The Trojan Horse of cost benefit analysis
By John Kemp The writer is a Reuters market analyst. The views expressed are his own.
LONDON – Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?
It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.
On one side are business groups such as the U.S. Chamber of Commerce and the International Swaps and Derivatives Association (ISDA), backed by conservative lawyers such as Eugene Scalia (son of Supreme Court Justice Antonin Scalia) and a group of judges on the U.S. Court of Appeals for the District of Columbia Circuit who oversee most federal rule-writing.
On the other is the White House, the Treasury and a host of agencies stretching from the Securities and Exchange Commission (SEC) to the Commodity Futures Trading Commission (CFTC).
QUEST FOR QUANTIFICATION
What was once an esoteric legal dispute is turning fiercely political.
Will oil prices stabilize around $80?
Most commentators and oil analysts are convinced a further rise in prices is inevitable in the next few years as emerging market consumption grows and supplies increasingly come from more costly and technically challenging sources such as ultra-deepwater.
While there are disagreements about the extent and the timing of price changes, there is a remarkable degree of consensus about the direction: up. But the roller-coaster experience of the last five years should have taught forecasters to be much more cautious about extrapolating trends and assuming the future direction is obvious.
Price forecasts are notoriously unreliable. There are simply too many variables and too much uncertainty about the current state of the market let alone how supply and demand will evolve in future. The crucial role of expectations in price formation adds an element to “reflexivity” which is hard for forecasters to anticipate or model accurately.
Reflexivity is a concept attributed to billionaire financier George Soros, in which perceptions of market direction and market fundamentals influence one another.
Forecasters’ confidence prices can only increase in future seems misplaced. On closer inspection, many of the factors which make price rises seem inevitable are flawed or unpersuasive. At present there are no fundamental reasons oil prices must increase above the current level of around $80 per barrel in real terms (once inflation and exchange rate changes are taken into account). Nor is there any reason to expect a spike in prices similar to 2008.
Prices have remained stable in a relatively narrow range of $65-85 for more than 12 months. While prices are unlikely to stay at this level forever, there is no compelling reason to expect the next move to be higher than lower, or for the current trading range to break down in the short to medium term. Risks to the outlook appear balanced, as they should be if the market is discounting expectations properly.
SHORT-TERM OUTLOOK In its November Oil Market Report (OMR), the International Energy Agency (IEA) attributed the spike in late 2007 and the first half of 2008 to a combination of factors — including strong demand growth; constrained supply; tight spare capacity; and a mismatch between crude oil supply, refining capacity and product specifications; as well as fears about peak oil and growing interest in commodities as an asset class.
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Savers shoulder the inevitable burden of bad loans
Britain’s new coalition government likes to remind voters we are all in this together. The phrase is rather glib. But in an important sense savers and borrowers around the world are finding the costs of reckless lending are falling on the innocent and guilty alike.
Few people this century will have experienced what it is like to turn up at their bank and be told they cannot withdraw deposited funds because the bank has “suspended” payments.
Suspension sounds harmless. But before the spread of deposit insurance, the word was enough to strike fear into the hearts of depositors, who risked losing much if not all their life savings, and being made to wait months or years for access to what remained.
Between 1930 and 1933, more than 9,000 banks across the United States were “suspended”, accounting for $6.9 billion or 15 percent of all deposits in the country, according to official figures. Behind those numbers are tales of misery for families, farmers and small businesses suddenly left without funds when their bank was suspended or collapsed forever.
So terrible was it, that even the threat of suspension could produce long lines of anxious depositors outside institutions trying to withdraw cash before the tellers closed their windows. In 1907, long lines marshaled by police formed outside the doors of the Knickerbocker Trust Company on New York’s Fifth Avenue as the depositors (“mostly small shopkeepers, mechanics and clerks”) tried to pre-empt suspension.
“Stacks of green currency, bound into thousand dollar lots, were piled on the counters beside the tellers. One by one these stacks were broached and they dwindled rapidly. Clerks went to the vaults from time to time with arms full of notes, piled up like bundles of kindling wood,” according to an account published by the Washington Post and reproduced in Robert Bruner and Sean Carr’s monograph “The Panic of 1907″.
“As the morning wore on many more depositors arrived carrying satchels, showing they were ready to carry off large amounts. One young man, with his hands trembling, stacked his trousers pockets full of one-hundred and twenty-dollar bills.”
