A war deadlier than the war in Iraq is about to end

Just two days ago I wrote about the imminent demise of the US- and Ethiopian-backed Transitional Federal Government of Somalia at the hands of Islamist rebel forces, but the post sort of rambled and didn't explain very well the significance of the event. The Somali Mogadishu politicians are squabbling over cabinet positions while rebels are "within a few kilometers of the city," playing Nero while Rome burns, and a little-known, but very bloody chapter in the war on terror is about to come to a close.

While no American troops were involved, money and training were provided by the US to Ethiopia in order to fight the recently-established Islamists in Somalia, and the public blessing of Ethiopia's mission by the State Department probably didn't hurt. The Bush administration viewed it as another front on the global war on terror, and took advantage of Ethiopia's presence in Somalia during the war to attack al-Qaeda leaders by air and ground.

The American financial obligation of $20 million might have paled in comparison to the trillions spent in Iraq, the rate of civilian deaths has been much higher. In total, about 10,000 civilians have been killed since Ethiopia invaded a little over two years ago and 1.9 million displaced, among a population of less than 4 million (60% of Somalia's 10 million official inhabitants live in breakaway unrecognized states that weren't threatened by the Ethiopian invasion). This compares to 100,000 civilians dead in Iraq since early 2003 and 4.7 million displaced among a population of 23 million (I excluded the 7 million Iraqis who live in Kurdistan, which the war has barely touched in terms of civilian deaths). In Afghanistan, there have been about 7,000 direct civilian deaths in seven years among a population of 32 million. That means that the per capita civilian death rate of the war in Somalia is higher than that of the Iraq war by about a third, and it beats out the Afghan war by at least an order of magnitude. And if what will be the sixth battle for Mogadishu is drawn out and deadly, this ratio could rise.

Like what is bound to happen in Afghanistan and Iraq, the proxy invasion of Somalia will have been an abject failure. The same Islamists that the Ethiopians chased out two years ago will be returning to power, but this time bringing along with them another possible civil war among the different Islamic factions to be fought before one of them emerges on top.

Update: The death toll appears to have surpassed 16,000 according to another report.

Why did the ratings agencies fail so badly?

Credit ratings agencies have taken a lot of heat for the subprime meltdown, with the apparently true accusation leveled against them that their ratings were optimistically and unrealistically high for traded derivatives based on subprime mortgage loans. But according to economist Charles Calomiris, the regulatory framework unintentionally rewarded what were essentially fake ratings. The excerpt of the article where he discusses the four regulatory signals to the agencies to lie is very long, so I've stitched together the four main points. Since it's highly redacted, I'm not going to indicate where the cuts are, but you can find the text on pages 31–36:

1. Insurance companies, pension funds, mutual funds, and banks all face regulations that limit their ability to hold low-rated debts, and the Basel I and II capital requirements for banks also place a great deal of weight on rating agency ratings. By granting enormous regulatory power to rating agencies, the government encouraged rating agencies to compete in relaxing the cost of regulation (through lax standards). Rating agencies that (in absence of regulatory reliance on ratings) saw their job as providing conservative and consistent opinions for investors changed their behavior as the result of the regulatory use of ratings, and realized huge profits from the fees that they could earn from underestimating risk (and in the process provided institutional investors with plausible deniability).

2. Unbelievably, Congress and the SEC were sending strong signals to the rating agencies in 2005 and 2006 to encourage greater ratings inflation in subprime-related CDOs! In a little known subplot to the ratings-inflation story, the SEC proposed “anti-notching” regulations to implement Congress’s mandate to avoid anti-competitive behavior in the ratings industry (Calomiris 2007a). The proposed prohibitions of notching were directed primarily at the rating of CDOs, and reflected lobbying pressure from ratings agencies that catered most to ratings shoppers.
   
