Streetwise Professor

No sooner had I clicked “publish” on the China “Investment for Investment’s Sake” post did I come across this article from Foreign Policy (h/t Walter Russell Mead, whom you should definitely read regularly).  It pretty much captures my thoughts on the matter.  The key point:

For the last 40 years, Americans have lagged in recognizing the declining fortunes of their foreign rivals. In the 1970s they thought the Soviet Union was 10 feet tall — ascendant even though corruption and inefficiency were destroying the vital organs of a decaying communist regime. In the late 1980s, they feared that Japan was going to economically overtake the United States, yet the crony capitalism, speculative madness, and political corruption evident throughout the 1980s led to the collapse of the Japanese economy in 1991.

Could the same malady have struck Americans when it comes to China? The latest news from Beijing is indicative of Chinese weakness: a persistent slowdown of economic growth, a glut of unsold goods, rising bad bank loans, a bursting real estate bubble, and a vicious power struggle at the top, coupled with unending political scandals. Many factors that have powered China’s rise, such as the demographic dividend, disregard for the environment, supercheap labor, and virtually unlimited access to external markets, are either receding or disappearing.

Yet China’s declining fortunes have not registered with U.S. elites, let alone the American public. President Barack Obama’s much-hyped “pivot to Asia,” announced last November, is premised on the continuing rise of China; the Pentagon has said that by 2020 roughly 60 percent of the Navy’s fleet will be stationed in the Asia-Pacific region. Washington is also considering deploying sea–borne anti-missile systems in East Asia, a move reflecting U.S. worries about China’s growing missile capabilities.

Sounds damn familiar.  Worth reading in its entirety.

Through the miracles of web search, with an initial boost from Highgamma’s comment linking to a 1996 WSJ story, I have reconstructed what happened in cheese in 1988 that led to my first foray into commodity manipulation.

For many of the gory details, you can read this summary of a very long report on the goings on in the cheese market in the ’88-’96 time frame.  Here’s a GAO take on it.  (Who knew cheese was such a big deal?!)

The Cliffs’ Notes version is pretty simple.  Starting in 1988, Kraft started selling large quantities of cheese on the National Cheese Exchange.  At first glance, this seems peculiar, because Kraft is a major cheese buyer.  But at second glance it makes sense.  Kraft bought most of its cheese on contracts tied to the NCE price.  So driving down the NCE price reduced its acquisition costs under the contracts.  Put differently, Kraft was short cheese forward contracts, and had an incentive to drive down prices.  Given the thinness of the NCE market, selling a few carloads at the Friday auctions accomplished just that.

Kraft, it should be noted, vociferously denied these allegations.  But the case set out in the report seems pretty damning.  In particular, in a manipulation of cash-settled forwards (which Kraft’s cheese purchase contracts were), the manipulator loses money on the transactions used to distort the price, but makes it up on the forwards.  That definitely appears to be the case here.  Relatively small volume transactions on NCE lost money, but had a big price impact which benefited Kraft’s far larger volume of cheese purchases.

In other words, Kraft’s strategy was right out of my 2001 J. Business article “The Manipulation of Cash-Settled Futures Contracts.”

I’m sure you have all been on tenterhooks waiting for those details.  Or not.

A spate of news out of China all points in one direction: a slowdown, and perhaps a severe one.  Whether it is stock prices, PMIs, or data from the banking sector, or capital flows, the signs are all quite bearish.  The perpetual China bulls are doing their best Alfred E. Newman “What? Me worry?” imitation, claiming that the omniscient and omnipotent Chinese government will order another stimulus splurge that will propel Chinese growth back to stratospheric levels.

Interestingly, the Chinese government seems to be reluctant to oblige.  And with good reason, IMO.  The economy is already wildly unbalanced, with investment representing an entirely disproportionate share of GDP.  What’s more, much of this investment has been malinvestment.  As Baldingsworld points out, the signs are everywhere, such as 50 percent vacancy rates in apartments and massive investments in wind electricity generation capacity that doesn’t actually generate, you know, any electricity.  (Another competition we should lose, Barry!)  I’ve already blogged about the appalling returns on Chinese investments in solar: that post has sparked a lot of comments on Seeking Alpha. Then there are the bridges that fall down.  Then too there is the accumulation of large quantities of inventory of stuff like copper, coal, and iron ore (that shows up as investment) that just sits there.

