Category: News and politics

The Abuse of Civil Forfeiture

The price of liberty is eternal vigilance

We need to repeat this warning twice every day. Today’s example comes from a three-part series in The Washington Post on the use and abuse of civil forfeiture by the police. Our free press is an essential pillar of our liberty.

The police, whose job is to protect us and enforce the law, can catch criminals more easily if they can freely search our private properties (our homes, cars, email, etc). It is more difficult to get away with unwanted crimes in a totalitarian state than in a liberal democracy that respects privacy as an important protection against the abuse of state power. We have wisely chosen not to live in a totalitarian state and have struck a balance between privacy and state/police intrusiveness that favors privacy. This makes it more difficult for the police to find criminals, but reduces the number of innocent citizens falsely accused. This is the way we like it, and we need to remain vigilant to keep it that way.

We also understand the importance of incentives for influencing and motivating behavior. If we want to encourage more of a particular activity, rewarding it financially can be effective. If those who find stolen (or illegally earned) money get to keep some of it, more will be found. That is what bounty hunting was (is) all about. But what if those finding the money are also given the authority to judge its legality? That would constitute a clear-cut conflict of interest. A bounty hunter could increase his financial take by declaring money illegal in questionable cases without due process to protect the innocent.

Our sacred principle of “innocent until proven guilty” is being undermined by the civil forfeiture of private property by police who are allowed to keep part of what they take. “Civil forfeiture is the government power to take property suspected of involvement in a crime. Unlike criminal forfeiture—used to take the ill-gotten gains of criminal activity after a criminal conviction—with civil forfeiture, police can take property without so much as charging the owner with any wrongdoing.” http://www.ij.org/inequitablejustice

“Cash seizures can be made under state or federal civil law. One of the primary ways police departments are able to seize money and share in the proceeds at the federal level is through a long-standing Justice Department civil asset forfeiture program known as Equitable Sharing. Asset forfeiture is an extraordinarily powerful law enforcement tool that allows the government to take cash and property without pressing criminal charges and then requires the owners to prove their possessions were legally acquired.” http://www.washingtonpost.com/sf/investigative/2014/09/06/stop-and-seize/

The practice of “equitable sharing” encourages police to circumvent state laws on civil forfeiture in order to share in the proceeds of property confiscated under federal law. This financial incentive encourages the police to seize more private property but suffers from an unacceptable conflict of interest. The results, as revealed in The Washington Post’s three article series, can be ugly. We should not be surprised, but we should be indignant.

Here is one of many examples: “Mandrel Stuart, a 35-year-old African American owner of a small barbecue restaurant in Staunton, Va., was stunned when police took $17,550 from him during a stop in 2012 for a minor traffic infraction on Interstate 66 in Fairfax. He rejected a settlement with the government for half of his money and demanded a jury trial. He eventually got his money back but lost his business because he didn’t have the cash to pay his overhead.
“I paid taxes on that money. I worked for that money,” Stuart said. “Why should I give them my money?”” http://www.washingtonpost.com/sf/investigative/2014/09/06/stop-and-seize/

“Last year, equitable-sharing agreements funneled $600 million to police budgets. Clearly, with the size of the federal Asset Forfeiture Fund exceeding $2 billion in 2013, civil forfeiture is big business for the government.” http://www.washingtonpost.com/opinions/tim-walberg-an-end-to-the-abuse-of-civil-forfeiture/2014/09/04/e7b9d07a-3395-11e4-9e92-0899b306bbea_story.html

“The Post found:
• There have been 61,998 cash seizures made on highways and elsewhere since 9/11 without search warrants or indictments through the Equitable Sharing Program, totaling more than $2.5 billion. State and local authorities kept more than $1.7 billion of that while Justice, Homeland Security and other federal agencies received $800 million. Half of the seizures were below $8,800.
• Only a sixth of the seizures were legally challenged, in part because of the costs of legal action against the government. But in 41 percent of cases — 4,455 — where there was a challenge, the government agreed to return money. The appeals process took more than a year in 40 percent of those cases and often required owners of the cash to sign agreements not to sue police over the seizures.
• Hundreds of state and local departments and drug task forces appear to rely on seized cash, despite a federal ban on the money to pay salaries or otherwise support budgets. The Post found that 298 departments and 210 task forces have seized the equivalent of 20 percent or more of their annual budgets since 2008.

“Since 2001, police have seized $2.5 billion in cash from people who were never charged with a crime.”  http://www.washingtonpost.com/blogs/wonkblog/wp/2014/09/08/civil-asset-forfeitures-more-than-double-under-obama/

This has gone much too far for the health of our Republic.

The Rule of Law

The rule of law is an essential foundation of modern market economies. It increases the prospect and expectation that our individual efforts will be rewarded on the basis of merit (i.e., the success with which we satisfy the public’s wants at prices the public is willing to pay) rather than on the basis of favoritism (i.e., who we know). It introduces an element of certainty (rules of the game) in an otherwise uncertain world upon which to build our entrepreneurial efforts. It is fundamental to our notion of fairness and a protector of our personal freedoms. It is a notion and practice that attracts wide admiration from ambitious and freedom-loving people around the world and to our great benefit brings many of them to our shores.

We have never enjoyed the rule of law fully or perfectly, but our belief in it and our relatively close adherence to it remains critical to our success and the world’s eroding respect. Departures from the rule of law in our dealings with each other at home or abroad, undermine the efficiency of our market economy and diminish our freedom, but more importantly undermine the respect of others and our moral authority, which is almost as important to our place in the world as our military strength. Thus any erosions of the rule of law should be exposed and resisted vigorously.

Two principles of the rule of law are that they must apply to everyone equally (ourselves as well as others) and that the rules can’t be changed retroactively.

Through the Foreign Account Tax Compliance Act (FATCA) and other tax and Anti Money Laundering measures the United States has been increasingly forcing its own laws on other countries and turning banks into policemen to the detriment of the banking system. According to The Economist magazine (6/28/14): “In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax. America is, in essence, using threats to outsource its financial policing. This is working: so far, more than 77,000 financial institutions have agreed to pass information to the IRS. The costs of complying with FATCA are likely to dwarf the extra revenue it raises” Many of the approximately 7 million Americans living abroad are finding it difficult to open bank accounts. “Many have been rejected by foreign providers of banking services, insurance and mortgages because, given the amount of paperwork needed to satisfy Uncle Sam, American clients are simply too much hassle. Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was hatched…. FATCA’s intrusiveness raises serious privacy issues…. The financial superpower looks ever more a regulatory bully, setting rules it ignores itself.” “America’s new law tax compliance heavy handed inequitable and hypocritical FATCAs-flaws?”

