Streetwise Professor

June 11, 2011

My Kind of Guy

Filed under: Economics,Politics — The Professor @ 2:13 pm

Mexico’s chief central banker, and University of Chicago econ PhD, Agustín Carstens is the dark horse candidate to replace accused rapist Dominique Strauss-Kahn as head of the IMF.  He is the main challenger to Frenchperson Christine Lagarde.

The main knock from the Euros against Carsten is, according to the FT, his Chicago pedigree: specifically, “he studied economics at Chicago University [Note to FT: WTF is Chicago University?], famed for its orthodoxy [emphasis added].”  As if to emphasize the point, John Paul Rathbone writes in the FT that “as a University of Chicago-educated economist, Mr Carstens is somehow too orthodox, and therefore out of touch with these increasingly Keynesian times.”  If you Google “Carstens IMF Chicago orthodox” you get 113,000 results.

Chicago?  Orthodox?  Spare me.  Chicago has become more mainstream lately, but Chicago-qua-Chicago is a notoriously unorthodox place.  It was the leader of rebellion against Keynesian orthodoxy–yes, it was the orthodoxy–for decades.  Free market economics is definitely not orthodoxy, especially in Europe (the focus of opposition to Carstens).

No, international organizations like the IMF and the World Bank are the bastions of all sorts of smelly little orthodoxies–all of which are statist to the core.  That, in fact is the real problem.  Bleats about orthodoxy are an inversion of the real fears about Carstens: that he will upset the insular little world dominated by French dirigistes like Strauss-Kahn and Lagard and the “elite” bien pensents from Europe and the United States.

But maybe the real reason for opposition to Carstens is revealed in this WSJ article: he’s a Cubs fan.

Chicago grad.  Cubs fan.  Opposed by the French.  Definitely my kind of guy.

June 10, 2011

London Calling

Filed under: Commodities,Derivatives,Exchanges — The Professor @ 2:07 pm

I’m in London for a conference at the LSE. Here with the family, and we’ve seen most of the typical sites (it’s my family’s first time in the city).

The highlight for me, however, was watching the ring trading at the London Metal Exchange. (Yes.  You don’t need to tell me.  I know I’m weird.)  Very interesting.  Each metal trades for five minutes–in theory.  In reality, there is desultory bidding and offering until the last 30-45 seconds of the 5 minute period, at which time trading really picks up.  A visual illustration of volume clustering.  Although it is face-to-face open outcry trading, it is very different than Chicago.  It is more like a sequence of call auctions, rather than a true continuous auction.  Moreover, the trading crowd is small–there were 15 people in the ring, and about twice that many clustering around it.  I’m glad I could see it, after having worked with LME data and studied metals rather extensively for about 18 years (yikes!)

Thanks to Allan Schoenberg for helping to set things up, and special thanks to Miriam Heywood at the LME for giving us the tour.

Witness What the Sorcerer’s Apprentices Hath Wrought

Filed under: Uncategorized — The Professor @ 9:55 am

There have been several articles over the last couple of days regarding the implications of the CFTC’s and SEC’s inability to write the rules necessary to implement Dodd-Frank.  In a nutshell, Dodd-Frank repeals the Commodity Futures Modernization Act, which gave legal certainty to swaps.  When Dodd-Frank goes into effect, if the rules are not in place–a near inevitability–losing participants in derivatives deals–and remember boys and girls, there will be one in every deal!–may attempt to escape their losing OTC derivatives trades by claiming that the agreements are illegal off-exchange futures.

The CFTC’s Gary Gensler says “trust me on this.”  I’m with the WSJ on this one:

Commodity Futures Trading Commission Chairman Gary Gensler says his agency and the Securities and Exchange Commission are working on clarifications to guide derivatives markets for the period between July 16 and whenever regulators decide on new rules. He promises to post something on the CFTC website soon.

But not everyone is convinced that Gary’s web posting is going to defuse the bureaucratic bomb that Chris and Barney have programmed to detonate next month. Mr. Gensler can’t prevent private lawsuits if the law becomes murky. It doesn’t take too much imagination to see trial lawyers trolling the ranks of underachieving municipal finance officials who might want a do-over after some bad derivatives bets. We could immediately be talking about real money.

