Author Archives: bdinger

Still Working on Net Neutrality

Net Neutrality has been a topic I have written about at length, multiple times this semester. With the recent Netflix Deal in place the debate about the legality or consequences for the health of the internet as we know it. As I wrote about in my previous pieces on this issue, there seemed to be a general though that maybe the loss for the FCC against Verizon in the case on how Verizon needed to treat is broadband traffic regarding whether or not telecommunication antitrust rules applied to them, was not really a loss at all. In fact, the “loss” may have opened up the opportunity for the FCC to write all new legislation for ISP’s that would be much more strict and well defined than anything they could enforce via the old teleco rules.

Unfortunately today, the WSJ and NYTimes reported that the FCC was going to propose new Net Neutrality rules that to my eye, seem like a real cop out on the parts of legislators. With the new rules that the FCC will propose, ISP’s and certain companies would be allowed to create deals giving those companies preferential treatment in terms of bandwidth if the terms were “commercially reasonable”. The WSJ article claims that this is an attempt by the FCC to find a middle ground amongst the many different voices in their ear on how to legislate on this major issue. With companies like Apple and Amazon creating massive streaming operations the ISP’s will need to be more technologically sound than ever, but the question in the end is who should bear that cost and with what sorts of consequences.

I believe that the passing on of these costs to consumers will be a huge limiting factor for companies who need the larger bandwidth constraints but cannot pay for it as well as a barrier to entry for those potential companies that cannot afford to strike deals with the major ISP’s. Cable prices have skyrocketed over the past 20 years as I am sure the majority of us can attest to as we pay the Comcast bill every month, and in my opinion if these companies are allowed to charge for preferential treatment the costs will be passed onto the consumer and then some, all the while stifling any competition left in the market. The road will not be easy for the FCC with multiple lobbying efforts going on and with a new technological reality than they have ever faced sitting in front of them, but hopefully they stay strong on net neutrality rules for the sake of the internet.

Student Loans: The Next Financial Crisis? (Revised)

As I have been browsing the news the last couple of days, an article on the WSJ got me really thinking about student loan debt and the uncanny parallels shared with housing debt in the mid 2000’s. To preface, mortgage standards in the US were lowered in the early 2000’s in a push by the Clinton Administration to get people into houses. Loans that were issued by banks were sold to entities like Fanny & Freddy and then bundled into securities that were bought up and sold by different banks and hedgefunds around the US. Obviously we all know how this ended, but the issue as I see it, was two fold on the banking side of things. The first issue was the relaxed standards set by Washington for loans to be given out and the second issue was the moral hazard represented by the banks writing the loans because they could turn around and sell them just as fast as they could write them.

Almost 6 years now after all of the events of the financial crisis happened, I see a striking parallel between another type of debt and mortgages: Student loans. One of the bigger facets of Mr. Obama’s presidency has been the lowering of the barriers of entry for people to goto college. In 2011 the president enacted a program in which students can attend college and then pay after the fact as they earn at whatever jobs they may find– this program is aptly titled, “Pay As You Earn”. Under this plan, you would attend college at the cost of the government, and then 10% of your total discretionary income per year after school would be taken as repayment for the loans. If you find a job in the private sector after school then you pay for 20 years and then the remaining balance is forgiven, 10 years if you work in the public sector. (Student Aid Website)

Unsurprising to any market failure monitoring economist though, this plan is backfiring, even despite noble intentions. In an article from the WSJ we see that the plans have expanded to over 1.3 million people (originally less than a million before changes to debt forgiveness were enacted) and total debt balances rising to $72 billion from $52 billion before the easing in forgiveness measures were enacted. A moral hazard exists here between the tax payer and the schools who are now incentivized to raise their tuition prices and pay for more of the students bills because the government will pay them back regardless after 20 years and as everyone attending this great University of Michigan knows; tuition has been rising.

So the first ingredient in a recipe for financial crisis obviously being bad debt, the time must have seemed perfect for a dash of bundling; the bundling of asset backed securities. In another WSJ article, we see SLM Corp who happens to be the largest student lender in the US selling over a billion dollars worth of student loan backed securities (SLBS). The interesting part about this and other SLBS sales is that the majority of the demand for the offerings is for the riskiest parts (the most likely to default) of the securities. Why this appetite for risk? Low interest rates may be the answer. Thinking back to the early-mid 2000’s there was a refusal by Alan Greenspan to raise interest rates and people were hungry for yield; the mortgage backed securities promised a rate of return higher than what anyone could find in the bond market and was still rated AAA to top things off. Many believe that the mix of moral hazard and systemic risk present in the banking structure combined with the low rate environments was the catalyst for the financial bubble to blow up and eventually burst. These student loan offerings show that investors are indeed searching for yield wherever they can today.

