. The U.S. ambassador in Nairobi, citing the embassy’s vulnerability to car bomb attacks, asked the state department in December 1997 to authorize a relocation of the embassy to a safer place. In its January 1998 denial of the request, the state department said that, in spite of the threat and vulnerability, the post’s “medium” terrorism threat level did not warrant the expenditure.

Old Fears

The 1998 East Africa embassy bombings highlighted the consequences of the security budget cuts that came during the lull years. Clearly, terrorism was not dead then, nor is it dead today, in spite of the implications in the March 13 Washington Post article. Indeed, the current threat of attacks directed against U.S. diplomatic facilities is very real. Since January 2008, we have seen attacks against U.S. diplomatic facilities in Sanaa, Yemen; Istanbul, Turkey; Kabul, Afghanistan; Belgrade, Serbia; and Monterrey, Mexico (as well as attacks against Ameri can diplomats in Pakistan, Sudan and Lebanon). Since 2001, there have also been serious attacks against U.S. diplomatic facilities in Jeddah, Saudi Arabia; Karachi, Pakistan; Damascus, Syria; Athens, Greece; and Baghdad, Iraq.

Even if one believes, as we do, that al Qaeda’s abilities have been severely degraded since 9/11, it must be recognized that the group and its regional franchises still retain the ability to conduct tactical strikes. In fact, due to the increased level of security at U.S. diplomatic missions, most of the attacks conducted by jihadists have been directed against softer targets such as hotels or the embassies of other foreign countries. Indeed, attacks that were intended to be substantial strikes against U.S. diplomatic facilities in places like Sanaa, Jeddah and Istanbul have been thwarted by the security measures in place at those facilities. Even in Damascus, where the embassy was an older facility that did not meet Inman standards, adequate security measures (aided by poor planning and execution on the part of the attackers) helped thwart a potentially disastrous attack.

However, in spite of the phrase “war on terrorism,” terrorism is a tactic and not an entity. One cannot kill or destroy a tactic. Historically, terrorism has been used by a wide array of actors ranging from neo-Nazis to anarchists and from Maoists to jihadists. Even when the Cold War ended and many of the state-sponsored terrorist groups lost their funding, the tactic of terrorism endured. Even if the core al Qaeda leaders were killed or captured tomorrow and the jihadist threat were neutralized next week, terrorism would not go away. As we have previously pointed out, ideologies are far harder to kill than individuals. There will always be actors with various ideologies who will embrace terrorism as a tactic to strike a stronger enemy, and as the sole global superpower, the U.S. and its diplomatic missions will be target ed for terrorist attacks for the foreseeable future — or at least the next 100 years.

During this time, the booms and busts of counterterrorism and security spending will continue in response to successful attacks and in the lulls between spectacular terrorist strikes like 9/11. During the lulls in this cycle, it will be easy for complacency to slip in — especially when there are competing financial needs. But terrorism is not going to go away any time soon, and when emotion is removed from the cycle, a logical and compelling argument emerges for consistently supplying enough money to protect U.S. embassies and other essential facilities.

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Wednesday, March 18, 2009

That can't be right!

As the resident rethug, I have to give Mr. Stewart his due.

A foray into grass roots politics

I heard about an issue on Sunday afternoon in connection with my hobby that concerned me a bit in connection with a Dept. of Defense policy change announced last week that would have increased the cost of my hobby by a great deal.

The purpose of the post is not to address the policy issues behind the DoD change but to relate what happened. (Jonah Goldberg posted about it briefly on The Corner Monday.)

I immediately emailed my congressman and two senators. From the representative, I got an immediate robo-reply saying he'd look into it. From one of my senators I got a robo-reply on Monday that was vaguely related to the issue to which I'd alerted her. I never did hear back from the second senator.

From an email I received today from the source who originally alerted me to the issue:

Emails, faxes, and calls went to the offices of every Senator and Representative on The Hill. Senators Tester and Baucus of Montana (both Democrats) contacted the Department of Defense on Tuesday, and within an hour, they had a reply that this new, ill-considered, policy had been rescinded.

I don't know how much effect we actually had but the timing seems to so indicate. [Update: I should add that there are many policy reasons, including very green reasons, why this would have been a bad idea. And, that it apppears the policy change was initially proposed under the Bush administration under some crazy Homeland Security logic.]


I tried to give Sen. Dodd the benefit of the doubt in this discussion with Stephanie. I'd heard some of his denials and read a pretty convincing argument that this was all a right-wing character assassination of the senator. Also, the complicated ins and outs of sausage making made me want to err on the side of the Senator.

I should have known better. From the Hartford Courrant:

In an apparent change of his position, U.S. Sen. Christopher Dodd said Wednesday that he was aware of changes in legislation for a loophole that allowed highly controversial bonuses for AIG, the embattled insurance company that has received federal bailout money.

In a live interview on CNN, Dodd said, "I agreed to a modification in the legislation, reluctantly.

