Kevin Drum

Speculating on Oil

| Tue Jul. 7, 2009 6:08 PM EDT

The New York Times reports that the Obama administration plans to take a more proactive position toward speculation in the oil market:

In a big departure from the hands-off approach to market regulation of the last two decades, the chairman of the Commodity Futures Trading Commission, Gary Gensler, said his agency would consider new limits on the volume of energy futures contracts that purely financial investors would be allowed to hold.

The agency also announced that it would pull back part of the veil on the oil and gas markets, publishing more detailed information about the aggregate activity of hedge funds and traders who arbitrage between domestic and foreign energy prices.

....Oil prices have swung wildly in the last year, hitting about $145 a barrel last summer, then plunging to $33 in December before rising to about $70.

....A growing number of critics have blamed some of the extreme volatility on the role of purely financial investors — those who are simply betting on the direction of energy prices, as opposed to those who actually use such products, like airlines....Non-commercial traders accounted for almost a fifth of the activity in several major oil and gas products for the week that ended June 30, according to data compiled by the commodities agency.

One of the interesting aspects of this is that it demonstrates the genuine difficulty in identifying asset bubbles.  The housing bubble was relatively easy to spot: it took place over a long period of time and prices shot up way, way past their historical trendline.  But oil?  That's harder.

Take a look at the chart on the right, courtesy of Calculated Risk.  It shows oil prices over the past couple of decades, and what you see is moderate stability from 1985-1999 followed by a slow rise starting around 2000 and a sharp jump between 2004-2006.  Was that a bubble?  Prices dropped for a few months after that, and then, over the space of 18 months, tripled from $50 to $150.  Was that a bubble?

To this day, I don't think there's any consensus about this.  Given growing demand and flat supply, prices should have gone up after 2000 — and the sharper rise in 2004 was no big surprise either.  That's not a bubble, it's just the free market at work.  But how about that second spike?  Was it driven by speculation?  Or was it also driven by demand fundamentals, which cratered naturally when the global economy went into recession in mid-2008?  And even if it was a bubble, it only lasted 18 months.  What are the odds that anybody could have identified it and targeted it fast enough to keep it under control?

Beats me.  But although I continue to think that supply and demand fundamentals were behind much of the price rise, I began to wobble on this during the first half of 2008. The oil market really did start to look pretty bubbly, and in August the CFTC begain to produce some persuasive evidence that financial speculators were having a substantial effect on prices.  This speculative bubble couldn't last very long (eventually speculators run out room to store their oil), but there's good reason to think that even a 12-month spike did a lot of damage to the world economy.

So what now?  Oil has been on the rise recently despite the recession, causing a few analysts to suggest that speculation is once again temporarily inflating prices.  And me?  I don't know.  As I've said before, though, one thing we can count on now that demand for oil is bumping up against fundamental supply limits is lots of price volatility.  Given that, trying to keep a lid on speculators creating even greater frenzy in the oil market makes a lot of sense.  The CFTC is probably doing the right thing here.

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MoJo Mix: 7 July 2009

| Tue Jul. 7, 2009 3:13 PM EDT

Hey, it's Laura again. Kevin says it's okay if I drop by every few days with some MoJo stories we think you'll like. Don't worry, he'll be back in the next post.

I can't vouch for his cats, but Kevin Drum is one incredibly nice teetotaler in person. All the more reason his non-dirty-hippie's guide to marijuana legalization is well worth a read. And when you're done weeding that (sorry), here are three more stories readers are liking today:

1) This reporter fled the Mexican Army. Spread the word and you could save his life.

2) Drug War Quiz: Do you know which anti-pot ad campaign findings the White House buried in 2004? Dust off your short-term memory and test your drug war knowledge.

3) The latest Palin ethics complaint: She allegedly collected per diem payments for living in her Wasilla home. Palin ethics bingo, anyone?

Laura McClure writes the MoJo Mix and is the new media editor at Mother Jones. Read her investigative feature on lifehacking gurus in the latest issue of Mother Jones.

Raw Data

| Tue Jul. 7, 2009 2:12 PM EDT

The Michael Jackson tribute is currently being aired on 18 separate channels on my TV.  Just sayin'.

Pricking Bubbles

| Tue Jul. 7, 2009 1:21 PM EDT

Alan Greenspan famously argued that the Fed shouldn't pay attention to asset bubbles.  They're hard to identify, he said, dangerous to prick, and can be better dealt with after they deflate.  This was, roughly speaking, the "Greenspan put," which served to make the recent housing bubble worse than it otherwise would have been, since investors knew the Fed would do nothing to stop the party while it was underway and would always be around afterward to help clean up.

Via Simon Johnson, I see that recently appointed New York Fed chairman William Dudley, a longtime bubble hawk, gave a speech a few days ago taking issue with Greenspan's claims:

Relative to this, I would argue that:

1. Asset bubbles may not be that hard to identify — especially large ones. For example, the housing bubble in the United States had been identified by many by 2005, and the compressed nature of risk spreads and the increased leverage in the financial system was very well known going into 2007.

