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In Why plans for early fiscal tightening carry global risks, Martin Wolf of the Financial Times demonstrates yet again why he is the most savvy columnist writing on that side of the pond.

He looks at the foolishness of the Austerians, the name Mark Thoma has given to the newly converted deficit chickenhawks.

Wolf:

“Yet again, we hear the cry of the old economic religion: repent before it is too late; the wages of fiscal sin is death. But is it already time to retrench? I doubt it. At least, we must recognise the risks: delayed retrenchment poses the danger of inflation and even default; premature retrenchment threatens recession and even deflation, as I argued last week. Having barely survived the biggest financial meltdown in history, we need to appreciate that these downside risks are serious . . .

Let us look at where we now are, courtesy of the financial balance approach of the late Wynne Godley. This forces us to examine how the private sector is behaving. In 2010, according to the International Monetary Fund’s latest forecasts, the private sectors of every large high-income country will run a huge excess of income over spending. This is forecast at 7.8 per cent of gross domestic product for these countries as a group, at 12.6 per cent for Japan, at 9.7 per cent for the UK, at 7.7 per cent for the US and at 6.8 per cent for the eurozone. What we are seeing, in short, is an epidemic of private sector frugality – just as many economic doctors recommended.

Yet such thrift entails either current account surpluses or fiscal deficits. Of these countries, only Germany and Japan have current account surpluses. The rest are capital importers. These countries will duly run fiscal deficits that are bigger than their private surpluses. We have, as the hysterics note, a tide of fiscal red ink. Which came first – private retrenchment or fiscal deficits? The answer is: the former. In the case of the US, the huge shift in the private balance between the fourth quarter of 2007 and the second quarter of 2009, from a deficit of 2.2 per cent of GDP to a surplus of 6.6 per cent, coincided with the financial crisis. The fact that aggregate demand and long-term interest rates tumbled at the same time shows that the collapse in private spending “crowded in” the fiscal deficits. Wild private behaviour drove the wild public behaviour.

Yet it would now be particularly damaging for fiscal austerity to overcome the European economy and so force beggar-my-neighbour outcomes on the hapless US. As Fred Bergsten of the Peterson Institute for International Economics in Washington noted in the FT last week, such policies could be very dangerous. Thus, far from being stabilising, premature fiscal retrenchment threatens destabilisation of the world economy. In this case, a decision to turn the eurozone into a huge Germany would – and should – be seen as an act of mercantilist warfare upon the US. How long would the latter put up with the hypocrisy of surplus countries that blame borrowers for the deficits their own surpluses make inevitable? Not much longer, would be my guess, at least now that the US government has become the world’s borrower of last resort.

I have to ping Thoma to ask if its a mere coincidence that Austerians sounds awfully similar to Austrians . . .

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Source:
Why plans for early fiscal tightening carry global risks
Martin Wolf
FT, June 15 2010 22:41
http://www.ft.com/cms/s/0/fc8d1dd4-78b6-11df-a312-00144feabdc0,s01=1.html

Lovely comments on our humble blog in this week’s Up and Down Wall Street column in Barron’s:

“THE CERTAIN IMPACT ON energy prices and the oil industry of what euphemistically is being called the “spill” needs no further description for regular readers of this space. And for those who aren’t, it ain’t good.

Yet for all the justifiable disgust and outrage from the endless images from the underwater pictures showing BP’s crude spewing from its crippled rig to the images of oil-soaked marine birds, Americans show little inclination to renounce their energy gluttony. A graphic from the U.K. Guardian passed along by Barry Ritholtz on his terrific blog, The Big Picture (www.ritholtz. com/blog), shows that the U.S. consumes 25% of global oil output while having less than 5% of the world’s population. This helps explain the Brits’ feeling that we Yanks are being less than honest with ourselves in our pique at BP. “They raise a valid point,” he adds.

What Americans are loath to admit is that there are limits to our consumption. Similarly, the U.S. has absorbed a huge chunk of the world’s savings to satisfy our massive budget deficit. The latest Treasury International Capital data show private long-term inflows totaled an “astounding” $250 billion in the first four months of the year, says William O’Donnell of RBS Securities.

But the European debt crisis probably has staved off that day of reckoning for the U.S. government. Global investors have flocked to dollar assets as it’s become painfully apparent that the euro isn’t ready to assume the role as a true alternative to the greenback.”