When contracts can’t be honored because a company is not earning enough money, bankruptcy laws provide for a well-defined process for transferring ownership from shareholders to creditors, which includes the priority of creditor claims against the inadequate assets of the failed company. Bank bondholders and other creditors price their credit in light of their place in the cue. It violates the principles of the rule of law to changes these priorities after the fact, but this is exactly what the Obama administration did when it put General Motors into bankruptcy by favoring the United Auto Workers pension fund: “A bedrock principle of bankruptcy law is that creditors with similar claims priority receive equal treatment. In the auto bankruptcies, however, the administration gave the unsecured claims of VEBA [union pension] much higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders.” “Obama’s UAW Bailout”

The government’s inconsistent and unpredictable treatment of distressed financial institutions in 2007-8, some were bailed out and some were allowed to fail, and the resulting uncertainty about future treatment, has surely contributed to the reluctance of banks to lend and of firms to invest thus slowing the pace of our economic recovery. “The Financial Crisis: Act II”

Sadly the examples of political hypocrisy with regard to the rules of the game are growing. Fortunately there are some signs of push back. The Supreme Court just unanimously overturned as illegal the President’s so called recess appointments of members to the National Labor Relations Board. “Supreme court strikes blow-Obama exceeded authority with recess appointments” The Speaker of the House of Representatives is suing “the Obama administration for its use of executive actions to change laws.” “Boehner confirms lawsuit against Obama executive actions”

The hypocrisy has been non-partisan. Though fully justified, the hypocrisy of the outcry over the IRS’s missing emails related to targeting conservative organizations was exposed fully in Sunday’s Washington Post. Government departments and agencies are required by law to maintain copies of official correspondence (all office emails included). This law has been regularly violated. Examples are “the Bush White House’s destruction of millions of e-mail messages [including those of John Yoo, the Department of Justice lawyer who justified torture] as well as the destruction of pre-investigative files by the Securities and Exchange Commission, including files pertaining to Bernie Madoff and Goldman Sachs.” How has this happened? “Congress has neither appropriated sufficient funds for agencies to implement electronic record-keeping nor added oversight and penalties to the Federal Records Act that would ensure compliance.” “The IRS isn’t the only agency with an e-mail-problem”

Hypocrisy is rendered impotent, hopefully, from exposure. Thus hopefully George Wills’ latest column on the Redskins will be widely read. “The government decided that redskins bothers you” It begins: “Amanda Blackhorse, a Navajo who successfully moved a federal agency to withdraw trademark protections from the Washington Redskins because it considers the team’s name derogatory, lives on a reservation where Navajos root for the Red Mesa High School Redskins.” And the hypocrisy gets worse from there.

For more examples see my “Big brother is getting bigger”

Big Brother is getting bigger

Americans are forever debating the best boundary between the domain of government authority and our personal authority. It is an important discussion, which should continue forever. Many but not all of the issues discussed have to do with the balance between security (protecting us from attack, disease, hunger, etc.) and liberty (leaving us free to hold our own religious and political beliefs, and set our own personal goals, make our own decisions, etc.). Many of the considerations in these discussions revolve around the relative advantage and efficiency of the government, or entrepreneurs, or ourselves —which can do something better (set standards, build bridges, build rockets, develop and implement more efficient sources of energy, cure cancer, develop better telephones, put on a play, etc). An important class of considerations concerns the risks of granting the government powers that can potentially be abused. Edward Snowden has certainly made us think about some of these risks. I urge you to reread my earlier blog on this subject: https://wcoats.wordpress.com/2013/03/08/protecting-our-civil-liberties/.

Four recent examples of the government’s abuse of power suggest that it is sliding into increasingly dangerous habits. I optimistically count on the good sense of you all to push the pendulum in the other direction.

The Common Core. The effectiveness of any undertaking should be measured by its output – its result. In the critically important area of education, data on what we spend on education tells us nothing about whether the money was well spent. Expenditures measure inputs not outputs. In order to determine whether children have learned what we think they should have learned, we test them. Some tests are better than others, of course, but there is value (at the very least to parents trying to decide where to live) in being able to measure the quality of teaching in one area with that in another, and common, standard tests are one of the ways of doing so. Different localities may have different ideas about what they want their kids to learn, but otherwise it is helpful to be able to compare how much kids learn on average in different schools, communities, and states. It would also be of concern if the skills and knowledge one area aims for are very different from those sought in another area of the same country, as there are a core of values and shared knowledge necessary to preserving a peaceful, flourishing society within a nation, to preserving a shared sense of nationhood. For an immigrant nation like the United States, this is especially important.

These are the considerations that led Bill Gates to finance the development of the common core of knowledge expected for each grade level and the standard examinations to test their achievement. I strongly support the desirability and value of this goal. But what is the role and scope for experimentation in approaches to effectively teaching what we think our kids need to learn? Though it is a little disturbing to use our kids as guinea pigs, it is better to do so one school or school district at a time rather than experiment with the entire nation (which eliminates the possibility of comparisons between approaches). Many educational fads have proven to be misguided and have done great damage (look-see reading methods, the elimination of groups of different ability within one class, etc.) More over, it is essential that parents have a choice of what school and approach to send their kids to. Such School Choice and the variety of approaches offered allow limited experimentation while preserving social peace (each family is free to make their own choices) at the same time. Still, there is a minimum standard core of values and knowledge we rightly expect every child (our future citizens and voters) to have if we are to preserve the values on which the country was founded and has so successfully operated for over two hundred years.

These somewhat conflicting objectives cannot be resolved easily. There is a balance between individual choices and the minimum common values needed to live peacefully together. The search for the best balance is facilitated by keeping most education decisions local and close to the families for which it is most important. We are suffering from Ronald Reagan’s failure to deliver on his promise to abolish the Department of Education (a department of the federal government, which has no constitutional role in education). I think that a Common Core of educational achievements is desirable but that they must be voluntarily adopted by each school district and state. The process of discussion between districts and states will improve the standards that most choose to adopt.

If you think that the federal government leaves this choice to the states (where it has constitutionally been placed), think again. The federal government both penalizes and rewards (subsidizes) states in order to pressure them into adopting the standards promoted by the federal government. It should not.

Lois Lerner’s missing emails

It is not surprising that government officials and bureaucrats sometimes let their own political, religious, or cultural views influence their performance of their official duties. After all, they are human like the rest of us. Thus where we have given a responsibility to government, and collecting taxes is a proper and necessary function of government, it is important to impose strong checks and balances against the abuse of such powers. The misuse of the IRS to punish political enemies is a disturbing abuse of government power, reminiscent of Richard Nixon’s enemies list. But such things happen from time to time under every administration. What is much more disturbing is the failure of this administration to take all reasonable measures to punish those responsible. The missing IRS emails subpoenaed by Congress (like all government agencies, the IRS had contracted a company to back up its emails) are reminiscent of the missing 18 minutes of Nixon’s White House tapes. Ms. Lerner and others involved should be in jail.

