Wednesday Night #1473

David Mitchell‘s unexpected arrival afforded everyone the opportunity to congratulate (through him) his son Parker Mitchell and George Rotor, co-founders of Engineers Without Borders (EWB) , who  next week will receive honorary Doctorates from Queen’s University Faculty of Engineering and Applied Science. Patrick Mercier  is off to India (following training in London) as part of his excellent adventure with HSBC’s International Managers Program. He starts in India (Mumbai and Pune– or Poona) on August 2nd. Adam Daifallah reports that Conrad Black is awaiting the U.S. Supreme Court decision on the ‘honest services’ statute any day.

Risk analysis, the oil companies and the inevitable spill
— There is a fundamental flaw at the heart of the most technologically advanced societies – Risk is imposed on whole communities without any vote from the people who are obliged to assume it
— It’s a tragedy but it’s more about risk analysis and responsibility than it is about oil.
— Just say No to risk

According to the LSE’s Ulrich Beck in the ‘risk society’, risk is omnipresent and is an automatic outcome of goods production and the set of material conditions necessary to bring them into production. In terms of governance, there is an obvious problem in the interdependency of the regulator and the regulatee – whether EPA/oil company or banks, finance companies/rating agency. Moreover it is often cheaper to accept the risk, pay  off those who are harmed and continue, than it is to change corporate ways.
In this case, the possibility of a mistake was so disastrous that there was no way it should have been undertaken.
Most risks are calculable in terms of probability but not in terms of time of occurrence. The probability of the Katrina disaster was known – calculated as occurring roughly once in 200 years – but the date of the occurrence was not, so the delay in the reinforcement of the dike was considered an acceptable risk; in retrospect, a poor choice.
In the case of Exxon Valdez but more especially, the Gulf of Mexico spill , it seems that the risk was considered acceptable, presumably because it would be assumed by the population, wildlife and ecology (without their informed consent) while any possible gain would accrue to  the government and oil company.
An objective observer might conclude that any risk analysis would have determined only that financial rewards for BP and the US government far exceeded any consideration of the environmental/economic costs to the inhabitants (human, animal, plant) of the affected areas.
Now that the Gulf spill has happened, BP and the U.S. government can afford to do whatever is required to minimize the damage and compensate affected humans in a monetary – but not necessarily in a humane or timely manner. There will eventually be an ‘adequate’ clean-up, but the damage to humans and their livelihood, the ecology and environment will last for a long time – perhaps even permanently.
The Tar Sands also imply environmental risk, a fact of which the Conservative government appears to be either ignorant or dismissive. [Editor’s note: A new report commissioned by Ceres and carried out by by the financial risk management group RiskMetrics underlines the dangers and suggests that oil sands expansion should give the companies involved and their investors pause.]
Unfortunately, the people who assess and accept risk are not those who ultimately pay the price. While it appears that BP has the financial means to clean up the area and compensate the local citizens – and more importantly, that the U.S. government has given every indication that it will ensure that it is done right, what if that were not true? What if the same scenario had occurred in a less wealthy country than the U.S. – for example, off the Ivory Coast? [In fact, in 2006, there was a toxic waste disaster in that country that went virtually unnoticed by the world.] Without a global mechanism for allocating costs and a regime to regulate and tax, the situation will get worse; there are too many smaller, poorer (and sometimes corrupt) nations that will sell rights to multinational corporations and be unable – even if willing – to enforce regulation. [Editor’s note: oil-rich Nigeria has huge problems with Shell; the DRC seems headed for potential disaster.] Some organizations never learn. One wonders if shareholders ever ask questions. South Korea, whose income in 1964 was about the same as Ghana’s (the year of its independence) is now almost a developed country with leading enterprises in consumer electronics, automotive products etc. How lucky they were not to have had oil.
Finally, we should recognize that we have little understanding of the effects of some of the technology employed to repair damage (ex. the chemical dispersants currently employed by BP).
Post WWII Germany offers a possible (if elaborate) model: the cost of renewing bombed out homes was subsidized by the owners of homes left intact, thus spreading the risk in a bearable manner.
The probability exists, however slight, of the cost of disasters not yet considered. For example, no underwriter has insured nuclear plants in the U.S. It would appear that there are various potential situations the cost of which the government would have to pay.
The lessons learned from this disaster must include the need for risk analysis to evaluate alternatives (certainly little if any consideration was given to investing in alternative fuels with lower probable risks than mining the ocean floor a mile under the surface) and to allocate financial responsibility before any disaster.
Meanwhile as an enraged world watches BP’s attempts to plug the leak while assuring everyone of their intentions to clean everything up and compensate the victims, perhaps we can hope that improved risk analysis guidelines, more stringent review of proposed exploration, stronger regulation and better enforcement will begin to take hold, along with more motivation to invest in and adopt alternative sources of energy.
There may be some consolation in the fact that the Gulf spill may arrest some of the proposed Arctic drilling, where the long-term damage could be spread over 500 years.

