“Regarding mankind, no t…

“Regarding mankind, no theme is more salient in the Bible than the morality of personal responsibility, for it is through this that man cultivates the inner development leading to his own growth, good citizenship and happiness. The entitlement/welfare state is a paradigm that undermines that noble goal.”

Aryeh Spero in a Wall Street Journal Editorial

Who needs things when you…

Who needs things when you have thoughts

Sophie-Anne Wolff 

Sunshine Oilsands Chinese IPO Plans

Hong Kong Chinese trade gateway

Sunshine Oilsands Ltd. a canadian based oil sands venture with chinese backing is preparing an IPO launch in Hong-Kong. The Financial Times reports that the Calgary based early development stage company is readying its IPO with backing from chinese institutional investor backing.

The float is estimated to reach as much as $600 Million representing 25% stake in the company. Last March Sunshine raised $230-million from investors including China Life Insurance and Bank of China Group Investment.

Traditionally primary ressource Canadian based companies float their stocks on the Toronto Stock Exchange TSX and Toronto Venture Exchange where a deep pool of ressource analysts and investors exists. Most of the Worlds Material stocks are concentrated in the TSX, London Stock Exchange and Australian Stock Exchange. The Hong-Kong stock exchange is not recognized as a particularly ressource oriented stock market. The reasons for a chinese based issuance have not been divulged by the company. The Financial Times in its article suggests the decision was influenced by Chinese government backed companies.

For those having read my previous posts know I take issue with Canada’s regulatory stance onforeign takeovers and investments. I had previously raised the issue of foreign entities not seeking profit should not be permitted to acquire companies in Canada. I would like to expand that statement to include purchases or investments at large in undeveloped ressources. The logical business decision here would have been to issue stock where it can be most precisely valued by experienced professionals to obtain the best price. Here in what can only be described as a nationalistic move to develop its internal financial markets, China has pressured its semi-private subsidiaries into picking Hong-Kong over Toronto.

Is the company going to be free from future interference? Will the destination and price of the oil produced by Sunshine going to be determined by profit seeking incentives and the Market place or by chinese polit-bureaucrats?

zài jiàn

Questions for Lefties

Canadian Prime Minister Stephen Harper was at the World Economic Forum in Davos this past week. In his adresses to world leaders and dignitaries he raised the issue of fiscal irresponsibility , how Canada avoided it and how Canada would continue progressing on the road of virtuous fiscal behaviour and macro-prudential conservatism. Now the prescription from the Prime Minister, although quite vague, are raising howls from the opposition. Much of the fiscal hawkishness involves a plethora of social and political policies repressing much of the Left’s past and present grievances, let’s spend a few moments to examine them.

The bulk of Harper’s ideas revolved around cubing employment at the federal level, curbing transferes to other levels of government and curbing of transfer payments to household and individuals. In the United States these last payments are called entitlement program spendings a name I find quite appropriate.

When it comes to employment and compensation of federal employees, Big Union is the loudest critic. So called experts from such groups as the Canadian Centre for Policy Alternatives (CCPA) call public sector unions the last pillar of the Canadian middle class following the decline of the manufacturing sector. They believe the Conservative Government’s call for austerity is a direct assault on the Canadian middle class. One of the reasons I believe this claim is preposterous is because these syndicated public sector unions aren’t part of the middle class. Not only is their compensation with benefits estimated to be ~40% above similar private sector jobs, they possess job security! a concept foreign to most canadians. In Canada there is a two-tiered employment system public versus private. Such a situation has led to the Spring Revolution in the Middle-East, advocacy from the CCPA is shameful in light of the lip service they pay to their quest for greater equality. The worst part is the total ignorance such special interest show to the paradox of a two-tiered system in which the less well-off private workers pay for the benefits enjoyed by the upper worker class in public servicedom. In Europe historians called these circumstances serfdom in the Middle Ages, 500 years later nothing is learned seemingly. When it comes to employment levels a serious discussion is needed. The point of public service is to offer services to the populace which could not be offered in the private sector and necessary to the general social welfare. A general assumption is these services should be offered as effectively and efficiently as possible. The idea that employment levels should be increased for the sack of preserving the middle class is social engineering, that’s not part of the mandate, for the left to try and squeeze it into the fabric of government through labour unions and labour laws is dishonest and mischievous by method… Get a mandate from the people before you increase the cost of government and do it honestly not holding back on the shortcomings of the scheme if it’s really what you want to orchestrate. The costs of a single civil servant is huge with already close to 150 Billion invested in the Canadian Pension Plan Investment Board and an estimated 250 Billion unfunded liability, that comes out to roughly a third of yearly output just to cover the pension needs of less than 1% of the population. All this to say government is the least efficient component of the Canadian economy. That says nothing of the relative efficiency compared to other countries, however the failure of government in other countries sounds like a bad barometer for comparison in ours.