The Redskin’s name

I am not a Native American and thus have no idea why some of them consider the name of our football team, “The Washington Redskins”, offensive. Negro’s (aka African-Americans) are regularly referred to as “blacks” without apparent offense. In my opinion, ethnic groups should be free to inform the rest of us what they prefer to be called, and out of respect I am happy to oblige (though it is a bit annoying when they change their preferred designation every decade or so). But this should be none of the government’s business. Social conventions of good manners should be communicated to the government, not the other way around. But our government seems to be imposing its views on such private matters more and more these days. Upon visiting ground zero (the monuments constructed where the Twin Towers used to stand in New York City) a few weeks ago, I was very offended by a sign with a details list of how to behave while in the area. I didn’t object to the substance of the behavior demanded, but to the presumption of the government of the need to do so.

Last week the U.S. Patent and Trademark Office canceled the Washington Redskins’ trademark on the grounds that federal trademark law does not permit registration of trademarks that “may disparage” individuals or groups. In its announcement the Office stated: “that these registrations must be canceled because they were disparaging to Native Americans.” We will need to pay more attention in the future to the social/religious views of those we elect to office in the expectation that they will be increasingly imposing those views on society. This is not where we should want to go. “The-patent-office-goes-out-of-bounds-in-redskins-trademark-case”

Operation Choke Point

Imposing the government’s views on how we should behave takes a frightening leap forward with Operation Choke Point. As reported in The Economist: “a scathing report released on May 29th by a congressional committee… claims the operation was designed to strangle legitimate businesses that the government objects to for ideological reasons, such as payday lenders or gun dealers. The method is to deny them access to banks and payment systems, by prosecuting payment firms that abet suspect transactions…. The congressional report raises an even more vexing question: whether Operation Choke Point ‘inappropriately demands that bankers act as the moral arbiters and policemen of the commercial world’. The banks’ own legal travails suggest they are not obvious candidates for the job.” “Anti-fraud push accused of turning bankers into unaccountable cops”

I find this totally unjustified intrusion into private affairs deeply disturbing. We should push back hard. I would not be surprised, and would be quite pleased to see the rest of the world push back against similar U.S. bullying of foreign banks via its Foreign Account Tax Compliance Act (FATCA) and long running Anti Money Laundering (AML) campaign. Via FATCA and in total disregard for the laws of other countries, the U.S. is extorting foreign banks to share private depositor information and undertake costly vetting not only of their customers but of their customers’ customers. “Big-banks-are-cutting-customers-and-retreating-markets” This is imposing large costs on banks, which are increasingly refusing to deal with American customers rather than incur those costs. To the extent this concerns compliance with tax obligations, the United States needs to fix its impossible and dysfunctional income tax codes (individual and corporate) rather than bully the rest of the world. “The principles of tax reform” This is not a promising trend.

War – Bosnia, Kosovo, Afghanistan, Iraq, Libya, ??

Current developments in Iraq are depressing but follow the pattern of America’s well meaning but misguided attempts to remake the world in our own image. “Chaos in Iraq prompts soul searching among military veterans” WP /2014/06/18/ For my friends in Iraq the advances of the Islamic State of Iraq and Syria (ISIS) fighters is alarming and dangerous. I am truly sorry for them that they have not yet sorted out their internal sectarian (Shia and Sunni Muslims) and ethnic (Kurds and Arabs) issues. However, these developments do not constitute a serious risk to the United States, though reengaging militarily in Iraq to support the terrible al-Maliki government would. I hope that President Obama sticks to his current resolve not to. Our attack of far away Iraq ten years ago was a disastrous mistake foisted upon us by misguided neocon warmongers. See my account of my work and life in Baghdad in 2004: “My Travels to Baghdad”. And Senator McCain would you please shut up before I loose all respect.

For over twenty years I have worked in transition economies (Bulgaria, Kazakhstan, Kyrgyzstan, Moldova) and post conflict economies (Bosnia, Kosovo, Serbia, Afghanistan, Iraq, South Sudan and West Bank and Gaza) to help them develop central banks capable of supplying a stable currency and overseeing a sound banking system. I have made many wonderful friends along the way and am thankful for the opportunity given me by the International Monetary Fund to have these experiences. My primary motivation, which I think I share with most people, has been the desire to help make the world a better place by sharing the knowledge and expertise I have developed in my field (monetary policy). Often working alongside or with the U.S. military, which is I am sure the finest that ever existed, has convinced me that the neocon dream of forced democracy at the point of a gun is a dangerous delusion. Our post cold war military adventures have weakened our national security, weakened our liberties at home as part of a mad war on terror, and failed to establish better governments in the countries we attacked. We need to engage the rest of the world cooperatively to help build a peaceful, productive, and just world based on the rule of law. Our Army should stay at home to defend our territory.

My longest engagement has been in Afghanistan, starting with a visit in January 2002 and lasting through this last December. I have watched bright and dedicated young Afghans (some still in their twenties) grow up into outstanding leaders in Afghanistan’s central bank (Da Afghanistan Bank). I admire and respect them and have been privileged to enjoy their company. If Afghanistan succeeds in becoming a viable country, it will be because of them and other young Afghans like them. I pray for it to happen. It cannot be made to happen by the U.S. military and President Obama is right to finally bring them home. The rest of the world and its international organizations such as the IMF and World Bank should remain engaged with Afghanistan, sharing its advice and resources. But only Afghans can sort out the country’s ethnic, corruption and governance problems.

A full transition to a truly democratic country based on the rule of law, something badly wanted by the younger generation I have been working with, will take decades of hard work by Afghans. Significant progress has been made. Both candidates for President in Afghanistan’s run off election this past week are capable people who should be able to put together and run a successful government. Success of the election and Afghanistan’s continued progress toward becoming a modern, effectively governed country depends, in my view, more on the Afghan peoples’ broad acceptance of the outcome of the election rather than on who wins. Thus I am saddened (appalled actually) by the behavior of Abdullah Abdullah, one of the two candidates. Today’s Washington Post reports that he “is calling the government’s vote-counting process illegitimate, laying the groundwork for a protracted dispute that could destabilize the country.” This risks sabotaging Afghanistan’s future. “Afghan-presidential-election-thrown-into-question-as-abdullah-disputes-vote-counting”

Liberal societies vs top down (centrally planned) societies

Michelle Obama is absolutely correct to criticize food served in many school cafeterias as contributing to an epidemic of obesity. I grew up knowing that white bread, especially enriched white bread, was bad for me. My mother, who like all mothers loved her children and wanted them to be healthy, had read every word of Adelle Davis three times over. Moreover, compared to whole wheat and multigrain breads, white bread has no taste. So why are some kids today—fat kids no doubt—throwing whole wheat bread and fruit in the trash? “Michelle Obama’s school lunch agenda faces backlash from some school nutrition officials” WP/2014/05/29/

I believe it is ignorance, which the First Lady wishes to help overcome, and rebellion. The ignorance is a bad thing to be over come, and the rebellion, if that is what it is, is fundamentally a good thing—resistance to being dictated to from above. If loving mothers and their children understood the importance of nutritious food to their well-being, do we really believe they would throw it in the trash? These are children we are talking about, who must be taught everything they know. If on the other hand, the government and school administrators simply try to impose healthier food on them, they will resent having their candy taken away from them and will rebel.