With default rates on these loans continuing to rise, the government needs to act now to reform this pay as you go expansion for the student loan program. The best solution I think would be to work with colleges to lower tuition rates and quit forgiving the debt that these students take on. Because as long as people can have something for nothing, or rather, a college education at the expense of the US Taxpayer, they will continue to do just that until we are in the midst of another massive asset bubble.

Student Debt the Next Balloon to Pop In US?

As I have been browsing the news the last couple of days, an article on the WSJ got me really thinking about student loan debt and the uncanny parallels shared with housing debt in the mid 2000’s. To preface, mortgage standards in the US were lowered in the early 2000’s in a push by the Clinton Administration to get people into houses. Loans that were issued by banks were sold to entities like Fanny & Freddy and then bundled into securities that were bought up and sold by different banks and hedgefunds around the US. Obviously we all know how this ended, but the issue as I see it, was two fold on the banking side of things. The first issue was the relaxed standards set by Washington for loans to be given out and the second issue was the moral hazard represented by the banks writing the loans because they could turn around and sell them just as fast as they could write them.

Almost 6 years now after all of the events of the financial crisis happened, I see a striking parallel between another type of debt and mortgages: Student loans. One of the bigger facets of Mr. Obama’s presidency has been the lowering of the barriers of entry for people to goto college. In 2011 the president enacted a program in which students can attend college and then pay after the fact as they earn at whatever jobs they may find– this program is aptly titled, “Pay As You Earn”. Under this plan, you would attend college at the cost of the government, and then 10% of your total discretionary income per year after school would be taken as repayment for the loans. If you find a job in the private sector after school then you pay for 20 years and then the remaining balance is forgiven, 10 years if you work in the public sector. (Student Aid Website)

Unsurprising to any market failure monitoring economist though, this plan is backfiring, even despite noble intentions. In an article from the WSJ we see that the plans have expanded to over 1.3 million people (originally less than a million before changes to debt forgiveness were enacted) and total debt balances rising to $72 billion from $52 billion before the easing in forgiveness measures were enacted. A moral hazard exists here between the tax payer and the schools who are now incentivized to raise their tuition prices and pay for more of the students bills because the government will pay them back regardless after 20 years and as everyone attending this great University of Michigan knows; tuition has been rising.

Students are obviously carrying more debt now with this plan and the next question is what will happen to default rates now that there exists an economic incentive to not pay these loans back because the tax payer obviously will. The parallel between this easing in debt rules and mortgages while different in the total amount of money being given away is different than that of houses, still sets a bad precedent for us in a post 2008 economy.

Wage Theft: Fact or Fiction?

This past week I came across a very interesting article about alleged “wage theft” in Silicon Valley orchestrated by the likes of numerous tech giants such as Google, Apple, Intel, and Adobe Software. Software engineers of these companies claim that the companies have engaged in a collusive scheme by not competing over rival companies engineers and thus keeping the compensation schemes lower for these workers. The engineers brought a civil suit against these companies and there is a settlement expected in the very near future with payout in the tens or maybe even hundreds of millions of dollars (NYTimes).

This case is really a bit of a different animal, because normally wage theft is thought to be confined to the likes of low wage employees who work off the clock or are denied over time, etc. In another article, they talk about how one man was so agitated by his lost earnings power in Silicon Valley that he even ended up in a confrontation with police– a confrontation that he would be shot in.

I think that the engineers in this case would be quite lucky if they got to trial to find a judge that would rule in their favor, although the settlement by these companies suggests that there may be a smoking gun within an email somewhere that implicates someone along the way. I think back to my antitrust class in which there was a case in which Crest Theater Enterprise sued Paramount Pictures because they thought that the movie maker was colluding against them in the premier of new movies. This ruling by Judge Clark shows identical behavior is not enough to show guilt according to the Sherman Antitrust Act.

While this is all well, I do think that the social aspects here are just as interesting as the legal aspects. Why do these engineers, who are already among the best paid in the world, think that identical behavior means that they are being colluded against. I was reading among the comments in the first NYT article and many seemed to think that there was a bit of an unwritten code of conduct amongst the big tech companies of silicon valley in which they would not actively go after eachother’s workers out of respect for one another.