   This effectively would have further emboldened the most lenient rating agencies to be even more lenient to ratings shoppers, since it effectively would have required the relatively conservative agencies (e.g., Moody’s) to accept the ratings of other agencies in repackaging securities rated by others. Unbelievably, the SEC agreed that notching was anti-competitive and proposed to prohibit notching. In light of the CDO debacle, and a flood of criticism from academics (including myself), the SEC quietly withdrew this proposed anti-notching regulation (at least for the time being). But it still contributed to the subprime rating problem. In the face of the threatened anti-notching rule, the likely response by the relatively conservative rating agencies was to loosen their ratings standards on subprime MBS and CDOs.

3. Changes in prudential bank capital regulation introduced several years ago relating to securitization discouraged banks from retaining junior tranches in securitizations that they originated, and gave them an excuse for doing so. This exacerbated agency problems by reducing sponsors’ loss exposures. The regulatory changes relating to securitization raised minimum capital requirements for originators retaining junior stakes in securitizations. Sponsors that used to retain large junior positions (which in theory should have helped to align origination incentives) no longer had to worry about losses from following the earlier practice of retaining junior stakes. Indeed, one can imagine sponsors explaining to potential buyers of those junior claims that the desire to sell them was driven not by any change in credit standards or higher prospective losses, but rather by a change in regulatory practice – a change that offered sponsors a plausible explanation for reducing their pool exposures.
   
   More fundamentally, the prudential regulatory regime lacked any device for ensuring that bank risk would be adequately measured or that capital would be commensurate with risk. As Adrian and Shin (2008) show, both risk and leverage increased during the subprime boom, which provides prima facie evidence of the regulatory failure to measure risk and budget capital accordingly. Interestingly, Calomiris and Wilson (2004) show that in the 1920s this was not the case. During that lending boom, as banks’ risks increased, market discipline forced banks to reduce their leverage in order to limit the riskiness of their deposits. In the presence of deposit insurance and anticipated too-big-to-fail protection, however, debt market discipline is now lacking. If prudential regulation fails to limit risks, banks may fail to maintain adequate capital cushions. The recent failure of banks to maintain adequate capital in the face of rising risk suggests a need for fundamental reform of prudential regulation, which is explored in detail in Section III.

4. The regulation of compensation practices in asset management likely played an important role in the willingness of institutional investors to invest their clients’ money so imprudently in subprime mortgage-related securities. Casual empiricism suggests that hedge funds (where bonus compensation helps to align incentives and mitigate agency) have fared relatively well during the turmoil, compared to other institutional investors, and this likely reflects differences in incentives of hedge fund managers, whose incentives are much more closely aligned with their clients.
   
   The typical hedge fund compensation structure is not permissible for some other, regulated, asset managers. Mutual fund managers must share symmetrically in portfolio gains and losses; if they were to keep 20% of the upside, they would have to also absorb 20% of the downside. Since risk-averse fund managers would not be willing to expose themselves to such loss, mutual fund managers typically charge fees as a proportion of assets managed and do not share in profits. This is a direct consequence of the regulation of compensation, and arguably has been a source of great harm to investors, since it encourages asset managers to maximize the size of the funds that they manage, rather than the value of those funds. Managers who gain from the size of their portfolios rather than the profitability of their investments will face strong incentives not to inform investors of deteriorating opportunities in the marketplace, and not to return funds to investors when the return relative to risk of their asset class deteriorates.

Did you catch that part in the third point about federal deposit insurance creating a moral hazard that exacerbated the crisis in a way that didn't happen in the run-up to the Great Depression? Also, though I didn't excerpt it, in the section right before this one, the author argues pretty convincingly that the big institutional investors using the ratings agencies were aware of the unrealistic assumptions that the ratings were based on (i.e., an eternally appreciating housing market). This has all convinced me that the ratings agencies' optimistic ratings were a symptom of the problem, and not a cause of the crisis brought on by lack of regulation of the agencies.