This all speaks directly to a frequent theme of mine—the sanctity of the individual vs. the power of the state. If the government thinks it knows better than Johnny and Betty what is good for them to eat, what should it do? The top down, central planning mentality calls for better food standards imposed on schools. After all, pizzas etc. are cheaper and easier to prepare as well as more fun to eat and the government shouldn’t allow these shortsighted considerations to dominate. Respect for individuals, even children, suggests a very different approach. It suggests improved education (the same arguments I have made against the war on drugs). If mothers, and through them their children, understood better what food was good for them and the implications of eating or not eating healthier food, most would choose it. The companies that make it are interested in selling their products and if there is demand for healthier food, then that is what they will make money producing.

My country

Those of us who attend events at the Kennedy Center rather than Wrigley Field or other such palaces of sport are not used to starting off the evening singing the Star Spangled Banner. Thus it is always a bit of a surprise when an evening with an orchestra visiting from abroad starts off that way followed by its own national anthem. The other evening it was the Israel Philharmonic—The Star Spangled Banner followed by Hatikva. We rose a bit awkwardly to our feet. The fact that two nations joined in friendship to salute their national identities, ideals and aspirations added a great deal to the emotions of that moment. I was reminded once again of the great respect and pride I have for my country.

I say this not because my government or fellow citizens always do the right thing—far from it. But because we pretty much agree on what the right things are at the level of general principles and because we try to adhere to them as much as possible and return to them when we don’t. The United States was founded on great and honorable principles. We established institutions and developed attitudes—which include checks and balances on the exercise of power—that deserve our respect and defense. Thus I am encouraged that the abuses of government power following the 9/11 attacks on New York and Washington, which reflected a frightened public’s desire for security, are beginning to be reversed. I am encouraged that our misuse of our military and political power to impose our views on others (Iraq, Afghanistan, Libya, etc.), which we have never been very good at, seems to be on the wane.

Our freedom of speech and free press and our critical mind-set play important roles in the never-ending fight to keep leviathan at bay. The trauma of 9/11 brought out the best and worst in my country. The dangerous excesses of the NSA have received a lot of badly needed attention in recent months but now another area of government lying to us in the name of security is back in the spot light. If you take yourself back twelve years or so, and try to remember what you thought about torturing terrorists for information that might prevent another terrorist attack, you might remember that some argued that it was OK if it really saved lives. We all knew that torture violated our values (not to mention international treaty commitments), i.e. that it was wrong, but if it really saved lives….. It turns out that it didn’t and the government lied to us about the useful information it allegedly produced. It was wrong AND didn’t save any lives. Congressional oversight and our free press are to be thanked in this case for disclosing these government misconducts: “CIA misled on interrogation program”/2014/03/31/.

Were these bad things done by bad people? These latest disclosure were made the same day as General Motor’s failure to disclose a faulty auto part for ten years and the causes of the failures are similar (human nature in the face of weak incentives to behave properly). Most people I encounter (not just Americans of course) want to do good with their lives even when the result of their activities are sometimes not good. There are, of course, also bad (just plain mean) people in the world. Most of us have encountered one or two of them in school (bullies). In adult life they can easily be attracted to position that give outlets to their meanness (the police, prisons, military provide such opportunities). We are fortunate that as the result of hard efforts by many people, our police, military etc. are generally very professional and keep the bullies among them in check. There are exceptions, of course. The disgusting mistreatment of Iraqi prisoners by a few Americans in Abu Ghraib prison was exposed just as I took up a two-month residency in Baghdad. I was embarrassed that my countrymen and women could have behaved so badly (and concerned with its possible impact on my safety). But my point here is that in the United States such things are almost always revealed and disclosed eventually and thus kept in check. This is why I can remain proud of my country. Though we never live up to our high ideas, we take them seriously and are always trying. Excesses usually get corrected until the next one comes along. It is an important and never-ending battle, but as long as we keep fighting it, I will remain proud of my country.

Strengthening National Security

On March 10, Edward Snowden was interviewed via videoconference at the annual conference of SXSW Interactive: “Conversation with Edward Snowden” It is an absolutely brilliant discussion of the issues first raised by Snowden last year with emphasis on protecting our privacy. I had not viewed it yet when I posted my last blog on the slippery slop of government expansion, but it provides another powerful set of examples. I strongly urge anyone to view it who is interested in and concerned about how to strengthen our security against criminals and enemies without eroding the checks and limits on the scope and power of our government that is one of the foundations of our successful democracy built into our constitution.

Snowden is surprisingly articulate. He understands economics almost as well as cryptology. I will repeat here just two of the many brilliant points he made and urge you to watch it all.

No one in the discussion of surveillance and national security raised by Snowden wishes to impede the ability of the NSA or the government to gather information on targeted individuals under court orders with proper oversight. Sounding like an economist (and of course we all love economists) Snowden notes that the billions of dollars that have been wasted on mass (as opposed to targeted) data collection and analysis (it has produced virtually no useful information) has taken valuable resources away from improving the collection and analysis of targeted information. Thus, for example, the underwear bomber and the Boston marathon bombers probably could have been stopped if our government had used its intelligence resources more wisely. In short, mass surveillance programs have reduced our security in many ways.

When asked why the NSA and other government security agencies persist in hanging on to worthless and wasteful (and potentially dangerous) programs, Snowden presents a proper public choice answer that is very similar to the special interest defense of wasteful and harmful tax loop holes I criticized a few days ago. Individuals and companies benefit from the huge amounts spent on these programs. They acquire a self-interest in their preservation. In addition, bureaucrats are naturally self-protective and slow-moving. You really should listen to Snowden’s own words.

As I have said a number of times previously, the disclosures of confidential government documents and internal discussions by Chelsea (AKA Bradley) Manning are harmful to the effective functioning of government. I am glad that she is in jail, though a hospital would probably be more appropriate. Snowden, on the other hand is a full-blown hero and patriot. It took me a while to fully embrace this view, but it is clear now that our personal and national security have already improved and should improve further in the future because of him (and others working in the same direction). I am very grateful for the huge personal sacrifice he has made for me and for our country. I hope that our government will find a way to welcome him back home soon.

President Putin’s welcome to Crimea

Anyone interested in current events in Ukraine should read Russian President Putin’s address to the Russian people on March 18, 2014 welcoming Crimea back into Russia: “Putin’s speech on Crimea”. It is very clever in playing to the insecurities of the Russian people while also speaking to the international community. Putin says many things we can hardly disagree with along with (and often packed in) some amazing lies and some embarrassing truths.