The Omnibus bill
The least-worst scenario unfolds not only on the international scene but in the Canadian Parliament as well. We appear to be moving closer to being a sort of U.S. North, or a fifty-first state as Parliament moves away from our prestigious position of best loved/most admired foreign country. Being in a minority situation, very likely for the last time, the Harper government has cleverly bundled all the sticky controversial issues into an omnibus budget bill, which is therefore a matter of confidence, leaving the opposition in  a lose – lose situation. Many of the issues covered in the bill  (e.g., AECL, environmental protection) at the very least require further parliamentary scrutiny.

Politics and political thought
A fall general election is a strong possibility. The people around Mr. Harper appear to believe that the longer he is seen as Prime Minister, despite some serious tactical errors that he has made, the more the public will get used to the idea. The international events that Canada is hosting this year give him more opportunity to look Prime Ministerial (even if some of us thought he looked bored and wooden at the Olympics), and although Canada has lost stature in many international bodies. One politically astute observer believes that the Liberals will not make major gains in the polls. The Canada At 150 conference was a huge lost opportunity for the Liberals. Michael Ignatieff, (like Conservative candidate Stockwell Day in a previous election), seems incapable of clearly stating what he stands for. People tuned in for a while, gave him a chance, but now they are starting to tune out and opinion is hardening (against him). Elections are usually lost not won. The party in power is always the culprit for what it has done or left undone. That is what happened in the U.K. and will probably happen in the U.S. mid-terms. However, in view of the failure of Michael Ignatieff to project a positive image, it is unlikely to happen in Canada’s next election.
A number of Wednesday Nighters are concerned that politics as practiced today are increasingly partisan, but with an absence of consistency in political thought or in the solutions they offer. What are conservative values? What are leftist values? Neither is consistent with what is happening. Conservative (Republican) governments increase the debt. Unfettered free markets give rise to social problems. Technological advances put some people out of work (the man who pushes a wheelbarrow on a construction site will likely never be able to operate the new forklift).  Class struggle is a real danger as austerity is imposed (by Socialist governments) and will not be accepted by the people. Let us not forget the Spanish and Greek civil wars that broke out in the Thirties.

The market
Low bond yields have made equity very attractive and witnessed what prudent investors noted as a warning signal, namely the rise in the equity market from March to March, equities up 42% to 44% (equivalent to 60% in England due to the falling pound). The low bond yield and “greed factor” exaggerated the gap between price and value.
We are currently in a bear market that started in April. The European markets are very nervous, largely because of Greece and the other PIGS countries, Great Britain, Ireland, Iceland … and they are concerned about the domino effect. The only solution is restructure or default. With the euro dropping precipitously, Germany is predicted to emerge as a winner, Japan as a loser. The next 6 months should see tremendous volatility in currencies. We appear to be facing an unknown situation, the only solution to which appears to some to be a period of re-inflation. A rebound of up to ten percent has been predicted in the next six weeks.
The massive drop in the euro might be a blessing in disguise for Europe, giving all European economies increasing competitiveness, expansion of exports, and promoting greater trade within the European region. There is a distinct probability that a mosaic of regions, and economically autonomous national economies as Brazil or China will emerge as individual trading areas, the prime requisite being a sufficiently large population. The lower forty-eight States constitute a totally self-sufficient trading area within a single country. There are certain caveats. First, the need for natural resources would drive a number of regional economies, e.g. Europe, China, to seek partners elsewhere. Further, limited inter-bloc trading would lead to lower income (below their potential) levels for everyone, owing to opportunities foregone.
Indebtedness is a danger. Although calculations often take into account only public indebtedness, private indebtedness can be as much of a threat. In North America, it is much higher than in Europe. If the public debt is owed to the same currency area or citizens of the country, as is the case in Japan, it is not a problem. It becomes a problem when currency fluctuations must be taken into account.