In other words, a CFTC web posting or Gary Gensler writing on his Facebook wall (and no, he hasn’t friended me!) or Tweeting that it’s all cool (and no, he doesn’t follow me nor I him!) of whatever won’t deter firms with big losses from taking a punt on a lawsuit.  Even if, in the end such lawsuits go nowhere, (a) uncertainty about this will chill some business, and (b) legal costs will be appreciable.

In other words, this is just another big screw up.  And it’s merely a procedural screw up–a problem that Congress in its infinite wisdom (for those who come for the sarcasm–there you go!) could have anticipated and addressed.  We haven’t even gotten to the potential substantive screw ups.  Screw ups that the financial world is now viewing with growing alarm.  People are starting to recognize that the unintended substantive consequences of Dodd-Frank–e.g., making CCPs too big to fail entities, the liquidity impacts of clearing mandates, to name just two of the biggies–could be the source of the next crisis.

So, as we venture into this brave new world, folks, don’t forget who brought the broomsticks to life but couldn’t control them:

June 9, 2011

More on Timmy!’s Smart Financial Diplomacy

Filed under: Derivatives,Economics,Financial crisis,Politics,Regulation — The Professor @ 1:20 am

I cannot recall a situation where a US Secretary of the Treasury, or any cabinet member, for that matter, has been the subject of such scathing rebuttals as Timothy Geithner.  The disdain that his lectures on derivatives regulation unleashed is pretty amazing.  It was not respectful disagreement.  It was disrespectful disagreement.  And not from anonymous sources, but from named representatives of government and industry bodies.  Nor is this a new thing.  The Chinese and German Finance Minister Wolfgang Schaeuble, to name but two, have been brutal in their criticisms of Geithner.

This makes it all the more curious to read in the WaPo piece that I linked to yesterday that Geithner has a very close relationship with Obama, arguably the closest relationship of all the cabinet members.  But perhaps that’s not so curious after all: for all his rhetoric about rebuilding relationships with other nations, Obama apparently has a very poor relationship with the leaders of most other countries–worse relationships than Bush.  This suggests that Obama, a notoriously aloof individual, doesn’t really care about what them furriners think.  And as the foreign criticism of Geithner demonstrates, I think those feelings are reciprocated.

June 8, 2011

Timmy! Winning Friends and Influencing People

Filed under: Clearing,Derivatives,Financial crisis,Politics,Regulation — The Professor @ 1:29 pm

Timmy!, the addressee in a WaPo love letter (h/t R) isn’t feeling the love from outside the 202.  Timmy! lectured—or should I say hectored—the world on derivatives, saying, for all intents and purposes, our way or the highway.

To say this went over like the proverbial, uhm, lead balloon would be the understatement of the year.  The Singapore Monetary Authority and the Hong Kong Monetary authority took umbrage at Geithner’s implication that they were lax regulators.  The CEO of the Futures and Options Association, Anthony Belchambers, was quite biting in his reply:

US Secretary Geithner’s comments do not appear to take any account of the fact that the SEC, arguably, was an equally tragic failure – and by a regulatory authority that was notably “heavy touch” but also in some areas “no touch”!

Ouch!  Can you say “Bernie Madoff”?  I knew you could.

Martin Wheatley, who is leaving his position as the head regulator in Hong Kong to take up the leadership of the UK’s Consumer Protection and Markets Authority (eat your heart out, Elizabeth Warren!) was equally scathing.  More so, actually:

US Treasury secretary Tim Geithner was talking “nonsense” when he warned that the world must follow America’s lead on financial regulation, according to a senior European regulator and outgoing head of Hong Kong’s market watchdog.

“To suggest that the US sets a gold standard that other markets should follow is nonsense,” said Mr Wheatley, speaking on the last day of his six-year stint as head of Hong Kong’s Securities and Futures Commission.

That’s gonna leave a mark.

I guess this is what they call smart financial diplomacy.  It’s having about the same effect as the administration’s “smart diplomacy” more generally.  Which is not a good thing.  International coordination on derivatives and other aspects of financial regulation, but US browbeating will not facilitate this coordination.  The opposite effect is more likely, and all of the WaPo puff pieces in the world won’t make any difference.