“If true, real GDP will be around 15 percent lower in 2018 than it would have been in the absence of the crisis. Together with the extra millions of unemployed, that is the measure of the real cost of the financial crisis.”
The crisis was just the death by natural cause of the financial bubble that helped create the false prosperity reflected in past great GDP figures.
You can call it ‘false growth’.
The scary part is that the same mentality, interests and politics, which inflated that bubble are still dominant – both in WS and in DC.
Third time unlucky for BHP
- The opinions are the author’s own -
No one doubts BHP Billiton is the smartest, most innovative mining company in the world. It has shaken up a once-sleepy sector and transformed pricing and marketing of raw materials from copper to coal and iron ore. BHP is the mining sector’s Goldman Sachs. It employs the best minds and campaigns to change practices which have been long-established but which the firm considers outdated in a successful quest to unlock immense value for its shareholders.
According to the firm’s website “At BHP Billiton we’re looking for people who want to grow with us around the globe, take chances and stand out from the crowd. We need people who embrace tomorrow, have vision, love stretching their minds and going far beyond what they thought was achievable.”
But like Goldman, BHP’s success has come at a price. The company is unloved. BHP’s success has bred envy among its competitors. Worse, the company’s aggressiveness has made it a host of enemies among competitors, customers and regulators. Now that backlash is hampering the company’s ambitions to grow.
In the past few decades, the company which revels in its nickname as the Big Australian has found itself embroiled in acrimonious battles with China over the price of copper and iron ore; steelmakers in Europe and Asia over pricing; Australia’s Labor Party over mineral taxes; and competition authorities around the world over the proposed takeover and later the joint venture with Rio Tinto, both now abandoned.
While BHP has won many battles, it has left a legacy of bitterness and mistrust, which is now shaping the reception of big deals. Regulators in particular have become very sceptical when reviewing the firm’s plans.
DEAL MACHINE SPUTTERS
Fed launches QE-lite
In a compromise, the Federal Open Market Committee (FOMC) has approved a cautious and conservative second round of quantitative easing (QE2) which may satisfy nobody but should prevent internal splits from widening.
It is designed to provide some marginal stimulus to asset markets and economic recovery without further undermining the confidence of foreign investors.
The best way to characterize the $600 billion bond-buying program implemented over eight months is “QE-lite”. The total is slightly higher than expected, but spread over a slightly longer period. The Fed has done almost exactly what it signaled over the last few weeks — no more (there was no “shock and awe”) and no less.
There is an implicit commitment to continue buying securities until the end of June 2011 and to buy $600 billion in total but the figures are described as an intention, so they could be varied in response to changing conditions.
The committee preserved its flexibility by promising to “regularly review the pace of its securities purchases and the overall size of the asset-purchase program in the light of incoming information and will adjust the program as needed”.
Supporters of large-scale, open-ended asset purchases will note there is no finite end to the program. The committee pledged to continue employing all the policy tools at its disposal “as necessary to support the economic recovery and ensure that inflation, over time, is at levels consistent with its mandate”. It was the Fed’s equivalent of “all necessary means”.
Opponents will be relieved the committee has only sanctioned $600 billion so far, a relatively moderate amount. The regular review means even this could be halted early or scaled back if conditions improve or inflation and commodity prices start to accelerate too much.
California voters back weakened climate law
-The opinions are the author’s own-
California voters on Tuesday rejected a measure to suspend the state’s innovative climate change law. But the state’s emission trading scheme has been substantially diluted to buy off opposition from energy-intensive industries and allay fears about job losses.
If it is true that “as California goes, so goes the nation”, the past 10 days have confirmed the lack of political support for tough emissions curbs.
The survival of California’s cap-and-trade scheme has kept alive hopes for enacting a patchwork of state and regional schemes in the absence of a federal program. Supporters hope establishing even a diluted system will lay the groundwork for a program that can be toughened as the economy improves.
But the state government’s last-minute decision to give away most emissions allowances rather than auction them suggests voters and politicians are not ready to embrace the steep increase in energy prices needed to decarbonize the economy.
“NO” ON 23 Proposition 23 would have suspended the 2006 Global Warming Solutions Act (AB 32) until the state unemployment rate fell below 5.5 percent for four consecutive quarters. Proposition 23 would have effectively killed the law because unemployment is currently over 12 percent and has only rarely dipped below 5.5 percent in the last three decades.
