Arbitrage – Moon of Alabama

October 11, 2004

Arbitrage

In economics, arbitrage is the practice of taking advantage of a state of imbalance between two markets: a combination of matching deals are struck that exploit the imbalance, the profit being the difference between the market prices.

An upbeat article in the NYT is headlined:
Rebels Loyal to Shiite Cleric Begin Handing In Arms in Iraq

(paragraph 1)
Militiamen loyal to the rebel cleric Moktada Al-Sadr surrendered hundreds of weapons today in what appeared to be an encouraging start to a deal struck with the Iraqi government and the American military to end months of fighting in the eastern Baghdad area known as Sadr City.
…
(paragraph 3)
In exchange, American commanders agreed to halt military operations against the group, known as the Mahdi Army, and to begin hundreds of millions of dollars worth of reconstruction projects in the impoverished and dilapidated Sadr City area. The Iraqi government also promised to release any member of the Mahdi Army, among the dozens picked up in sweeps here, who has not been charged with a crime.
…
(paragraph 15)
The weapons drop-off sites brought out an array of characters, some of them Mahdi Army loyalists following orders to turn in their weapons, and some of them unemployed Iraqis looking to make some quick cash for their old army equipment. Under the agreement, the Iraqi government agreed to pay above-market prices for any weapons turned in; $250 for a mortar, $170 for a grenade launcher, and for a bullet, 25 cents.
…
(paragraph 28)
at the gates of one of the weapons-disposal sites, the Iraqi security officers checked the identification card of an American reporter and then made him an offer.

“Do you want to buy the weapons inside?” he asked. “Just $150 for a Kalashnikov.”

Every sane inhabitant of Sadr City will rush to buy a weapon at his favorite bazaar and sell it to the Iraqi government for a profit. The bazaaris will then replenish their shops from the new government stocks. At least three Iraqis will benefit in each transaction – the arbitrageur, the bazaari and the Iraqi security officer. Others will profit from the additional reconstruction funds.

The Neocon utopia of economic revolution in Iraq fulfilled? Only if the markets would balance. But with guaranteed prices, the business opportunity for Iraqis is now endless and as some might see it, one-sided.

(paragraph 30)
In violence today, three American soldiers were killed and 14 were wounded in a pair of attacks in Baghdad and Mosul. In the first, two American soldiers were killed and 5 wounded in a rocket attack in south Baghdad. In the second, one American soldier was killed and 9 wounded when a car bomb crashed into a convoy in Mosul.

BTW, how to value the NYT’s reporting priorities?

Posted by b on October 11, 2004 at 23:48 UTC | Permalink

Comments

Hilarious, B:
You really shouldn’t write all that much about economics.
You are too Adam Smith vicious.
Is there a futures market for AKs, RPGs, and mortars.
Entreprenurial minds want to know.
Who knows, “foreign entreprenurial elements of the worst sort” might enter the game.

Posted by: FlashHarry | Oct 12 2004 0:45 utc | 1

Say Bernhard, your not really Billmon, are you?

Posted by: Justasking | Oct 12 2004 0:50 utc | 2

The whole “contractors and free markets” approach is a total ideological absurdity.
The present model is a monstrous hybrid of artificial demand signaled by the CPA and private supply lured by the potential profits. I say the demand is artificial, because the Iraqis obviously have no personal disposable income to spend.
Capitalism works well, when three roles are played by one person: the benefiter, the payer and the decident. You know what is good for you, you have the money, therefore you decide. Here the people of Iraq are supposed to benefit from the decisions of the CPA and the US tax-payers foots the bill.
The most important thing to observe is that CPA contracting ALREADY IS a ‘big government’ subsidy and a giant distortion of free markets.
No sane investor would put his money into building Iraqi infrastructure and the subsidy is trying to distort that. No sane person wants to risk one’s life, and the profit to make is trying to distort that behaviour, too.
It is the choice between profit and risk, the fight between greed and fear, the classic capitalist game. At some point, the profits needed to offset the growing risk shoot up expotentially. More money is needed to distort. Which brings us to the conclusion that free market solutions to the problems can be very expensive.
In a emergency environment BIG GIANT OPPRESSIVE GOVERNMENT _IS_ the logical solution, and that is how it has usually been done. You take the profit motive completely out of the behavioural equation, because you mandate risk. That is how the military works, soldiers do not demand a pay huge rise when they are send to the front. The logical choice would be to force-employ every single adult Iraqi and create reconstruction plus protection units. Possibly import from abroad what can not be produced locally. Whoever else runs around has obviously a ‘unofficial’ source of income.
But that would be Communism and we know that Communism does not work. Except for maybe 70 years.
P.S. If you are outraged at this, observe how I use the keyword ’emergency’. I asume that Iraq is in an emergency since March 2003.
P.P.S. A fine (although not perfect) example is the German Technisches Hilfswerk which provides relief during natural crises. No sane person will expect the market to come up with a quick solution during a disaster. At least not at reasonable prices.