The second thing demanded by the left is an increase in the scope of the welfare state, routinely derided as the nanny state by the right wing press. This request commonly takes the form of the preservation of one-tiered universal healthcare, expansion of transfer to household programs such as unemployment insurance – UI – (now called employment insurance in Canada), parental leave programs and last but not least mandated retirement ages with garanteed federally disbursed pensions. Now these programs are all well and danddy but not a single one is adequately funded. Morever every single one creates economically distortive moral hazards. Only three countries have single tier medicine: Canada, Cuba and North Korea. Do we really want to be in this club, where one’s healthcare is being subsidized by cheap Venezuelan oil and the other is in constant famine even after massive food aid from its neighbours. When it comes to UI its name is a lie. Whereas insurance is commonly defined as risk pooling backed by premium contributed investment funds. Canada hasn’t put money aside for insurance premium payouts since the Prime Minister Paul Martin raped those coffers to help pay down the deficit in the 90s. The obvious drawback of mandated participation in such unemployment insurance schemes is it tempts workers away from finding new jobs when layed off. Textbook moral hazard. One of the causes of prolonged unemployment in the US right now is the extension of unemployment benefits. No wonder their economy is swimming in a sea of slack. Parental leave programs shift the cost of child rearing partially to those who do not wish to have kids, a little unfair to say the least. We all know someone who complains about working who is tired and counts down the days till he can get his pension check from nanny government, talk about creating incentives to get people out of the labour force, shifting the cost of that retirement to others who may be a little less lazy and de-motivated. That is without counting that the babyboom generation which lavishly entitled itself to these programs didn’t even bother to have enough kids to pay the taxes necessary to see them through. The only solution will have to be a reduction in our generation’s living standard to pay for the entitlements of another generation we had no voice in determining.

Is this really the lefts prescription to alleviate the ailments of today’s society, shifting the burden from one generation to the next? I would like to ask the left: Dontt you believe in the evil of intertemporal inequality?Well that’s a little simplistic, because advocacies on the left have a number of solutions to deal with the economic and budgetary fallout caused by their wish list. Suggestion number one would be to tax the rich, idea number two tax corporations and finally tax imports! There are a few issues here in need of serious tackling. Firstly if you don’t know what a Larger Curve is go look it up in Wikipedia. Increasing the tax on the wealthy never really raises all that much revenu especially in an environment of capital mobility and tax jurisdiction arbitration possibilities ad infinitam. Secondly a progressive tax system isn’t fair or helpful as economic theory 102 will tell you, you make proportional profit or personal gain from the amount of welfare you bestow upon society. Taxing corporations is equally distortive if not much more. It represents a double taxation of income and worst compounds the issue of insolvent retirement schemes. As taxes reduce the valuation of companies which serves as the basis of all pension plans the Left cherishes so. Lastly when attempting to do more than pay lip service to reducing inequality between the wealthy and the poor import taxes are the last things that should be on your mind. Sure you creates some jobs that just might go to an otherwise disadvantaged person but than you just kick the remaining disadvantaged in the teeth with higher costs for everyday goods. A policy that increases wealth for some but reduces living standards  for others only increases wealth disparities don’t you think?