And the phenomenon is economy wide.  The IMF notes that China’s manufacturing capacity utilization is 60 percent-as compared to US utilization at about 80 percent (which is low by historical standards).  Capacity utilization began to decline with the onset of the crisis, but has continued to drop post-stimulus, suggesting that much of the capacity resulting from stimulus measures has been unutilized, or underutilized.

Now all of this investment, when made, contributed to GDP and represented a healthy fraction of Chinese GDP growth.  To those of you who actually consume (or get utility) from “aggregates”, this is wonderful news!  But the joke is on you. Paying people to dig holes (or eat the inedible) may contributes to GDP-but you end up with holes (or indigestion).

Investment involves a sacrifice of current consumption (including consumption of leisure), and makes sense only if it generates a sufficiently large increase in future consumption.  Empty apartments, collapsed bridges, idle factories, piles of inventory, and oversized pinwheels do not produce any consumption gain.  The resources used to create them were wasted.

Thinking from a real options perspective makes things look even worse.  Real options theory says that under conditions of uncertainty, it is better to wait to invest because information about the value of the investment is revealed over time: just as one should only exercise a call on a stock early if pays a dividend, one should exercise the option to invest only when the immediate flow of services/consumption from the investment-the dividend-is sufficiently large to offset the information-driven benefits of waiting.  Empty apartments and underutilized factories and disconnected windmills are not generating any flow of services/consumption/dividends.  Indeed, inasmuch as they depreciate and require maintenance, they are producing negative flows.  Thus, the investments in them are at best premature, and at worst a total waste: in the future, information may reveal that the resources should have been used to produce something else.

Investment for investment’s sake, or to produce some economic aggregate number that gets people to ooh and aah (based on the fiction that the increase in the aggregate corresponds to an actual increase in the production of, or the potential to produce, things people actually value) is a waste.  Moreover, it is typically a drag on future economic performance, in part because worthless assets funded by borrowing weakens the banking system making it more difficult to finance truly valuable investments, in part because worthless assets aren’t yielding income or enhancing the productivity of labor.

You get something like Japan, now in year 21 or so of its Lost Decade.  Or worse.  And in China, worse is a very real possibility.  Moribund economic performance is a conformist society like Japan’s doesn’t lead to social convulsions.  China’s history is one of  convulsions.  Which is no doubt why China’s government stimulated like crazy in 2009.  That bought time.  But reality eventually intrudes.  Malinvestment can only go on for so long.  The wealth it creates is chimerical, and people are not happy when the fantasy is revealed as such. And 1.3 billion unhappy Chinese is not a comforting thought.

I have lived through the time when first the USSR and then Japan were touted as economic titans that would leave the US in the dust.  Amazingly, the optimism about China has been even more extreme.  And, methinks, the comedown that China will experience will be just as extreme.

Glencore’s director of agricultural trading, Chris Mahoney, unleashed a torrent of criticism when he remarked:

“The environment is a good one. High prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities.

“We will be able to provide the world with solutions… and that should also be good for Glencore.”

Let the witch hunt begin!  The UN and Oxfam and other NGOs and the allegedly conservative (though really Conservative-there’s a difference) British government responded to Mahoney’s remarks with sputtering outrage:

With the US experiencing a rerun of the drought “Dust Bowl” days of the 1930s and Russia suffering a similar food crisis that could see Vladimir Putin’s government banning grain exports, the senior economist of the UN’s Food and Agriculture Organisation, Concepcion Calpe, told The Independent: “Private companies like Glencore are playing a game that will make them enormous profits.”

Ms Calpe said leading international politicians and banks expecting Glencore to back away from trading in potential starvation and hunger in developing nations for “ethical reasons” would be disappointed.

“This won’t happen,” she said. “So now is the time to change the rules and regulations about how Glencore and other multinationals such as ADM and Monsanto operate. They know this and have been lobbying heavily around the world to water down and halt any reform.

. . . .

