Streetwise Professor

March 21, 2011

Tim Newman Nails It

Filed under: Economics,Politics,Russia — The Professor @ 1:54 pm

I strongly recommend you read Tim Newman’s latest post at White Sun of the Desert.  I think it nails it:

Firstly, let’s take Skolkovo.  So Russia plans to set up a special zone where the mind-numbing, wealth-and-soul-destroying, all-encompassing bureaucracy which has cursed Russia since the Revolution will supposedly be relaxed.  Sorry, are we supposed to be impressed by such plans?  Russia plans to do in one small place what most developed countries do anyway as a matter of course, and they’re supposed to be showered with praise?   No, what would be worthy of praise is Russia actually achieving this aim of cutting bureaucracy and the inevitable graft and corruption that follows it and kept things that way for several decades, not just merely announcing grand plans.  Cutting bureaucracy and corruption in Russia has been tried before, and has failed on every occasion.  Previous attempts at creating technology hubs in Russia have not been met with much success.  The vested interests in maintaining bureacracy and corruption in Russia are formidable, and merely announcing that they will be disposed of – even in an area as pathetically small as Skolkovo – is no more impressive than king Knut’s efforts at turning back the sea.  Everybody knows this, which is why such announcements are met with snorts of derision.  There is no fear of a modern, efficient Russia, just recognition of the same old Russia.

. . . .

So Russia wants praise for showing an interest in trade?  Fuck me, half the western world understood the importance of trade, and the institutions which underpin it, over two hundred years ago.  The other half were slow in catching up but finally the penny dropped.  By contrast, Russia spent 80 years making trade illegal – something I’m fairly sure the west consistently told them was a bad idea – and now, having spent 20 years enforcing laws which make trade more difficult and people less wealthy, they show an interest in it?  Even assuming they are sincere (a big assumption) the most positive thing I can think of saying is “About bloody time!”

But this is the best part:

Russia demands respect without realising that respect must be earned.  People don’t respect the Germans because they are stern, humourless, and business-like: they respect them because they go to Germany and find shit works.  They go to Russia and find nothing works.  The USSR gained respect chiefly through threat of force alone, but such respect is one-dimensional, similar to the respect one would afford a knuckle-head bouncer on the door of a club.  If Russia wants to be respected as an adult, the first thing it needs to do is grow up.  Nobody is going to respect Russia merely for doing “some shit they supposed to do.”

Absolutely.  The demand for respect unearned through performance is a salient feature of Russian behavior in numerous spheres.  That is the best characterization of Putin and Putinism that I have seen.

I’d only change one thing about Tim’s post.  How’s this for a rewrite?:

People don’t respect the Germans because they are stern, humourless, and business-like: they respect them because they go to Germany and find shit works.  They go to Russia and find things work like shit.

SPR: Where Hotelling Doesn’t Rule

Filed under: Commodities — The Professor @ 1:45 pm

Steve Landsburg is a marvelous economist.  He has written several things on the Strategic Petroleum Reserve.  Today he invokes the Hotelling Rule to argue that the government should not tap SPR:

If the government starts depleting the oil reserve now (with, presumably, the intent to replenish it in the future), they bid down current prices and bid up expected future prices — creating an incentive for all the other suppliers to sell less now and more in the future — pushing current prices right back up again. For a non-exhaustible resource, this would partially offset the government’s action, but for an exhaustible resource (like, for example, oil) there should be a 100% offset, at least on a naive application of Hotelling’s Rule.

Here (roughly) is the reasoning behind Hotelling’s Rule: The price of oil, in expectation, has to rise at the rate of interest. That’s because leaving oil in the ground is a form of investment, and therefore has to pay the same amount as any other investment (after adjustments for risk, etc.) That pretty much nails down the price path. If a current supplier (like the government) tries to change that price path by increasing current output and lowering the current price, then the expected growth rate (briefly) exceeds the interest rate, inducing everyone else to leave more oil in the ground. They increase this investment until it’s not a good investment anymore, which is to say until they’ve completely offset the effects of the government’s action.

If that’s wrong, it must be because Hotelling’s Rule doesn’t apply, in which case it must not apply for some reason. Has anyone even tried to offer a candidate for that reason?