(HT: Institutional Economics)

Matt Yglesias fails to make the right case against highways

Matt Yglesias is one of the best mainstream bloggers on land use/transportation that I know of, and, as one blogger who I don't recall right now once said, his urban planning and transportation posts could be blogs in their own right. However, it's puzzling that in an article for Cato Unbound, he comes up with such a pathetic rejoinder to the O'Toole/Cox/Poole vulgar libertarian transportation cabal, who don't seem to have ever met a road they didn't like:

Or consider the fact that Randall [sic] O’Toole is indignant about the prospect of public expenditures on mass transit systems, but appears to have little to say about public funding of highways. This, too, looks more like a case of narrow business interests than sterling free market principles.

While Yglesias' instincts are right – current transportation markets in America are highly distorted – the reason they're distorted has little to do with the ways highways are financed. Based on some basic figures, Randal O'Toole concludes that the vast majority of road funding – over 80% – comes out of user fees. Now, of course there're still some subsidies there, but it's really nothing compared to the subsidies that mass transit systems receive, which in America never even come close to covering operating costs, nevermind capital expenditures. Now, there are some problems with the 80% number, such as the government's favorable access to bond markets and the legacy of infrastructure that wasn't paid for with user fees, but all in all, it's hard to argue that roads have a subsidy advantage over mass transit.

However, that's not to say that Yglesias doesn't have a point when he says that libertarians and conservatives have blind spots when it comes to how they see transportation. But the real government benefit that the road/car system has over mass transit is density: there are innumerable regulations at every level of government in the United States which favor low-density, single-family detached housing over the denser forms that dominated non-rural areas before the 20th century. Successful roads as we have in America require this low density to remain (almost) financially solvent – it would be very difficult to cope with people's road needs if they were allowed to build as densely as they would without maximum density zoning rules and minimum parking regulations.

As a thought experiment, imagine your local town/neighborhood with twice the density. Chances are, the roads would quickly become very congested. They would have to be widened, which would require money, and even more money than normal, because the government would have to purchase valuable land next to existing roads. (That is, assuming that eminent domain is not used.) The gas tax would have to be raised, and soon the costs would get out of hand. On the other hand, mass transit would become more profitable rather than less, because much less track needs to be laid to satisfy the same demand, and mass transit systems have much more excess capacity than roads. If densities are limited, though, then this alleviates both stress on roads that go through valuable urban property (which are expensive and difficult to widen) and forces people to drive farther, thus paying more in user fees.

There's a legitimate case to be made against American transportation and land use policy, but condemning highway subsidies ain't it.

US/Ethiopian coalition in Somalia fails, Islamists advance

Somalia, yet again, is in turmoil. This time, the Islamists are advancing against Somalia's weak central government, the Transition Federal Government. And far from being a complicated and inexplicable basket case, the story of Somalia actually holds some pretty simple and important lessons: foreign governments cause problems and terrible regimes, while the international community's neglect allows capitalism to bring Somalis' living standards up.

The TFG was created in the mid-2000s as a response to Ethiopia's fear of any coherent state at all in Somalia, and the West's fear of radical Islam. At the time, the Islamic Courts Union was sweeping through the southern half of the country, and damn near took over the parts that hadn't already seceded. (Somaliland and Putland are de facto independent governments, and aren't at risk of collapse from the ICU, though they aren't the most stable regimes.) Ethiopia was understandably worried about Somali revanchism, as it won the Ogaden region from Somalia in a war of that same name in the late '70s, along with the four million Somalis on it that didn't flee into Somalia proper. The West had its own well-being in mind: it was afraid of Somalia becoming a hub for al-Qaeda and Islamic terrorism.