I think that this suit, while there may be some merit in to the thought of wage robbery in lower income brackets, is more of a case of greed by the engineer who enjoy some of the best work perks in the world out there at these massive tech compounds, rather than collusion amongst companies.

The Merit to Michael Lewis’s Arguement (Revised)

There has been plenty of drama in the last few days of trading since Michael Lewis’s segment of the popular Sunday night news show, 60 Minutes. Mr. Lewis is the author of a new book called FlashBoys in which his broad message to the public is that the stock market is rigged. More specifically, he claims that high frequency trading firms (HFT’s) are rigging the market by placing servers closer to exchanges than the general public and essentially front running their orders and trading any number of times before the mom and pop traders even get one order through in order to make a quick buck.

Lewis shows how these traders are making millions upon millions of dollars while giving themselves an unfair advantage over the little guys. Supporters of the practice, however, claim that the high speed trading provides plenty of added liquidity to the market and promotes tight spreads that make sure the smaller investors can get orders filled basically whenever.

In a NYTimes post, though, Andrew Ross Sorkin makes a great point I think: Is Lewis looking at the right culprit in his crusade against HFT? The real proponents of this issue are the exchanges themselves for allowing it to happen under their watch as well as Congress for allowing this practice to go on untouched if people really do not approve of it. Exchanges like BATS actually pay these HFT’ers to provide liquidity to their exchange, effectively allowing the traders to burn the candle at both ends.

I personally do not think that HFTrading really affects any of us normal investors on a day to day basis; our orders are not big enough for the algorithms to really care about. So in fact we really are the beneficiaries of this type of trading. I also think Lewis has done a good job of promoting his book because this type of trading that he frames as this new silent killer in the background, has existed for years and years now.

Another article from the WSJ highlights this and offers an explanation for the fuss being made here; the issue is not really the speed of the trading but rather the informational asymmetries that help make people money. There are a couple of interesting facets to this argument: the first one offered by institutional investors of AQR Capital Management is the premise that they believe that HFT has actually improved their performance over the years by lowering the transaction costs they face. The second part of the argument talks about why people may be making a stink over it; the old time managers who used to make money by front running orders or trading off of information before others could now have lost a bit of their edge and thus cannot make as much money. The third part of the argument has to do with the loss of the market makers edge with how tight the spreads are and how the market moves with such small orders– to this argument they offer the idea that the market has changed to a lower volume market with many small trades happening frequently.

I believe that exchanges and regulators will now be forced to make some changes in legislation because of the visibility of this book and the 60 minutes news program. But as long as the public really needs someone to blame, I do not think it is fair to stick the traders who are “trading the market they have not the one they dream of” with the blame for this practice. The ones who complain seem unable to realize that the market is changing, just like a bad investment that someone makes and will not come around to see that their thesis has gone wrong. A well functioning market responds quickly to prices– maybe HFT is not so bad after all.

Shockingly, Pension Holders Do Not Like Risk

The aftermath of the 2008 financial crisis has obviously merited the reevaluation of any number of financial regulations, instruments, procedures, and the list goes on. Even in 2014 we are still sorting through a lot of the aftermath with toxic assets on peoples balance sheets still, but one of the most touchy subjects still today are the issues of pensions and their paper losses, sustainability, and how to regulate around them in the future.

So what are the stakes here? As you can see from the Fred Graph, pension assets have been steadily rising for as long as we can graph, at a rate much greater than that of GDP expansion.

Screen Shot 2014-04-14 at 8.50.42 PM

 

 

 

 

 

Obviously these assets need to be protected in such a way that they are not so vulnerable in the next crisis and to do go about changing the way pensions work is a very touchy subject for people. There are different types of pension plans that companies can enroll into (as you will see this sounds eerily similar to the structure of CDO’s). Today the trouble exists with multi-company pension plans. What these plans do is pool the funds of many different companies and then invest them with the idea being that the fund managers will procure a rate of return that allows these plans to be self sufficient in perpetuity, all the while being able to withstand the economic downfalls of some companies due to the diversification that is achieved with so many different companies in the fund (NYTimes).

The same NYTimes article talks about how the CBO projects some of the largest pension plans, including that of the Teamsters, to run dry within the next seven years. Obviously this presents a major issue, one that could take down all of the insurance providers backing these pension plans as well. I have a feeling that Congress will have to write a check in order for most of these pensions to remain out of water, but courts are already cutting back on some of the pensions such as those supposed to be paid out to widows of workers that died before they were retired. The article references the fact that it has been illegal to cut benefits that have already been earned by workers, for over 40 years. There are plenty of tough decisions to be made here and plenty of people waiting to receive payment will find themselves rather disappointed in the future.