What I’m actually asking people on the left is if they actually have any new ideas to promote equality and the middle class? The Left’s policy proposals are dated from a time when international competition only existed between relatively equal states. Globalisation means factor price equalization! especially in the labour market. Does the Left actually have any plans for the future as opposed to plans promoting returning to the past? Please be my guest and leave comments and rebuttals!

In my next post I will actually propose my on macro policies to promote wealth and its distribution!

P.S. by “my own” I really mean those I’ve discovered laying around the place and rippe for intellectual picking and sharing.

Prof Bernanke reappears, then…

After a term and some of being Chairman of the Federal Reserve System, Prof. Ben Bernanke has finally decided to pretend to be a shadow of his former intellectual self. My day started off brightly when I read that the Reserve Chairman had decided to finally implement one of the more characteristic monetary policies of his academic career. The hallmark of most western Central Bank policies has been since the early 1990s inflation targeting. A monetary strategy that involves communicating and then acting only with regard to pegging inflation to an announced level of growth. After the strategy showed early success in New-Zealand and then Canada, most Central banks shifted their stances to the new strategy. The Federal Reserve was one of the only Central Banks in the world to have no explicit goal variables to target. For the longest of times only financial market participants were implicitly knowledgeable about the monetary policy stance of the Fed, the public at large was left in the dark. Of course some will argue that the public knew about the mandate. Although the informed barely informed members of the masses would simply answer that the mandate of the Fed was effectively useless in understanding its objectives given that the mandate of high employment, sustainable growth, and stable prices are contradictory. So Bernanke has finally fulfilled one of the objectives of his academic career.

On the other hand his career as a central banker leaves much to desire. After rechecking my Bloomberg feed a little later I was astounded to see that monetary policy 101 had given place to monetarist lynching 101. As though monetary aggregates growth rates were essentially a none existant consideration, Bernanke announced he was considering further asset purchases. Thanks Ben! I also believe that further price bubble ballooning in various commodities and financial assets is the remedy to main street ailments.

 

In praise of all that is German

Germany hasn’t been getting a lot of slack of late. Between accusations of trying to succeed where they’ve failed in two previous World Wars – dominating Europe – or accusations scuttling the European Project out of selfishness, and again with cries that Germany is abandoning the Euro, the nation of sauerkraut and beer is in the throws of a full blown Greek tragedy (lol pun intended). Asides from the on camera superficial Merkozy marriage, no french love seems to be crossing the Rhin. Further compounding the courteous hate fest, Italian flirting has gone from invitations to the bunga bunga parties (most often refused anyways) to the sober and stale Monti ear whispering for more cash. Somehow, I don’t think encouragements from the euro-sceptic nationalisty Finns was the recognition Berlin technocrats were looking for. The Euro area is eerily looking like an Animal Farm in the throes of its Orwellian infancy. Need I really specify which Euro countries are acting like over-eager egalitarian PIIGS, hrum I mean pigs, seeking the overthrow of opulent and oppressive markets, hrum… I meant masters. All punning aside, I believe there may be a little lack of balance in the debate over fiscal and monetary policy proposals to the Euro area mess.

Let’s start by awarding praise where it is due and sing the virtues of the German machine, hrum… economy sorry forgot about the inter-temporal analogy bank. To my knowledge German policymakers are the only ones of any major economy who seem to have learned the lessons of history. This is no coincidence as not-repeating the errors of history has become part of German culture. Little children are taught at school about the immeasurable harm generations of their ancestors have wrought upon the world (maybe even too zealously). A cursory look at the lessons young children learn from Dortmund to Munich, leaves the history amateur with a few residual lessons in economic virtue, that we shall survey here:

1) Inflation = bad. How so? Well inflation leads to economic inefficiencies most notable of which is the rise of unemployment, which then leads to socio-political problems we need not raise here. To see just how hawkish they are monetarily, read anything on the Bundesbank or even the ECB.