Posted by: MarcinGomulka | Oct 12 2004 2:15 utc | 3

General Bernhard Sir,
Just goes to show the infinite wisdom of our Dear Leader and his neo-con Lieutenants to both jump start the Iraqi economy and end the insurgency in one genious stroke. May I further suggest, that all Iraqis be paid a nominal sum for every intention of owning a bullet or a firearm, and then perhaps, a handsome sum for an imagined program to own such weapons, because as we have learned, the greatest danger lies not so much in the facts, but in the
evil realm of the possible.
Yours in moonlighting,
PFC Missed

Posted by: anna missed | Oct 12 2004 2:33 utc | 4

Quote:
“Say Bernhard, your not really Billmon, are you?”
***
I was about to say that Bernhard is getting better and better and is great “replacement” for Billmon and I want to thank you for doing this Bernhard…Keep up good work as long as you can…
————————
It is incredible how those “war’s economies” work …you wouldn’t believe that. In Bosnia for example all 3 sides used to trade everything including all sorts of weaponry in between fights. Problem is once this kind of economy is introduced it really is practically impossible to change it in to the normal one for decades…And there is nothing some people will not do for money… Profiteers know it and exploit it. It’s even so much better when you don’t have to risk your own money to make a profit but USA tax payers money that government is so willing to risk…It’s a profiteers paradise.
And about Iraq’s police officers…do you really believe they will risk their lives and their families just for a salary (no matter what amount of money that could be but I suppose not more then one or two hundred dollars)???? You must be joking. There is nothing as profitable as being a policeman in times and countries like this…Corruption is a name of the game and it’s growing as hell …

Posted by: vbo | Oct 12 2004 2:51 utc | 5

Quote:
“May I further suggest, that all Iraqis be paid a nominal sum for every intention of owning a bullet or a firearm, and then perhaps, a handsome sum for an imagined program to own such weapons, because as we have learned, the greatest danger lies not so much in the facts, but in the
evil realm of the possible.”
***
You are great Anna…

Posted by: vbo | Oct 12 2004 2:55 utc | 6

The NY Times had a picture earlier of some terrorists/insurgents standing before a pile of rusting mortars.
I had a chuckle.
Partly from the rampant iron oxide, and partly from wondering if the gunpowder had all been sucked out with a straw like yolk from an egg.
Gunpowder out. Sand in.
Of course, more is going on here that meets the eye. Well, check that…
The more that is going on here is PRECISELY what meets the eye. This was nothing more than a photo-op for the “things are getting better in Iraq” crowd.
Or, to quote the other article Bernhard linked to on the previous thread, this was just another “dog and pony show“:

The frustration of the Marines was evident one afternoon last week as members of the platoon traveled from Forward Operating Base Kalsu back to Camp Iskandariyah. An attack had reportedly taken place in the area, and members of the platoon were asked to leave their Humvees and walk up a road to look for suspicious activity.

Traffic quickly began to pile up: cars packed with families, trucks loaded with animals and vegetables. The line of vehicles would have taken hours to search. An order was suddenly passed for the Marines to search all buses for insurgents or weapons.

“This is what we call a dog-and-pony show,” said Kelly, the heavyset, sharp-tongued lance corporal from Fairbanks. He said the operation was essentially a performance for American reporters who were traveling with the Marines. “This is so you can write in your paper how great our response is,” he said.

Obviously we in America have the best government money can buy. Unfortuantely, in a democracy at least, money can’t buy a government worth a damn. But at least we have pretty photo-ops.