It is always gratifying anytime a column of the importance of Up and Down Wall Street recognizes the work . . .

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Source:
Hogan’s Antihero
RANDALL W. FORSYTH
Barron’s June 19, 2010
http://online.barrons.com/article/SB50001424052970203296004575306871666352824.html

David R. Kotok
Chairman and Chief Investment Officer
Oil Slickonomics – Part 8– Chemotherapy in the Gulf of Mexico
June 20, 2010

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“Plaquemines Parish President Billy Nungesser was out on Terrebone Bay at the break of dawn with his new industrial strength, compressed air-powered vac. Within 15 minutes, he said his crews had collected 55 gallons of oil and Nungesser — vocally frustrated by the response from BP and the federal government — was thinking about whipping out his credit card to pay for more pumps from an online site.”

Meanwhile, the BP president, “After being lambasted in Congress on Thursday … was spending the weekend with his family in Britain’s Isle of Wight. “On Saturday — Day 61 of the oil disaster – Tony Hayward was watching his yacht, a Farr 52 named Bob, compete at the J.P. Morgan Assessment Management Round the Island Race.” Source: CNN, June 19, 2010

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Let’s be blunt. Only one of three presidents “gets it.” That one is Billy.

President Tony continues to demonstrate that he doesn’t get it. His congressional testimony proved it. We wonder how much prep help he got from his fellow BP board member and former US Senator Tom Daschle. Reminder: Daschle was a prospective President Obama appointee, whose name was withdrawn after financial revelations killed his nomination. Daschle is the former US Senate leader of his, and Obama’s, political party.

UPDATE: In our earlier comments related to BP we wrongly identified Former Senator Tom Daschle as a member of the BP board.  That information is incorrect.   He is not listed as board member according to the BP website reviewed this afternoon.  We apologize to Mr. Daschle for our error.

The third president is now in deep trouble. Our national leader faces huge and growing disapproval and repudiation by his core constituency. “Whose ass to kick” was supposed to be a demonstration of toughness. It backfired. Harvard lawyer and Chicago politician Obama is a skilled orator and chooses every word carefully. This phrase was selected by him to convey some type of forceful political nuance. It failed because it showed Obama out-of-character and therefore suggested that he is a politician first and leader second.

The timeline of events starting with April 20 shows that the White House and the Obama administration had conflicting contingency plans and were disorganized. On April 22, the day the rig sank, President Obama, Homeland Security Secretary Napolitano, Interior Secretary Salazar and others did not know there was a leak. They were in an emergency meeting together in the Oval Office and were operating without good information. That is understandable. What is not comprehensible is why it took them so long to realize the seriousness of their ignorance.

It took Coast Guard Admiral Allen to wake them up. On April 24, Obama’s staff was told there was a meaningful spill. On April 28, the White House finally accepted that it was big.

The president made his first trip to the Gulf a week later and two weeks after the rig explosion. And he did not immediately activate sufficient federal resources to the level we now know was needed even when briefed by Admiral Allen and Governor Jindal. That is why Obama is being compared to George Bush and Katrina when the public evaluates the response to crisis.

Sorry, Mr. President. You failed us at the beginning. You were ill prepared. You announced expansion of offshore drilling because of politics and, we now know that, you hadn’t considered increased research funding for NOAA and for the preventive measures we now know are necessary. You formed no commission of experts to study it. You failed to heed warnings. And we now know that your administration’s Mineral Management Service was a mess.

And we also know that your present moratorium structure is improperly conceived, politically driven and lacks petroleum engineering professional skills. We also know that your present moratorium plan was discussed in Washington last week with Gulf folks who traveled to our nation’s capitol. They returned home convinced that Washington is likely to do huge damage to the US by the way you are shutting down existing and non-BP activity. Your moratorium doesn’t make us safer. It will make the US dependent on foreign sources for oil to the tune of another 2 million barrels a day as it shuts down the Gulf and if it causes the Alaska pipeline to cease operations for insufficient throughput.

The list of bungling is extensive, Mr. President. When looking for asses to kick, you might want to start with the mirror. But first help me explain the use of this language to my four year old granddaughter after she sees her president demean himself and his office on national television.

Let’s get to some very real economic reality.