When the Levee Breaks

Filed under: Clearing,Derivatives,Financial crisis,Politics,Regulation — The Professor @ 12:52 pm

Reading the BIS paper I just posted about brought to mind an issue that I think is of paramount importance, but which has been almost completely overlooked.  Like many other analyses of the effects of clearing mandates and rules relating to derivatives, the focus has been on providing mechanisms to reduce the likelihood of default on derivatives positions.  The idea is that losses on derivatives positions can be a channel of contagion between important financial institutions.  So to address this problem, legislators and regulators want to raise collateral requirements and other requirements to ensure that non-defaulting derivatives counterparties receive all that they are owed when a firm defaults.

But focusing on derivatives alone is dangerous.  All of the measures intended to increase the safety of derivatives markets–increasing collateralization, multi-lateral netting, etc.–privileges derivatives and derivatives counterparties.  But that privileging comes at the expense of other claimants of a bankrupt firm.  Let’s say that without greater collateralization and netting, derivatives counterparties would have lost X, but with the greater collateralization and netting, they lose 0.  Sounds great: there is no possibility of derivatives losses cascading from firm to firm.  But not so fast: what means, to a first approximation* is that now somebody else loses X more than they did under the previous rules.  In other words, the loss of X has been shifted from the derivatives counterparties to somebody else. There can still be contagion—just via a different channel.

There is something of a debate about the priority of derivatives in bankruptcy.  Mark Roe has questioned this priority privileging.  I’m in London for a conference at the LSE, and one of the conference papers, by Patrick Bolton and Martin Oehmke, also questions privileging derivatives.  I’m not sold on the specific Roe-Boton-Oehmke arguments because I think they don’t see the whole picture, but I do think it is a very important issue.

It is a particularly important issue in the context of the ongoing regulatory debate because all of the rules intended to reduce the likelihood of derivatives defaults effectively increase the priority of derivatives.  Which means that they reduce the priority of other claimants.  That’s not obviously a good thing.  But since the regulators and legislators have failed to look at the problem holistically, instead focusing on derivatives in isolation without seriously questioning how the changes in derivatives rules will primarily shift risk rather than reduce it, whether it is a good thing or not has escaped attention completely.

A couple of analogies come to mind.  One is target fixation.  Many fighter pilots become so focused on the target they are chasing that they fail to see the guy that just jumped their six and is about to shoot them down.  Being fixated on the derivatives target, regulators and legislators are unaware that they are shifting risks elsewhere—risks that may very well jump them of the future while they are still fixated on derivatives.

Another is levees.  Building up a levee around a particular city protects that city, yes, but the rising water has to go somewhere.  So raising the levees in one place makes the flooding problem worse somewhere else.  Legislators and regulators seem obsessed with raising the levees around Derivatives City, without regard as to how this will affect where the water goes and who gets flooded–Commercial Paper Town and Moneymarketville, for instance.  It could well be the case that keeping Derivatives City high and dry results in even more devastating flooding in other, less privileged precincts.

The Corps of Engineers has created many problems in the past with its attempts to control the Mississippi and Missouri Rivers through its efforts to control floods: there is a very real risk that a (metaphorical) Corps of Financial Engineers will also create havoc despite its intention to do good.

There are of course differences.  A river system is more mechanical than a financial system.  But that actually makes the situation more fraught in financial markets.  Market participants will respond to the privileging of one class of claim—such as derivatives—by adjusting their behavior, by adjusting what they trade, their capital structures, etc.

But maybe it’s not that different.  The design of the levee system will affect where people build and how they build.  Designing the levee system properly requires just that—a systemic approach, not an approach focused on just one part of the system, but its entirety; and an approach that takes into account how people will respond to the design of the levee system.  Unfortunately, that’s not the way that it’s being done in the derivatives markets.  The history of the Mississippi River valley suggests that’s not an encouraging thing.

* As I discuss below, this privileging will affect decisions people make, and thus the amount of risk.  That means the problem is even more complex than what I consider here.  But that only makes the derivatives-centric focus of regulators and legislators even more dangerous.