''Previously, Dodd had said he was not a member of the conference committee that crafted the final version of the highly complicated bill. But he had come under strong fire from Republicans and others as the person who was involved in what CNN anchor Wolf Blitzer had called a "mysterious loophole'' in the legislation.

When Blitzer asked Dodd what had changed in his understanding between Tuesday and Wednesday, Dodd replied, "Going back and reviewing it. ... I apologize if we had some confusion.''


I struggle with what all this means but here’s brief blurb by Larry Kudlow at NRO that helps a bit:

Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week’s decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.

Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital [emph. mine]. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.

Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.

"... destroying bank profits and capital." When the capital of a bank is reduced, then it’s ability to lend is correspondingly (something more than 1:1) reduced because of the (reasonable) restrictions we’ve placed on them. We don’t want to require a bank to have one dollar of gold in the bank for every dollar of loans it makes (just like we don’t require the Treasury to have a dollar of gold in Ft. Knox for every dollar it prints–though I’m starting to hear those grumblings on the really rabid fringe). OTOH, we don’t want the banks to lend everything it has without some sort of capital reserve–think bank runs in the 30s and the S&L crisis in the 80s.

I have no idea which (mark-to-market or positive cash flows) is the proper method by which to value these assets. In today’s market, however, if they really are being serviced 70 cents on the dollar, how can they be worth nothing?

Btw, if only being serviced 70 cents on the dollar, then how can they possibly be considered to be "serviced in a timely cash-flow manner"?

Insurance collapse, to go along with banking collapse

Here is a good commentary from David Smick, published by WaPo on March 10. You don't want to read this before bed, though, or you can be assured of nightmares (complete with Stockard Channing voice-overs).
In addition, Geithner worries that because the troubled insurance giant American International Group (AIG) is a conduit for the banks' use of credit default swaps, a collapse of AIG (as an unintended consequence of dismantling the big banks) could be catastrophic. AIG's more than 300 million terrified holders of insurance-related investments and pension funds, who have investments totaling $20 trillion (U.S. GDP is $14 trillion), could suddenly rush for redemptions -- the equivalent of a run on a bank. Geithner would face a worldwide insurance collapse to accompany his global banking collapse.
Smick recommends a "world-class problem-solver who is not from Wall Street as [Obama's] bank workout czar, " and suggests James Baker, Bill Bradley (ah... no), or George Mitchell. I think he's right that Geitner doesn't seem quite right for the job and further it's too much to do on top of regular Treasury Dept duties. But who in their right mind would take the job?

Focusing on the Tool Shed, not the Power Plant

From Mankiw:

The AIG bonuses now being debated in Congress and everywhere else represent about .001 percent of annual GDP. If a typical Congressman spent that fraction of a 2000 hour work year on the topic, it would consume only about 1 minute of his or her time.

Yes, I know, that calculation is silly in many ways, but here is my point: Regardless of how outraged you are about the AIG bonuses, it is probably not an optimal allocation of resources for our elected leaders to spend large amounts of time and energy on the topic. The economy has bigger problems right now, and it would be better to focus attention on those.

The tool shed analogy is from one of his readers later in the post but one gets the drift. One thought, though: How many Congresspersons really work 2000 hours per year?

RE: AIG political contributions

FWIW: I almost never get too riled up about that sort of thing. To me, there is a certain level of sleaze that just goes with the political territory.

Off with his head

Ok, the title is too strong for what I intend to be sincere advice from a member of the loyal opposition. And I don't mean the Treasury Secretary.

I think White House Press Secretary is one of the most under-appreciated jobs in the White House. It has got to be extremely difficult facing a press corps that has the advantage of being able to specialize in areas of expertise while the WHPS is only one person getting good info (and bad) from many sources and is limited in what s/he is allowed to say.

Having said that, as a supporter of a president who had exactly one good WHPS for all of about a year in an eight year administration, President Obama needs someone who can inspire just a bit more confidence. Mr. President, don't let too much loyalty to Mr. Gibbs do too much harm to your administration.

Stratfor on the Rise of Turkey and Russia.

Because Stratfor says it's ok for me to post:

By Reva Bhalla, Lauren Goodrich and Peter Zeihan

Russian President Dmitri Medvedev reportedly will travel to Turkey in the near future to follow up a recent four-day visit by his Turkish counterpart, Abdullah Gul, to Moscow. The Turks and the Russians certainly have much to discuss.

Russia is moving aggressively to extend its influence throughout the former Soviet empire, while Turkey is rousing itself from 90 years of post-Ottoman isolation. Both are clearly ascendant powers, and it would seem logical that the more the two bump up against one other, the more likely they will gird for yet another round in their centuries-old conflict. But while that may be true down the line, the two Eurasian powers have sufficient strategic incentives to work together for now.