Here is one example of the former: “I would like to reiterate that I understand those who came out on Maidan with peaceful slogans against corruption, inefficient state management and poverty. The right to peaceful protest, democratic procedures and elections exist for the sole purpose of replacing the authorities that do not satisfy the people. However, those who stood behind the latest events in Ukraine had a different agenda: they were preparing yet another government takeover; they wanted to seize power and would stop short of nothing. They resorted to terror, murder and riots. Nationalists, neo-Nazis, Russophobes and anti-Semites executed this coup. They continue to set the tone in Ukraine to this day.” Perhaps Putin’s virtual shut down of a free press in Russia has kept the Russian people from knowing of his suppression of political opposition there. Or perhaps he thought that the recent release from prison of Mikhail Khodorkovsky (after over ten years of political incarceration) and Pussy Riot demonstrated that the “right to peaceful protest” was alive and well in Putin’s Russia. His statement that the murder of over 100 Maidan demonstrators was at their own hand is just a bald faced lie.

Examples of embarrassing truths include President Obama’s pledge not to bomb Libya. Quoting Stephen Cohen, a professor emeritus at New York University and Princeton University, on the Charlie Rose show:  “The United States said to Russia, support of the United Nations’ [authorization of] a no-fly zone over Libya so that Gaddafi can’t take his planes up and attack the insurgents.  Russia said, so it’s just a no-fly zone?  You’re not going to bomb Gaddafi?  [But] we did and it led to his assassination. From that moment on, Putin never trusted anything that came out of the White House.”

I had intended to start the previous paragraph with the often repeated claim that, to quote former U.S. defense secretary Robert McNamara, ‘‘the United States pledged never to expand NATO eastward if Moscow would agree to the unification of Germany.’’ According to this view, ‘‘the Clinton administration reneged on that commitment when it decided to expand NATO to Eastern Europe.’’ Quoted in Mark Kramer: TWQ article on Germany and NATO. Recently available documentary evidence cited by Kramer clearly refutes this “myth.”

I want to share an account of a famous meeting I attended in Tashkent on May 20-21, 1992. The account was written by me many years ago but never shared until now. It presents the truth of another mini lie in Putin’s speech contained in the following passage:

“The USSR fell apart. Things developed so swiftly that few people realized how truly dramatic those events and their consequences would be. Many people both in Russia and in Ukraine, as well as in other republics hoped that the Commonwealth of Independent States that was created at the time would become the new common form of statehood. They were told that there would be a single currency, a single economic space, joint armed forces; however, all this remained empty promises, while the big country was gone.” The following account reveals just how committed Russia was to “a single currency” for the newly independent Former Soviet Republics.

Tashkent, May 20 1992

A.   Background: Monetary Babylon

The sudden formation of 15 central banks out of Gosbank in the Former Soviet Union created a strange and ultimately unsustainable situation. One monetary system suddenly had 15 suppliers of “rubles.” The ruble banknotes supplied by the new Central Bank of Russia (they were initially the USSR ruble notes that had already been printed by the Central Bank of the USSR) were issued in their respective areas by each of the 15 FSU central banks. In addition, ruble deposits with banks where used in payments throughout the entire FSU region using the settlement accounts each bank maintained with its newly independent central bank. When payment orders from FSU republics outside Russia began piling up at the Central Bank of Russia in Moscow, we were forced to start sorting out what was wrong with the “system.”

Initially the payment system continued to function as it had previously under Gosbank. The system was decentralized. All that was needed under that system was to verify that the sender (payer) had sufficient funds in its account with its bank. As there was only one bank in the Soviet system, Gosbank, there was no issue of the sender’s bank having enough money in its “settlement” account. All deposit transfer payments were in effect “on us” (i.e., intrabank transfers). Thus a valid payment order could be and was safely accepted at which ever branch or office of Gosbank it was delivered to (the one closest to the recipient of the payment). However, with the introduction of a two tiered banking system several years earlier, the adequacy of a depositor’s bank’s settlement account with the central bank potentially became important.

In early 1992 we were confused by the system being described to us. It was very difficult for us to understand how it really worked. Our counterparts who were explaining the system to us, either didn’t really understand the system either or understood it in terms of its functioning in monobank days. On top of this, the system we were trying to understand was being described to us in Russian and then being translated into English for us by interpreters with no real knowledge of the subject they were interpreting.

Under the old, inherited system, a payment order was sent directly from the central bank branch office used by the sender to the central bank branch office used by the receiver. We were concerned with the potential for credit creation by overdrafts that seemed to be automatically generated when payment orders were accepted wherever they landed without being able to verify the sending bank’s settlement balance with its respective central bank. Bruce Summers of the Federal Reserve Bank of Richmond, complained that each of the fifteen central banks created out of Gosbank needed to centralize the information on account balances if they were to avoid accepting payment orders that might result in overdrafts. Furthermore, something was needed to ensure that net payments among the fifteen central banks did not result in unauthorized overdrafts.

In a series of quick steps, the Central Bank of Russia centralized all incoming payment orders from FSU payers outside of Russia in its Regional Branches and ultimately in Moscow. Furthermore, payment orders that had earlier been sent directly from the Gosbank office servicing the payer to the Gosbank office serving the payee, were now redirected to the new central bank of the republic of the payer, which forwarded it to Moscow (if the payee was somewhere in Russia). Quite aside from whether the bank of the payer had sufficient settlement funds, the sheer volume of payment orders now directed to Moscow overwhelmed the CBR staff there. The time for processing cross border ruble payments was measured in months.

In addition, no one seemed to know the terms under which the CBR supplied its ruble bank notes to the new FSU central banks. Under the inherited system, banknotes were shipped from the mints to the regional branches and offices of Gosbank as needed. They were issued to enterprises against debits to the enterprises’ account balances with the central bank or as credits to the enterprises. The rest was just internal bookkeeping. This arrangement continued for a while until the new FSU central banks began to realize that they were no longer part of the new central Central Bank of Russia and would need to pay for the banknotes of the CBR.

I remember being told by bewildered staff of the National Bank of Kazakhstan and National Bank of Kyrgyzstan that of course the CBR would continue sending banknotes when needed because they always had. And why should they “charge” for them as they had never charged for them before. And indeed, the CBR did continue to send their banknotes for a while and no one knew what the terms for providing them was or might be. This was new territory for everyone and no one seemed to understand exactly where the system was going or how it should work.

As almost all of the new republics had a balance of payments deficit with Russia, the settlement accounts of their new central banks with the CBR in Moscow were always over drawn. The CBR periodically extended credits to these FSU central banks in order to put the overdraft credits on a more explicit basis. But in fact, as the whole process was not really understood and the CBR’s policy not yet really established, the terms of these credits were often unspecified for many months after the fact. Russia seemed to use the undefined terms for political leverage. More politically cooperative Republics negotiated better terms than others.