So as a result, the corrupt and ineffective TFG came into being. From what I understand, by now it doesn't have power at all outside of Mogadishu, and the Islamists are currently preparing for a battle there. The general objection to the Islamists is their strictness: the NYT cites the example of a teenager being stoned to death for adultery for reporting a rape. But this rigid interpretation of sharia is alien to most Somalis, especially the vast population of pastoralists who have very tight family and clan-based governance structures. Given the Somalis' distaste for non-autochthonous government (Michael van Notten wrote a fascinating book about the indigenous Somali law system), and the foreignness of Wahhabi Islam, it's unlikely that the Islamists could stay in power long without adapting. But anyway, we'll see now how long the Islamists last, as it looks like the Ethiopian- and American-backed TFG is about to crumble. It just would have been nicer if this were allowed to happen years ago, so that we could have avoided the intervening war.

This pattern of foreign intervention trying to create a state begetting horrific results in Somalia is not limited to the last decade. As early as the colonial period, the imperialists had a very difficult time getting Somalis to register and interact with the state, as their isolated pastoral culture kept them out of coastal towns for the most part. The brief democratic post-colonial period was a failure, because even though it was Somali in its conception, it was the conception of the Westernized Somali diaspora and elite, not of the prevailing Somali culture. The descent into dictatorship and the horrific experiment with Siad Barre's "scientific socialism" again can be seen as a result of foreign powers interfering, with Somalia being a pawn in the proxy war between America and the Soviet Union. First by the USSR, and then to some extent by the US (though not really), Siad Barre was allowed to go on with his destructive domestic policy. Luckily, détente eroded his power and the collapse of the Soviet Union ended the nightmare, as the government collapsed for good. A brutal civil war broke out, and when Barre was finally deposed, a power vacuum led to a nasty competition over who would be heir to the Somali state. The US and international community got involved in 1992 but failed miserably, and only prolonged the civil war. This conflict was rooted in Barre's discriminatory policy towards other clans – it was a war that was destined to be fought.

From then up until the early 2000s, vast expanses of Somalia were more or less stateless. And yet, in many ways its people fared better than those in neighboring African states that had governments, as well as doing better than during the Barre state. The best thing for the West to do right now would be to vow not to interfere anymore in Somalia, and promise to stand by idly if the country is broken up into even smaller factions. Dictators and would-be governments are only egged on by the prevailing nation state norm, and know that if they can establish themselves in power, the international community will help them stay there. But the West should make sure to get out of the mindset that a stable central government is necessary for peace and economic development in Somalia.

The roots of the Ingush-Ossetian terrorism feud

As a follow-up to a post I made last week about a recent bombing in Vladikavkaz, the capital of North Ossetia, I found an article from Radio Free Europe that touches on the roots of the recent Ingush-Ossetian conflict:

Since the election in the spring of 2002 of Zyazikov as Ingushetia's president, the republic has degenerated from a peaceful if impoverished backwater to the most unstable of the North Caucasus republics, with drive-by shootings and car-bombings occurring almost on a daily basis.

The catalyst for that escalating violence was a spate of abductions of young Ingush men, which many Ingush are convinced are the work of security organs in neighboring North Ossetia.

Since then, attacks by Ingush on Ossetians (as was the case with the November 6 bombing in Vladikavkaz) have been seen as retaliation for these original kidnappings.

So, I decided to dig a litter deeper into the kidnappings. And what I found is that two years before her death, Anna Politkovskaya interviewed an official who confirmed suspicions that the kidnappings were carried out by government forces:

At about the same time, Abubakar Kostoyev, who at the time was the Interior Minister of Ingushetia, confirmed in an interview with “Novaya Gazeta” correspondent Anna Politkovskaya that forced disappearances (abductions) are conducted by special services military men, who call these operations ‘special activities’. In most cases they come from Chechnya, and if they have a ‘special coupon’ (i.e. special pass), the Ingush militia has cannot [sic] examine their cars. As indicated by a Federal Interior Ministry order, the Ingush militia should not obstruct these ‘special activities’ in any way.

At all checkpoints the military men from these cars identify themselves as FSB officers, and if the militia tries to prevent such a vehicle from passing to the Ingush territory, the men refer to an agreement with the Head of the FSB Administration in Ingushetia, General Sergey Koryakov.