Let me give that a try, Steve.  Hotelling essentially abstracts from short run rigidities/constraints and stochastic demand and supply.  The only economic decision in the Hotelling world is the rate of extraction.  This was–is–a reasonable abstraction to make in order to understand some crucial issues.  But it is an abstraction.

The more complex reality is that in the short run productive capacity is essentially fixed by the stock of capital–the number of wells, the capacity of the wells, the fields they are in, and so on.  Moreover, output is somewhat inflexible downwards: wells tend to produce at a given rate, unless they are capped.  Capping and uncapping involve fixed costs.  Thus, it is typically inefficient to cap wells in response to a demand decline, especially if that decline is anticipated to be transitory.

Furthermore, both supply and demand are subject to random shocks, and due to the fixed capacity (which limits the ability to expand output, especially in the very short run) and the downward rigidity in output, these shocks cannot be accommodated by adjusting output.  Under these circumstances, it is efficient to hold inventories of oil “above ground” (i.e., oil that has been produced from a well and then stored, as opposed to oil that is “stored” in the oil-bearing formation*).  Like other commodity inventories, these oil inventories can be used to dampen the price impacts of demand and supply shocks.  It is optimal to add to these inventories in response to short run declines in demand or increases in supply, and to draw down on these inventories when the reverse is true.

This is done with commercial inventories of oil.  During the financial crisis and recession, for instance, stocks of oil rose dramatically.  Much of it was stored on ships.  That inventory has been tapped into as demand has risen.  Similarly, the recent oil supply shocks in the Middle East have led commercial inventory holders to draw on those supplies.

There are price implications of these competing stories.  In a Hotelling world, oil futures prices (and the prices of other commodities) are always in full carry, i.e., forward prices exceed spot prices by the rate of interest.  In contrast, the alternative model that I sketch exhibits “backwardations”–situations where forward prices are below spot prices, let alone below spot prices plus interest.

We observe backwardations in the real world.  We observe above ground inventories.  Thus, the Hotelling world is not a precise description of the way the oil market works.

Roughly speaking, Hotelling presents a model of the long run which abstracts from short run rigidities.  The alternative model I discuss focuses on the short run and pays close attention to the implications of these rigidities and the stochastic nature of demand and supply.

It would be nice to have a model that integrates both of these features.  That is very challenging, as it is a high dimensional stochastic dynamic programming problem, with indivisibilities (e.g., fixed costs of exploration, capping and uncapping) and irreversability (there are multiple decision options in oil exploration and production, but investments made when these options are exercised are typically sunk).  Existing models focus on a subset of the relevant features (e.g., including irreversibility while abstracting from above ground storage, including storage but abstracting from adjustments in capacity).

When it comes to SPR, Steve is right to point out the potential interaction between the operation of the SPR and the operations of private storers.  My early posts on this focused on that, focusing on the issue of how commercial storers were affected by the inherently political, and thus difficult to predict, nature of the operation of the SPR.

There is a broader question: Why do we need an SPR in the first place?  Why must the government store?  Why is private storage insufficient?  To determine whether it is optimal to tap SPR today, you need to know why SPR exists in the first place.

One answer is along the lines suggested by the late Earl Thompson (an Alchian student, back in the day) in his analysis of the national defense argument for protectionism.  Thompson argued that one could justify protectionism as a second best response to another market failure.  In particular, government wartime price controls reduce the returns to investing in the production of strategically important materials.  In order to offset the resulting underinvestment, a second best strategy can be to use tariffs and quotas to protect strategic industries.  Protection raises the private rate  of return that is depressed by the possibility of wartime price controls.  This leads to higher investment that offsets the underinvestment resulting from price controls.  Thus, some sort of policy that would otherwise be inefficient (such as protectionism) can be justified on second best grounds for strategic materials that are likely to be subject to wartime price controls or other policies (e.g., taxes) that essentially expropriate from those who have invested in the capacity to produce such materials.

I think you have to make a similar argument for SPR.  It is plausible that in the event of a war the US government would impose price controls on oil.  The anticipation of this would reduce the private returns to investing in oil production capacity.  Filling SPR increases the demand for oil, thereby lifting prices.  This tends to offset the effects of price controls anticipated during wartime.

Moreover, SPR provides a stock of oil that can be utilized for military purposes in the event of a war.  For instance, private storers may hold too little oil in inventory if they anticipate that during a war the government will require them to sell it at below market prices.  SPR can be a second best response to this problem.