Wasn’t Bart Simpson Available?

Filed under: Derivatives,Economics,Exchanges,Politics,Regulation — The Professor @ 9:09 am

Bart Chilton, apparently all knowing, has decided that the priority rules that exchanges have chosen are all wrong, and need to be changed.  In his continuing war on high frequency trading (not to be confused with his war on commodity speculation), he has condemned size priority rules.  He claims that these give “cheetah” (stop it Bart!  You’re killing me with your clever repartee) traders that can move faster than others an unfair advantage that they use to game the markets.

Any centralized trading mechanism has to have priority rules—rules that determine the sequence in which orders are filled.  Price priority—the highest bid and higher offer get executed first—is universal, but secondary priority rules are needed to break ties between bids and offers at the same price.  Different secondary priority rules are possible.  A common one is first-come-first-served.  This is called time priority, giving the earlier orders at a given price priority in execution over ones entered later.  Another secondary rule may give some priority to designated market makers.  Still another is size priority, which gives bigger orders preference over smaller ones.  There can also be hybrid rules which use time, market maker status, and size to allocate trades between quotes entered at a given price.

Each priority rule provides different incentives.  There is no obvious “best” rule: every alternative involves trade-offs.  Chilton apparently believes that time priority is best, and that size priority is unfair.  But he provides zero, zip, nada in terms of an analysis of the trade-offs involved.

Size priority, no surprise, gives an incentive to quote in size.  This can be very beneficial, as it means that big market orders can be accommodated more readily without large price movements.  This can be important in markets in which liquditiy demanders desire to trade in size—which is the case, and increasingly so.  For somebody worried about flash crashes, you’d think this would be a virtue.

Exchanges internalize many—perhaps not necessarily all, but many—of the costs and benefits of alternative secondary priority rules.  Whether they are competing, or monopolists, exchanges that choose priority rules that result in the creation of the amount and type of liquidity that is preferred by most traders in the marketplace generate more volume and can charge higher fees and can make more money.

A coherent objection to exchange choices would require some sort of demonstration that there is an externality resulting from these choices.  Chilton, to belabor the obvious, does no such thing.

Chilton says that high frequency traders program their algorithms to optimize results given the secondary priority rule.  Really?  Wow.  Who knew?  But that would be true regardless of the rule.  If exchanges went with strict time priority, the HFTs would adjust their algos accordingly—and those with the fastest connections and best programmers would win.  The algorithms would be different, but odds are that the winners and losers would be the same.

It is particularly strange that Chilton simultaneously objects to size priority rules and HFT in which the fastest algos win.  Under time priority, speed (and hence things like collocation, computing power, etc.) would be even more important.  If he has a problem with the race going to the swiftest, protesting against size priority rules is a strange way to go about it.

Unless and until there is a convincing demonstration of that exchanges face systematically distorted incentives in their choice of priority rules, regulators should butt out.  Objections to priority rule choices should be based on a clear and concise identification of some sort of externality.  For absent such an externality, exchanges have every incentive to make the trade-off that maximizes value.  Not everybody will be happy with the choice because traders are diverse.  But that’s the nature of the real world in which trade-offs are pervasive, as opposed to the Never Never land where too many regulators and legislators seem to dwell.

There *Is* an Echo in Here

Filed under: Clearing,Derivatives,Economics,Financial crisis,Politics,Regulation — The Professor @ 8:33 am

Yes, there definitely is an echo.  The BIS has released a paper that, er, echoes several SWP themes.  Most notably, the paper by Daniel Heller and Nicholas Vause notes that variation margin calls can lead to substantial demands on market liquidity.  In high volatility environments, the liquidity needed to fund variation margins would represent over 28 percent of G14 dealer cash and cash equivalents on one day out of 200 for interest rate swaps alone.  CDS margin calls could also result in a substantial cash drain on dealers.