By "Federal Interior Ministry order," what they mean is the MVD (МВД), which is an elite counter-terrorism branch of the Russian secret services. There is no way that an operation involving them could have been hatched solely in the Caucasus: this is definitely a high-level decision emanating from Moscow.

Last week, I noted the similarities between the attack in Beslan and the Vladikavkaz suicide bombing. Now, I find another incident that seems to be of the same conflict. Both Beslan and the Ingush kidnappings have been tied to the Russian government by well-known assassinated muckrakers (Alexander Litvinenko and Anna Politkovskaya, respectively). I wonder how long it will take for someone to blame the Vladikavkaz attack on security forces...

Subsidized corn = subsidized fast food

Wired has a front-page article that states something that I've long suspected: one of the main reasons fast food is so cheap is because of subsidized corn:

Chemical analysis from restaurants across the United States shows that nearly every cow or chicken used in fast food is raised on a diet of corn, prompting fresh criticism of the government's role in subsidizing poor eating habits. [...]

Corn is central to agriculture in the United States, where it is grown in greater volumes and receives more government subsidies than any other crop. Between 1995 and 2006 corn growers received $56 billion in federal subsidies, and the annual figure may soon hit $10 billion.

In addition to encouraging unhealthy fast food consumption beyond the free market equilibrium, cheap corn also contributes to fertilizer and antibiotic use, as well as food poisoning:

But in recent years, environmentalists have branded corn as an icon of unsustainable agriculture. It requires large amounts of fertilizer and pesticides, both of which require large amounts of fossil fuel to manufacture.

Most of the resulting corn is fed to livestock who didn't evolve to subsist entirely on corn. In cattle, eating corn increases flatulence emissions of methane — a potent greenhouse gas — and creates an intestinal environment rich in e. coli, a common cause of food poisoning. That necessitates mixing cow feed with antibiotics, in turn producing antibiotic-resistant disease strains.

Though Obama has paid lip service to reform, he still supported the most recent farm bill. His only misgivings about the bill, at least during the campaign season, came in the form of anti-agribusiness populism, though he never acknowledged that it's the fundamental distortionary effects of the farm bill that are the problem. McCain, for all his economic ignorance, agreed with the majority of economists in opposing the farm bill, though he didn't seem to care enough to show up to vote on it this time around (though neither did any of the other presidential candidates).

Unfortunately, the farm bill is only seriously renegotiated every five years, and the most recent one just passed a few months ago. So even if President Obama would have been more intelligent and sincere on agricultural policy than wannabe President Obama, it's really too late now to matter.

The NYT rehabilitates the payday lender

The New York Times Magazine has a fascinating and uncharacteristically libertarian feature called "Check Cashing, Redeemed" – pretty self-explanatory. In it, Douglas McGray traces the history of Nix Check Cashing – a "ghettoized" bank that's become the biggest in Southern California. "Ghettoized financial services," as one expert calls it, is an $11 billion industry in America. Through the story of Nix, the author discovers that the appeal of check cashing is the simplicity of the transactions. Traditional banks are seen as tricky and unreliable:

But he pays a fee to cash his paychecks. Then he pays even more to send a Moneygram to his wife. There’s a bank, just down the street, that could do those things free. I asked him why he didn’t take his business there.

“Oh, man, I won’t work with them no more,” Enriquez explained. “They’re not truthful.”

Two years ago, Enriquez opened his first bank account. “I said I wanted to start a savings account,” he said. He thought the account was free, until he got his first statement. “They were charging me for checks!” he said, still upset about it. “I didn’t want checks. They’re always charging you fees. For a while, I didn’t use the bank at all, they charged like $100 in fees.” Even studying his monthly statements, he couldn’t always figure out why they charged what they charged. Nix is almost certainly more expensive, but it’s also more predictable and transparent, and that was a big deal to Enriquez.