Oxfam was scathing about Glencore’s exploitation of volatile world food prices. Jodie Thorpe, from the aid agency’s Grow Campaign, said: “Glencore’s comment that ‘high prices and lots of volatility and dislocation’ was ‘good’ gives us a rare glimpse into the little-known world of companies that dominate the global food system.”

Oxfam said companies like Glencore were “profiting from the misery and suffering of poor people who are worst hit by high and volatile food prices”, adding: “If we are going to fix the ailing food system then traders must be part of the cure.”

Stephen O’Brien, Parliamentary Under Secretary of State for International Development, said: “We know that food-price spikes hit the poorest hardest. Ensuring the poor can still access enough food is vital in times of food-price rises, which is why the UK is investing in safety nets that deliver food and cash to the poorest.”

All of which raises the age old question: Is profit the problem, or the solution?

For economic nitwits like the UN, Oxfam, etc., it is definitely the problem.  And such economic nitwittery has been with us long hence, as Adam Smith noted in his Digression Concerning the Corn Trade and the Corn Laws, Book V of WON (bonus ironic marxists.org link!-seems appropriate):

In years of scarcity the inferior ranks of people impute their distress to the avarice of the corn merchant, who becomes the object of their hatred and indignation.

Smith goes into detail about how government policies derived from this outrage are destructive, rather than constructive, turning shortages into famines by restricting the efficient flow of grain from places where it is relatively abundant to where it is desperately short-an efficient flow that is best achieved by allowing avaricious grain merchants to profit front the price disparities that these uneven endowments create:

The ancient policy of Europe, instead of discountenancing this popular odium against a trade so beneficial to the public, seems, on the contrary, to have authorized and encouraged it.

By the 5th and 6th of Edward VI, c. 14, it was enacted that whoever should buy any corn or grain with intent to sell it again, should be reputed an unlawful engrosser, and should, for the first fault, suffer two months’ imprisonment, and forfeit the value of the corn; for the second, suffer six months’ imprisonment, and forfeit double the value; and for the third, be set in the pillory, suffer imprisonment during the king’s pleasure, and forfeit all his goods and chattels. The ancient policy of most other parts of Europe was no better than that of England.

Our ancestors seem to have imagined that the people would buy their corn cheaper of the farmer than of the corn merchant, who, they were afraid, would require, over and above the price which he paid to the farmer, an exorbitant profit to himself. They endeavoured, therefore, to annihilate his trade altogether. They even endeavoured to hinder as much as possible any middle man of any kind from coming in between the grower and the consumer; and this was the meaning of the many restraints which they imposed upon the trade of those whom they called kidders or carriers of corn, a trade which nobody was allowed to exercise without a licence ascertaining his qualifications as a man of probity and fair dealing.

. . . .

Whoever examines with attention the history of the dearths and famines which have afflicted any part of Europe, during either the course of the present or that of the two preceding centuries, of several of which we have pretty exact accounts, will find, I believe, that a dearth never has arisen from any combination among the inland dealers in corn, nor from any other cause but a real scarcity, occasioned sometimes perhaps, and in some particular places, by the waste of war, but in by far the greatest number of cases by the fault of the seasons; and that a famine has never arisen from any other cause but the violence of government attempting, by improper means, to remedy the inconveniences of a dearth.

. . . .

The unlimited, unrestrained freedom of the corn trade, as it is the only effectual preventative of the miseries of a famine, so it is the best palliative of the inconveniences of a dearth; for the inconveniences of a real scarcity cannot be remedied, they can only be palliated. No trade deserves more the full protection of the law, and no trade requires it so much, because no trade is so much exposed to popular odium.

Grain traders like Glencore are the visible manifestation of the invisible hand.  The prospect of earning a profit is what drives them to find who is willing to sell grain and who is desperate to buy it.  It is the extreme shock to relative availability that results from regional and localized droughts (or other weather extremes) that makes trade particularly valuable-and profitable.  It is in such conditions that trade-and trading firms-are most valuable.  And as Smith noted, it is precisely then that they make their biggest profits: deprive them of the ability to profit then, and they won’t be there precisely when they are most necessary.  They won’t invest in the physical and human capital needed to facilitate trade.  They won’t generate the dense network of facilities scattered through the world, that are not only the conduits for physical flows, but are also the conduits through which vital information about supply and demand flow: information that permits them to find out where the grain is available and where it is most needed.