The question now needs to revolve around how the pension system can a) better hedge away risk and b) how they can avoid being stuck in a situation like this again in the future as we are still paying for the crashes in 2000 and 2008 today! As I alluded to, there are plenty of strong emotions surrounding this issue, but there needs to be a restructuring here.

The Laura and John Arnold Foundation is one of the leading institutes researching the health of these public pension plans and has publicly advocated for the conversion of many of these pension plans to quasi IRA’s or 401k’s or some other types of hybrid vehicles. What it comes down to though, is that the pension system, as it currently is, cannot be sustained due to the fact that there are more workers who work longer in our system (WSJ).

While many unions cry foul on the L&J Arnold proposals and have gone so far as to lobby those funding the foundation to stop spending money, they obviously cannot see the writing on the wall here. Even secured creditors can lose their money when there is none to pay out in bankruptcy cases, the same should go for these pensions. I think the main issue here need to be the education of the workers who are saving for retirement about the potential risks here and the fact that there is no such thing as a real risk free asset. If these people want to try and invest to achieve higher returns they should be able to select plans like that and do so at their own peril, rather than hiding behind insurance and pension plans. I am not saying that they do not deserve to get their money, rather, I would like to see people take a greater responsibility in educating themselves about whats going on with their money even if they are letting someone else manage it.

My second though here is similar to one that Prof. Kimball had on his blog in 2012, or at least takes a bit of a queue from it. The fact that all of these pension pools are invested in with a large number of companies does not really sound like that great of a hedge to me, or rather a complete hedge. I think that the investment managers need to be invested in countries outside of the United States or some other type of contra-asset, in order to further protect against potential economic downfalls. I realize that the world would tumble if the United States collapsed again, but I believe that having a large sample of companies is not enough to protect against economic downturns as is evidenced by the current state of pension plans.

All in all this really is the next big issue for the US to tackle and there is no one right answer. But I do emphasize yet again that I believe the holistic financial education of many of these workers is integral to the reduction in the information asymmetries that cause rapid moves in prices.

Does ACA Legislation Prevent or Induce Market Failure?

The cornerstone of our presidents legacy rests solely on the success or failure of his oft-publicized, debated about, & seemingly misunderstood health care policy. I have recently taken the time to learn a little more about some of the provisions and general ideas that exist in the bill and if I may not have been totally sold on the bill before, I have even more questions now.

The ACA is designed as a “multi-faceted” plan (with over 1000 pages in the law its not a stretch to believe this) that tries to deal with both small group and non-group individuals who may have fallen through the cracks of the health care system before; some may have been too young to enter into medicare or too close to the poverty line to qualify for medicaid, etc. The law fights to extend medicaid benefits to more people as well as make an effort to drive down other insurance costs due to its marketplace style reduction of informational asymmetries present in the old style health care system. (US Dept. of Health & Human Services).

It is not my goal here to explain the law in its entirety but rather to point out a couple of the parts of the law that aim to fight against market failure and maybe cast a light as to their effectiveness. One of the most interesting and recently written about issues is the promotion of preventative care as a tool to help drive down future costs for healthcare companies due to the fact that they now theoretically will be insuring those that have much larger future expected costs.

Thusly, it seems prudent to take a look at whether or not the logic behind the pushing of preventative care is actually sound despite what we may think at first glance. The first issue that comes to mind with the focus on preventative care is the new potential for the abuse of this care. A study in Oregon dating back to 2008 that simulated the extending of Medicaid benefits to include more people in the low income bracket as well as expanding coverage to make it more affordable to use a primary care doctor shows the problems that seemingly defy logic. Those people who won the lottery for expanded Medicaid benefits went to the emergency room a whooping 40% more than the part of the group who did not enjoy the benefits of expanded primary care coverage (NYTimes).

Another interesting facet of the cost/benefit focus of preventative care again comes from the New York Times, once again the thought that a focus on preventative care would deal with problems now in a more cost effective manner than would be used later does not seem so clear. Canadian women were separated into two different groups; one that would have regular mammograms and breast examinations and the other that would only have routine breast examinations and no mammograms. The doctors found at the end of the trial (which appeared in the British Medical Journal) that the death rate between both groups was in fact the same, which leads some researchers to question the cost effectiveness of this preventative approach to medical health. In fact, the researchers took things even further and hypothesized that the unnecessary treatments administered to women while obviously did not lead to lower healthcare costs, could also lead to harmful health effects from routine surgery as well as the fact that some cancers that are benign can turn malignant and spread after being biopsied. The article talks more specifically about the meaning of thing in the medical world and how treatment may or may not change, but I think its worth thinking about on a much broader level. If one of the main points of the Affordable Care Act is to reduce costs to both insurers as well as the insured, then it should probably be the case that it actually happens.