Marlo Lopez had no broad gripe with banks, but his experience was similar. He moved to the United States from Peru a couple of years ago (with a visa) and got a job as a mechanic at a food-processing plant. Lopez opened his first bank account last summer. A couple of months later, out for dinner, he overdrew his account by 18 cents and got hit with a $35 penalty. It was his fault, he said; he thought he had more in the account than he did. Still, losing that money all at once unsettled him. He kept the account but returned to cashing his checks at Nix.

Check cashers benefit from their smaller scale and lack of bureaucracy that keeps banks from adapting to the needs of the poor:

Nix’s cashiers also try to never say no. Take photo identification. A lot of customers don’t have a driver’s license. Nix stores have accepted high-school yearbooks. They’ve been known to cash a McDonald’s paycheck if someone comes in wearing a McDonald’s uniform. They even have a phone in the lobby, so a cashier can call a customer’s job site and then patch the customer in, listen to him talk to his supervisor and decide if they sound like a legitimate boss and employee. Nix says he loses as much as 5 percent of his check-cashing revenue on bad checks, but it’s worth it, he says, to be known as a place that says yes.

And at least some of the customers use the high-interest loans in financially sound ways, in order to avoid even higher fees for nonpayment of debts. Nix explains why he went from check cashing to the more villified payday lending:

In the late 1980s, when a few check cashers started to accept postdated personal checks and advance cash for a fee, Nix thought it was a sleazy scheme. He thought so even after California legalized the practice in 1997. “I didn’t want to be a loan shark,” he told me. “But the reality is, customers wanted it.”

He told Lagomarsino why. A bounced check, a fee to reconnect a utility, a late-payment fee on your credit card, or an underground loan, any of those things can cost more than a payday loan. And then there are overdraft charges. “Banks, credit unions, we’ve been doing payday loans, we just call it something different,” Lagomarsino says. “When it starts to get used like a payday loan, it’s worse.”

The spread of Nix has challenged payday lenders, check cashers, credit unions, and other "ghettoized finance" outlets to lower their rates, and seems to have energized the industry:

Kinecta’s executives decided to keep the payday loan and change the terms. Starting with three stores in the spring, and eventually across the entire chain, Nix is increasing the maximum loan from $255 to $400. They are dropping the fee from 18 percent ($45 for a two-week $255 loan) to 15 percent ($60 for a two-week $400 loan). And they will rebate a third more ($20, in the case of a $400 loan) into a savings account, after six months, if you pay your loans back and don’t bounce any checks. People get payday loans because they have no savings, Lagomarsino explained. After six months, heavy payday borrowers will accumulate a small balance. Enough, she and Nix say they hope, to convince them they can afford to save more. Later, they say, they intend to drop fees further for borrowers who always pay back on time.

Once Kinecta finishes rolling out its new payday loans, Lagomarsino has promised to open Nix’s books to outside researchers and publish data on its profits and losses. In the meantime, Kinecta will be under enormous scrutiny. “Some people said, ‘Why does it have to be so visible?’ ” Lagomarsino told me, and laughed. “One or two branches wouldn’t make a difference. This is the beauty of buying Nix. They were the largest alternative financial-services company in Southern California. If they change their fee structure, everyone has to change.”

The Wikipedia article has an interesting comparison of payday loans to different forms of late payment fees.

Seymour Hersh on the January 20th revelations

Über-investigative reporter Seymour Hersh had the following to say in an interview with the Guardian:

You cannot believe how many people have told me to call them on 20 January [the date of the next president's inauguration],' he says, with relish. '[They say:] "You wanna know about abuses and violations? Call me then." So that is what I'll do, so long as nothing awful happens before the inauguration.'

John Steward made a joke that sounded eerily similar to that the other night. The article was published a few weeks ago, so maybe it was his inspiration?

The infinite monkey theorem in action, or: Naomi Klein almost gets it

Naomi Klein has got to be my favorite liberal commentator to read. Not because she's got any clue about what she's saying, but because she has an amazing ability to gather tons of fascinating and relevant facts and come to all the wrong conclusions, and every once in a while she'll say something brilliant that effectively debunks all the wrong things she'd said up until then. Radley Balko notes this same tendency, with her book The Shock Doctrine coming "dangerously close to making a Higgs-ian point about the growth of government at the expense of civil liberties in times of crisis."