Maybe this isn’t exactly the right story, but to justify government provision of storage you need to identify a market failure–or, as in the case of the Thompsonesque story, a government failure–that leads to underprovision of storage and/or investment by private actors.   Once you have this story, you can identify what the appropriate strategy for SPR should be, and can then evaluate whether it is optimal to draw down on this inventory under current conditions.

If it were operated on commercial principles, it would make sense to draw down on SPR inventories: the lack of full carry in the oil market is signaling that there is a short term shortage that can be mitigated by drawing down on inventories, and that’s what commercial storers are doing.  If operated on commercial lines, SPR could generate profits under current conditions by following a similar policy.  But if SPR is instead intended to address a government failure (or a market failure) in which there is a divergence between private incentives and the social optimum, it should not be operated according to the same principles as commercial storage (which only takes into account private benefits and costs).

That’s the direction you need to take to evaluate the prudence of drawing down on SPR.  Hotelling’s Rule doesn’t really help you because it abstracts from crucial aspects of the economics of above ground inventories.  Moreover, even the storage models abstract from the potential for market and government failure.

* This terminology is confusing because some “above ground” inventories are held below ground.  SPR, for instance, is held in subterranean salt caverns.  The relevant distinction is that “above ground” oil has been extracted from its original formation, and moved to some other storage location.

March 20, 2011

What’s In a Name?

Filed under: History,Military,Politics — The Professor @ 3:09 am

The names of military operations can give a glimpse into the mindset of those in charge. For instance, Overlord, Dragoon, Husky, Torch, all from WWII.  These names connote strength, power, dominance.  In Viet Nam, Rolling Thunder was evocative of the administration strategy of threatened escalation; its successor operations, Linebacker I and Linebacker II, connoted something far different, a determination to hit the enemy hard.  (This was the era of Dick Butkus and Ray Nitschke; people knew that linebackers inflicted pain and knocked people out.)  More recently, Desert Storm and Iraqi Freedom were quite descriptive of American intentions.  My favorite operational name is Ripper, the sobriquet given by Matthew Ridgeway to the offensive to push Chinese forces back to the 38th parallel and to retake Seoul.  That name oozed aggressiveness and violence.

And today, the Obama administration brings us . . . Operation Odyssey Dawn?  That sounds like the name of some kid born at a California commune, circa 1970.  Operation Odyssey Dawn?  Really?  What does that mean, exactly?

The best explanation I can come up with is that the Pentagon is trying to warn the country that we’re at the beginning of a long, strange trip.  And they may be right.

The Pentagon has been signaling furiously since unrest began in Libya that it wanted no part of it.  SecDef Gates made it sound like operations against Libya would be as daunting as invading Festung Europa.

My hypothesis to explain the defense establishment’s obvious reluctance to get involved with Libya is that it was–is–petrified at the prospect of getting involved in a civil war under the command of an obviously reluctant, diffident, unenthusiastic, uncommitted, and distracted commander in chief who has articulated no coherent policy.  The military doesn’t want to get left hanging when things get tough–and they will, in a messy situation like Libya.  They sense that Obama’s commitment to the endeavor is extremely shallow, and that he is likely to bail at the first sign of trouble.  I am also convinced that they are deeply troubled by his lack of any military experience and strategic sense, and indeed, his complete disinterest not to say disdain in the subject.

These concerns are legitimate, and the actions of the last month only substantiate them.  The most opportune time to have struck passed weeks ago, when Khaddafy was reeling and the rebels were surging.  Now the reverse is true: the rebels are reeling and Khadaffy is surging.  Now, it is likely that the best outcome is stalemate, perhaps like in Iraqi Kurdistan between Desert Storm and Iraqi Freedom.  The rebels’ offensive capability is nil.  An air campaign can eliminate Libya’s air force and, depending upon how aggressively it is waged, Khaddafy’s ability to use armor and massed infantry to reassert control over the rest of the country.

But as Saddam showed in 1991 when brutally suppressing the Shia revolt in the south, after his forces were routed in Kuwait and southern Iraq, a dictator bent on restoring control can often do so.  And as it was with Saddam in 1991, this is an existential conflict for Khaddafy.  He loses, he dies, most likely.  He may be denied some means of prevailing by an allied air campaign, but he has numerous asymmetric tools at his disposal that are not as vulnerable to air attack that he can–and will–employ to survive and prevail.