To put it bluntly: if you don’t like seeing pictures of starving African babies,  like the one in the Independent story, ignore those sanctimonious moral poseurs like Oxfam and Ms. Calpe who feed what Smith likened to the “popular terrors and suspicions of witchcraft” far more effectively than they feed actual people.  Remember that prices and profits signal scarcity, giving an incentive to conserve and an incentive to move grain where it is most needed.

And as in Smith’s time, governments are the greatest impediment to this process.  For instance, in 2010 Russia embargoed wheat exports, and there is widespread discussion (including by Glencore’s Mr. Mahoney) of whether it will do it again:

But the smart money is betting that Moscow will indeed force overseas sales down by November or December.

Any export restriction is likely to be far different from the ban imposed in 2010, when Moscow introduced what many traders labelled a “brutal” outright export embargo. Instead, the Kremlin is likely to be subtler this time, combining administrative measures that would slow the flow of grain overseas to a trickle. [Again-nothing new under the sun, i.e., Russian “administrative measures.”]

. . . .

Moscow has a large arsenal of tools at its disposal. Export tariffs and quotas are the most obvious; but executives deeply involved in Russian trading say Moscow could use informal and less obvious tools, including its tight control over the railway, to reduce exports without triggering the ire of its trade partners. [Welcome to the WTO!]

. . . .

Christopher Mahoney, the head of agriculture at Glencore and one of the most influential traders of Russian grains, last week warned about possible restrictions. He said that Russia was likely to exhaust its exportable surplus in the next three months, forcing Moscow to “rethink” its current opposition to restrictions.

There were also extremely counterproductive export restrictions (in rice, particularly) during the 2008 price spike.  These are eminently understandable policies from a political economy perspective, but they shouldn’t be confused with enlightened efforts to minimize the impact of shortages of vital foodstuffs.

Do not read this as a blanket endorsement of commodity trading firms and all they do.  That is far from my view: I know that they can, and have, undertaken inefficient and anti-competitive actions that harm commodity producers and consumers.  I will say-and have said-that under oath.  I know they are anything but moral avatars.

But that’s exactly Smith’s point: “It is not from the benevolence of the butcher, the brewer, or the baker , that we can expect our dinner, but from their regard to their own interest.” And a lucky thing, that, because if we did we’d often starve.  And far fewer people starve, or go hungry, because there are avaricious types who do themselves some good by mitigating the impacts of scarcity.  Meaning that if you want to criticize the Glencores or Dreyfuses or Cargills of the world, castigate them for actual sins-manipulation, for instance-that reduce welfare, and applaud their efforts to profit from droughts by mitigating the effects of supply dislocations even though both the vicious and virtuous actions stem from the very same avarice.

Norwegian state oil firm Statoil, which has considerable production in the Bakken, has announced plans to lease 1K railcars to ship oil from ND to refineries throughout eastern North America (h/t Greg L):

Statoil ASA said it is leasing more than 1,000 railroad cars to carry crude oil from fields in North Dakota to refiners across North America, in a bid to overcome pipeline bottlenecks that plague the booming oil-producing region.

The Norwegian oil giant’s railroad effort is a new sign of how the U.S. pipeline network is having a hard time keeping pace with the oil boom triggered by hydraulic fracturing, forcing companies to come up with creative workarounds.

Nowhere is the challenge more apparent than in North Dakota, which this year unseated Alaska as the country’s second-largest oil-producing state. In May the state produced 639,000 barrels per day, or about 10% of the oil produced in the U.S., up from 364,000 barrels per day in May 2011, according to the U.S. Energy Information Administration.

Beginning in early September, the trains that Statoil will have secured with long-term leases will have the capacity to move some 45,000 barrels of crude per day to refiners across North America, more than enough to cover the entirety of the company’s current net production there, company spokesman Ola Morten Aanestad said. Potential destinations include refineries in the East, West and Gulf Coasts and Canada, Mr. Aanestad said.

It would take 14 or 15 days for the trains to make a round trip to Canada, the U.S. East Coast or the Gulf of Mexico, including the loading and unloading of crude, Statoil said. The company didn’t disclose the party it was leasing rail cars from or the price it would pay.