2) Trade competition = good (especially when your winning). How so? The best buffer when in hard times is to have a trade surplus and savings. Germany has been at the forefront of multilateral trade talks, especially in Europe (see European Union history) but also internationally. I guess Germans remember how bad Smoot-Hawley was for everyone and how good the life has been since… well… 1946 I guess.

3) Hard work = prerequisite to 2). Now I know this might sound sacrilegious to all of us westerners getting used to resting on the laurels of previous generations hard work but bear with me. Our current level of wealth is tied if anything to previous generations working hard, earning dough, not spending but saving dough in the bank account, that dough being magically transformed by the financial industry into fixed capital formation, a.k.a. every single piece of equipment, factory infrastructure that buttresses our current economies. If you didn’t follow the flow working harder than your living standard would entail serves as the anvil of tomorrows wealth. Germans get that, they preach it, than they actually do it. This saving/underspending/fixed capital forming needs to happen at the household level, the firm’s level and the governmental one.

4) Mash up all of the above = hawkishness in every sphere of public policy (and private actually) = kicking the worlds butt economically.

So what has been going on exactly in Europe? following the above stated framework for success lets see where things went wrong. Europe was a place of high savings (or at least American savings though the Marshall Plan)a, hard working and rebuilding for while following WWII. No problems so far. Italy, Britain and France had thriving industries, peripheral Europe slowly started democratizing itself. Than they started moving towards the European Union. Savings and investment flows started getting a little complex at this point. Big Euro countries started saving for peripheral ones, sending money so that those countries could invest in infrastructure modern

isation and other stuff of the like. Eventually thy took a bunch of countries with a myriad of fiscal and monetary systems and patched them together into a big currency block. Germany kinda knew where this was going so they tried the  true and tested policies. They retrenched further into fiscal and macro-prudential austerity. So yes this national savings craze as measured by a current account surplus peaking at 7.4% of GDP just before the crisis hit in 08, did lead to some imbalances within the Euro block by depressing Euro wide inflation numbers and interest rates. The real trouble however wasn’t German economic virtue it was the rest of Euro countries, more particularly the PIIGS, reaction to these circumstances. How did they react, like all good socialisty, humanisty, mushy hearted westerners, they indulged in profligate entitlement spending. Riding on the coattails of previous generations of hard work and contemporary German virtue (i know redundant), they offered their people an easy life at low borrowing costs.

Then one day the masters hrum… markets, sorry, woke up and said “the break is over back to work”. The current crisis boils down to looking to the Germans and saying no we don’t want to work as hard as you! keep paying. Unfortunately markets tend to act like the tough love parents that they are and Germany seems content to not act like the over-indulgent parent its savings temporarily were. Now some might quibble that the crisis is one of solvency or simply liquidity needing some temporary patching to be corrected. What needs correcting is peripheral Europeans expectation of living standards they must go down! if they are one day to go up to Germany’s level. Increasing the ESM or EFSF or introducing eurobonds does not solve the problem. Even Angela Merkel’s suggestion of limiting federal governments deficits to 0.5% of GDP remains to timide a goal. Mario Monti is somewhat on the right track in Italy. Although his reforms are limited in scale they are in the right direction. A combination of fiscal austerity coupled with market liberalization is the equivalent of putting italians back to work. Less play more labour! is the key to making labour unions howl and incidentally generating long-term wealth. Let’s hope more european nations decide to go the german path to prosperity before the s*** really hits the fan.

Cius

Potash vs. Oil Sands, a policy dichotomy

With news of PetroChina International Investment Co. readying itself to be the sole owner of the undeveloped Mackay River in-situ project ~40 km Ouest of Fort McMurray, the question of Canada’s foreign takeover review scheme merits further attention than it’s been getting of late. The deal triggered by Athabasca Oil Sands Corp. owner of the remaining 40% stake not owned by PetoChina will lead to the latter buying the stake for an estimated $680 M Canadian dollars.