It doesn’t seem that Obama, Sarkozy, and Cameron have fully appreciated the capacity for ruthlessness, and the endurance, of people like Khaddafy when they are against the wall.  Indeed, Obama’s perfunctory speech, delivered before jetting off to the Copacabana–literally–betrays considerable confusion.  On the one hand, he presented a damning portrait of Khaddafy as a murderous psychopath who “must go.”  (Is it news that Khaddafy is a murderous psychopath?  Who didn’t know this, in say, 1985, or particularly, 1988?  Or even in late-February, when the opportunity to strike was far more promising?  Is it a surprise that Khaddafy has reacted brutally?  To whom?  Other than Louis Farrakhan, of course.)

On the other hand, he committed the US to extremely–extremely–limited military objectives: safeguarding civilians.  He has indicated publicly, and apparently to Congress, that he will employ extremely limited means to the task: evidently, American aircraft are not committed to the campaign, only British and French (and perhaps later some Arab forces).  Americans will “shape the conditions”: can you imagine Churchill saying “we will shape the conditions on the beaches.  We will shape the conditions on the landing grounds.  We will shape the conditions on the hillsides . . . ?”

What’s more, the message is apparently a mixed one, because some sources, including but not limited to Stratfor, claim that regime change is the true objective.  Given the predicate (Khaddafy is a murderous psychopath and numerous civilian lives are at risk) this makes sense: how do you really protect the civilians from said murderous psychopath when he is still in charge?

But if regime change is the true goal, then why is Obama so insistent on the limited nature of the objectives, and on the extremely limited nature of the American resources committed?  If regime change is the real goal, why won’t he come out and say it?  Is it that he cannot admit to Bushian impulses?  Waging war under false pretenses is always a bad idea, and usually inflicts huge political damage on the president that attempts to do so.

Make no mistake, as was demonstrated in both 1991 and 2003, even extremely intensive, comprehensive air campaigns far more powerful than those contemplated in Libya today provide few assurances of achieving decapitation, let alone regime change.  “Shock and awe” didn’t deprive Saddam of his means of political control or prevent him from brutally repressing civilians.

So I think that the military is having LBJ flashbacks.  Only worse.

March 19, 2011

My New Trading Strategy

Filed under: Commodities,Derivatives — The Professor @ 11:18 am

When I taught a course in the Masters of Arts in International Trading, Commodity Finance, and Shipping program at Universite de Geneve last summer there was a corner in coffee.  This year, right when I am teaching in Geneva, there is another coffee corner.  So, before I come next time, I think I’ll put on some coffee spreads.  I’ll announce my travel dates after I put on the trade.

March 18, 2011

?????????, 21st Century Edition

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:55 am

Several interesting stories on the way things work in Russia.

The most fascinating is the tale of the remarkable rise to prominence of gas producer Novatek, and the windfall reaped by Putin friend Ginnady Timochenko:

The Novatek agreement was signed on March 3 in Novo-Ogaryovo with Putin personally blessing the deal. According to official reports, Total will acquire 12 percent of Novatek, the second-largest gas producer in Russia, from its CEO and largest shareholder, Leonid Mikhelson, and co-owner Gennady Timchenko.

The huge figures involved in this deal are especially noteworthy. In fact, on Dec. 20, Gazprom sold Gazprombank a 9.4 percent stake in Novatek for 57.5 billion rubles ($2 billion). Only one day earlier, that stake was valued on the MICEX at 87 billion rubles, and it is now worth 101.3 billion rubles. The very next day, Dec. 21, Gazprombank resold those shares to Novatek. Now, with Putin looking on, Timchenko and Mikhelson resold several major share packets to Total for 30 percent more money than Gazprom received for the same shares.

Gazprom is run by Putin’s friend Alexei Miller, Gazprombank is owned by Putin’s friend Yury Kovalchuk, and yet another friend of Putin’s, Timchenko, is co-owner of Novatek. What we have is a complex, multistaged financial transaction in which individuals and companies with close ties to Putin flip billions of dollars worth of stocks and securities in murky, under-the-table schemes.