Note what is missing from this story: a mention of the rail carrier that benefits most from all this traffic.  That would be BNSF.  You know, Rail Buffett.

If you don’t believe that fact has anything to do with the Obama administration’s decision to put Keystone XL pipeline running from Canada and the Bakken region to Cushing (and thence to the Gulf) on the regulatory siding, have I got a deal for you!:  Prime oceanfront real estate in the Badlands.

Corruptocrat Jon Corzine is whining about the MF Global Bankruptcy Trustee’s decision to assist customers who lost money as a result of the MFers in their attempts to recoup their losses by suing Corzine and other executives of the firm:

Corzine, along with other current and former MF executives, filed an objection in court on Wednesday arguing that their ability to defend themselves would be hurt if trustee James Giddens is allowed to assign his legal claims to plaintiffs in existing cases.

The executives are defendants in multiple lawsuits accusing them of mismanaging the firm and playing a role in its October 2011 collapse.

“Nothing in the Bankruptcy Code authorizes such limitations on the objectors’ rights and defenses or an enlargement of the trustee’s rights,” lawyers for Corzine and the other executives wrote in documents filed in U.S. Bankruptcy Court in Manhattan.

If allowed to join the customer cases, Giddens would have the right to limit the information and documents available to the executives through discovery, as well as dictate which documents the executives would turn over to plaintiffs, lawyers for Corzine and the other executives wrote.

Sorry.  I’m getting all choked up.   Hard to type through the tears.

JK.  MF him.

It looks like Corzine is going to skate on criminal charges, as in a reversal of usual procedure prosecutors appear to be focusing on low level employees, and not as a way of getting at bigger-and rotten-fish like Corzine.  (I’m sure that he’s a made man in the Democratic Party and a big fundraiser for Obama has absolutely nothing to do with that.)

Given that, one can only hope that he spends a good part of the rest of his life in civil legal torments, and ends up coughing up large sums to the injured customers who he victimized.  For regardless of his culpability in diverting segregated customer funds, his recklessness was the proximate cause of their losses: his ill-judged and ill-designed (i.e., improperly funded) bet on PIIGS debt put the firm in the straits that led someone to consider it necessary to take money that wasn’t the firm’s in a vain attempt to save it.  Moreover, even if he did not give the order to use seg funds, it happened under his watch: the choice is between scienter and negligence.  It still stuns me that a guy who was head of a major clearing firm claimed ignorance of the mechanics of the clearing process.  I guess he was too busy figuring out how to gamble his firm to resurrection.

So encroach away, Mr. Giddens!  Rough justice perhaps, but that’s exactly the kind Corzine deserves.

Apologies for the light posting.  I’ve been immersed in commodities.  That’s not unusual, but the commodities that have submerged me are: Platinum, palladium, and milk and cheese.  I have learned more about the mysteries of milk and cheese pricing and marketing in the past month than you can imagine.*  And as an added bonus, this cheese drill-down gave me an opportunity to learn about wine through show & tell & taste.

I hope to make up for the slow blogging pace of the last week with a blitz of posts today and over the weekend (especially if the remnants of Isaac keep my cooped up indoors on Saturday).  I’ll start with a few short ones, and then some longer pieces that I’d been hoping to get to.

*Although ironically my first exposure to commodity manipulation litigation involved an alleged cheese squeeze in 1987 or 1988 undertaken by Kraft.  That took place on the National Cheese Exchange.  Really.  There was such a thing, in Green Bay, WI.  (The cheese auction has since moved to the CME.)  I have a vague recollection that the WSJ had an article about that that I will try to track down.  Little did I know that would foreshadow a big slice of my professional career 🙂 (I could have said “a block of my professional career”-because, as I now know, cheese is marketed in blocks and barrels.)

This article from Der Speigel is a fascinating article on many levels.  It describes how an environmental mandate-the German mandate to increase the power generated from renewables-is wreaking havoc on high tech German manufacturing:

Sudden fluctuations in Germany’s power grid are causing major damage to a number of industrial companies. While many of them have responded by getting their own power generators and regulators to help minimize the risks, they warn that companies might be forced to leave if the government doesn’t deal with the issues fast.

