2010 - %3, May

BP Oil Spill: Why Size Matters

| Wed May 26, 2010 11:10 AM EDT

Initially it seemed that arguing over how much oil was gushing into the Gulf of Mexico thanks to the BP disaster was mostly an academic exercise. BP said about 5,000 barrels a day; others put the figure at perhaps ten times that much. But the critical issue was how to stop the damn leak, whatever the amount.

Yet the size of the leak, it turns out, may matter a lot. Reuters reports:

Just how many barrels of oil are gushing into the Gulf of Mexico from the Deepwater Horizon spill is a billion dollar question with implications that go beyond the environment. It could also help determine how much BP and others end up paying for the disaster.

A clause buried deep in the U.S. Clean Water Act may expose BP and others to civil fines that aren't limited to any finite cap -- unlike a $75 million limit on compensation for economic damages. The Act allows the government to seek civil penalties in court for every drop of oil that spills into U.S. navigable waters, including the area of BP's leaking well.

As a result, the U.S. government could seek to fine BP or others up to $4,300 for every barrel leaked into the U.S. Gulf, according to legal experts and official documents.

Do the math. At $4,300 a barrel, the difference between 5,000 barrels a day and, say, 20,000 could be $64 million per day in civil fines. And such a fine would be on top of any liability payments. So BP does have a rather direct interest in how the spill is measured. Which also means it has an interest in what information—such as video feeds of the leak—is released.

After the Reuters report came out, the office of Sen. Bill Nelson (D-Fla.) emailed it to reporters with a succinct explanation: "here's one of the big reasons why Sen. Nelson and others push so hard to get the video of the leaking oil from BP." Indeed.

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More on Rand Paul

| Wed May 26, 2010 10:47 AM EDT

Ezra Klein asks whether Kentucky senate candidate Rand Paul believes the federal government can set a minimum wage. True/Slant's Conor Friedersdorf doesn't think that's an important question:

There is just no possible way that the federal minimum wage is going to be repealed, and even if it were, states are perfectly capable of setting their own minimum wage laws, as many do.

Friedersdorf seems to be suggesting that if a political change is unlikely, a politician's position on that change is irrelevant. That is unconvincing. It isn't easy to predict which previously off-limits political issues might suddenly be in play in the future. And in the meantime, voters are trying to make a decision about which candidate most closely mirrors their values. After party identification, candidates' issue positions are the best representation of that. 

(Mistermix at Balloon Juice makes a similar argument.)

Behind Dems' Record Low Approval Rating

| Wed May 26, 2010 9:43 AM EDT

A new CBS News poll out last night reveals approval levels have declined to an all-time, basement low for Obama's Democratic Party, with only 37 percent of those polled saying they have a favorable view of the Dems. That's a decrease of 20 percentage points in the past year. Then again, Republican Party's image isn't much better, either: 33 percent approve of Michael "Keepin' It Real" Steele and Co. And in the "unfavorable" view category, it's a neck-and-neck race between which party gets the mantle of most loathed by American populace so sick of Washington the name evokes disgust and resentment—55 percent of Americans have a negative view of the GOP, and 54 percent say the same about Democrats.

The conclusion here is obvious: If you're a candidate running for national or even state political office, you basically have to do everything you can to separate yourself from the folks in Washington, casting yourself in the starkest terms possible as an outsider untainted by the influence and money of modern-day politics. Take Rory Reid, a gubernatorial candidate in Nevada and the son of Senate Majority Leader Harry Reid (D-Nev.). The other day I was clicking around Reid's site, reading up on his ambitious new education reform plan. Then it hit me: You'd never know that Rory was the son of Harry from reading Rory's website. The only mention I could find of papa Reid was in a smattering of press clippings posted on the site. As one Nevadan wrote me in an email recently, "it doesn't take a rocket scientist to see the negative effects that could arise from such a relationship."

Back to the CBS poll. While the broad political data is mostly predictable, the economic-related results are more telling. For instance, 59 percent of respondents said Wall Street has undue influence on Washington. That's a no-brainer—consider that the finance, insurance, and real estate (or FIRE) sector has spent more than $4 billion lobbying Washington in the last decade or so. And when Washington had the chance to beat back the Wall Street influence machine by limiting the size of big banks, constraining not just their financial size but the size of their political influence, too, the Senate failed to act and the White House did nothing. And there's little chance the House and Senate together will revive that idea.

What's more, the poll shows the public strongly backs government support for homeowners—but not bank bailouts. Which means the Obama administration has it all backward: It's poured billions of dollars and plenty of political capital into the massively unpopular bailouts; but the program that could win them public support, the Making Home Affordable program, the Treasury's homeowner rescue, has been a complete mess. Some would say a failure.

Indeed, with the perilous state of the economy still looming large on the minds of Americans (eight of 10 told CBS the economy remained in bad shape), the administration's inability to help homeowners as it helped the banks could prove disastrous in this fall's elections.