Resolving the settlement problem was further complicated by the fact that the system was not designed to produce up-to-date account balances. I remember when our accounting expert, Alan Vedren Lacohm from the Bank of France, reported to me that the central bank did not seem to know the current balances of the deposits banks held with it. As hard as it was for him to believe or understand, the central bank seemed to maintain separate debit and credit accounts that were only compared and balanced once a year. An enterprise could issue payment orders against its account on the basis of a central plan authorization. It didn’t matter if it had enough money in its combined debit and credit accounts, and in fact no one really knew whether it had a positive balance or not. This astounding fact mystified us because we were seeing it from the prospective of the systems familiar to us designed for market economies. When we came to understand that the Soviet system, obviously designed to serve a centrally planned economy, was really a budget tracking tool, we suddenly understood its logic. None-the-less, it would not work for a market economy. (Alan later married my assistant after they met on my second mission to Kazakhstan and Kyrgyzstan)

When a bank did not have sufficient balances in its settlement account at the central bank, the central bank could extend it credit to permit payment settlement to proceed. However, such credit did not help when “rubles” were being transferred from Kazakhstan (for example) to Russia. The National Bank of Kazakhstan could not extend credit to its own account with the CBR. The system was designed to work with one central bank and it continued to operate throughout the ruble area as if it still had one central bank when it in fact had 15. The fact that the CBR more or less automatically extended credit to the other FSU central banks and supplied them with what ever ruble bank notes they needed (a very soft budget—balance of payments—constraint), encouraged the FSU central banks to create ruble credit at an ever increasing rate.

B.   A Blue print for monetary union

The emerging system was not viable. The USSR had been one economic and monetary space. With its break up, the ruble continued to circulate and to be used for payment through out the entire area. In the case of bank notes, a ruble was a ruble (until new versions were introduced later in the year and in 1993). But in the case of deposit rubles, 15 central banks now issued them. And they continued to be transferred from one account to another as if they were one currency in one system. As we more fully appreciated later, the ruble area of 1992 consisted of one cash ruble and 15 different non cash rubles. Each central bank was issuing its own ruble credits. A ruble claim on the National Bank of Kazakhstan was not the same as a ruble claim on the CBR even though they had the same name.

If an FSU central bank was going to create credit as it saw fit, it would need to introduce its own currency (bank notes as well as central bank account money). If an FSU republic wished to continue using the “traditional” ruble, it’s monetary policy would need to be subordinated to or coordinated with that of the CBR and any other central banks that remained a part of the ruble system. We developed a set of rules for central bank cooperation within a ruble area that we thought would be needed to make the system coherent and stable and invited the governors of all 15 FSU central banks to a meeting to discuss them. The meeting took place in Tashkent on May 20 and 21 following a heads of state meeting there as part of the Russian effort to organize the Commonwealth of Independent States (CIS).

This meeting was preceded by building tensions between the CBR and most of the other FSU central banks as they raced to out do one another in creating ruble credit and as payment orders piled up in Moscow. The situation was further complicated by conflicting signals from Moscow. Depending on who was speaking on any given day, Russia seemed to support the introduction by the FSU republics of their own currencies (thus leaving the ruble area) or the surrender of monetary autonomy to the CBR. Either of these Russian positions was coherent. Our own proposal was meant to provide coherence and central, but collective, control of monetary policy (along the lines of the subsequent ECB), without full surrender to the CBR (These can be found in IMF [Occasional Paper 51]). The Russian terms for staying in the ruble area were cleaner, but because they required complete subservience to the CBR, we felt they would drive out (into their own currencies) even those countries that wanted to stay in a ruble area.

After helping to develop the guidelines to be discussed, I attended the meeting. Other IMF staff attending where Malcomb Knight (later the Sr. Deputy Governor of the Bank of Canada and the General Manager and CEO of the BIS), John Oling-Smee (head of the IMF’s newly established European II Department consisting of the FSU countries), Ernesto Hernadus Catan and Ishan Kapur (both from the IMF’s European I Department). Most of us met in Geneva in order to take a charter flight on May 19. We stopped in Moscow on the way to pick up Ernesto. May 19, 1992 happened to be my 50th birthday. We celebrated on the plane with a bottle of Dom Perignon. It was a memorable birthday.

We were met at the airport in Tashkent by the Deputy Prime Minister. A caravan of three Chaikas and several police cars took us to the compound in which we would stay and our meeting would be held. It was 10:00 pm when we arrived and a formal welcoming dinner had regrettably been planned that required our attendance.

Following the dinner, sometime after midnight, I slept moderately well, despite my excitement, because I was so tired. We had no idea what the current Russian position on use of the Russian ruble would be. It had been changing back and forth in the work up to these meetings almost daily. Clearly views within the Russian hierarchy were divided. Relations between Russian and most of the FSU republics had grown increasingly tense. No one trusted anyone. I had found trying to understand the existing monetary arrangements and working out principles that could make it work intellectually very challenging and interesting. I was filled with excitement and anticipation to hear the reactions of the delegates.

The meeting on the 20th was opened by the Prime Minister, Abdulhashim Mutalov, and the Governor of the State Bank of Uzbekistan. The substantive part of the meeting, which was attended by the Governors of most of the FSU central banks and the Deputy Governors of the rest, was led by John [Odling-Smee]. After a general introduction of the purpose of the guidelines, we proceeded through the sixteen points one after the other. Questions were raised by one chair or another to clarify some of the points. The general suspicion that the IMF would take the Russian position gradually melted (this was helped by the fact that we had fielded technical assistance missions to all of the FSU central banks by then and established the beginnings of relationships of trust). Very few political statements were made and everyone kept glancing at the Russian chair trying to read their position. The Russian Chair, headed by Governor Georgy Matyukhin, said nothing at all that day. It seemed that Russia was not going to challenge our proposal, which was enthusiastically supported by all of the other central banks. At the conclusion of the day it was agreed that a communiqué signed by each of the fifteen governments would be prepared that would set out the sixteen points.

Following the long day’s meetings, we were taken in a long police escorted motorcade to a lake on the outskirts of Tashkent for a celebratory banquet. Our banquet tables were on a large wooden pontoon floating at the edge of the lake. By that time I knew the routine (toasts from each governor, lots of food and lots of vodka). Between the 15 central bank representatives, Uzbek/Tashkent government representatives, and our group, there were a guaranteed minimum of 18 toasts. And indeed, we exceed the minimum. My routine of minimal sips was again subverted by yet another Russian woman sitting across the table. Nothing but “bottoms up” was acceptable. The spirit of the group was exuberant. Each toast became more friendly and gushier than the one before it. Governor’s who were barely willing to speak to each other in the morning had become the best of friends—brothers (“comrades” was no longer a forbidden term).