Voters rejected it by a wide margin following a heavily funded campaign pitting clean technology companies, environmentalists and moderate lawmakers against parts of the oil refining sector. With 92 percent of precincts reporting, “No” votes led “Yes” votes by 4.2 million to 2.6 million (61 percent to 39 percent), according to the Los Angeles Times.
DaBear is wrong as usual, its the republicans and the Chamber of Commerce that heavily supports off shoring our good paying middle class jobs, the republicans killed any legislation that punishes companies for doing so.For some bizarre reason they think the minimum wage workers that remain can sustain our government and pay off the national debt. Talk about a bunch of loons, and then they attempt to blame their evil ways on the democrats. Shame on you DaBear, get some education or shut up…
Fed is split but QE2 looks a done deal
- The opinions expressed are the author’s own-
FOMC meetings are usually a strange combination of formality and easy-going familiarity but levity may be in short supply this week. The Fed’s institutional credibility is on the line, and the normal decorum that characterizes relations among committee members has become increasingly strained over the summer.
Divisions between proponents and opponents of a second round of quantitative easing (QE2) have been on display as never before. It is not clear what members will say to one another to fill two days since all the arguments have already been rehearsed in detail and in public over the last six weeks.
In a thinly veiled swipe at his colleagues, Kansas City Fed President Thomas Hoenig has stumped around his patch on the Great Plains denouncing QE as a “dangerous gamble” and “a bargain with the devil”.
Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser have made no secret of their skepticism or outright opposition to launching QE2 at this point. Minneapolis Fed President Narayana Kocherlakota has questioned whether it will work. Richmond Fed President Jeffrey Lacker has seemed to doubt whether it is necessary.
In contrast, the New York Fed (always the closest to the major money centre banks) and the St Louis Fed (the spiritual home of monetarism in the Federal Reserve System) have openly campaigned for the benefits of a second round of asset purchases.
The final vote to adopt QE2 looks set to be 10-1 (with Hoenig dissenting). But the tally will mask much wider misgivings among the non-voting regional presidents and perhaps among some members of the Board of Governors itself, who will nonetheless fall in line with the chairman to support his authority.
“I think in late 2011 or 2012 we will look back on QE2 and either say “what a good idea” or “boy was that dumb”.
Not a chance, you know what the average American will be saying then?
“Waa waaa waaa!” followed by “how do we deal with this In a forward looking fashion?”
Right now, how many people are truely saying “3 trillion in new spending was really dumb”?
None. & 90% don’t even know that we have FNMA and FRE in conservatorship, and monitized their debt of 14trillion+. They’re always looking to fix a problem using the new “future plan” when all the answers are right there by analizing the past. History will repeat itself again. The federal govt knows clearly that their only escape is to massively devalue the dollar. Big suprise there. Been going on expotentially since 1964 ( & 1913 by some accounts)
$160 for 2 burgers w/drinks by 2015
Quantitative easing and the commodity markets
-The views expressed are the author’s own-
A warning by an International Energy Agency (IEA) analyst this week that quantitative easing (QE) risked inflating nominal commodity prices and derailing the recovery drew a withering response from Nobel Economics Laureate Paul Krugman, who labelled the unfortunate analyst the “worst economist in the world”.
According to New York Times columnist Krugman “Higher commodity prices will hurt the recovery only if they rise in real terms. And they’ll only rise in terms if QE succeeds in raising real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery”.
Krugman’s criticism is unfair. There are clear links between QE and investor appetite for commodity derivatives and physical stocks (via the Federal Reserve’s “portfolio balance” effect), and from investors’ holdings of derivatives and physical inventories to cash prices (given the relatively inelastic supply and demand for raw materials in the short term).
In other words, there are financial as well as real economy links between QE and commodity prices. Commodities have some of the characteristics of financial assets as well as physical consumption materials. Via portfolio effects, QE could boost the relative (real) price of commodities even if it did not boost employment and output in the United States by very much.
It is a more open question whether commodity-driven inflation would hinder or promote a recovery in output and employment in the advanced industrial economies. It would reduce the real burden of inherited debts from the boom years. But it would harm savers, and it might harm manufacturers and households, depending on whether increased commodity prices were matched by rising non-commodity consumer prices and wages.
Overall, an unbalanced, commodity-driven inflation would probably be more of a drag on recovery than a help. Reasonable observers have reached different conclusions. In any event, the analyst’s warning was certainly not a “classic freshman mistake” or evidence of a new “Dark Age of economics” that the erudite professor labelled it.
Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. QE always favor all the commodity investments with low risk matter. Higher QE, higher commodities inventories.
http://www.mikeastrachan.com/
Markets make prisoner of the Fed
“Market participants should not direct policy,” Kansas City Fed President Thomas Hoenig warned listeners at a town hall meeting in Lincoln, Nebraska, back in August. Unfortunately that is precisely what is now happening.
Hoenig noted that Wall Street’s clamour for cheap money was not disinterested: “Of course the market wants zero rates to continue indefinitely … they are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.”
Now the same pressure groups want the Fed to launch a second round of asset purchases so they can sell U.S. Treasury bonds to the central bank (in effect back to the federal government) at inflated prices.
A new round of securities purchases provides investors with an exit strategy from what might otherwise be a dangerous bubble in the bond market. Every bubble needs a “greater fool” prepared to pay a higher price for the asset to keep the bubble inflating. In this case, the guaranteed sucker is the Fed itself.
Meanwhile quantitative easing (QE) has pushed up the value of all the risk assets institutions and investors hold, giving the market a highly desirable insurance policy.
Set aside the question of whether the Fed should socialise investors’ risks and losses in this way. Set aside also the issue of moral hazard — whether by bailing out investors the Fed will encourage more excessive risk-taking behaviour in future. Most officials admit recent actions have increased moral hazard but believe it is a problem to be solved in the long term by appropriate supervision.
The immediate policy question is whether the prospective QE programme is contributing to stability in the financial markets and an environment likely to encourage more long-term investment by businesses and job creation. In other words, is QE succeeding in its own terms, meeting the objectives set by the central banks themselves? There are several reasons to be extremely doubtful.
The trade of QE causing intense inflation harming primarily the poor and further QE to keep the S&P alive is a hard choice.
The Poor, rationing between food and fuel, now reaching to the lower middle class, which Mr. Bernanke when addressing food & fuel doesn’t consider as real inflation conflicting with Europe’s measurements; or propping up the S&P and Dow by maintaining a cheap dollar and pushing exports.
Unfortunately his positive arguments for QE is weakened by the Large corporate entities going rapidly offshore to avoid paying American Corporate taxes. It’s tough when your chosen constituents stick it up your rear.
Morgan Stanley stumbles in rough trading
Morgan Stanley has paid a steep price for trying to trade its way through tough markets and has failed to reap much of a reward.
In contrast to rivals Goldman Sachs and JP Morgan , which have both been reducing the amount of risk they hold in their trading book, including for commodities, Morgan Stanley has kept trading risk at a high level in a bid to catch up after falling behind in 2008-2009.
Its daily value-at-risk (VaR) allocated to commodity trading averaged $32 million in the third quarter, up from $29 million in the second and $27 million in the first. Commodity VaR was the highest for the bank since the three months ended August 2008.
Morgan Stanley has been pursuing the opposite strategy to its archrival in commodities in recent years. In 2009 and early 2010, while Morgan Stanley cut commodity VaR sharply, Goldman was boosting its own risk allocations. Now that Goldman has begun to trim commodity VaR, Morgan Stanley has raised its own risk profile.
The decision to expand commodity VaR reflects a broader increase in risk appetite across the bank’s trading book. Firm-wide VaR net of diversification effects rose to $142 million in Q3 from $139 million in Q2, and $143 million in Q1. Firm-wide VaR is up 20 percent compared with the same quarter a year ago. In contrast Goldman has cut VaR by 40 percent.
But more risk-taking has not yet translated into higher profits. Morgan Stanley’s net revenue from trading slumped to just $1.4 billion in Q3, down from $3.4 billion in Q2 and $3.4 billion in Q3 2009.
Trading efficiency has fallen. Morgan Stanley generated $15.90 of net revenues for every $1 of average VaR in Q3 2010, down almost half from $29.60 in Q3 2009. In contrast, Goldman Sachs has kept trading efficiency at around $32-33 of net revenues per $1 of VaR.
@Mott,
Correction: Third paragraph should have read “Only to such extent as unelected and unaccountable government bureaucrats unreasonably and without appropriate justification impose artificial and unnecessary “qualifications” on the accomplishment of projects or employment of people is there any connection between the adverse effect of ill-considered and arbitrary bureaucratic actions and inactions and the reciprocal and adverse effect on American’s “cost of living”.