At first glance the focus on preventative would seem to be a good thing for insurance companies, but if stories like Oregon’s and Canada’s are true then it is the exact opposite. The focus on preventative care has the potential to create an entirely new segment of moral hazard that will have to be dealt with all of the while trying to deal with another.

So Now We Should Blame The Dark Pools?

I recently wrote about High Frequency Trading (HFT) and Michael Lewis’s hot 60 minutes spot as well as his book and their attempts to “expose” the United States stock markets for being rigged. In this interview and his book as well, Lewis also scrutinizes what he calls “Dark Pools” for also being unfair and allowing price manipulation and the front running of trades in stock markets (IBT). Dark pools are as seemingly as misunderstood as the use of HFT in today modern stock exchanges.

The premise of these dark pools comes first from the different types of trading that can occur in the markets today; block and exchange trades. An exchange trade is one that is placed on the regular stock exchange through either a specialist or some other broker/dealer at the publicly quoted price at that time. The problem for larger investors though, is that when they are placing rather large trades in markets where liquidity may be lower, the price can move up rapidly as the trade gets filled which increases their cost basis. This is where block trades come in; block trades are trades that are completed off of any national exchange like the NYSE or the NASDAQ and they are done in such a way that there is a settled on price before the exchange is made. Obviously these block trades are harder to come by and take more time to complete, so the opportunity cost is the efficiency lost by trading on the exchanges themselves.

Having said this, now I can explain dark pools. Dark pools are pools of liquidity that can act like either block trades or exchange trades and allow large investors to trade with a much higher degree of anonymity than they would otherwise be able to achieve. An example of a dark pool is called POSIT, POSIT is a call market that matches traders throughout the day. Someone wanting to sell a large portion of stock would enter their order in and wait for the market to be called and then maybe or maybe not get part/all/none of their order filled. If their order is filled they are told the price and how many shares were traded, but the market itself never sees the sizes or origins of any of the trades. The downside to these dark pools is the same thing that makes them so attractive; their lack of information. Traders cannot see what is going on inside of these dark pools and as we see in Michael Lewis’s complaints, the lack of transparency leads to misquoting prices among other issues.

Lewis’s complaints have brought down a bit of a fire storm on the whole trading industry that does not seem to be getting a fair shake for itself (fat chance we will see a trader on 60 minutes). This week Goldman Sachs was said to be considering closing its own dark pool called Sigma X which was a perennial top 5 dark pool in the nation according to the WSJ. While the bad publicity may not be the whole reason as to why they are thinking about closing– the article cites increased competition and legislative issues with misquoting of prices, etc– I think that Lewis’s story is actually going to turn out to be part of the problem.

These dark pools have been a safe haven for institutional investors looking to put positions on without worrying about the moving of the stock price due to the fact that HFT’ers can see the size and price of the order they are trying to put in before it even gets there. In fact, I do not think that it would be a stretch to say that these dark pools of liquidity do more to make markets efficient than they do to hurt them. If more and more of these dark pools close, the institutional guys have no where to go but the exchanges where they are sure to lose out on potential profits due to their inability to get trades to go through at a decent price.

I really would be interested to hear why Lewis had bad things to say about dark pools when in fact they are the biggest tools fighting against his main antagonist here: HFT’ers.

Amazon Dashes to Keep Things Fresh

Its as simple as search, click, and ship. Amazon prime is something in between a shopping addiction and pure convenience with millions of annually subscribing users spending on average over $1000 per year on the service (Fast Company). In addition to prime, there is another service that not everyone realizes exists; Amazon Fresh. This service has existed since 2007, originating in Seattle and expanding to southern California and Los Angeles. Amazon Fresh is like Amazon Prime except, as you may have imagined by now, delivers groceries and other personal items of the like straight to your front door on the same day you order them. Obviously this is quite an achievement, as the previous Fast Company article talks about, there are major logistical hurdles that the company has to overcome here; it takes a lot of money and time to get items to peoples’ front doors so there has to be quite a bit of volume and science behind a program like this.