We arrived back at our compound around midnight. Galinda, our translator from Washington went to work translating the draft communiqué into Russian. John had asked me to be ready to respond the next morning to any questions about inter-enterprise arrears. I started down the hall to my room to brush up on my potential presentation and the First Deputy Governor of the State Bank of Kazakhstan (Mr. Tadjeokof) grabbed me and insisted that I join him in his room for another drink. I had met him two months earlier in Alma Ata (now called Almaty) during my first mission to Kazakhstan. He wished, it seemed, to thank me for our technical assistance and to explain how much they needed lots more. Mr. Tadjiokof did not speak English and I do not speak Russian (or Kazakh), but we proceeded to speak to each other and to lift our glasses of Vodka and toast whatever warm words had been said.

I had assumed that Mr. Tadjiokof had wanted company for another drink, but he persisted in efforts to communicate. It was only possible to go on as if we understood each other for a limited time. I was soon forced to seek help from one of our interpreters. Galinda agreed to suspend her translations of the draft communiqué to interpret for us. Several toasts late, I had second thoughts about the seriousness of Mr. Tajiokof’s communications, which remained focused on his gratitude for our assistance. Galinda was complaining that she needed to return to her work on the communiqué. I was beginning to lose patience and focus. As Galinda left, I spotted Ernesto in the hall. He had been taking Russian lessons and agreed to practice on Mr. Tadjiokof. It was 3:00 am and I stagger off to my bed.

I awoke a few hours later still fully dressed where I had fallen on the bed. I had one of the worst hangovers I can remember. I had serious doubts that I could clearly explain the interrelationships between inter-enterprise arrears and monetary policy. I wanted to sleep for a few more days. But the meeting resumed. No one raised the issue of inter-enterprise arrears thank God. The Russians remained silent. The text of the communiqué was agreed on and the Uzbek hosts agreed to obtain the signatures of the fifteen FSU republics.

The communiqué was never issued nor heard of again. The Russian’s had quietly killed it. In the end, Russia required each FSU republic to choose subordination to the CBT or to introduce their own currency. All but Tajikistan chose the latter. Within several months the Baltic states introduced their own currency and one year later Kyrgyzstan became the first FSU country beyond the Baltics to introduce its own currency. Most of the rest followed before the end of 1993 and the ruble crisis came to an end. Inflation in 1992 is thought to have been several thousand percent dropping to 875% in 1993 and 307% in 1994.

*****************

The quiet disappearance of the central bank cooperation communiqué is reminiscent of the mysterious disappearance of President Yanukovych on February 22, 2014, one day after signing an EU brokered truce with opposition leaders following two days of the worst violence between demonstrators and police in 70 years in which almost 100 were killed. According to witnesses in the room, Yanukovych only agreed to sign the agreement after being instructed to do so by President Putin in a phone call during the meeting. The agreement has not been heard of since. Though Yanukovych was removed from office by an overwhelming vote of the Ukrainian Parliament on February 22, Putin and Yanukovych called it a coup.

Ukraine- Monetary Regime Options

I visited Kyiv March 11 – 14 and participated in the Emergency Economic Summit for Ukraine at which I discussed the pros and cons of the central bank following currency board rules or inflation targeting. My paper on the subject will appear in a few weeks in the Cayman Financial Review, but the introductory paragraphs give a quick picture of the domestic (not external Russian issues) political situation. I reproduce those here:

The recent protests leading to the replacement of the government of Victor Yanukovych, reflect a widely held desire for the rule of law and normal individual freedoms and dignity. The few thousands who demonstrated in the Maidan (Independence Square) in Kyiv starting November 21, 2013 following the surprise refusal of then President Yanukovych to sign Association and Free Trade Agreements with the EU, swelled to almost one million by early December in response to deadly police attacks on the demonstrating students. The Ukrainian public, countrywide, is outraged at the corruption of its government and wants a new direction more reflective of western values.

President Yanukovych was removed from office on February 22 by a vote of 328 of 447 members of the Ukrainian parliament. Ukraine’s leadership has changed a number of times since the collapse of the Soviet Union without any significant or enduring change in governance and corruption. More than the head of state needs to change. Having been disappointed by the outcome of the Orange revolution, the demonstrators remain distrustful of any new government with old faces. The barricades and tents of the Euromaidan demonstrators remain in place, and their occupants vow to stay to monitor the new government at least until the Presidential elections scheduled for May 25.

Maidan tent city IMG_0162IMG_0160

The Future of Ukraine

Bordering Moldova, Romania, Hungary, Slovakia, and Poland to the west, and Russia and Belarus to the East, Ukraine should be well placed to benefit from the trade opportunities in both directions. Although the 47 million population of modern (post WWII) Ukraine is overwhelmingly ethnically Ukrainian (about 78%) followed by 17% Russian (concentrated in the industrial eastern and southern areas), Ukraine’s educated citizens are almost universally bilingual in Ukrainian and Russian. Ukraine’s western half naturally leans toward Europe while its eastern half leans toward Russia. The country’s presidency has shifted between favoring one then the other. The tensions between the two are real but can easily be exaggerated.

Many of us wonder why President Putin seems to want yet another unproductive, loss-making territory added to Russia’s care, something it increasingly cannot afford. As with Transnistria, the inefficient, loss-making, industrial, secessionist, eastern part of Moldova (now largely a gangster haven), the eastern part of Ukraine is saddled with former Soviet, industrial, white elephants, which sooner or later must be dismantled. Why is Putin flirting with isolation from the world community with ultimately devastating economic costs to Russia to take over more industrial dinosaurs? Why, in short, is Russia giving up joining the “civilized” world it seemed to once aspire to?  The only tangible benefit for Putin seems to be great popularity at home. Having almost totally snuffed out significant political opposition and a free press in Russia, and then convinced the vast majority of Russians that he is defending Russia from its many enemies, his moves against Ukraine have sent his popularity soaring at home.( “Putin wins in Russia only by escalating his war rhetoric” Washington Post /2014/03/14/ )

Just as President Victor Yanukovych’s brutal repression of the Ukrainian protesters following his switch from signing the Association and Free Trade Agreements with the EU to signing a trade and financing agreement with Russia backfired, resulting in his removal from office by an overwhelming vote of the Ukrainian Parliament, Putin’s thuggish maneuvers against Ukraine seem to have backfired as well. By all accounts (except those broadcast by Russian media) almost all Ukrainians, ethnically Russian as well as Ukrainian, are uniting in their opposition to a Russian take over. Just because many Ukrainians in the eastern parts of the country are native Russians doesn’t mean they want to be annexed by Russia. It reminds me of the large number of Mexicans now living in southern California. No one would imagine that they would vote in a referendum to become part of Mexico (again). “Putin’s interference is strengthening Ukraine” Washington Post /2014/03/13/, “Russia supporters in eastern Ukraine pose challenges to pro western government” Washington Post/2014/03/14/.