It should also be remembered that these kinds of events are likely to be associated with (either caused by, or causing) tightness in funding markets.   It should also be noted that the BIS just looks at dealer variation margin payments.  In stressed market conditions, however, other market participants—including hedge funds, broker-dealers, and depending on the kinds of regulations that are adopted, certain derivatives end users—will also be subject to big margin calls.  This places further demands on liquidity.   These hedge funds and others would be looking to banks—including notably the big dealers—for funding.  This could lead to major liquidity shortages, and as the BIS notes, central banks are likely to need to inject liquidity either to banks or CCPs in order to mitigate these shortages.  [The zero sum nature of these margin calls raises some interesting issues.  I am currently noodling through some models based on the Holmstrom-Tirole setup to work through these issues.]

It would not be correct to suggest or imply that this is a problem associated with clearing alone.  Many OTC derivatives trades—including trades between dealers—are marked to market daily, and require variation margin payments.  Thus, big price moves would create funding demands to meet margin calls even in the absence of central clearing.  However, note that the increase in initial margins that clearing mandates, and margining mandates for non-cleared derivatives, will increase funding and liquidity needs beyond the level that would be required without these mandates.  Add to this Basel III liquidity requirements, and the heightened potential for liquidity crunches in the new environment are clearly manifest.

The BIS paper also quantifies the potential burden that variation margin payments could place on CCP default funds in the event of a default by one or more clearing members.  It concludes:

With a probability of one in 10,000, non-margin resources at risk from the failure of one particular dealer, two particular dealers or any dealer with sufficiently adversely affected portfolios would respectively be 20%, 37% and  42% of total initial margins for IRS, and 36%, 46% and 65% of total initial  margins for CDS. If prevailing levels of volatility were high, these figures would  equate to $21 billion, $39 billion and $44 billion for IRS, and $13 billion,  $16 billion and $23 billion for CDS.

These are big numbers, and indicate the kinds of resources that CCPs must have on tap to deal with defaults.

Note especially that these resources are likely to be contributed by major banks—which means that major defaults will impact non-defaulting bank balance sheets, contrary to the facile claims that clearing would put a firewall between derivatives defaults and major banks.  It also has implications for the appropriate capital charges for default fund exposures.

The BIS report quantifies roughly the economies of scope that result from clearing (another common theme here), and argues that these economies will permit more economical use of capital.  Left unstated is an important point that I’ve emphasized—but which is too often ignored.  Specifically, if clearing improves capital efficiency, it will reduce the marginal cost of trading derivatives, which will lead to an increasing scale of derivatives trading—and hence greater total counterparty risk.  Even if one assumes that CCPs allocate a given amount of counterparty risk more efficiently than is the case in the bilateral markets (an arguable assumption), it is not evident that this improvement in the allocation of risk would more than offset the effect of an increase in the total amount of risk to be allocated.  This issue deserves far more attention than it has received—which is not a hard statement to make, given that it has received almost no attention whatsoever.

The BIS report also discusses procyclicality of margins—another echo.  This is an extremely important—and extremely vexing—matter.  It is one about which CCPs are quite sensitive.  I don’t have any easy answers, except to say that (a) it is a real issue that deserves attention, (b) it is by no means obvious that CCPs have the appropriate information or incentive to take into account the knock-on effect of margin changes, and that (c) mechanical, value-at-risk driven approaches like those proposed by CFTC, SEC, and the Fed are the worst way to set margins.

Today’s WSJ carries an article related to procylicality in which I am quoted.  The issue is getting attention, and is not going away.  It is not going away in part because it is a very knotty problem.  So I am certain that the echoes will continue for some time to come.

June 6, 2011

More Dangerous to Friend Than Foe

Filed under: Military,Russia — The Professor @ 1:09 pm

Somebody really needed a smoke, apparently:

A fire, possibly sparked by a discarded cigarette, engulfed a Urals arms depot over the weekend, injuring at least 95 people and prompting 2,000 others to seek psychological help, officials said.

Smoking in an arms depot?  Really?

This follows by about week anther explosion at another Urals arms depot:

But a careless moment as he worked with fellow conscripts to prepare artillery shells for disposal started a fire at the ammunition depot, launching shells hundreds of meters into the air, setting fire to buildings and trees and injuring a dozen people.

On Friday, Denyayev’s commanders told him that he would face a criminal investigation over the accident.