Russia’s World

Russia is among the world’s most strategically vulnerable states. Its core, the Moscow region, boasts no geographic barriers to invasion. Russia must thus expand its borders to create the largest possible buffer for its core, which requires forcibly incorporating legions of minorities who do not see themselves as Russian. The Russian government estimates that about 80 percent of Russia’s approximately 140 million people are actually ethnically Russian, but this number is somewhat suspect, as many minorities define themselves based on their use of the Russian language, just as many Hispanics in the United States define themselves by their use of English as their primary language. Thus, ironically, attaining security by creating a strategic buffer creates a new chronic security problem in the form of new populations hostile t o Moscow’s rule. The need to deal with the latter problem explains the development of Russia’s elite intelligence services, which are primarily designed for and tasked with monitoring the country’s multiethnic population.

(click image to enlarge)
[click on link for Statfor Map]

Russia’s primary challenge, however, is time. In the aftermath of the Soviet collapse, the bottom fell out of the Russian birthrate, with fewer than half the number of babies born in the 1990s than were born in the 1980s. These post-Cold War children are now coming of age; in a few years, their small numbers are going to have a catastrophic impact on the size of the Russian population. By contrast, most non-Russian minorities — in particular those such as Chechens and Dagestanis, who are of Muslim faith — did not suffer from the 1990s birthrate plunge, so their numbers are rapidly increasing even as the number of ethnic Russians is rapidly decreasing. Add in deep-rooted, demographic-impacting problems such as HIV, tuberculosis and heroin abuse — concentrated not just among ethnic Russians but also among those of childbearing age — and Russia faces a hard-wired demographic time bomb. Put simply, Russia is an ascending power in the short run, but it is a declining power in the long run.

The Russian leadership is well aware of this coming crisis, and knows it is going to need every scrap of strength it can muster just to continue the struggle to keep Russia in one piece. To this end, Moscow must do everything it can now to secure buffers against external intrusion in the not-so-distant future. For the most part, this means rolling back Western influence wherever and whenever possible, and impressing upon states that would prefer integration into the West that their fates lie with Russia instead. Moscow’s natural gas crisis with Ukraine, August 2008 war with Georgia, efforts to eject American forces from Central Asia and constant pressure on the Baltic states all represent efforts to buy Russia more space — and with that space, more time for survival.

Expanding its buffer against such a diverse and potentially hostile collection of states is no small order, but Russia does have one major advantage: The security guarantor for nearly all of these countries is the United States, and the United States is currently very busy elsewhere. So long as U.S. ground forces are occupied with the Iraqi and Afghan wars, the Americans will not be riding to the rescue of the states on Russia’s periphery. Given this window of opportunity, the Russians have a fair chance to regain the relative security they seek. In light of the impending demographic catastrophe and the present window of opportunity, the Russians are in quite a hurry to act.

Turkey’s World

Turkey is in many ways the polar opposite of Russia. After the dissolution of the Ottoman Empire following World War I, Turkey was pared down to its core, Asia Minor. Within this refuge, Turkey is nearly unassailable. It is surrounded by water on three sides, commands the only maritime connection between the Black and Mediterranean seas and sits astride a plateau surrounded by mountains. This is a very difficult chunk of territory to conquer. Indeed, beginning in the Seljuk Age in the 11th century, the ancestors of the modern Turks took the better part of three centuries to seize this territory from its previous occupant, the Byzantine Empire.

The Turks have used much of the time since then to consolidate their position such that, as an ethnicity, they reign supreme in their realm. The Persians and Arabs have long since lost their footholds in Anatolia, while the Armenians were finally expelled in the dying days of World War I. Only the Kurds remain, and they do not pose a demographic challenge to the Turks. While Turkey exhibits many of the same demographic tendencies as other advanced developing states — namely, slowing birthrates and a steadily aging population — there is no major discrepancy between Turk and Kurdish birthrates, so the Turks should continue to comprise more than 80 percent of the country’s population for some time to come. Thus, while the Kurds will continue to be a source of nationalistic friction, they do not constitute a fundamental challenge to the power or operations of the Turkish state, like minorities in Russia are destined to do in the years ahead.

Turkey’s security is not limited to its core lands. Once one moves beyond the borders of modern Turkey, the existential threats the state faced in years past have largely melted away. During the Cold War, Turkey was locked into the NATO structure to protect itself from Soviet power. But now the Soviet Union is gone, and the Balkans and Caucasus — both former Ottoman provinces — are again available for manipulation. The Arabs have not posed a threat to Anatolia in nearly a millennium, and any contest between Turkey and Iran is clearly a battle of unequals in which the Turks hold most of the cards. If anything, the Arabs — who view Iran as a hostile power with not only a heretical religion but also with a revolutionary foreign policy calling for the overthrow of most of the Arab regimes — are practically welcoming the Turks back. Despite both its imperial past and its close security association with the Americans, the Arabs see Turkey as a trusted mediator, and even an exemplar.