2. If one means by monetary policy the instrument of short-term interest rates, then I agree that monetary policy is not well-suited to deal with asset bubbles. But this suggests that it might be better for central bankers to examine the efficacy of other instruments in their toolbox, rather than simply ignoring the development of asset bubbles.

3. If existing tools are judged inadequate, then central banks should work on developing additional policy instruments.

Let’s take the housing bubble as an example. Housing prices rose far faster than income. As a result, underwriting standards deteriorated. If regulators had forced mortgage originators to tighten up their standards or had forced the originators and securities issuers to keep “skin in the game”, I think the housing bubble might not have been so big.

I think that this crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high. That suggests we should explore how to respond earlier.

The basic proposition here — namely that letting bubbles run their course might not be such a great idea after all — is no longer especially controversial.  But Dudley's second and third points are the important ones here.  Even now, many economists still argue that hiking interest rates and producing a recession is too high a price to pay every time someone thinks an asset bubble is forming.  But if that's the case, it means that the Fed needs to be more aggressive about applying more targeted tools to prick bubbles, or, if their tools are inadequate, asking Congress to give it better ones.

Johnson is skeptical that Dudley is really serious about this.  If he is, the next step is to put some meat on the bones of this speech: specify how asset bubbles should be identified and what kinds of tools are needed to fight them.  Stay tuned.

Raw Power

| Tue Jul. 7, 2009 12:31 PM EDT

In a speech today in Russia, Barack Obama said  that "the pursuit of power is no longer a zero-sum game."  Dan Drezner isn't so sure:

If he had said, "The pursuit of prosperity is no longer a zero-sum game," I'd be fine with the passage.  I still think power is a zero-sum concept, however.  The two ideas are linked but hardly the same. 

I suppose that's true.  Even in a Thomas Barnett-ish world where all the big players gang up to police the world, it's prosperity and security that are positive sum, not raw power.  Anyone care to try and come up with a counterexample?

Taking Sarah at Face Value

| Tue Jul. 7, 2009 12:00 PM EDT

Sarah Palin, decked out in fishing gear and hauling in the salmon, talks to ABC's Kate Snow about why she quit as governor of Alaska:

Palin conceded many people are still confused about why she made the decision to leave office. "You know why they're confused? I guess they cannot take something nowadays at face value," Palin said.

But she said a major factor in the decision was the mounting legal bills she and the state have had to incur to fight ethics charges from her political adversaries. None of the accusations has been proven but, she said, the costs of fighting them have been enormous.

"You know conditions have really changed in Alaska in the political arena since Aug. 29, since I was tapped to run for VP. When that opposition research — those researchers really bombarded Alaska — started digging for dirt and have not let up. They're not gonna find any dirt," she said. "We keep proving that every time we win an ethics violation lawsuit and we've won every one of them. But it has been costing our state millions of dollars. It's cost Todd and me. You know the adversaries would love to see us put on the path of personal bankruptcy so that we can't afford to run."

I'm actually more willing than most to take Palin's explanation at face value.  The constant stream of piddling and frivolous ethics charges probably did get hard to put up with and probably did cost her a lot of money.  But don't most politicians in similar circumstances set up a legal defense fund of some kind?  The attacks would still be annoying, but dealing with them doesn't necessarily have to be either a huge time sink or a huge personal cost, especially when you have the fundraising power she does.

Very mysterious.  But my guess is that the other half of her explanation should be taken at face value too.  (Well, face value plus a little bit extra.)  Namely that she doesn't want to be a lame duck.  Not because she doesn't want to milk the good citizens of Alaska for lots of overseas junkets, but because the entire legislature hates her guts these days and the whole thing has become a slog.  "We won't get anything done," she told Snow, and just that's no fun.  Giving speeches to adoring throngs is way more satisfying.

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Cheese-Eating Healthcare

| Tue Jul. 7, 2009 2:06 AM EDT

When I reviewed Jon Cohn's Sick a couple of years ago for CJR, I concluded with this:

The format of Sick almost begs for narratives about overseas health care systems. The book is basically a tour around America, with each of its eight chapters named after the place in which its story unfolds. So why not include chapters on Manchester, Malmö, and Marseilles, each of them highlighting in narrative form both the good and bad points of the British, Swedish, and French systems?

Naturally, then, I'm delighted that Jon found someone to fund exactly that:

Last year, I had the opportunity to spend time researching two [] countries: France and the Netherlands. Neither country gets the attention that Canada and England do. That might be because English isn’t their language. Or it might be because they don’t fit the negative stereotypes of life in countries where government is more directly involved in medical care.

....In the course of a few dozen lengthy interviews, not once did I encounter an interview subject who wanted to trade places with an American. And it was easy enough to see why. People in these countries were getting precisely what most Americans say they want: Timely, quality care. Physicians felt free to practice medicine the way they wanted; companies got to concentrate on their lines of business, rather than develop expertise in managing health benefits. But, in contrast with the US, everybody had insurance. The papers weren’t filled with stories of people going bankrupt or skipping medical care because they couldn’t afford to pay their bills. And they did all this while paying substantially less, overall, than we do.