Up until now (from what I can tell), Klein's interpretation of the recent financial meltdown has been the standard progressive party line – a mixture of sudden-outbreak-of-greed and deregulation. But about two weeks ago in the Nation, she published an article where she basically tows the libertarian line. The idea of the piece is that the Bush administration is being "like the Portuguese in Mozambique in the mid-1970s, [pouring] concrete down the elevator shafts" and running off with as much money as possible. Well, not him specifically – I guess we're meant to assume that he derives his pleasure from the well-being of the general "big business" community.

So, in the midst of this condemnation, she explains why the bailout is so insidious: it's not necessarily the money itself, but rather the signal that it's sending to the market – that "big business" has the backing of the US federal government. Very astute point, Naomi! But then she stumbles upon an even more fundamental point about the root of the crisis:

Interestingly, Fannie Mae and Freddie Mac both enjoyed this kind of unspoken guarantee. For decades the market understood that, since these private players were enmeshed with the government, Uncle Sam would always save the day. It was the worst of all worlds. Not only were profits privatized while risks were socialized but the implicit government backing created powerful incentives for reckless investments.

Now, with the new equity purchase program, Paulson has taken the discredited Fannie and Freddie model and applied it to a huge swath of the private banking industry. And once again, there is no reason to shy away from risky bets--especially since Treasury has not required the banks to give up high-risk financial instruments in exchange for taxpayer dollars.

In isolation, that's got to be one of the best analyses of the subprime crisis that I've ever seen. She says outright that the government's backing of the GSEs played at least some part in the meltdown. About a month and a half ago, Klein was of the opinion that "deregulation and privatization" were the culprits.

Unfortunately, in typical Naomi Klein fashion, the moment of clarity is brief, and her ultimate conclusion misses the point. She calls on the next president to stop the bailout, but instead of just leaving it at that, she says that: "All deals should be renegotiated immediately, this time with the public getting the guarantees." So, basically, while she concludes that private rewards/public losses was a bad model, rather than returning to private rewards/private loses, we ought to go to move to public rewards/public losses (i.e., nationalization). Damnit – she was so close to sounding like a libertarian!

Will Russia invade Crimea?

France's foreign minister accused Moscow recently of handing out Russian passports to Ukrainian citizens living in the Crimean peninsula. Crimea has a Russian majority, ethnically-speaking, and many (including prominent Russian politicians) have speculated that it could be reincorporated back into Russia. The peninsula has strategic importance in that it's home to the naval base of Russia's large Black Sea Fleet – an arrangement that Ukraine has recently begun to oppose. The handing out of passports is a threatening gesture, as protecting newly-minted Russian citizens was Russia's justification for invading South Ossetia and Abkhazia this summer. Foreign Minister Kouchner notes the obvious: that a "danger exists" that Russia will use these new citizens as a pretext to occupy Crimea and eastern Ukraine – but he also says that he doubts Russia will go through with it. Of course, he'd say that no matter what the truth were, but in this case, I'm inclined to believe him.

The threat to the Ukrainian government that these new Russian citizens on Ukrainian territory pose is useful in and of itself as Russia vies for control of Ukraine's top politicians. And though Russia handed out passports in South Ossetia and later invaded, residents of Transnistria (a pro-Russian break-away province in northern Moldova) already have Russian passports, and an explicit Russian occupation of Transnistria looks unlikely. Ultimately, I think that invading Crimea – which shares no border with the Russian Federation – would be too blatant of a move for Russia. For now, it looks like Russia is using the passports as leverage against Ukraine's leaders – but if the Ukrainians fail to yield to Russia, an invasion would be more likely. But I doubt that Russia will fail in co-opting such a weak political establishment as Ukraine's.