Investigators say he mistakenly threw an artillery shell still containing a detonator onto other shells ready for disposal, which triggered an explosion and the subsequent blaze.

When powerful blasts broke the silence in the sunny afternoon, shattering windows of the nearby buildings, residents in the Urals village rushed to leave their houses, many of which burst into flames soon afterwards. Local officials said 120-mm artillery shells were exploding at the depot.

But the he-dropped-a-fused-shell-on-the-pile story doesn’t make much sense:

Sadovsky could not specify how much time had passed between the moment when Denyayev threw his ill-fated shell and the first blast, saying that investigators were working to establish the details.

“If he threw this shell, an explosion would have occurred immediately and everyone would have been killed, given the power of a 120-mm shell,” says military expert Ivan Konovalov. “But there was no explosion. There was a fire, and explosions followed later. It’s very strange.”

So maybe Denyayev is a patsy.  Maybe this just another tragic consequence of playing with matches.  Regardless, it blew up real good.

These are just more of a string of such accidents:

The fire in Urman is a continuation in the series of accidents at Russia’s military bases last year.

Last June, one person was killed and several dozen injured as old ammunition exploded at a military base in central Russia while being unloaded.

In November last year, a total of ten people were killed by two explosions at an arms depot in the city of Ulyanovsk in Russia’s Volga region, which occurred with a 10-day interval. Russian President Dmitry Medvedev described the tragedy as a “shame” and fired several high-ranking military officials.

These incidents are symptomatic of the severe software problem in the Russian military.  Poor, abused, conscripts, who are often from the left tail of the mental and physical aptitude distribution (for those with better prospects often find ways to avoid service) are prone to carelessness and accidents.  They have virtually no supervision from trained NCOs, and officers often fail to supervise as well.  With such personnel, stuff happens.  Stuff happens a lot.

So sure, with a force of men such as this to operate it, it makes total sense to spend hundreds of billions on new, advanced hardware.

June 5, 2011

If You’re Wondering About That Slow Recovery

Filed under: Economics,Energy,Financial crisis,Politics,Regulation — The Professor @ 12:58 pm

Cheniere Energy is back in the news–and arguably, back from the dead.  Cheniere has been on a roller coaster for about 5 years–right along with the gas market.  In the mid-2000s, when the conventional forecast was that the US was facing gas shortages and persistently high prices, Cheniere was investing in facilities to import liquified natural gas and re-gasify it.  But then the financial crisis and the shale boom caused gas prices to crater, and Cheniere’s import terminal at Sabine Pass looked to be a white elephant.  But prices fell so far in the US relative to the rest of the world that the opposite play appeared promising.  And indeed, a couple of weeks back the company received permission to export LNG.  Its stock price doubled on the news.

Cheniere is looking to configure its facility to be capable of importing or exporting gas.  Like many physical assets, Cheniere’s facility is a real option.  Under the original plan, it was an option to transform foreign gas into domestic gas with a strike price equal to transportation and gasification costs.  With the ability to import or export, it is an option to transform foreign gas into domestic gas, or domestic gas into foreign gas, again with a strike price determined by transportation and transformation costs.

These options can be quite valuable given the volatility of relative prices in the US and elsewhere, with relative price volatility being driven by technology shocks, the development of new fields–and notably, politics.  Developments like Germany’s shutting down of its nukes or the UK’s imposition of punishing taxes on North Sea extraction can have profound effects on relative prices that affect the profitability of real options like those possessed by Cheniere.

Although political developments and uncertainties generate volatility that enhances the value of real options like Cheniere’s facility, politics may also pose its greatest challenge.  Greg Meyer of the FT, who wrote a good article on the company’s change in fortune, pointed out to me this language in the Department of Energy’s decision approving Cheniere’s application to export gas:

We intend to monitor those conditions in the future to ensure that the exports of LNG authorized herein and in any future authorizations of natural gas exports do not subsequently lead to a reduction in the supply of natural gas needed to meet essential domestic needs. The cumulative impact of these export authorizations could pose a threat to the public interest. DOE is authorized, after opportunity for a hearing and for good cause shown, to take action as is necessary or appropriate should circumstances warrant it. Furthermore, DOE/FE will evaluate the cumulative impact of the instant authorization and any future authorizations for export authority when considering any subsequent application for such authority.