With the disappearance of the threats of yesteryear, many of the things that once held Turkey’s undivided attention have become less important to Ankara. With the Soviet threat gone, NATO is no longer critical. With new markets opening up in the former Soviet Union, Turkey’s obsession with seeking EU membership has faded to a mere passing interest. Turkey has become a free agent, bound by very few relationships or restrictions, but dabbling in events throughout its entire periphery. Unlike Russia, which feels it needs an empire to survive, Turkey is flirting with the idea of an empire simply because it can — and the costs of exploring the option are negligible.

Whereas Russia is a state facing a clear series of threats in a very short time frame, Turkey is a state facing a veritable smorgasbord of strategic options under no time pressure whatsoever. Within that disconnect lies the road forward for the two states — and it is a road with surprisingly few clashes ahead in the near term.

The Field of Competition

There are four zones of overlapping interest for the Turks and Russians.

First, the end of the Soviet empire opened up a wealth of economic opportunities, but very few states have proven adept at penetrating the consumer markets of Ukraine and Russia. Somewhat surprisingly, Turkey is one of those few states. Thanks to the legacy of Soviet central planning, Russian and Ukrainian industry have found it difficult to retool away from heavy industry to produce the consumer goods much in demand in their markets. Because most Ukrainians and Russians cannot afford Western goods, Turkey has carved out a robust and lasting niche with its lower-cost exports; it is now the largest supplier of imports to the Russian market. While this is no exercise in hard power, this Turkish penetration nevertheless is cause for much concern among Russian authorities.

So far, Turkey has been scrupulous about not politicizing these useful trade links beyond some intelligence-gathering efforts (particularly in Ukraine). Considering Russia’s current financial problems, having a stable source of consumer goods — especially one that is not China — is actually seen as a positive. At least for now, the Russian government would rather see its trade relationship with Turkey stay strong. There will certainly be a clash later — either as Russia weakens or as Turkey becomes more ambitious — but for now, the Russians are content with the trade relationship.

Second, the Russian retreat in the post-Cold War era has opened up the Balkans to Turkish influence. Romania, Bulgaria and the lands of the former Yugoslavia are all former Ottoman possessions, and in their day they formed the most advanced portion of the Ottoman economy. During the Cold War, they were all part of the Communist world, with Romania and Bulgaria formally incorporated into the Soviet bloc. While most of these lands are now absorbed into the European Union, Russia’s ties to its fellow Slavs — most notably the Serbs and Bulgarians — have allowed it a degree of influence that most Europeans choose to ignore. Additionally, Russia has long held a friendly relationship with Greece and Cyprus, both to complicate American policy in Europe and to provide a flank against Turkey. Still, thanks to proximity and trading links, Turkey clearly holds the upper hand in this theater of competition.

But this particular region is unlikely to generate much Turkish-Russian animosity, simply because both countries are in the process of giving up.

Most of the Balkan states are already members of an organization that is unlikely to ever admit Russia or Turkey: the European Union. Russia simply cannot meet the membership criteria, and Cyprus’ membership in essence strikes the possibility of Turkish inclusion. (Any EU member can veto the admission of would-be members.) The EU-led splitting of Kosovo from Serbia over Russian objections was a body blow to Russian power in the region, and the subsequent EU running of Kosovo as a protectorate greatly limited Turkish influence as well. Continuing EU expansion means that Turkish influence in the Balkans will shrivel just as Russian influence already has. Trouble this way lies, but not between Turkey and Russia. If anything, their joint exclusion might provide some room for the two to agree on something.

The third area for Russian-Turkish competition is in energy, and this is where things get particularly sticky. Russia is Turkey’s No. 1 trading partner, with energy accounting for the bulk of the trade volume between the two countries. Turkey depends on Russia for 65 percent of its natural gas and 40 percent of its oil imports. Though Turkey has steadily grown its trade relationship with Russia, it does not exactly approve of Moscow’s penchant for using its energy relations with Europe as a political weapon. Russia has never gone so far as to cut supplies to Turkey directly, but Turkey has been indirectly affected more than once when Russia decided to cut supplies to Ukraine because Moscow felt the need to reassert its writ in Kiev.

Sharing the Turks’ energy anxiety, the Europeans have been more than eager to use Turkey as an energy transit hub for routes that would bypass the Russians altogether in supplying the European market. The Baku-Tbilisi-Ceyhan (BTC) pipeline is one such route, and others, like Nabucco, are still stuck in the planning stages. The Russians have every reason to pressure the Turks into staying far away from any more energy diversification schemes that could cost Russia one of its biggest energy clients — and deny Moscow much of the political leverage it currently holds over the Europeans who are dependent on the Russian energy network.

There are only two options for the Turks in diversifying away from the Russians. The first lies to Turkey’s south in Iraq and Iran. Turkey has big plans for Iraq’s oil industry, but it will still take considerable time to upgrade and restore the oil fields and pipelines that have been persistently sabotaged and ransacked by insurgents during the fighting that followed the 2003 U.S. invasion. The Iranians offer another large source of energy for the Turks to tap into, but the political complications attached to dealing with Iran are still too prickly for the Turks to move ahead with concrete energy deals at this time.