Before the Blast, Signs of Problems

| Wed May 26, 2010 8:10 AM EDT

There were a number of warning signs in the 24 hours before the blast that destroyed the Deepwater Horizon on April 20. Failed tests, concerns with equipment, and building pressure in the well indicated problems with the operation, according to a report released by a congressional committee investigating the disaster.

"[K]ey questions exist about whether proper procedures were followed for critical activities throughout the day" of the blast, the report concludes. While of their memo reaffirms information that has come out in hearings, it also raises new questions about some of the warning signs before the blast.

The report was compiled by the House Energy and Commerce Committee from internal documents from BP (the rig's operator), Transocean (the rig's owner), and Halliburton (the company that poured the cement for the well). It notes that there were signs that too much gas was entering the well and that the cement job on the well might have been faulty. But it appears that those problems may have been ignored and proper procedures were not followed.

From the committee's summary:

According to BP there were three flow indicators from the well before the explosion. One was 51 minutes before the explosion when more fluid began flowing out of the well than was being pumped in. Another flow indicator was 41 minutes before the explosion when the pump was shut down for a "sheen" test, yet the well continued to flow instead of stopping and drill pipe pressure also unexpectedly increased. Then, 18 minutes before the explosion, abnormal pressures and mud returns were observed and the pump was abruptly shut down. The data suggests that the crew may have attempted mechanical interventions at that point to control the pressure, but soon after, the flow out and pressure increased dramatically and the explosion took place. Further, BP’s preliminary findings indicate that there were other events in the 24 hours before the explosion that require further inquiry.

The report isn't conclusive; the information is drawn from company documents, and so far each company involved has pointed the finger at the others for failures on the rig that might have lead to the blast. Hearings on the explosion and spill continue today in Louisiana focusing on what happened on the rig that day. In Washington, the House Natural Resources Committee will hold hearings Wednesday with government regulators overseeing drilling, and on Thursday with the CEOs of companies involved in the accident.

We're Still at War: Photo of the Day for May 26, 2010

Wed May 26, 2010 7:45 AM EDT

 

Lance Cpl. Justin Roy of Lafayette, La., an infantryman who serves with Company F, Anti-terrorism Battalion, 4th Marine Division, engages targets during live-fire urban combat marksmanship training conducted by US Marines and Moroccan soldiers as part of Exercise African Lion 2010 at Morocco Military Base Tifnit May 19. Photo via the US Army photo by Sgt. Whitney Houston.

Senate Standoff on Spill Liability

| Wed May 26, 2010 6:00 AM EDT

After a third Republican block of a Democratic bill to raise the liability on oil spills, the GOP put forward its own bill on Tuesday afternoon. This one would eliminate the cap only for the current spill, but not change the cap set under the Oil Pollution Act for future spills, which stands at $75 million.

The new bill comes from Lisa Murkowski (R-Alaska) and David Vitter (R-La.), and also contains provisions that would expedite the claims process for Gulf residents. Vitter said on the floor that their measure would hold BP to its pledge to cover all costs related to the current spill. "That's a contract offer," he said on the floor Tuesday. "We're saying we'll take it."

Murkowski blocked a first effort from Democrats to bring up a bill that would have raised the cap to $10 billion. James Inhofe (R-Okla.) blocked the same measure last week as well as a revised measure that would eliminate the cap outright on Tuesday. Murkowski said in a statement that she thinks the standard liability should be raised, but that "Congress needs to carefully consider what the appropriate cap should be" before proceeding.

Robert Menendez (D-NJ), cosponsor of Democratic effort to remove the cap, in turn blocked the Murkowski-Vitter bill Tuesday. "What happens when, God forbid, this happens again and the company doesn't make this kind of offer," Menendez said.

Both parties have accused the other of grandstanding on the issue. Meanwhile, oil is still gushing into the Gulf at an unknown rate and the liability cap remains a measly $75 million. Our Senate at work, folks! Never letting a good environmental disaster get in the way of partisan squabbling.

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What Went Wrong in the Gulf?

| Wed May 26, 2010 1:47 AM EDT

So what caused the Deepwater Horizon oil rig to fail? Here's the latest:

BP previously told investigators that a "negative pressure" test, which checks for leaks in the well, was inconclusive at best and "not satisfactory" at worst. But in the meeting Tuesday, BP went further, saying the results were an "indicator of a very large abnormality" but that workers — unnamed in the memo — decided by 7:55 p.m. that the test was successful after all. That may have been a "fundamental mistake," BP's investigator said in the meeting, according to the memo.

Next up is a "top kill," in which mud is injected into the well in order to plug the broken pipe. According to one expert, "There's always a trade-off between making it better and making it worse. This probably has the least amount of risk of making it worse." Why does that not make me feel especially comforted?