And lo and behold, Putin anoints Novatek as the leader in future Russian LNG endeavors:

Prime Minister Vladimir Putin, who wants Russia to export 10 percent of its gas as LNG by 2020, blessed Novatek’s plans at a ceremony near Moscow last week, calling it a “good and large- scale work.” Gazprom has delayed decisions on expanding Russia’s only LNG facility, the Sakhalin-2 project with Royal Dutch Shell Plc, and developing the Shtokman field on the Barents Sea.

“Novatek’s project is now Russia’s primary LNG project outside of Sakhalin,” said Chris Weafer, chief strategist at UralSib Financial Corp. “Total’s strategic partnership with Novatek is an acknowledgement that Shtokman is on a much slower development path with an unpredictable future.”

And speaking of anointing, Putin pushed through a deal to elevate a partially state-owned wireless firm to lead efforts to create a 4G network, vaulting the heretofore minor firm to the forefront of the telecoms business:

But investment banking isn’t the only sector the Kremlin and the companies it controls have dipped their hand into recently, despite intense rhetoric of late about privatization and reducing the state’s role in the economy. Last week, Mr. Putin presided over a plan to give a little-known wireless company, partly owned by the state, the lead role in building a nationwide fourth-generation wireless broadband network, leapfrogging the three major non-state companies that had controlled the mobile industry. With these precedents, Russia investors are left wondering which privately-owned industry is next.

In sum, FOKs (“friends of the Kremlin”*) get blessings showered on them: multi-billion dollar overnight windfalls on stock stakes, preferential positions in new utility franchises.

And with respect to privatization, the state appears to be fading its offer to sell a stake in Sberbank:

Russia may delay a key element of its planned $35 billion in state assets sales, a government minister said Monday, as dramatically higher oil prices shrink the budget deficit and reduce fiscal pressure.

The sale of a 7.6% state-held stake in OAO Sberbank, Russia’s biggest lender, may not happen in 2011 because of questions about market conditions and a lack of preparation for the deal, Economy Minister Elvira Nabiullina said Monday, according to Russian newswires. Ms. Nabiullina also sits on the state-controlled bank’s supervisory board.

Later on Monday, Russian Finance Minister Alexei Kudrin said higher oil prices alone wouldn’t halt asset sales and that the “mood of international investors” is a bigger factor.

Deputy Prime Minister Shuvalov could go into the landscaping business with all the hedges in this statement:

Comments state-owned shares “Savings Bank” may be privatized in 2011, if the market had a good situation and be able to attract quality investors. This was reported by First Deputy Prime Minister Igor Shuvalov at the forum “Russia and the world.” “Maybe this year. If we can get a good capital, and market competition is set for good capital, and if we are able to get a good price, and will be at this moment a good market, in this case, the transaction will take place” – said he said.

Kudrin’s demurrals must be taken with a grain of salt: it’s all about the fiscal situation.  The privatization drive, such as it is, doesn’t reflect a newfound appreciation for the virtues of privately owned enterprise over state owned businesses.  It’s driven first and foremost by fiscal needs.  With the recent spurt in oil prices, those fiscal pressures have eased.  And not surprisingly, the enthusiasm for privatization has faded accordingly.

But as the Novatek and telecoms stories indicate the concept of private property in Russia is, well, rather Russian–Muscovite, really.  Property is not really a bulwark against the intrusions of others, most notably the state.  Instead, ultimate discretion over the use of resources rests with the state and its de facto ruler, which takes it from those whom they desire to punish and rewards it–conditionally–it to those whom they desire to reward.  The current system bears more than a passing similarity to the system in Muscovite times, in which holding of property was conditional on service to the state, and loyal service was rewarded by the assignment of a ????????? (“feeding”):

One problem [with kormlenie] was the lack of effective controls over how much was extracted; another, that the subjects would be drawn into complex patterns of personalized relations, where all distinctions between public and private were eroded.

Back to the future.  The current Russian system often more resembles the Muscovite one, in which property tenure was contingent on the discretion of the ruler and dependent on service to him (or her), than even the one that existed after Catherine’s reforms, which severed property tenure from state service.  For all the talk of modernization, that’s the way things work today–and it’s anything but modern.

*Yes, I know that Putin isn’t in the Kremlin–yet.  But that’s a mere detail, and FOKs has a nice ring to it.