Complications remain for now, but Turkey will be keeping an eye on its Middle Eastern neighbors for robust energy partnerships in the future.

The second potential source of energy for the Turks lies in Central Asia, a region that Russia must keep in its grip at all costs if it hopes to survive in the long run. In many ways this theater is the reverse of the Balkans, where the Russians hold the ethnic links and the Turks the economic advantage. Here, four of the five Central Asian countries — Kazakhstan, Uzbekistan, Kyrgyzstan and Turkmenistan — are Turkic. But as a consequence of the Soviet years, the infrastructure and economies of all four are so hardwired into the Russian sphere of influence that it would take some major surgery to liberate them. But the prize is a rich one: Central Asia possesses the world& #8217;s largest concentration of untapped energy reserves. And as the term “central” implies, whoever controls the region can project power into the former Soviet Union, China and South Asia. If the Russians and Turks are going to fight over something, this is it.

Here Turkey faces a problem, however — it does not directly abut the region. If the Turks are even going to attempt to shift the Central Asian balance of power, they will need a lever. This brings us to the final — and most dynamic — realm of competition: the Caucasus.

Turkey here faces the best and worst in terms of influence projection. The Azerbaijanis do not consider themselves simply Turkic, like the Central Asians, but actually Turkish. If there is a country in the former Soviet Union that would consider not only allying with but actually joining with another state to escape Russia’s orbit, it would be Azerbaijan with Turkey. Azerbaijan has its own significant energy supplies, but its real value is in serving as a willing springboard for Turkish influence into Central Asia.

However, the core of Azerbaijan does not border Turkey. Instead, it is on the other side of Armenia, a country that thrashed Azerbaijan in a war over the disputed Nagorno-Karabakh enclave and still has lingering animosities toward Ankara because of the 1915 Armenian “genocide.” Armenia has sold itself to the Russians to keep its Turkish foes at bay.

This means Turkish designs on Central Asia all boil down to the former Soviet state of Georgia. If Turkey can bring Georgia fully under its wing, Turkey can then set about to integrate with Azerbaijan and project influence into Central Asia. But without Georgia, Turkey is hamstrung before it can even begin to reach for the real prize in Central Asia.

In this, the Turks do not see the Georgians as much help. The Georgians do not have much in the way of a functional economy or military, and they have consistently overplayed their hand with the Russians in the hopes that the West would come to their aid. Such miscalculations contributed to the August 2008 Georgian-Russian war, in which Russia smashed what military capacity the Georgians did possess. So while Ankara sees the Georgians as reliably anti-Russian, it does not see them as reliably competent or capable.

This means that Turkish-Russian competition may have been short-circuited before it even began. Meanwhile, the Americans and Russians are beginning to outline the rudiments of a deal. Various items on the table include Russia allowing the Americans to ship military supplies to Afghanistan via Russia’s sphere of influence, changes to the U.S. ballistic missile defense (BMD) program, and a halt to NATO expansion. The last prong is a critical piece of Russian-Turkish competition. Should the Americans and Europeans put their weight behind NATO expansion, Georgia would be a logical candidate — meaning most of the heavy lifting in terms of Turkey projecting power eastward would already be done. But if the Americans and Europeans do not put their weight behind NATO expansion, Georgia would fall by the wayside and Turkey would have to do all the work of projecting power eastward — and facing the Russians — alone.

A Temporary Meeting of Minds?

There is clearly no shortage of friction points between the Turks and the Russians. With the two powers on a resurgent path, it was only a matter of time before they started bumping into one another. The most notable clash occurred when the Russians decided to invade Georgia last August, knowing full well that neither the Americans nor the Europeans would have the will or capability to intervene on behalf of the small Caucasian state. NATO’s strongest response was a symbolic show of force that relied on Turkey, as the gatekeeper to the Black Sea, to allow a buildup of NATO vessels near the Georgian coast and threaten the underbelly of Russia’s former Soviet periphery.

Turkey disapproved of the idea of Russian troops bearing down in the Caucasus near the Turkish border, and Ankara was also angered by having its energy revenues cut off during the war when the BTC pipeline was taken offline.

The Russians promptly responded to Turkey’s NATO maneuvers in the Black Sea by holding up a large amount of Turkish goods at various Russian border checkpoints to put the squeeze on Turkish exports. But the standoff was short-lived; soon enough, the Turks and Russians came to the negotiating table to end the trade spat and sort out their respective spheres of influence. The Russian-Turkish negotiations have progressed over the past several months, with Russian and Turkish leaders now meeting fairly regularly to sort out the issues where both can find some mutual benefit.