Global Financial Reform Update

| Wed May 26, 2010 1:30 AM EDT

The Washington Post reports that efforts to coordinate global financial reform aren't going so well. Among other things:

European diplomats are alarmed by a measure, introduced by Sen. Susan Collins (R-Maine), that they say could force European financial companies to shift significant amounts of capital to their U.S. subsidiaries to cover potential losses....Geithner has said that new capital standards are at the heart of reforming the global banking system, and the financial overhaul bill on Capitol Hill largely defers to the Basel committee to set the standards. Some Europeans complain they have found it hard to coordinate with the United States over the Basel process.

Well, look: Collins's amendment requires banks to hold more capital. That will indeed force European banks to shift capital to their U.S. subsidiaries, but only if European negotiators insist on the new Basel accords having toothless capital standards. Conversely, if they adopt standards similar to Collins's, then European banks will simply need to carry similar levels of capital every place they do business.

Now, maybe European banks don't like Collins's capital standard and want Basel to adopt a looser one. What happens then?

The outcome, for instance, could be very different ways of banking in New York and the financial capitals of Europe, prompting leading American firms to shift their riskiest activities overseas beyond the purview of U.S. regulators.

And that right there is the whole enchilada. If we adopt tough rules and banks decide to move their risky activities in Europe to take advantage of their looser rules, then Europe will be taking a big chance. But they'll be doing it with their eyes open. They can reduce that risk anytime by adopting stricter standards. Every country and every region always has that option.

I'm pretty much convinced that the Basel standards are almost certain to be inadequate unless the rest of the world is essentially forced to accept tough standards. And the only effective way to make that happen is for the United States to adopt strict standards first, thus giving Europe an implicit choice: agree to make strict standards global or else accept becoming the worldwide hub for risky investment. Hopefully they'll choose the former.

Are We Japan 2.0?

| Wed May 26, 2010 12:46 AM EDT

A balance sheet recession is different from a normal recession. It's caused not by inventory cycles or monetary manipulation by the Fed, but by a debt fueled boom that eventually bursts and leaves the economy in the doldrums until debt levels get back to normal. That's the kind of recession we went through last year, and it's the kind of recession that wracked Japan in 90s. Mike Konczal points us today to a paper written a few months ago by Richard Koo of Nomura Research that compares what we're going through today to Japan's earlier experience:

As Koo argues, the economy will not enter self-sustaining growth until the private sector balance sheets are repaired. Even with zero interest rates, there are no borrowers of newly generated savings and debt repayments. With no borrowers, the economy will continue to lose aggregate demand.

And how long will it take for balance sheets to get back to normal? Here's Koo on Japan's experience:

With their balance sheets in a shambles, people had no choice but to reorient their economic priorities from the usual profit maximization to debt minimization in order to put their financial houses in order. This shift, in turn, nullified the effectiveness of economic theories and
policies based on the assumption that the private sector always seeks to maximize profits.

....Those whose balance sheets are underwater will try to pay down debt as quickly as possible to restore their credit ratings, regardless of the level of interest rates. By 1995 Japanese interest rates were almost at zero, but instead of borrowing more, Japan’s corporate sector became a net repayer of debt until 2005 — fully 10 years later — as shown in Exhibit 4....No economics or business textbook recommends that the private sector pay down debt when interest rates are at zero, but that was precisely what happened in Japan for a full ten years.

Exhibit 4 is below. Japan's property bubble was roughly similar in size to ours, and their recession lasted 16 years. Between 1995 and 2005, net corporate borrowing was negative despite interest rates of zero percent. Monetary policy simply lost traction: you can't force businesses that are deeply in debt to borrow even more no matter how cheap you make it. So what to do? Koo argues that the only answer is fiscal stimulus and plenty of it, even if that means piling deficits on top of deficits. "Now that the experience of Japan is available for anyone to see," he says, "there is no reason for the U.S. to repeat the same mistake....The U.S. government should not embark on fiscal retrenchment until it is absolutely certain that the private sector is healthy enough to borrow and spend the funds left unborrowed by the government."

HS Teachers Toss Holy Water on Atheist Colleague

| Tue May 25, 2010 7:31 PM EDT

[UPDATEThe plot to this story has thickened, with spying, sniping, union intrigues, and right-wing patriots. Check out the latest here: "Tea Party, Union Back Holy Water Teachers."]

South Florida: pristine beaches, liberal amounts of liquor, vacationing coeds, flamingoes, drug dealers.

Growing up there, though, I knew the region wasn't all Miami Vice, CSI, or even Dave Barry columns. As in every part of the union, South Florida has its traditional nooks, where mainly minority working-class folks with old-time discipline and old-time religion reign supreme. Western Pompano Beach, on the wrong side of the tracks from the ocean, was one such place. At its core, tucked between a crumbling neighborhood road and I-95, was Ely High School, where I graduated from.

That's where local pastors say Leslie Rainer and Djuna Robinson, two Christian teachers, doused colleague Schandra Tompkinsel Rodriguez with "holy water" March 11 in the middle of a class Rodriguez was teaching. They claim she was discussing her nonbelief with the students, thus warranting their aqueous intervention. Rodriguez filed a complaint, and the teachers were removed from campus.

You'd assume that's the end of the story. But not in Pompano Beach. [More]