Now for those not aware, the Mackay river flows into the Athabasca river which itself flows into Athabasca Lake which outflows through Slave river and through a few national parks until the water system reaches its final destination in the North Arctic Sea. All that to say that the in-situ development finds itself in quite the environmentally sensitive region. Now, a foreign state owned company will be an environmental guarantor of the region. Why am I kicking up a fuss about this exemple of foreign Oil Sands ownership and not say, Statoil’s not far off operations. Is it maybe because Norwegians are something of green nuts while China is competing with Russia for most pollutated country in the World, maybe. Is it because Statoil is known for trying to maximize the return on Norwegian taxpayer dollar while PetroChina and other chinese primary ressource companies are known for attempting to distort markets for the gain of the motherland, probably.

The reason I raise this issue is because I personally disagreed with the Canadian federal government’s decision to oppose the BHP Billiton bid for Potash Corp of Saskatchewan, while I opposed the federal governments regulatory decision to allow PetroChina’s majority ownership and operating of Canadian natural ressource exploitations. So who between the Conservative government of Canada and myself is wrong while both hold seemingly inconsistent and paradoxical opinions? I’ll let you answer that once I’ve finished exposing my case.

Let’s start by raising a point that would seem to show inconsistency on behalf of the Government. The regulatory approval of PetroChina’s deal with Athabasca raised the feds no problem because it could only increase competition for the supply of Canadian Oil and increase the competition for demand in Canadian labour, win-win right? The decision to oppose the purchasing of Potash Corp. was one of opposing increased supply of Canadian potash (one of the worlds most popular agricultural fertilizers). Sudden policy shift or backtrack? Not really, here is a situation of two weights, two measures. Both ressources are considered ‘Strategic Ressources’ in Canada. However one is treated as a free market good while the other one is considered as legitimate producer collusion product, a.k.a. a cartel worthy product. In light of the Governments recent abolition of the Canadian Wheat Board monopoly, their previous decision to protect the Saskatchewan potash cartel seems strange. Or maybe it doesn’t after all Alberta (where most of the Oil Sands are) is traditionally pro-market whereas Saskatchewan is traditionally left-leaning. Does lobbying by Provincial governments really explain a difference in policies. The real difference lies behind the fact that Oil production is extremely geographically atomized, thus it’s trade is quite competitive, potash on the other hand can only be found in a few regions of the World. One of the regions richest in potash is western Canada. Essentially the difference is that Canadians can get away with cartel-esque behaviour in potash but not in oil.

This demonstrates that if the conservatives in Canada are not consistent in their policies it is not for lack of reflection of pragmatic economic solutions, simply inconsistent and un-ideological ones. So we actually have two very different decisions made for pragmatic reasons. That just means I will have to raise two different objections!

Regarding the BHP Billiton takeover of Potash Corp. blocking. The main reason for blocking the takeover was because of the aforementioned cartel in potash. In Saskatchewan the export of potash outside of NAFTA is undertaken by a corporation called Canpotex (short for Canadian Potash Exporters), which effectively operates as a cartel controlling over 30% of the worlds potash production. BHP would have broken up the cartel in order to produce at capacity and sell freely. The Provincial governments belief was that it would have lost royalty revenue from the drop in per unit profit. Whether the government would have actually registered a drop in revenues following the decision is aside from the point. It represents a stark intervention into markets which should be unacceptable in a modern democracy. A short list of consequences include, higher fertilizer prices for such poor farmers as those found in India or Africa, damaged Aussie-Canadian relations, reduced attractiveness of Canada as an investment destination and countless other immeasurable and unimaginable damages to Canada and the World.

Unfortunately one bad decision tends to follow another in politics, let’s now turn our attention to the regulatory decision that paved the way for a foreign power’s state owned corporation buying up ressources in Canada. As a fervent classical-liberal and staunch internationalist, I am all in favour for increasing developing nations and less than democratic nations participation in Global trade. I think there is no better way to improve their economic and socio-political prospects, than permitting them to join the WTO and partake in international trade. Although these beliefs push me to reflexively accept international takeovers, I believe there are a few caveats needed to smooth things out. First problem is the lack of reciprocity. Chinese companies benefit from industrialized nations legal systems when investing in the West. Western multinationals do not benefit from such property protection when doing business in China. Let’s help China, let’s show them some tough love by telling them they can buy our ressources when our companies will get some respect in China. An important issue is that state owned corporations do not necessarily seek to maximize profits as much as maximize socio-economic and political priorities of their governments, whereas public companies always seek to maximize profit for their shareholders. From the economic literature I believe it is most evident to all that maximizing profit in a competitive environment is the key to increasing global welfare.