The first area of cooperation is Europe, where both Russia and Turkey have an interest in applying political pressure. Despite Europe’s objections and rejections, the Turks are persistent in their ambitions to become a member of the European Union. At the same time, the Russians need to keep Europe linked into the Russian energy network and divided over any plans for BMD, NATO expansion or any other Western plan that threatens Russian national security. As long as Turkey stalls on any European energy diversification projects, the more it can demand Europe’s attention on the issue of EU membership. In fact, the Turks already threatened as much at the start of the year, when they said outright that if Europe doesn’t need Turkey as an EU member, then Turkey doesn’t need to sign off on any more energy diversification projects that transit Turkish territory. Ankara’s threats against Europe dovetailed nicely with Russia’s natural gas cutoff to Ukraine in January, when the Europeans once again were reminded of Moscow’s energy wrath.

The Turks and the Russians also can find common ground in the Middle East. Turkey is again expanding its influence deep into its Middle Eastern backyard, and Ankara expects to take the lead in handling the thorny issues of Iran, Iraq and Syria as the United States draws down its presence in the region and shifts its focus to Afghanistan. What the Turks want right now is stability on their southern flank. That means keeping Russia out of mischief in places like Iran, where Moscow has threatened to sell strategic S-300 air defense systems and to boost the Iranian nuclear program in order to grab Washington’s attention on other issues deemed vital to Moscow’s national security interests. The United States is already leaning on Russia to pressure Iran in return for other strategic concessions, and the Turks are just as interested as the Americans in taming Russia’s actions in the Middle East.

Armenia is another issue where Russia and Turkey may be having a temporary meeting of minds. Russia unofficially occupies Armenia and has been building up a substantial military presence in the small Caucasian state. Turkey can either sit back, continue to isolate Armenia and leave it for the Russians to dominate through and through, or it can move toward normalizing relations with Yerevan and dealing with Russia on more equal footing in the Caucasus. With rumors flying of a deal on the horizon between Yerevan and Ankara (likely with Russia’s blessing), it appears more and more that the Turks and the Russians are making progress in sorting out their respective spheres of influence.

Ultimately, both Russia and Turkey know that this relationship is likely temporary at best. The two Eurasian powers still distrust each other and have divergent long-term goals, even if in the short term there is a small window of opportunity for Turkish and Russian interests to overlap. The law of geopolitics dictates that the two ascendant powers are doomed to clash — just not today.

Tell STRATFOR What You Think

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AIG political contributions

Drudge has a headline today about Obama receiving political contributions from AIG and that story links to this list at It's worth pointing out that G.W. Bush has received nearly double what Obama has received. In 2008, AIG gave Obama almost double what it gave to McCain; for lifetime, they've given Obama about $8,000 more than McCain. In 2004, AIG gave Bush almost three times as much as Kerry. In 2000, AIG contributed almost four times as much to Bush as to Gore.

Tuesday, March 17, 2009

The Happy Wanderer

I love to go a-wandering,
Along the mountain track,
And as I go, I love to sing,
My knapsack on my back.

And apparently little else. From the NYT:

In recent years, it has become fashionable for a growing number of Swiss and some foreigners to wander in the Alps clad in little more than hiking shoes and sunscreen. Last summer, the number of nude hikers increased to such an extent that the hills often seemed alive with the sound of everything but the swish of trousers.

H/t: Hot Air

A model of efficiency

New bill would tax AIG bonuses at 100%; from Newsday.

RE: Crips

Stephanie's post got me wondering about the name of the gang. Per Wiki:

The original name for the alliance was "Cribs", a name narrowed down from a list of many options, and chosen unanimously from three final choices, which included the Black Overlords, and the Assassins. Cribs was chosen to reflect the young age of the majority of the gang members. The name "Cribs" generated into the name "Crips" when gang members began carrying around canes to display their "pimp" status. People in the neighborhood then began calling them cripples, or "Crips" for short.

Short-selling, credit default swaps and zero-sum gambling

Samantha Bee last night on the Daily Show shines a light on short selling:

Anyone want to tell me how/why short-selling is allowed? I've heard a defense of it as a mechanism for properly pricing stock, but it didn't make sense to me. Why can't potential buyers just look at the P/E ratios and other company fundamentals to decide what price they're willing to pay for a stock?

The short-selling is just another version of gambling, like the credit default swaps. This kind of gambling is zero-sum, isn't it? For someone to make money, someone else has to lose money, as far as I can tell. If I have that right, then that's what makes these vehicles different in kind from regular old ownership of a share of stock in a company. Sure, it's a gamble to own stock, in the sense that it could lose some or all of its value, but no one need lose any money for your stock to go up in value.

Subhead: Crips

The subtitle nearly quotes Gen. Richard B. Meyers, from his appearance on The Daily Show on Monday, March 16. He was talking about the partisan political climate since 2004.

Thanks to reader RS for correcting my spelling of Crips.