Five states are now suffering because of the BP spill. Florida, Alabama, Louisiana, and Mississippi are hit by oil slicks that are devastating their fisheries and tourism. Texas is a casualty along with the others because the drilling moratorium that was poorly designed by Obama’s team was created out of a political response.

The moratorium payback will be the loss of thousands of jobs.

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In the Sunday NYT, Yale Professor Robert Shiller discusses one of the recommendations of the Squam Lake Report — holding back some executive compensation to align their risk with taxpayers (Help Prevent a Sequel. Delay Some Pay.)

Here is their recommendation:

“The Squam Lake group recommends that companies be encouraged to withhold a good part of the compensation of their top executives for a number of years, and that it should not take the form of stock options. That would give them incentives to consider some of the long-term consequences, and intrinsic value, of their decisions.

The holdback should be for a pre-announced dollar amount, and the contract should specify that it will be lost if the company goes bankrupt or gets a government bailout. That way, the economic cost of a bankruptcy or bailout is placed partly on the executives who make decisions.”

The thought process behind this is that risky corporate activities should also become a risk to the firm’s executives. The case the Squam Lake economists make is that by holding back some of the executives’ personal assets, risky behavior becomes their problem, not just the taxpayers’. The hope is that “this will transform executives’ thinking about risks — and may help prevent another disaster.”

I sincerely doubt it. Similar disincentives were already in place — and they failed miserably.

At each and every one of the companies that went bust due to their excessively risky speculations — from AIG to Bear to Citi to Fannie Mae to Lehman to WAMU — every executive had huge amounts of stock, stock options, and future salaries at risk. Lehman’s Dick Fuld reputedly lost over $500 million dollars in stock value, and a few of Bear Stearns execs lost close to a $ 1 billion dollars each in asset value.

The mere threat of future losses has already proven insufficient to moderate behavior. Holding back $100s of 1000s of dollars — or even millions of dollars — is a meaningless inconvenience to the people whose net worth is measured $100s of millions or billions of dollars.

There are better alternatives.

While researching Bailout Nation, I did discover one group of Wall Street firms whose senior management took a very measured approach to managing risk. They managed to engage in risk taking and speculation in a fashion that was responsible, and avoided trouble.

The group? Wall Street partnerships.

There is a simple explanation for this: Unlike corporations, Partners have “joint and several liability.” Every partner is fully liable, up to the full amount of the relevant obligation, for the actions of every other partner. This has the effect of focusing the minds of management on exactly what the worst case scenario of their behavior can wreak. Imagine if a partnership like Lazard Freres (since gone public) or Brown Brothers Harriman embraced risk the way their publicly traded brethren did. The liabilities form the losses falls first tot he partnership. Once those assets are exhausted, the creditors can proceed to recover losses from the personal assets of every partner.  Bank accounts, Houses, boats, vacation property, 401ks, cars, jewelery, watches, etc. are all fair game for creditors.

Not surprisingly, none of the Wall Street partnerships got into trouble, and I argue the full personal liability for losses are why. Execs at publicly traded Wall Street firms only risk was their future earnings and stocks. The actual losses fell to the shareholders, bondholders and eventually, the taxpayers.

Risking minor amounts of future earnings, relative to massive, trillion dollar losses, is vastly disproportionate. It did not alter behavior in this crisis, and it will not prevent the next crisis. The amounts of money lost, relative to their existing wealth, failed to moderate behavior. The losses amounted to little more than tears in the rain.

If we want to prevent senior management from acting recklessly, then we need to impose costs that are proportionate to the losses they caused.  Personal partnership liability for senior management would have prevented the past crisis, and it will prevent future crises.

The question isn’t if this will work — we know it already does. The only issue is whether we have the political will to impose this liability on our reckless, irresponsible executive class . . ..

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Source:
Help Prevent a Sequel. Delay Some Pay.
ROBERT J. SHILLER
NYT, June 18, 2010  
http://www.nytimes.com/2010/06/20/business/20view.html

My favorite automotive stat of the year so far comes via Barron’s, and is regarding the Lexus LS 600h L.

It seems that the regular LexusLS gets a emre 16 mpg city and 23 mph highway, versus the hybrid’s 20/22. The cost for this insignificant fuel improvement? An extra $34,350 to be precise.