This is mercantilist.  No–it is Putinist.  It is a threat to do in the US gas market what Putin did with the Russian grain market–cut off exports in order to depress domestic prices in order to favor particular domestic constituencies.  It is a threat to micromanage trade–transactions undertaken by consenting adults for mutual advantage–through coercion.  It is contrary to free trade principles that the US often piously promotes in lectures to others, but all too often flouts in practice itself.

It is also a piece with this administration’s modus operendiwhat Richard Epstein calls “government by waiver” in this typically incisive article.  A government agency arrogates to itself the discretion to permit or disallow individuals and firms to engage in voluntary transactions, with only the vaguest statement of the criteria it will use to make these decisions.  Decisions that can make someone wealthy–or ruin them.  Note that there is not even an assertion–let alone a proof–of a real externality (as opposed to a pecuniary, distributive one) to justify this threat of intervention.  This is purely a threat to use coercion to achieve a politically desirable distribution of wealth between producers and consumers of natural gas.

“Good cause.”  “Threat to the public interest.”  “Essential domestic needs.”  In whose eyes?  Under what criteria?  What public?

All this really means is: we will do what we want when we want for whatever damn reason we want.  It is, as Epstein argues, the antithesis of the rule of law in which general principles are applied uniformly and impersonally; it is a return to the personalized, arbitrary, natural state.  It bears creepy similarities to Putinism.

And as such, it will have–is having–the same consequences.  The DOE’s ominous statement puts Cheniere and any other company thinking about exporting natural gas on notice that a sword of Damocles hangs by a hair over its head.  But this is just one company, one hair, one sword.  There are tens of thousands of swords, tens of thousands of hairs, tens of thousands of companies.  More even: as Epstein notes, Obamacare dangles a sword over every company–and every person–in the US.  Dodd-Frank does the same in financial markets.

The threat of arbitrary government action poses grave risks to every company subject to it.  Which is to say every company, with the risks becoming greater by the day.

This cannot fail to have a depressing effect on investment and hiring.  Given the moribund recovery from the Great Recession–a recovery that was never robust, and which is sputtering noticeably today–it is reasonable to conjecture that there is a link between the hyperactive regulatory policies of this administration and anemic economic performance.  Robert Lucas notes that what made the Great Depression great was not its initial severity, but the failure to recover from it, a failure that persisted for almost a decade.  Lucas conjectures (and he is not alone in this*) that the hyperactivity of the Roosevelt administration–and yes, the Hoover administration before it, conventional wisdom on this score being laughably wrong–prevented recovery from a crash initially caused by faulty monetary policy.  He further conjectures that the eerily similar failure of the US economy to bounce back from the Great Recession is the direct result of “harmful real policies” and “the demonization of business.”

His list of destructive policies, which mirror’s Epstein’s, makes depressing reading:

• Believe it is more accurate to say that the problem is government is doing too much

• Again, I see analogies to the U.S. of the 1930s

• Likelihood of much higher taxes, focused on the “rich”

• Medical legislation that promises large increase in role of government

• Financial legislation that assigns vast, poorly-de?ned responsibilities to Fed, others [this is another example of the Epstein discretion point]

• Are these conditions that foster a revival in business investment, consumer spending?**

Are they indeed.

When every regulator at every government agency has the power–and the active encouragement of the political authorities–to say “Nice little business you got here.  Wouldn’t want anything to happen to it, would you?” one should not be surprised that these businesses are reluctant to invest or hire.  Not in Putin’s Russia.  Not in Obama’s United States.

* Robert Higgs has been the most forceful advocate of this view.  Harold Cole and Lee Ohanian have performed substantial empirical research that supports this contention.  With respect to the L-shaped “recovery” in the US, I argued here on SWP early in the Obama administration that its regulatory onslaught would lead to such an outcome.

** The list could, of course, be expanded dramatically.  It could include, for instance, the flouting of bankruptcy law and the expropriation of creditors as with Chyrsler and GM, and the outrageous decision of the NLRB to prevent Boeing from opening an assembly line in South Carolina.

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