When I posted it, I thought about rephrasing it as: "Like the Crips and the Bloods, except with better grammar" but I couldn't remember if we ever took liberties with quotes for the subtitle. Now it looks like I might have considered "Like the Crips and the Bloods, except with better spelling." Or would that be worse spelling, since I got it wrong?

Re: Dionne on Leuchtenburg

VDH had a similar thought yesterday (or over the weekend):

2) The Meltdown Commission. We had a 9/11 Commission; we formed the Baker-Hamilton Commission on Iraq (never mind the utility of the conclusions). So let us try a bipartisan investigatory commission on the autumn financial meltdown. Thus far the mainstream media narrative is a reductive “Bush did it.” But let us examine past bundling of subprime mortgages, and derivatives, and who introduced more regulation of banks, who opposed it; who tried to restrain Freddie and Fannie, who fought that tooth and nail, what the SEC did and did not do—and why. Let us collate all the campaign contributions from the failed banks, Madoff, the entire open sewer of politics and high finance, and then let those of the commission, both Democrat and Republican, issue a white paper on when, why, and how it all went down.

Monday, March 16, 2009

Dionne on Leuchtenburg

E.J. Dionne writes for The American Prospect about how he came to be a liberal. He cites the book Franklin D. Roosevelt and The New Deal: 1932-1940 by Leuchtenburg as influential in his thinking. In the piece, he notes similarities between the Depression and the current economic situation, and quotes Leuchtenburg:
You wonder if our Congress will launch a probe along the lines of the 1930s Senate investigation of Wall Street led by Ferdinand Pecora. "Pecora revealed that the most respected men on Wall Street had rigged pools, had profited by pegging bond prices artificially high, and had lined their pockets with fantastic bonuses," Leuchtenburg writes. "The bankers seemed bereft of a sense of obligation even to their own institutions."


I like this so much, I'm preserving it:
If we should perish, the ruthlessness of the foe would only be the secondary cause of the disaster. The primary cause would be that the strength of a giant nation was directed by eyes too blind to see all the hazards of the struggle; and the blindness would be induced not by some accident of nature or history but by hatred and vainglory.

With Apologies to Meryl Streep

It wasn't a dingo.

"A serpent ate my Bindi."

H/t: Hot Air

Starbucks part of the Great Jewish Conspiracy

First they went after Rushdie, Ayaan Hirsi Ali, the cartoonists, Van Gogh and Geert Wilders; now radical Islam may have crossed the Rubicon. They've taken on Starbucks per Melanie Phillips at the Spectator:

In January, Egyptian Cleric Safwat Higazi brought viewers of al Nas TV urgent news (subscriber only) about the Starbucks logo:

Has any of you ever wondered who this woman with a crown on her head is? Why do we boycott Starbucks? ... The girl on the Starbucks logo is Queen Esther. Do you know who Queen Esther was and what the crown on her head means? This is the crown of the Persian Kingdom. This queen is the queen of the Jews. She is mentioned in the Torah, in the Book of Esther. The girl you see is Esther, the queen of the Jews in Persia...

Can you believe that in Mecca, Al-Madina, Cairo, Damascus, Kuwait, and all over the Islamic world, hangs the picture of beautiful Queen Esther, with a crown on her head, and we buy her products.[...]We want Starbucks to be shut down throughout the Arab and Islamic world. We want it to be shut down in Mecca and in Al-Madina. I implore King Abdallah bin Abd Al-‘Aziz, the Custodian of the Two Holy Mosques: It is inconceivable that in Mecca and Al-Madina, there will be a picture of Queen Esther, the queen of the Jews.

As anyone can see, however, the female figure in the Starbucks logo (pictured above) has two fish tails. This is a clue that she is not Esther, queen of the Jews in Persia. She is instead a twin-tailed siren of Greek mythology. This is because the company is apparently named in part after Starbuck, Captain Ahab’s first mate in the book Moby Dick.

I have no idea if she's right about Moby Dick but sheesh.

Update: finally remembered what this reminds me of: Colonel Bat Guano’s, “You're gonna have to answer to the Coca-Cola company."

Somewhat misplaced anger: AIG Bonuses

We're all outraged, rightly, that AIG is dispensing $450 million in bonuses (the latest installment of which is $165,000,000) when we taxpayers have handed them $170+ billion in bailout money so far. Here's how those amounts compare (Bonuses on the left; Bailout on the right):

Of course, it's the principle that offends.

Thank you so very much, Mr. Paul M. Architzel

Paul M. Architzel's bio currently lays claim to being the architect of the Commodity Futures Modernization Act of 2000 that paved the way for credit default swaps to be exempted from state gambling prohibitions.
Prior to joining the firm, Mr. Architzel was chief counsel of the Division of Market Oversight at the Commodity Futures Trading Commission for more than 20 years. He was the main architect of the new framework for futures market regulation, codified by the Commodity Futures Modernization Act of 2000 (CFMA), and wrote the CFTC’s rules for regulated and exempt markets. In recognition of this work, he was granted the Presidential Rank Award of “Distinguished Executive” in 2000.