Posted by: koreyel | Oct 12 2004 3:03 utc | 7

@Marcin
While I would agree with you’re general advocacy of big government, as the better prescription for the post war Iraq — I have often wondered why after the fall of Baghdad, the occupatation did’nt simply proclaim victory, then send out a general proclamation to both the military and the civilian population that all functioning economic livelihoods would continue as normal, and with normal pay schedule intact. Iraq, being a centeralized state run economy, should have made this not an impossible task. The Jay Garner initiative seemed, at least in part, to be headed in this direction; using the army for reconstruction & security, with a rapid political reallignment through elections sooner rather than later. Why Washington rejected this approach in favor of the “Naomi Klein” model (as she theorizes) of reorientation — the complete breaking and remaking of the Iraqi economy as an idealized laissez-faire utopia is a mystery I don’t get. The neo-con approach may think a free economy would attract enough investment to reconstruct the country, but they had to be aware of the insurance problems that would sabatoge most investment initiatives. Some would also say this runs contrary to the notion of neo-con imperialist inclinations — how could you guarantee statist control of the country by the introduction of so many wild cards. So in the end , or at least so far, they rejected keeping intact a socialist and culturally compatable governmental structure with the smallest footprint surgical change of political leadership, and instead chose the complete destruction of infrastructure and economy to impliment a program of reconstitution that could never work because of international (legal/insurance) problems inherent in the plan. Go figure.

Posted by: anna missed | Oct 12 2004 8:55 utc | 8

i.e. there’s a libratarian objectivist dis-connect as far as the neo-cons are concerned

Posted by: anna missed | Oct 12 2004 9:21 utc | 9

Actions you should not take in Iraq include messing with the religious authorities.
U.S. Forces Arrest Top Cleric in Iraq’s Ramadi

U.S. forces Tuesday arrested the top cleric in Iraq’s volatile western Anbar province after fighting in the regional capital of Ramadi, witnesses said.
Cleric Abdel A’leem al-Saadi, the top Sunni cleric in Anbar, was arrested at a mosque in rebel-held Ramadi and six other people were detained at other mosques, the witnesses said.

Three days left to Ramadan

Posted by: b | Oct 12 2004 10:20 utc | 10

A very good analysis in the LA Times about the Saddams miscalculations and the miscalculations of the United States.
Through Hussein’s Looking Glass
Both had their Looking Glasses.

Posted by: b | Oct 12 2004 10:44 utc | 11

@MarcinGomulka
No sane investor would put his money into building Iraqi infrastructure and the subsidy is trying to distort that. No sane person wants to risk one’s life, and the profit to make is trying to distort that behaviour, too.
I hate to disagree about something I imagine you already know perfectly well, but we may need to remind ourselves that this sort of economic-speak is bad for us.
Specifically, there are both sane investors who would commit to building infrastructure in Iraq, and there are sane people who continue to want to risk their lives. They are the Iraqi taxpayers and the individuals who live in actual, particular places with actual neighbors and relatives. They, most sanely, are ready everyday to do these things.
The occupation is essentially unprepared to use these, Iraq’s best assets. The proof is that nearly all the money goes to foreign (which means non-Iraqi!!!) contractors. The proof is that the occupation forces were planned at a size that could never be large enough to protect Iraqi citizens from postwar chaos.
We’re quite used to underestimating the power of trusting the citizenry, but let’s remind ourselves. It might keep us clearer on exactly what is not merely criminal in this occupation, but also self-destructive.

Posted by: Citizen | Oct 12 2004 18:09 utc | 12

“Arbitrage” – perfect response.
I just about fell out of my chair when I read this story in the paper. Apparently, watching a war on TV makes one think that Iraq is not a war theater, but just an electoral one.

Posted by: Citizen | Oct 12 2004 18:23 utc | 13

@Citizen
Good point. There were some Iraqi expats who came back to Iraq with all their savings.

Posted by: MarcinGomulka | Oct 12 2004 21:13 utc | 14

A Guns-for-Dollars Swap in a Militant Stronghold isses Its Target
To give up your weapon for money, you first have to pay the Iraqi army. If you have no money, you will have to keep your weapon.

Posted by: b | Oct 16 2004 8:34 utc | 15

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