March 16, 2011

To Merge Their Farms, Will Deutsche Borse and NYSE Have to Sell the Silo?

Filed under: Clearing,Derivatives,Economics,Exchanges,Regulation — The Professor @ 10:52 am

Immediately following the announcement of the proposed NYSE-EuronextLIFFE-Deutsche Borse deal, I stated that the main risk to the transaction would be that European antitrust regulators who are not keen, to say the least, on the vertical integration of exchanges and clearinghouses (the “silo” model).  A close watcher of these developments, Anthony Belchambers of the Futures and Options Association, believes this risk is quite real:

European regulators could push merger partners NYSE Euronext (NYX) and Deutsche Boerse AG (DB1.XE) to spin off part of their derivatives clearing business, according to a senior industry lobbyist.

Fusing NYSE Euronext’s London-based Liffe unit with the German company’s Eurex business would create a dominant force in European-listed derivatives, and antitrust officials may target the profitable clearing segment as part of any approval, said Anthony Belchambers, chief executive of the Futures and Options Association, which represents banks and brokers in the region.

“Clearly they’re going to be looking very closely at this,” Belchambers said of the regulators’ stance. He was speaking in an interview on the sidelines of an industry conference organized by the Futures Industry Association, the FOA’s U.S. counterpart.

Deutsche Boerse has in the past successfully fought efforts by some European lawmakers to force the separation of its clearing business, and analysts said a renewed push could effectively sink the planned NYSE Euronext deal.

Belchambers said regulators are likely to focus on exchanges’ control of clearing trades in futures and options contracts listed on their markets, a framework that has enabled market operators like Eurex and Liffe to fend off competitors in fixed-income and stock-index contracts.

This would be a deal killer, most likely; the main attraction of the deal is the potential to exploit clearing efficiencies and profits, and DB considers integrated clearing an essential part of its business model.  I would think that DB would rather stand pat with its current business than merge and amputate its clearing operations.

Given that, will European regulators push it and impose conditions that make the deal unpalatable, especially for DB?  And if they do, will that leave the door open for NASDAQ (perhaps in conjunction with ICE)?  Absent a deal killer, or the serious prospect of a deal killer, I don’t see NASDAQ or NASDAQ + ICE as a serious threat to break up the proposed merger, especially since NASDAQ+NYSE would pose antitrust issues here in the US.

Obama Channels Scott Miller

Filed under: Energy,Politics — The Professor @ 5:29 am

Obama at his press conference, 11 March, 2011:

You may want to buy a fuel-efficient car, but you may not be able to afford it. And so you’re stuck with the old clunker that’s getting 8 or 10 miles a gallon.

Scott Miller and the Commonwealth, 8 Miles a Gallon:

From Washington to Arlington to the House of Saud
They’ll all be buying shovels so they can have a job
And I’ll be living happy in the Shenandoah Valley
Rollin’ down the road on 8 miles per gallon

Miller does have a suggestion for a fully organic, alternative energy source:

So I invent a big engine
make it run on bullshit
put in on a chassis
Buddy, it’ll never quit
invent a big engine
make it run on bullshit
put it on a train track
Buddy, it’ll never quit
invent a big engine
make it run on bullshit
put it on the highway
Buddy, it’ll never quit

Hey, we could tell the Middle East to pound sand (which they have a lot of) if we could make engines run on bullshit (which we have even more of, especially in the 202 area code).

But seriously: who do you know who drives an “old clunker” that gets 8 miles a gallon?  Yes, there are a few people in this vast land of 300+ million souls who do, but not many.  Is this just another revealing insight into how Obama envisions what life among the bitter clingers who can’t afford arugula is like?

But Obama has a solution, of course: his magical electric cars.  Which require batteries, of course.  But Obama has found the cool solution:

U.S. President Barack Obama has championed “multi-megawatt vanadium redox fuel cells” for mass-storage batteries as “one of the coolest things I’ve ever said out loud”. [Which means, I guess, that he is always saying even cooler things in his head.]

How cool does it sound to say “China currently dominates world vanadium production and has been restricting exports“?

When does reality intrude?  Ever?

“Present” Would Be an Improvement–Or Would It?