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The Prologue

In the wake of the SRO event last week (see  also Wednesday-Night.com) we expect a somewhat less elaborate event this week. However, it will be our last opportunity for a while to enjoy Tony Deutsch’s wit and wisdom, as he leaves for Europe on Saturday. Chil Heward and Kimon Valaskakis will also be with us, thus we can expect some serious discussion of economic, finance and governance issues as they relate to the multiplicity of events around the world including those affecting

Europe, the EU and the euro
A little not-so-light reading on the topics:
Crisis Imperils Liberal Benefits Long Expected by Europeans
Europe’s three great delusions
The heresy of the Greeks offers hope
And this delightful piece by Christopher Buckley The Debt of Socrates

Making matters worse on a global scale is the division between the U.S. and Europe on how to achieve global financial reform.
Nations go own way on global financial reform
The global campaign to harmonize rules for financial firms is swerving off course, threatening efforts to curb the risky bets that rocked the world economy two years ago.

The situation in Thailand remains fraught. Thailand’s silent monarch gives some good insights and elicited the following comment from someone who knows the country well:
“what is at stake here is not whether the past can survive (it never will) but whether Thailand can move from a (albeit benevolent) monarchy to a stable democracy.  As corrupt as Thaksin was, he was popularly elected.  And if people do not respect or like the person, they must respect and value the process that put him there.
“Government is not about individuals, it’s about how well it is able to weave the social fabric of a country over time.  As wonderful as any leader is, they will at one point die and a country must last beyond the death of a king.  The current royalists prove the point. Their incompetence has turned a corrupt politician into a saint and a mob into martyrs”

Adding to Asian turmoil is the escalating crisis between the two Koreas.
The Financial Times offers seven theories on why the North Koreans torpedoed South Korea’s destroyer – they are all credible and most are pretty scary.
Meanwhile, Foreign Policy offers a sympathetic view of the dilemma faced by Ban Ki-Moon – one that is apparently unique in UN annals (a Secretary-General  faced with an act of aggression against his home country).

The continuing ecological and economic disaster of the oil spill in the Gulf of Mexico attracts daily commentary and a variety of opinions. There have obviously been serious lapses in governance and the latest news that Despite Moratorium, Drilling Projects Move Ahead  is troubling to say the least. We concur with Bob Herbert’s conclusion that “President Obama has an obligation to make it unmistakably clear that BP’s interests are not the same as America’s interests. He needs to stand shoulder to shoulder with the people who are taking the brunt of this latest corporate outrage. The oil has now stained nearly 70 miles of the Louisiana Coast. No one can say what terrible toll the gusher is taking in the depths of the gulf. And spreading right along with the oil is a pervasive and dismaying sense of helplessness from our leaders in Washington.” Nor should we be complacent about the environmental consequences of Canada’s Tar Sands.
“Alberta’s oil sands are already the world’s largest energy project-with $200 billion in funds committed from the world’s leading oil producers, including BP, ExxonMobil and Shell.  However, these producers face numerous environmental, production and distribution challenges that will grow as the oil sands industry pushes to boost production amid tighter regulations and resource constraints”, concludes the Ceres-commissioned report authored by RiskMetrics Group. Oil sands companies in Alberta are already producing 1.3 million barrels a day, and their goal is to triple production by 2030.”

Financial Reform is always good for intense debate. Therefore, we are pleased to include the following from Tony Deutsch.
Goldman Is the Wrong Target – by Wharton Professor Jeremy J. Siegel
Of all the institutions and individuals who deserve blame for causing the financial crisis – and there are many – Goldman didn’t even come close. In fact, had other investment banks acted as Goldman did in the subprime market, there never would have been a financial crisis to begin with.

On that note, we conclude by reminding you of Astri Reusch’s stunning exhibition « MÉMOIRES GLACIALES » at the Canadian Guild of Crafts (1460 Sherbrooke St. W. Suite B) and the invitation for all to “Meet the artist” on Saturday, May 29 at 2PM.
Also – a Heads-up for next Wednesday‘s annual visit from David and Terry Jones.