It is hence my view that the Government’s Foreign Takeover Review process should be aimed at differentiating between those companies who will seek to maximize profit through increased productivity, the real key to increased wealth, and those companies who may have alternate motives such as shifting wealth from one geography to another (like state owned corporations). Blocking foreign State’s proxies from buying our ressources and encouraging public companies to invest is good policy. Let’s hope that when the Canadian federal government finishes its review of the takeover process that will be the ensuing conclusion.

Rating the Agencies

Having just read a commentary from Philip Stevens from the Financial Times (link at the bottom) I feel a need to write a partial response relating to some of the issues raised. Stevens’ article focus without stating it as some kind of principal/agent dilemma, whereby the ratings agencies Standard & Poors, Fitch’s and Moody’s are an integral and dominant factor in World finance while having vested and different interests than the rest of the financial community. Specifically, he boils down the issue to a group of profit seeking enterprises with no measurable intellectual superiority to the rest of us, making their money on the back of sovereign States. So we are presented with some kind of moral hazard that affects the sovereignty of all States and Peoples subject to yet another market deficiency.

Now I’ll admit that Steven’s raises a few fair points such as the Agencies only proposing common sense policy solutions and I’ll further admit that for somebody who’s intentions are quite clear and provocative the tone was levelled, however I am going to be a stickler for some of his conclusions, which I believe to be out of sink with the facts.

The first accusation levelled at S&P is one of using its sovereign credit downgrades as a marketing ploy to increase the value of its credit ratings. How this is a problem I’ll admit to being at a loss. It was my belief that for a AAA to actually have value it needed to be hard to obtain and easy to loose. One of the accusations made against the ratings agencies in the early part of the 2008-2010 crisis was that they too willingly gave away AAA ratings much to the despair of the many banks, hedge funds and institutional investors who got clobbered in 09. Now we can all agree that the Agencies were guilty of that… So why reverse course, and lambast them now for trying to make up for past mistakes and right the ship? Ratings Agencies may be paid by credit issuers which can be seen as a morally hazardous when their stated goal is the protection of lenders. So when an agency, such as S&P begins acting zealously to protect the value of investors investments by valuing investment as rigorously as possible it is my feeling that we are actually distancing ourselves from the real moral hazards that underpinned the last crisis!

Let’s talk about the actual ratings for a minute. Now people seemed to be peeved most egregiously because a downgrade has more often than not led to or contributed to a rise in sovereign yields. Effectively the rate at which governments must refinance accumulated debts and the cost of borrowing to pay current budgetary deficits. So governments get understandably annoyed when their credit ratings get reviewed. Some argue that this gives immeasurable power to the Agencies away from democratically elected governments, an attack on a nations sovereignty for international relations profs or an economic coup d’état. This is a load of boll** if you ask me… When a nation develops a current account deficit it necessarily gives up some of its sovereignty to foreign credit markets, not to speek of the decision to live outside of autarky being essentially the same decision to outsource sovereignty externally in exchange for economic benefits. So any attack on a nation’s sovereignty is initially fomented by the economic decisions of that nation not by some imperialistic ratings agency. Secondly as most people have noted including Stevens in his own commentary, Ratings Agencies ratings are nothing more than a reflection of the markets. There is only limited evidence of an asymmetric information problem here, the Agencies only know marginally more than your average assiduous investor. They primarily serve investors and institutions that are too lazy to do their own investing due diligence.

