Some Random Thoughts On A Slow Day

Aside from President Obama getting rained out in Chicago and some video feed that purports to be a saw cutting through the riser on the remains of the Deepwater Horizon’s drilling apparatus, there isn’t a whole lot going on in and around this country. Just the way a holiday should be. That gives me the perfect opportunity to jump around a few topics while feeling little compunction to get to any particular point.

So here goes a bit of rambling. Feel free to head to the barbecue at the first hints of boredom.

Financial Regulation

Definitely in the category of shutting the barn door long after the horse has headed for the high pastures is this article from Institutional Risk Analytics. The author’s thesis is pretty well summed up in this paragraph:

There is substantial evidence that the cause of the financial crisis was nothing more complicated than a buildup of weak and high-risk mortgages in the U.S. financial system-mostly the result of U.S. government policy to expand homeownership. Too little regulation was not a major factor. Under these circumstances, substantial changes in U.S. government housing policy-particularly with respect to Fannie Mae and Freddie Mac-would have been the most effective way to prevent a recurrence of a financial crisis. Yet the debate over financial regulation in Congress became a contest between those who want the government to have more control of the financial system and those who want it to have less. Considering the legislation that came out of both houses, the United States is well on its way to taking down the most innovative and successful financial system the world has ever known. This happened because an erroneous idea-that large, nonbank financial institutions are too “interconnected” to fail-initially adopted by the Bush administration as the rationale for the rescue of Bear Stearns, evolved into the narrative for explaining the chaos that followed Lehman’s collapse. With this narrative generally accepted, the Obama administration’s regulatory plan inevitably followed.

He makes some valid points, particularly when he contends that the very fact that the government rescued Bear Stearns created the climate that caused the failure of Lehman to so greatly impact the financial economy. Government action induced the players to position themselves for a similar result with Lehman and when that did not occur confusion and panic ensued.

I’m not sure I agree completely with his ideas but I do think that he is spot on when he contends that the new regulatory system that we are about to get is based on premises that have yet to be validated. By rushing to enact reform while the political climate was accomodative, we will to some extent put in place structures that are either unnecessary or counterproductive.

Oil

Offshore drilling will inevitably be the next casualty of the rush to regulate. Already, the Obama administration has put a hold on a substantial amount of drilling activity despite the fact that no core knowledge has been accumulated as to the causes of the current disaster or the likelihood of its repetition elsewhere.

The Business Insider featured an interesting comment from Cumberland Advisors which suggests that the fallout (pun intended) will equal or exceed the repercussions of the failure at Three Mile Island. In their review, they point out the scope of offshore oil and gas production within the industry:

It is important to understand the scope of the Gulf of Mexico in US and global energy terms.  GOM “accounts for 12% of the world’s active jack-up rigs and 16% of active floating rigs.  In 2009 the Gulf accounted for 19% of the operating revenues of the nine largest US-listed offshore drilling contractors.  The Gulf’s share of global capital spending on subsea production equipment was 20% in 2009.  Slightly less than 2% of world crude oil production came from the Gulf last year.  Of total US crude oil and natural gas production in 2009, 30% and 13% (respectively) came from the Gulf.”  (Source: Citi)  There is no way to currently assess what the implications of the Gulf events will be for offshore oil-drilling activity elsewhere in the world.

Once again, new regulation is likely to occur before cause and effect have been thoroughly vetted. As we all know by now, politicians do not like to waste good crises. It may in the end be wise regulation or it might not be, but we won’t know until long after it has profoundly affected our economy whether it was the proper response.

Europe

With each day and each article I read, I become more convinced that the Euro and the European Union are destined for a profound change. I don’t know that the Euro will survive but I suspect that the EU in some rump form will perservere.

Debt default seems like the only viable alternative for Greece and probably Portugal and Spain as well. Yet even with default, I’m not convinced that they weather their internal political storms while tied to the Euro. In order to achieve some semblance of international economic competitiveness, they need the devaluation tool and the only way that becomes available is to withdraw from the EU.

Fundamentally, their citizens are being told that they need to realign their entire lives to a new economic reality, and that it must be done yesterday. Societies don’t adjust or adapt that quickly, particularly when the perception is that the adjustment is for the benefit of a comfortable Germany. There is no sense of shared pain taking place within the larger EU community — indeed in reality there isn’t shared pain — so, however much austerity might be warranted in some countries, the prevailing sentiment is over time going to become one of resentment towards those not suffering. The old nationalisms, never far from the surface, are going to be reinforced and nothing will be unthinkable. Enduring political unions don’t survive these sorts of strains.

I think I’ll stop at this point. I may be boring myself and I suspect that most of you signed off long ago. Enjoy what’s left of your holiday and rejoice in the fact that Friday is much closer this week.

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