Forget Canada and Britain.  Neither one is even remotely close to the kind of system we'd ever put in place in the U.S.  France's system, however, is surprisingly American in its basic underpinnings.  And while no system comes out tops in every single metric, French healthcare, as Jon says, is better than ours on almost all of them and does it for close to half the cost.

Now, the fact that the French spend about half what we do doesn't mean that we'd cut our costs in half if we adopted a French-style system.  We wouldn't.  There's too much path dependence and too many cultural differences for that.  But what it does mean is that if we adopted something close to their system, we could certainly achieve high-quality 100% basic coverage — with the ability to purchase extra coverage for anyone who wants it — for no more than we spend now and possibly a bit less.

We won't, of course, because too many people are still convinced that healthcare in the United States is better than it is in France — or anywhere else.  It's not.  It's worse and more expensive.  Somebody tell Max Baucus.

UPDATE: Matt Yglesias says that Max already knows.  I figured as much.

Quote of the Day

| Tue Jul. 7, 2009 1:26 AM EDT

From Jaci Woods, a real estate broker in Irvine, California, explaining the charm of our little planned community:

"The people that don't like following rules say they can't stand it. I saw a man on a ladder starting to paint the side of his house lavender," she said, noting the color was banned by the homeowners association. "It's the ones like that that we guard against."

True that.  You can't be too careful in these parts.  In fact, my neighbor's air conditioner has been on the fritz for the past few weeks and its racket has become really annoying.  I'm thinking about having him deported with extreme prejudice.

From the Annals of Bad Editors

| Tue Jul. 7, 2009 12:30 AM EDT

I'm not quite sure why I looked this up — I think I was verifying the spelling of Daniel Keyes' name — but this afternoon I checked out the Wikipedia entry for "Flowers for Algernon" and learned this:

In 1958, Keyes was approached by Galaxy Science Fiction magazine to write a story, at which point the different elements of Flowers for Algernon fell into place. On submitting the finished story to Galaxy, however, the editor suggested changing the ending so that Charlie retained his intelligence, married Alice, and lived happily ever after. Keyes refused to make the change and sold the story to The Magazine of Fantasy and Science Fiction instead.

Keyes worked on the expanded novel between 1962 and 1965 and first tried to sell it to Doubleday, but they also wanted to change the ending. Again, Keyes refused and gave Doubleday back their advance. Five different publishers rejected the story over the course of a year until it was taken on and published by Harcourt in 1966.

Seriously?  Did these guys also tell Shakespeare that Romeo and Juliet was kind of a bummer and he really ought to have Juliet wake up just as Romeo was about to take the poison — followed by a backslapping reconciliation between the Montague and Capulet clans and a joyous wedding between the star-bless'd lovers?

Jeebus.  What the hell kind of story is it if you give it a happy ending?  What was up with these guys?

Turning the Screws on Iran

| Mon Jul. 6, 2009 2:30 PM EDT

On Sunday, Joe Biden told George Stephanopoulos that if Israel wants to bomb Iran's nuclear facilities, they can just go right ahead:

Look, Israel can determine for itself — it's a sovereign nation — what's in their interest and what they decide to do relative to Iran and anyone else.

Both Robert Farley and Matt Yglesias read this as Biden distancing the administration from any possible attack.  I have a hard time interpreting it that way, especially when Stephanopoulos asked for and got this clarification:

STEPHANOPOULOS: But just to be clear here, if the Israelis decide Iran is an existential threat, they have to take out the nuclear program, militarily the United States will not stand in the way?

BIDEN: Look, we cannot dictate to another sovereign nation what they can and cannot do when they make a determination, if they make a determination that they're existentially threatened and their survival is threatened by another country.

The normal response from Biden would have been simply to repeat the administration's standard position: we don't expect Israel to attack, we wouldn't countenance an attack, and beyond that we won't engage in hypotheticals.  But for some reason that's not what Biden did, and the change in tone was pretty clearly in the direction of not standing in Israel's way if they decide to do something.

My guess: this is mainly intended to put a little bit of public pressure on Iran.  Everyone understands that Israel would have to overfly Iraq to get to Iran, and everyone understands that they could only do this with American permission — tacit or otherwise.  Nothing has changed in this regard.  America is plainly on the hook as a co-conspirator if Israel does anything, and always has been.

Rhetorically, though, this amps things up.  Biden is basically saying that Israel really might launch an attack, and the best way to avoid that is for Tehran to start dealing seriously with the United States.  "If the Iranians respond to the offer of engagement, we will engage," he said carrotishly — and if they don't, well, there's not much we can do to stop our crazy cousin.  You know how he is.  You're better off dealing with us.

Hard to say if this will work.  But that seems to be what's going on.  This isn't distancing, it's pressure to quit screwing around and instead sit down and talk.