AAA means an obligor has EXTREMELY STRONG capacity to meet its financial commitments. Wikipedia words not mine. Now does France fit that bill, the US or Japan? Although the US has a relatively good demographic profile, it has a rapidly mounting amount of intergenerational entitlement obligations. Assuming the US doesn’t curtail its entitlement obligations because of political inertia or other, Americans will not be able to meet their financial obligations. France and Japan on the other hand have much less stellar demographic profiles, Japan more so than France. The scope of entitlement programs in France is staggering! What do you get when you mix the most comprehensive healthcare system in the world with one of the most generous leave of absence programs, unemployment insurance and retirement schemes? Greece times 10? worst… France. The nation of Camembert and wine lovers is slated to pose the greatest financial risk to the integrity of the Euro after Italy. So was S&P’s call appropriate? no it wasn’t, it came much too late and in itself isn’t strong enough. My reading of the definition of Credit Ratings tells me France should be in the BBB range. In the long term Social unrest stemming from public outrage at entitlement curtailing will push France to the edge of fiscal sustainability. To be fair France isn’t the only G8 country who should have its AAA taken away. Germany with one of the worst demographic profiles in the world, substantial debt load, fast shrinking labour force and a rapidly growing list of Euro area commitments to lesser credit worthy countries isn’t deserving of the highest honour in the credit world. In a slightly different vein, Canada is no more deserving. With a mixed demographic profile, outrageous household debt load, large unfunded and unaccounted federal liabilities and a growing debt load at the Provincial level, all is not bright in the land of the true north strong and free.

The case for Ratings Agencies doing their job correctly seems solid in my mind, only one problem remains. Many want to regulate the Agencies’ credit market influence. Where does this influence stem from anyways? It comes from regulation. If it wasn’t for banking regulation forcing banks and other financial institutions to hold credit rated securities as part of their core ratios the Agencies would not have such a systemic importance in the financial world. Obviously finding a substitute to ratings for regulatory purposes isn’t easy. One possible solution is a blind follow the market approach, where the assets held by banks for tier 1 ratios or others are determined by the liquidity and low risk of an asset.  Only securities fitting the following formula would be eligible as core capital: θ • (99th centile of security liquidity) * (1 – θ) • (1st centile of security σ^2)

The above rule is just a suggestion with the intention of adjusting regulation to make it less Agency clout enhancing. If you’ve got a suggestion for a less market distorting rule please leave it in the comments section!

http://www.ft.com/intl/cms/s/0/b9aaf7b0-4291-11e1-93ea-00144feab49a.html

Obama Block!

 Should have put money on it… In a perfectly political and foreseeable manner the current administration of Chief Executive Barack Obama has officially rejected the Keystone XL pipeline proposed by Canadian pipeline operator TransCanada Pipelines. Sad… yes for the World… sad for everybody in the World?… hum not so sure.

Let’s look at who are the winners here. The greenies are the obvious winners. What they’ve won or accomplished? I don’t really know, only a partial reading of the science on climate change and a total lack of understanding of the modern energy global supply chain, can help explain this spurious victory. Oil traders in the US…. say what? The price differential between West Texas Intermediate crude oil and Brent crude oil in Europe creates some serious arbitrage opportunities for the savvy speculator. The pipeline was suppose to help alleviate that price differential… oops I guess some opportunities are worth lobbying for, right! The Chinese may eventually be the big winners here. Should Keystone XL continually be pushed backed and Northern Gateway obtain the go-ahead, China’s consumers might actually get some breathing room at the gas pump… much to their American friends’ dismay and loss 😦

Pipeline a-bust?

Reports from Reuters and the Wall Street Journal claim that the White House is about to refuse permitting of the Keystone XL pipeline from Alberta to Texas. The reports also state the White House will permit TransCanada to reapply for the permit to a redrawn pipeline avoiding the Nebraska aquifers. Okay unsurprising decision by the Obama administration on this one. Realizing that some of Obama’s donors and staunchest supporters are tree-hugging, scorched-earth theorists hippies, the administration seems to be speeding up the regulatory process in preparation for the up-coming presidential election later this year. Mind you these are un-confirmed reports so far, yet reports we are sure at the very least represent Obama’s views regarding hydrocarbons in general.