Filed under: Economics,History,Politics — The Professor @ 2:42 am

In the aftermath of 9-11, Bill Clinton lamented that he had been denied the chance to achieve greatness because he had presided over the benign nineties.  Barack Obama cannot make the same complaint.  He has a cornucopia of existential and near-existential crises to choose from.  A budget crisis.  A still shaky US and international economy and financial system.  The Middle East on fire from Tripoli to, most worrisomely, Bahrain and Saudi Arabia (with Iran’s malign influence stoking the confrontation to an unknown extent).  The Japanese catastrophe.

But Obama is curiously–but obviously–detached from it all.  On Japan: “unshakeable (bad choice of words there) bond, blah, blah, blah. . . . FORE!”  On Libya: while Obama talks about the noose tightening on Khaddafy, in reality, Khaddafy is tightening the noose on the rebels–and that expression is likely to transform from a metaphorical description to a literal one within days.  On Bahrain and Saudi Arabia: timorous tut-tutting and fretting, mainly from lower levels within the administration.  In all of these events, a haste to defer to others, most notably international organizations.  But even when such organizations (such as the Arab League) call for action, the administration finds reason to demur.  On the budget, even Democrats in Congress have remarked upon–and criticized–Obama’s disengagement: newly elected WVA Senator Manchin said Obama had been “missing in action.”

But it’s not as if dairies are going to start to put Obama’s picture on milk cartons: he’s been doing things.  Like golfing.  Like preparing his NCAA hoops bracket.  Like fixing “No Child Left Behind” (is the subtext there “Bush screwed up everything, even when he had Ted Kennedy helping him”?).

Some have advanced the analogy between Obama and Eisenhower, who was widely ridiculed for his golf-heavy schedule and seeming detachment.   But, as historian Paul Johnson noted years ago, in fact Eisenhower was an active–and Machiavellian–leader behind the scenes.  Perhaps a generation from now (Johnson wrote a little more than a generation after Eisenhower’s presidency) historians will uncover evidence that Obama is similarly active behind the scenes, pulling strings.  But there is reason to doubt.  Prior to his presidency, Eisenhower had been a military commander responsible for the most complex and sprawling military campaign in history; his primary difficulty was managing a complex alliance beset by strong personalities and conflicting interests while maintaining the public image of agreement, coordination, and comity.  In contrast, Obama’s preparation for the presidency, such as it was, was as a state legislator and junior senator, earning in both places a reputation as someone unwilling to take stands on difficult issues while having absolutely no responsibility to manage or lead anything.  Prior to assuming the presidency, Eisenhower had more than a decade of executive experience under the most trying circumstances: voting “present” was never an option.  Obama made a career of that.  Obama never had to decide, in the gales of June 5, 1944, whether to launch the most audacious invasion in history, where the consequences of failure would have been catastrophic.  Eisenhower did.  So it is not really a surprise to me that Eisenhower was a forceful, crafty, and cagey behind-the-scenes leader.  I would be greatly surprised, based on background and past performance, if Obama is.

What’s more, it is far more difficult today for a president to act differently behind the scenes than in public, as was the case in Eisenhower’s day with its more deferential press and its less leak-driven Washington culture.  Especially with someone as narcissistic as Obama, who would surely let it be known if he were in fact shaping the world rather than letting it shape him.

Finally, the passivity is of a piece with Obama’s past public rhetoric and political positions, with their explicit questioning of American leadership and exceptionalism, their expressed desire to subsume the United States into collective international bodies, and their frequent criticism of the use of anything remotely resembling hard power.

If I am right in my analysis of Obama, at the most trying time in world history since the 1930s, a time fraught with political and economic peril, the United States is drifting along, neither led nor leading.  It’s worse than that, actually.  The administration has largely abdicated authority over the things that are properly in the executive sphere, while at the same time it has engaged in unprecedented expansion of government and executive power in areas–notably in economics–where the potential for mischief vastly exceeds the potential to make things better.  Doing too much of some things and too little of others doesn’t mean that on average you’re doing just the right amount: quite the opposite.

When stymied domestically, as Obama has been by the victories of the Republicans in 2010, presidents have historically turned their attention overseas, where they can exercise authority and discretion more independently and with less constraint.  Obama has not done that.  To the contrary, the opportunities to do so have been immense, but the more these opportunities have grown, the more he has shrunk from seizing them.