. . . .

Behind this worry stands the transition to renewable energy laid out by Chancellor Angela Merkel last year in the wake of the Fukushima nuclear disaster. Though the transition has been sluggish so far, Merkel set the ambitious goals of boosting renewable energy to 35 percent of total power consumption by 2020 and 80 percent by 2050 while phasing out all of Germany’s nuclear power reactors by 2022.

The problem is that wind and solar farms just don’t deliver the same amount of continuous electricity compared with nuclear and gas-fired power plants. To match traditional energy sources, grid operators must be able to exactly predict how strong the wind will blow or the sun will shine.

But such an exact prediction is difficult. Even when grid operators are off by just a few percentage points, voltage in the grid slackens. That has no affect on normal household appliances, such as vacuum cleaners and coffee machines. But for high-performance computers, for example, outages lasting even just a millisecond can quickly trigger system failures.

One reason the story is interesting is that it demonstrates-as if further demonstration were needed-that regulatory Sorcerer’s Apprentices take (allegedly) well-intentioned actions that have perverse unanticipated consequences.  Here the likely explanation is that said politicians and bureaucrats have a simplistic understanding of the industry they presume to regulate.  They perceive that the output of the power industry has a single dimension-megawatts produced.  They fail to understand that there are other economically crucial dimensions-such as voltage stability-so when they decree that Fraction X of Megawatts Shall Be Generated With Renewables, they fail to understand the implications of this decree for these other vital dimensions.  Meaning that they underestimate the costs of their lofty dictates.  (The electricity industry is particularly vulnerable to unintended consequences from attempts to structure it via legislation, cf. California.  I wrote a book chapter some years back about the difficulties in choosing the balance between the invisible hand and the visible hand in power.  The complexity of the power system, most notably the need to control its operation in real time, raises acute difficulties in relying solely on the invisible hand-the allocation of resources by price and contract-and makes it vulnerable to catastrophic consequences resulting from ill-considered interventions.)

The other source of interest to me is the Coasean aspect of the story.  Rather than a locomotive casting off sparks that sets farmers’ fields alight, here we have power generators producing random fluctuations in voltage that cause very sensitive-and expensive-machines to break down.  So who is liable for this?  That is a growing source of conflict in Germany:

Although the moves being made by companies are helpful, they don’t solve all the problems. It’s still unclear who is liable when emergency measures fail. So far, grid operators have only been required to shoulder up to €5,000 of related company losses. Hydro Aluminum is demanding that its grid operator pay for incidents in excess of that amount. “The damages have already reached such a magnitude that we won’t be able to bear them in the long term,” the company says.

Given the circumstances, Hydro Aluminum is asking the Federal Network Agency, whose responsibilities include regulating the electricity market, to set up a clearing house to mediate conflicts between companies and grid operators. Like a court, it would decide whether the company or the grid operator is financially liable for material damages and production losses.

But, for now, agency head Jochen Homann wants nothing to do with the idea. He first plans to discuss the problem with experts and associations in detail.

For companies like Hydro Aluminium, though, that process will probably take too long. It would just be too expensive for the company to build stand-alone emergency power supplies for all of its nine production sites in Germany, and its losses will be immense if a solution to the liability question cannot be found soon. “In the long run, if we can’t guarantee a stable grid, companies will leave (Germany),” says Pfeiffer, the CDU energy expert. “As a center of industry, we can’t afford that.”

In a Coasean zero transactions cost world, the liability assignment doesn’t matter.  So the situation in Germany raises the question of what are the transactions costs that preclude negotiations between power producers and power consumers that result in an efficient outcome.  (I should actually say “constrained efficient”, the constraint being the renewables mandate, which is almost certainly not efficient.)

There are only a few utilities to negotiate with, but there are many manufacturers adversely affected by the voltage variance.  Can these manufacturers engage in collective action (through an industry association, for instance) to negotiate?  Will free riders undercut these efforts?  Are the affected firms too heterogeneous to engage in effective collective action?  Does private information about value impede negotiation, either between the manufacturers and the utilities, or among the manufacturers in their attempt to organize collective action?