Don’t worry, the fuel savings will make up the difference . . . eventually:

“Yet for all its endearing qualities, it would be laughable to recommend this car on its pitiful fuel-cost benefits alone. If gas cost $4 a gallon, it would take 200 years of driving 15,000 miles annually to offset the difference between the hybrid and conventional all wheel-drive models. But for the luxury-car aficionado willing to part with stacks of green to be at least a pale shade of green, it could fill the bill.”

Yes, just 200 years of driving to pay for itself. That suggests anyone you see driving one these is either a poseur or innumerate.

For those of you who are green — and have nearly a $100k burning a hole in your pocket — you’d be much better off with the Mercedes V6 S400 hybrid. The big Benz is actually cheaper than the standard MB S550. The traditional model comes with a 382-hp V8 S550, gets 14/21 mileage, and has a sticker price of $91,60. For a few grand less ($87,950), the V6 hybrid is rated 19/26. Barron’s testers got 29 miles to the gallon on the highway.

My taste in green autos runs towards the higher MPG of the 918 Spyder: 62 mph in 3.2 seconds, 700 horsepower, and gets 78 MPG.  Now THATS a hybrid . . .

FREE FALL: World champion freediver Guillaume Nery special dive at Dean’s Blue Hole, the deepest blue hole in the world filmed entirely on breath hold by the french champion Julie Gautier. This video is a FICTION and an ARTISTIC PROJECT. Edited by BLUENERY (c). Music: ARCHIVE – you make me feel.

Guillaume Nery base jumping at Dean’s Blue Hole, filmed on breath hold by Julie Gautier

Hat tip kottke

The NYT has had some dazzling intergraphics showing various aspects of the Deepwater Horizon spillage. This one startled me — the extent of the environmental damage is far greater than I previously imagined:

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click for interactive graphic

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I was also taken aback by this quote, via the NYT’s Joe Nocera:

“We have to get the priorities right,” the chief executive of BP said. “And Job 1 is to get to these things that have happened, get them fixed and get them sorted out. We don’t just sort them out on the surface, we get them fixed deeply.”

-BP CEO John Browne, in 2006, regarding the Prudhoe Bay spill in Alaska

Nocera accuses BP of having 4 years to prepare and prevent this disaster — and they blew it:

Do you remember the Prudhoe Bay leak and the Texas City explosion? They were big news at the time, though they quickly faded from the headlines. BP was fined $21 million for the numerous violations that contributed to the Texas City explosion, and it was forced to endure a phased shutdown of its Alaska operations while it repaired the corroded pipeline, which cost it additional revenue.

In retrospect, though, the two accidents represented something else as well: they were a huge gift to the company. The fact that these two accidents — thousands of miles apart, and involving very different parts of BP — took place within a year showed that something was systemically wrong with BP’s culture. Mr. Browne had built BP by taking over other oil companies, like Amoco in 1998, and then ruthlessly cutting costs, often firing the acquired company’s most experienced engineers. Taking shortcuts was ingrained in the company’s culture, and everyone in the oil business knew it.

The accidents should have been the wake-up call BP needed to change that culture. But the mistakes and negligence that took place on the Deepwater Horizon in the Gulf of Mexico — which are so profound that everyone I spoke to in the oil business found them truly inexplicable — suggest that the two men never did much more than mouth nice-sounding platitudes.

Which also makes the disaster even more unforgivable than it already is. BP executives had four years to fix the company’s problems before an accident took place that was truly catastrophic. And they blew it.

House of Commons, Prime Minister Winston Churchill
June 18, 1940

I spoke the other day of the colossal military disaster which occurred when the French High Command failed to withdraw the northern Armies from Belgium at the moment when they knew that the French front was decisively broken at Sedan and on the Meuse. This delay entailed the loss of fifteen or sixteen French divisions and threw out of action for the critical period the whole of the British Expeditionary Force. Our Army and 120,000 French troops were indeed rescued by the British Navy from Dunkirk but only with the loss of their cannon, vehicles and modern equipment. This loss inevitably took some weeks to repair, and in the first two of those weeks the battle in France has been lost. When we consider the heroic resistance made by the French Army against heavy odds in this battle, the enormous losses inflicted upon the enemy and the evident exhaustion of the enemy, it may well be the thought that these 25 divisions of the best-trained and best-equipped troops might have turned the scale. However, General Weygand had to fight without them. Only three British divisions or their equivalent were able to stand in the line with their French comrades. They have suffered severely, but they have fought well. We sent every man we could to France as fast as we could re-equip and transport their formations.