One initial reaction is to regret this passivity.  But given Obama’s background, ideology, and history, a more considered reaction is to conclude that it isn’t such a bad thing: things could be worse, and would likely be so were he to act according to his (leftist) lights.

Yes, things could be worse, but they are bad enough now.  The United States and the world are suffering greatly due to the leadership vacuum on both economic matters (most notably the budget and entitlements) and international affairs.  Yes, as Adam Smith said, there is a lot of ruin in a nation.  And yes, as I wrote in the immediate aftermath of Obama’s election, we are testing just how much ruin there is in this one.

March 15, 2011

Lie-bor Lives!

Filed under: Derivatives,Economics,Exchanges,Financial crisis,Regulation — The Professor @ 11:14 am

It is ironic that this story about UBS came out on the day I arrived in Switzerland.

UBS has received subpoenas from the SEC, the US Commodity Futures Trading Commission and the US Department of Justice in connection with investigations regarding submissions to the British Bankers’ Association, which sets LIBOR rates. UBS understands that the investigations focus on whether there were improper attempts by UBS, either acting on its own or together with others, to manipulate LIBOR rates at certain times. In addition, UBS has received an order to provide information to the Japan Financial Supervisory Agency concerning similar matters. UBS is conducting an internal review and is cooperating with the investigations.

I wrote several of posts about Lie-bor back before the financial crisis climaxed.  The story seemed to fade from view very quickly, despite the fact that the effects of a distortion in the LIBOR index due to misreporting could lead to the transfer of  Carl Sagan-esque billions and  billions of dollars between swap counterparties and floating rate borrowers and lenders.  Moreover, since unlike in the natural gas misreporting episode where some firms had an incentive to report prices that were too high (and did) and other firms had an incentive to report prices that were too low (and did), here all the potential misreporters had the same incentive: to underreport the rates at which they borrowed.  This would tend to cause the effects of misreporting to be greater, as misreports would have no tendency to cancel out.

I surmised at the time that despite the fact that there was some pretty convincing stories to support the claims, government regulators did not seem to pursue the allegations aggressively because (a) that was the least of the problems in the banking sector and regulators had other fish to fry, and (b) because of those other problems, regulators were beyond loath to compound them and pour additional burdens on banks that were already reeling and threatened to bring down the financial system.  Regulators were looking to put out fires, not start them.  LIBOR was something that regulators, like Scarlet O’Hara, could worry about . . . tomorrow.

Those days of forebearance, it appears, are gone.  If you are a there’s-got-to-be-a-pony-in-there-somewhere kind of person, you might view this investigation as a strong signal that regulators believe that banks are healthy enough to stand the strain–and the potential fines (and perhaps damages in private litigation).  If you’re not, you’re probably saying “when will it all end?”  Be careful what you ask for.

A gratuitous image of a UBS branch, a block from my hotel:

Puddin’ Head Wilson’s Cat & Japanese Nukes

Filed under: Climate Change,Energy,Politics — The Professor @ 10:45 am

With the catastrophe at the Fukushima reactors in Japan has led to additional scrutiny of nuclear power plant construction projects around the world.  This is indeed prudent, but we should hope that the reviews are done soberly and carefully, rather than in a Chicken Little fashion.

For instance, the “no nukes of any kind anywhere” position advanced by people like Rep. Ed Markey from Massachusetts is a premature over-reaction.  “No boiling water nukes on seismically active coastlines vulnerable to tsunamis that could destroy emergency generators needed to operate cooling pumps” is sensible.  Just where between those extremes the line should be drawn depends on myriad factors, not least of which is the nature of new nuclear power technologies.  (Spare me the Chernobyl references: even Fukushima analogies are inapt when discussing more modern reactor designs.)

We should, in brief, keep in mind what Puddin’ Head Wilson said:

We should be careful to get out of an experience only the wisdom that is in it — and stop there — lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot stove-lid again, and that is well; but also she will never sit down on a cold one any more. [Emphasis added.]

In other words, when evaluating the future of nuclear power, we should not be like Wilson’s cat.

And another Twain phrase also comes to mind while following these events:

If you don’t read the newspaper, you are uninformed; if you do read the newspaper, you are misinformed.

And that goes double for the internet.  (Present company excluded, of course.)

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