One factor that affects value is the cost of mitigation.  The article has some interesting detail about that:

At other industrial companies, executives at the highest levels are also thinking about freeing themselves from Germany’s electricity grid to cushion the consequences of the country’s transition to renewable energy.

Likewise, as more and more companies with sensitive control systems are securing production through batteries and generators, the companies that manufacture them are benefiting. “You can hardly find a company that isn’t worrying about its power supply,” said Joachim Pfeiffer, a parliamentarian and economic policy spokesman for the governing center-right Christian Democratic Union (CDU).

. . . .

Even August Wagner, head of a textile firm with roughly 180 employees in Bavaria, is taking precautions against feared power interruptions. A stop in production would be catastrophic for him. “When we dye our materials, there are thousands of meters in the dye factory,” he said. “If the power goes out, all of the goods are lost, and we have huge losses.”

Wagner now regulates the power supply of his production himself so that it doesn’t come to that point. What’s more, for a few months, he’s had an emergency power source standing in container next to the production facilities. Since then, other businesspeople in the area have been dropping by to take a look at his setup.

Aurubis, a major copper producer and recycler in Hamburg, has also spent about €2 million to protect against unwanted power emergencies. “If grid stability doesn’t markedly improve, we’ll have to rely on emergency power supplies this and the coming winter,” the company say

Presumably different companies, with different products and different technologies, incur different costs from a voltage fluctuation, and incur different costs to mitigate it.  Moreover, they almost certainly have private information about these costs.  Furthermore, utilities probably have private information about the costs they incur to address this problem.  All the resulting heterogeneity and private information, combined with the free riding problems inherent in collective action, present challenges to private solutions to this problem.

But they also present acute challenges to regulatory and legal solutions.  Given information about the costs of voltage fluctuations, and the costs of mitigating them, one could theoretically design the right liability rule.  But no one-not the politicians, not the regulators, and not the courts-have this information.

All meaning that the resolution of this issue will probably be time consuming, and beset with errors and false starts.  Especially when one considers the potential for political economy considerations to distort the process.

So this will be interesting to watch going forward.  A real world case study of how a big, heterogenous economy and polity deal with a (regulation-induced) technology shock that creates an “externality”.  Pay attention, PhD students.  There are thesis topics in there aplenty.  Another unintended consequence, to be sure.

If a foolish consistency is a hobgoblin of little minds, Obama must be very broad minded indeed, because his policies on Libya and Syria have been wildly inconsistent: the “responsibility to protect” logic that underpinned the Libyan intervention (as equivocal as it was) would certainly justify intervention in Syria.  But Obama has avoided even the suggestion of intervention in Syria like the plague.

Until now.  He has drawn a red line, but in so doing, he sows confusion rather than producing clarity:

Seeking re-election in November, Obama noted that he had refrained “at this point” from ordering U.S. military engagement in Syria. But when he was asked at a White House news conference whether he might deploy forces, for example to secure Syrian chemical and biological weapons, he said his view could change.

“We have been very clear to the Assad regime, but also to other players on the ground, that a red line for us is we start seeing a whole bunch of chemical weapons moving around or being utilized,” Obama said. “That would change my calculus.”

“A whole bunch of chemical weapons”?  “A whole bunch”?  Really?  WTF constitutes “a whole bunch”?  Is he saying to Assad that he can move around and use a few chemical weapons, as long as he doesn’t cross the “whole bunch” line?  Wherever that is.

Excuse me while I go pound my head on the floor.

OK.  Back now.

Look.  There is a principle often invoked in foreign policy, and politics generally, of “constructive ambiguity.”  But this is completely unconstructive ambiguity, that creates the potential for a miscalculation.  Obama gives the impression that Assad can become a little bit pregnant in the use of WMD.  Think a dictator with his back to the wall just might see how pregnant he can become?

No, this is not Machiavellian ambiguity on Obama’s part.  It is an attempt to look all butch and tough while giving himself some maneuvering room down the road if Assad or whoever gets their hands on chem and bio weapons uses them in the coming weeks or months.  Obama can rationalize not responding by invoking the “whole bunch” clause.