I am not reciting these facts for the purpose of recrimination. That I judge to be utterly futile and even harmful. We cannot afford it. I recite them in order to explain why it was we did not have, as we could have had, between twelve and fourteen British divisions fighting in the line in this great battle instead of only three. Now I put all this aside. I put it on the shelf, from which the historians, when they have time, will select their documents to tell their stories. We have to think of the future and not of the past. This also applies in a small way to our own affairs at home. There are many who would hold an inquest in the House of Commons on the conduct of the Governments–and of Parliaments, for they are in it, too–during the years which led up to this catastrophe. They seek to indict those who were responsible for the guidance of our affairs. This also would be a foolish and pernicious process. There are too many in it. Let each man search his conscience and search his speeches. I frequently search mine.

Of this I am quite sure, that if we open a quarrel between the past and the present, we shall find that we have lost the future. Therefore, I cannot accept the drawing of any distinctions between members of the present Government. It was formed at a moment of crisis in order to unite all the Parties and all sections of opinion. It has received the almost unanimous support of both Houses of Parliament. Its members are going to stand together, and, subject to the authority of the House of Commons, we are going to govern the country and fight the war. It is absolutely necessary at a time like this that every Minister who tries each day to do his duty shall be respected; and their subordinates must know that their chiefs are not threatened men, men who are here today and gone tomorrow, but that their directions must be punctually and faithfully obeyed. Without this concentrated power we cannot face what lies before us. I should not think it would be very advantageous for the House to prolong this debate this afternoon under conditions of public stress. Many facts are not clear that will be clear in a short time. We are to have a secret session on Thursday, and I should think that would be a better opportunity for the many earnest expressions of opinion which members will desire to make and for the House to discuss vital matters without having everything read the next morning by our dangerous foes.

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Be Careful for What You Wish
June 18, 2010
By John Mauldin

Be Careful for What You Wish
GDP = C + I + G + (X-M)
The View From Europe
Under the Tuscan Sun

“Everyone” is upset with the level of fiscal deficits being run by nearly every developed country. And with much justification. The levels of fiscal deficits are unsustainable and threaten to bring many countries to the desperate situation that Greece now finds itself in. We must balance the budget is the cry of fiscal conservatives. But there are unseen consequences in moving both too fast or too slow in the effort to get the deficits under control. Today we look at them as we explore what a fine mess we have gotten ourselves into. (I am working without internet today so the letter will be shorter with fewer references than normal.)

GDP = C + I + G + (X-M)

We have discussed the above equation before, but let’s look at it again from a different angle. Basically, the equation is another accounting identity. GDP (Gross Domestic Product) for a given country is the total of Consumption (personal and business) plus Investments plus Government spending plus exports minus imports.

The Keynesians argue that when there is a drop in C due to a recession that the G must rise to offset the drop. That was at the heart of the argument for stimulus packages in so many countries. And there is no doubt that stimulus did help keep a very deep recession from turning into an even deeper depression. One can legitimately argue about the size of the stimulus, or about the nature of the spending, but it is difficult to argue that it did not have an effect.

Now, of course, the hope is that a recovery will allow C to begin to rise so that there is no more need for government deficits. Keynes argued that governments should run surpluses in good times, which is conveniently forgotten by most government spending types. The problem is that we are still running massive deficits. Tax receipts are way down (10% unemployment will do that to you!) and show no sign of turning back up soon all over the developed world.

If you reduce government spending, that also has a negative effect on GDP in the short run. But in past recoveries the growth of the private sector has overcome that negative effect. Normally at this time in a recovery growth is in the 7% range. This is a very tepid recovery in the US and the developed world.

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Rock & Roll Summer: Front Row at the Season’s Hottest Live Shows, From Green Day and Stone Temple Pilots to Miley and Rihanna
More at Rolling Stone

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Katy Perry

Katy Perry performs in Times Square in New York City, June 15, 2010

Vampire Weekend

Vampire Weekend performs at the 3rd Annual Roots Picnic in Philadelphia, June 5, 2010.

Miley Cyrus

Cyrus performs at the Rock in Rio Madrid festival in Arganda del Rey, Spain on June 6, 2010.

Rise Against

Guitarist Zach Blair at the Rock Im Park Festival in Germany, June 4, 2010.

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