I found it interesting that the Ukrainian Minister of Economy, Pavlo Sheremeta, switched from English to Russian during the “Emergency Economic Summit For Ukraine” in which I participated in Kyiv on March 12, for the benefit of the two Russian panelists to whom he was speaking. The Russians, Andrei Illarionov, former Economic Advisor to President Putin, and Kakha Bendukidze, fomer Minister of Economy of Georgia, both speak English as flawlessly as does Minister Sheremeta. The real point was to show affinity with Russia and Russian Ukrainians, while criticizing President Putin’s bullying.

Ukraine has much to do to clean up its government and to liberate the entrepreneurial energies of its economy. But such reform efforts could be interrupted if Putin moves Russian troops into Ukraine beyond the Crimea. It is certainly desirable to dissuade them from doing so if possible. The question for the U.S. and Europe is what measures should they be willing to take against Russia for violating Ukraine’s sovereign territory. The West’s objective should be to deter further Russian aggression if possible or to diminish its ability to continue to misbehave in the future if it persists in violating or threatening to violate the sovereignty of its neighbors.

Putin’s justification for its invasion of the Crimea and potentially more of Ukraine, the need to protect ethnically Russian citizens of Ukraine, is reminiscent of Hitler’s take over of the Sudetenland (the largely German-speaking western areas of Czechoslovakia). “Putin-the mask comes off but will anybody care” American Interest 2014/03/15/3.  Particularly egregious is Russia’s disregard of its commitments made on December 5, 1994 in Budapest, Hungary Budapest Memorandum on Security Assurances (also signed by the U.K. and the U.S.). In exchange for Ukraine’s giving up its nuclear weapons stockpile (then the third largest in the world) Russia and the U.S. provided assurances against the use of force against the territorial integrity or political independence of Ukraine.

Henry Kissinger has set out reasonable terms of an agreement with Russia (on the assumption that Putin is pursuing genuine Russian interests in the area) but offered no suggestions for how to encourage Russia to accept them. “To settle the Ukraine crisis start at the end” Washington Post /2014/03/05/.  The West’s strategy should be explicit and transparent and should escalate with continued Russian aggression. It should begin with measures that will command the most attention in Russia at the least cost and risk to the West. We should not make threats that we are not willing to carry out. No Obama red lines that are later ignored.

President Obama has already ordered the freezing of U.S. assets and a ban on travel into the United States of those involved in threatening the sovereignty and territorial integrity of Ukraine. No individuals have been named yet. It is a tool that can easily be expanded to a larger number of people if and when Russian intrusion expands. These measures are aimed at those in Russia with the greatest influence with Putin and would diminish the joys of their ill-gotten wealth (extravagant vacations in London, etc.). But unless the EU joins the U.S. in applying such sanctions, they will obviously be far less effective.

If Putin is unwilling to reverse course or at least stop advancing even in the face of targeted sanctions, the West’s strategy should be to reduce or limit Russia’s financial capacity to reestablish its former empire. Putin’s hold on power rests on the wealth he has directed to his friends, and wage and pension promises to the general public. About one half of Russia’s federal budget financing comes from its exports of oil and gas. The price of oil needed for Russian fiscal balance is in the neighborhood of $120 per barrel. This so-called breakeven price increases with expenditures by the Russian government and with the cost of producing its oil and gas. Brent crude is currently trading for around $108 per barrel. Russian exports and government revenue have become overly dependent on oil and gas and its supply of cheap oil is running out. It has not kept up with the investment in newer technologies and while its output can be sustained for some time its cost of production is rising.  Acquiring the Crimea or eastern Ukraine would add to Russia’s budgetary costs.  “Crimea as consolation prize-Russia faces some big costs over Ukrainian region” Washington Post /2014/03/15/

Europe is more cautious than the U.S. about trade sections in part because of its heavy reliance on Russian gas delivered though pipelines running through Ukraine and large investments by some of its companies in Russia. One of the interesting and beneficial things about increasing trade interdependence is that it cuts both ways and thus tempers the behavior of all sides. Russia is reluctant to shut off its gas sales to Europe as it did in 2006 and 2009 because it needs the money. Europe is less dependent on Russian gas than it was then and could replace it all together if it got over its aversion to the use of fracking technology. The U.S. should be doing everything possible to bring oil prices down in any event. Obama’s long delay in approving the Keystone Pipeline project to deliver Canadian oil to and through the U.S. is more than embarrassing. And all U.S. restrictions on shipping natural gas to Europe or elsewhere should be removed. In addition, oil supplies globally are expected to improve as the embargo on Iranian oil is lifted and production in Iraq, Libya, and South Sudan increases. Liberalization in Mexico promise increases in its oil production. Russia can’t afford to expand its empire of inefficient industries.

If we went all out, Russians and Russian companies could be locked out of the use of the U.S. dollar, a tool that has brought increasing pain to Iran. It is an effective tool because of the dominance of the dollar and dollar financial instruments in international commerce.  But like Russia’s shutting its gas pipelines to Europe, every use of such tools reduces its future effectiveness as those affected take measures to reduce their dependence on the products involved (Russian oil, or the U.S. dollar and financial system).

If in the hopes of preventing a Russian attack, the United States threatens to respond militarily in any way, it had better be prepared to do so. But should it? Clearly the American defense umbrella over our NATO allies should not be questioned and deploying additional aircraft and military capacity to Europe (especially the Baltic members) makes sense. Ukraine is not a member of NATO and I agree with Henry Kissinger that they should not be. If Russia grows up and behaves like a responsible adult we should not unnecessarily provoke insecurity on its part.

But if Russia, despite all, invades mainland Ukraine, should we militarily assist Ukraine and if so in what ways? Or should we prepare for a new cold war of containment, isolation and the eventual economic collapse of the new Russian empire? This, as they say, is above my pay grade. However, an invasion of Ukraine would be quite different from the invasions of Iraq and Afghanistan because we wouldn’t be the invaders. It would be different from the situations in Syria, or Libya because we would not be joining one group or another in a civil war.

The new interim government in Ukraine is promising but unproven. The distraction from the reforms needed that would result from a Russian invasion of Ukraine would be a tragedy for Ukraine as well as Russia. Excessive external aid (financial and/or military) from the West would likely prolong Ukraine’s history of corruption and deepen ethnic tensions. The external financial assistance now planned would largely address external debt service and would allow a more gradual reduction in government spending than would be required by a debt default. This would allow Ukraine itself to strengthen its governance and economy, but would not guarantee such a result. The West can encourage the adoptions of helpful reforms but cannot impose them on an unwilling or unready Ukraine. Russia is in a position to destroy or undermine these efforts, if that is Russia’s role in history that Putin wants.