Here's a cool thing: a bracket that you can fill in and "save". (I suppose such things are widely available but I hadn't noticed one before.) Could even publish your bracket if you have the courage.

"Spin your head...spin your head"

Back in the 90's, I used to enter the Final 4 ticket lottery. It's really sad that the general public gets so few tickets for events like this (the Final 4, the Super Bowl, etc.). But, in 1997, I actually got tickets. The Final 4 that year was in Indianapolis and I made the trek. The teams that made it that year were Kentucky, North Carolina, Arizona (the eventual champion) and Minnesota. Kentucky and NC had the most fans, but Minnesota had by far the most wild and fun fans. That is where I learned that (at least at that time) bars in Minneapolis closed at midnight. That is where I learned that (by sitting by many) Kentucky fans will turn on their team in a nano-second if they lose and I learned about the special talent of Goldie, the mascot of Minnesota.

During the semi-final game that Minnesota played in, right before the first TV time-out, the Minnesota fans started chanting...."spin your head...spin your head...spin your head". I had no idea what that meant or who they were directing the chant at. At the time-out, the Minnesota band started playing some song and Goldie, the mascot, started running around the court with the cheerleaders. He gets near the basket by the band, stops, and starts twirling his mascot head around in circles while still wearing it. I'd never seen a human mascot do this before and it was wild. The Minnesota fans were going crazy and this Kentucky fan sitting next to me, in his slow, Eastern Kentucky, coal-mining, Appalachia accent, turns to his son and says..."daaaaaamn, I ain't never seen anything like dat in the S-E-C. How is dat boy doin, that?"

Sadly, the Gophers lost and didn't make it to the finals. And, even more sadly, they got busted a couple of years later for numerous NCAA violations and were stripped of their Final 4 appearance and Big Ten Championship.

On a side note, I also got selected for Final 4 tickets the following year (it was in San Antonio) and that is where I had my close, personal encounter and conversation with Ashley Judd. Even without make-up and wearing "just" jeans and a Kentucky Wildcat t-shirt, she was stunningly beautiful. She was also extremely nice and polite and as committed a fan of Kentucky basketball as can be.

Cramer v. Stewart (and O'Reilly and Hannity)

I've got no problem with the way Stewart loaded up the questions and then crushed the puny Cramer and his Mad Money. Stewart's show is what it is, primarily a comedy show with bits of news and current events tossed in to make it relevant. It's the SNL weekend update for thirty minutes every weeknight.

In fact, from what little bits of Cramer's show I've caught in the kitchen at the office, his show is rather like Stewart's: primarily schtick with a bit of finance and economics tossed into the mix. The big difference is that Cramer's is on a "real" network while Stewart's is on the Comedy Channel.

I can't listen to O'Reilly and Hannity for the exact reasons LJ listed. Well, I guess I should say I've almost never listened to their radio shows. I can't watch the televsion programs for the exact reasons LJ listed. I don't even mind them being incredibly one-sided...that is what they do. I loathe the technique LJ described and the shouting.

Sunday, March 15, 2009

Minnesota versus Texas

The University of Minnesota (10th seed) meets the University of Texas (7th seed) in the first round of the NCAA basketball tournament on Thursday, March 19th.

Bear: age 17.1 months

From, Four Bad Bears:

And the Bear Bottoming Process:

AIG, credit default swaps, making gambling legal and making gamblers whole

Here is a lucid commentary on what happened to AIG and why bailing it out is not sensible. He explains that AIG has been essentially two companies: one an insurance company that is well-regulated and well-run and profitable, and one that has been a player in the highly risky, unregulated world of derivatives. It's the losses of the second, risky company that we're bailing out which is all wrong because everyone playing in that game should have been aware of their risks and should bear their own losses.

The NYT today, in its editorial, echos this assessment (and goes on to demand answers to some good questions).
Still, [AIG's] trading partners knew, or should have known, how dangerous the swaps were. And that is not necessarily the whole story. In the manic years of this decade, credit default swaps took off as a way to bet on the likelihood of default by a firm or an investment portfolio, without having to own any financial interest in the firm or portfolio. That is definitely not insurance, it is gambling. The reason it is not illegal gambling is that, in 2000, Congress specifically exempted credit default swaps from state gaming laws.
The Commodity Futures Modernization Act of 2000 (that exempted credit default swaps from prosecution under state gaming laws) passed on the last day and last vote of the 106th Congress. Republicans controlled both the House and the Senate and was introduced by Republicans (Rep. Thomas Ewing and Senator Dick Lugar), but the bill had bipartisan sponsorship, passed with bipartisan support and passed unanimously in the Senate and was signed by Pres. Bill Clinton. (Steve Kroft did a piece on 60 Minutes about credit default swaps that aired in October 2008.)