And note the unspoken corollary to Obama’s red line: Anything short of the use of chemical or biological weapons will NOT lead Obama to change his calculus.  At least that is very likely to be the corollary that Assad (and his BFFs, the Russians) draws from Obama drawing the red line at WMD.

Again, this may not be Obama’s intention.  And even if it is, it may not be a credible commitment, because outrage at Syrian government conduct may dragoon Obama into acting, against his will, as he did in Libya.

But by saying what would lead to intervention, Obama is implicitly telling Assad (and the Russians) what may very well not.  And with his back against the wall, that’s something Assad may decide to take a gamble on.

Mr. Vote Present has always wanted to maximize his political flexibility.  When it comes to military and strategic matters in particular, he has avoided making hard decisions, and avoided commitments intended to achieve decisive results.  In a situation like that in Syria, this way of (not) leading is fraught with potential for disaster.   Better to be thought a crazy MF who will order the extirpation of every Syrian military asset and every Syrian leader if Assad even looks cross-eyed at his unconventional weapons arsenal, than to be sending obscure messages that require interpretation of what constitutes “a whole bunch” or that suggest that pretty much everything else, no matter how brutal, will not lead President Math (or would that be, per pahoben’s comment, President Math Challenged?) to change his calculus.

When I hear “bunch” bananas come to mind.  That’s doubly true when Obama utters the word, because when it comes to anything military or strategic or geopolitical, his policies are bananas.

The CME Group has announced plans to open a European exchange, following its earlier announcement of its launch of a European clearinghouse.

Just another unintended consequence of Frankendodd.  Another bucket emptied by the Sorcerer’s Apprentice’s regulatory broomsticks.

Why do I say that, pray tell?  Because that’s what CME Group is saying, quite clearly:

The Chicago-based exchange said that as policymakers overhaul the global market infrastructure, it was becoming increasingly important for market infrastructure providers to offer a choice of regulatory regimes. Derek Sammann, managing director of CME Group’s global interest rate and FX business, told Financial News immediately after the announcement: “Clients should not have to choose to trade with us in the US regulatory environment, or not to trade with us at all. That is not a real choice.

He added: “The more we have invested in our global infrastructure, the more we have realised that there are customer acquisition opportunities by creating regional access to our services.”

. . . .

Phupinder Gill, chief executive of CME Group, in June told an international derivatives conference IDX in London that the exchange group’s non-US clients had raised concerns that they would become ensnared by the Dodd-Frank rules if they traded with the US-regulated company – a phenomenon commonly known as extraterritoriality.

He said: “The question that many of our clients ask is if they are going to get ‘Dodd-Franked’.”

No, no, no, Gill!  It’s “going to get Frankendodded.”  Get with the program!  We need to feed the meme!

The reporting has been rather unclear on what the CME Group’s plans are going forward.  The new UK-based exchange will offer FX futures contracts.  The CME press release, and the reporting, do not say explicitly, but it looks like these would be new products, distinct from the CME’s FX contracts traded on Globex.  This means that liquidity and clearing would be fragmented, so that regulatory cost savings for European customers would be offset to some degree by higher trading and clearing costs.  Great!  And regulators note: the market will become more complex and difficult to oversee, with divided jurisdiction and the consequent need for regulators to coordinate in the event of market stress.  There will be arbitrageurs-including, no doubt, those HFT demons-buying and selling between the two markets, leading to more message traffic, more complexity, and more potential for breakdowns and technological glitches.  That is, the adverse technological consequences of fragmentation that have accompanied fragmentation in equity markets may rear their ugly heads in futures as well, with the added twist of fragmentation across international jurisdictions.

Given the difficulties associated with building liquidity, it is uncertain how the CME’s UK initiative will fare: it may be the case that Europeans decide that the liquidity and clearing costs savings exceed the regulatory burdens.  But it is relatively inexpensive for CME to put its toe in the water in the way it has.  It is a cheap way to buy an option on regulatory uncertainty.  If Frankendodd turns out to be the real monster that I think it will be, European customers will be willing to incur higher liquidity and clearing costs in order to avoid the monster’s grasp.  CME Group will add more contracts that mirror its US offerings.  The market will become more fragmented, and more complex.

Exactly what Frankendodd and Gigi and Timmy! intended, surely.