Now the public reason for such a potential refusal would be to save the Nebraska aquifers which serve as the tap and drinking water of millions of inhabitants of the region. The political reason for such a refusal is the belief that Canadian Oil Sands, or Tar-Sands as the green mouvement calls them, are the dirtiest oil sources one can find and developing them imperils the global environment. Let’s adress these two issues shall we.

Regarding the fear of contaminated water and soils in Nebraska. I’ll admit that I understand it. I wouldn’t particularly like a big oil pipeline crossing my backyard either, especially given Enbridges pipeline leak in Michigan last year and the Gulf of Mexico Macondo well spill calamity of 2010. Now that would be my gut feeling reflexive reactionary thoughts right there. However my brain would eventually kick in and my train of thought would go somewhere along the lines of: Hey! no pipelines were involved in the GoM oil spill, serious case of apple and oranges comparisons going here. What of the Enbridge pipeline spill in a Michigan river? Well it was one of the first large scale spills in a long time to actually get reported on, why so? Apparently a little research reveals that pipelines have better safety records than airplanes do, who in turn have better safety records than cars. As I eye my own vehicle suspiciously after these thoughts, my mind turns back to the issue at hand. The over 3000 km Keystone XL project was only slated to increase the total US pipeline gride by ~1%. Much of the US pipeline grid is old and in need of replacing. Furthermore it is overstretched capacity is running at maximum on much of the grids routes. I am only speculating here but wouldn’t it be better if we  switched some of the oil flow from old decaying infrastructure to the most up to date technology in pipeline safety design? I’ll let the engineers answer that one but the answer seems quite self-evident.

Now assuming for a moment that the project never goes forward, what would be some of the easily identifiable consequences. One of the gravest consequences from an American perspective that I can think of would be increased dangers of oil spills. What was that? you say. Well, the most rapidly expanding production of oil in North America isn’t actually the Oil-Sands right now, it’s actually the Bakken oil fields in North Dakota. How does the oil from ND make its way to US refineries in the Mid-West or Texas you may ask yourself, the answer is by train. Oil from that region which could have been transported by Keystone XL or an attachment to the latter, is transported by freight-train hauling. If you’d ever looked up the safety record of freight-trains on Google you’d be a hell of a lot more worried than by pipeline trust me. Spilling petrochemicals from freight-train accidents are virtually a yearly norm in Canada where our two main freight-train companies have some of the best safety records in all of the Americas. But hey! suit yourself Obama. (In his defence it’s probably the EPA’s fault for being unable to study collateral benefits and consequences of their decisions)

Now let us look at the issue from a more global perspective, something the greenies claim to do. If Keystone XL doesn’t go through the most likely outcome will be the permitting of Enbridge’s Northern Gateway pipeline to the Pacific port of Kitimat. The result of that wold be simply increased CO2 emissions on a global level. How do we get to that conclusion? Firstly the oil will have to be transported to China or other regional industrial countries by super-tankers. No matter how efficient they’ve become over the years they don’t beat pipeline in terms of efficiency. Especially given that the distance travelled will be twice as long. Now we talk about the US being the biggest polluter in the world and China running a close second. A little detail forgotten quite often is that of efficiency per emissions. For virtually the same consumption of energy and pollutant emissions the US generates roughly three times more output (wealth), let’s not even broach the per capita quagmire. So Canada will have to send  the crude oil to be refined in some of the least environmentally efficient refineries in the world.

All this to say how can the best intentions in the world (save the planet from apparent environmental Armageddon) always lead to a worse outcome (more spills, more emissions and more deadweight loss: less global wealth). Mister Obama please think wisely before caving in to your green lobby please.

P.S. Since I now have to go to class I’ll leave aside talk of Canada’s Oil sands being all that dirty a point I’ll refute next time!

P.P.S. Leave comments, argue, get mad, it’s the internet there are thankfully no fist-fights to be had here 🙂