While there have always been some who questioned the sustainability of a program like this for the company and in turn Amazon has been relatively quiet on the matter except for the fact that the program keeps existing. But in late 2013 the program finally expanded into San Francisco and L.A., quieting some of the nay sayers. This past Friday though, something even more curious happened. Amazon teased a new device on their website called Amazon Dash. This device is a wand that scans the barcodes of items and adds them to your shopping card so all you have to do is get online and click after adding items as you use them (Re/Code).

Call it lazy or over the top, you have to give credit to Amazon: no one has pushed the status quo of retail shopping more in the last 20 years, and I believe that this will be more than just a wand and some groceries. Amazon is looking to put normal brick and mortar retailers completely out of business. One of the editors from Re/Code was on CNBC today and talked about how it is not sale of grocery items with same day delivery nor the normal small ticket items that Amazon hopes to profit from, rather it is the loyalty of the customers. With the average prime customer spending over $1k/year as mentioned above, an expanding grocery program could literally encompass every bit of shopping that some Americans do in a year; this is where they stand to profit.

In the end, Re/Code is correct in pointing out that no one knows if any of these new Amazon products will catch on, but I can say from personal experience that the ease of clicking and having something here the second day has made me move the majority of my own shopping online. Who is to say amazon won’t spell the end of the grocery store as we know it?

How Long Can Russia Hold Out? (Revised)

As the US and other leaders of the now G7 group of nations have shunned Russia and its antics in Ukraine, a clear message is being sent to the former Soviets: change your actions or there will be severe consequences. A few weeks ago the G7 agreed to economic sanctions of Russian energy, finance, banking, and weapons industries until the country backed off of its annexation of Crimea. Instead of the G8’s annual meeting in Sochi this upcoming June, the now G7 will instead travel to Brussels and have their meeting there. (WSJ)

The question now I believe is to what extent will these sanctions be successful and how does that compare with other economic damage being done purely due to the political and economic unrest created by Putin’s actions. What I am getting at here has to do with the cost benefit analysis of the sanctions. For the US, as explained in this WSJ article, sanctions against Russia really would not have much of an effect as only 1% of annual US trade occurs with Russia. The meat of the sanctions would come from European countries and as shown by the following graphic, could hurt Europe as much as they do Russia:

Screen Shot 2014-03-24 at 10.15.46 PM

With almost 160 billion euros worth of oil and gas sent to the European Union in the first 9 months of 2013, there is substantial demand that would have to be gotten elsewhere if the EU were to in fact, sanction like the G7 is talking about. It is also unfortunate for the EU that over 15% of their gas needs come through Ukrainian pipelines that Russia could feasibly have some sort of control over now as well. Russia is the EU’s 4th largest trading partner and has substantial banking and automotive ties in the EU countries to boot. So obviously the G7 has something much more complicated than just sanction and wait going on here.

The good news here though, is that the G7 may not even have to impose as extreme of measure as are being talked about due to the unrest in the financial markets in Russia. As news broke of the tense situation back towards the beginning of March, Russian stock indexes dropped as far as 10% in a single day and have continued falling since. These are accompanied by massive losses in value in the Russian Ruble and the MICEX Russian Index (not hedged against losses in currency value) has fallen to almost 30% losses on the year at points. Accompanied by massive capital outflows from Russia and it becomes feasible that Russia could enter a recession without the US or the G7 ever having to do anything more than threaten to sanction. (Bloomberg) This is the most interesting part of the whole story I think, that while these threats of sanctions can be quite complicated as well as costly, there is really nothing as clear as Russian oligarchs losing over 20% of their wealth as quickly as Putin can send troops to the Ukraine.

Another factor, albeit a longer term issue, that stands in front of Russia is the shrinking cost of oil with the US becoming energy independent as well as the continual development of new alternative fuels. In a recent Barron’s article, economists from Citigroup talked about how the continual rise of production of oil in the US and elsewhere and this decreasing demand due to the ability for engines to run on alternatives, could lead to oil price averages around $75 a barrel rather than the traditional $90 to $100 range (Barron’s). This alone should make Russia think twice about its aggressive political movements of late, because alternative fuels like LNG exportation and solar energy just became a much bigger threat to Russia’s future monetary prospects. The lasting implications of aggressive moves such as these for the country are the expedited development and use of other fuels. This would leave Russia’s economy in complete shambles as that is their primary source of revenue.

The next time Mr. Putin asks his friends for a little money from the private sector and they do not have it, he may come to regret the path he has taken here on the Ukraine. The implications of his actions could be longer lasting than he realizes and the stakes for the Russian economy could be much higher than just a few months of sanctions.