Hey, Slick!

Last night on the PBS News Hour, BP spokeswoman Ayana Mcintosh-Lee said in response to a question about the Deepwater Horizon oil spill, "Well, we have some of the best minds working on this. And they are working around the clock in areas in Houston, in London, as well as here in Houma..."

OK, these are the same best minds that created an ultra-deepwater dynamic positioned semi-submersible oil rig with a blow-out valve that was supposed to prevent spills? Actually, not! The drilling rig was built by a Korean Company, Hyundai Heavy Industries. I guess work isn't going on in Korea.

The political impact of the spill is already starting (here and here), especially since the Obama administration wants more drilling off the US East coast. Before the spin and back pedaling starts, we should understand this event as part of the diminishing returns associated with the approach of Peak Oil. Ultra-deep wells are necessary because the easy-to-reach deposits have already been tapped. Evidently, the engineering on ultra-deep water wells is not quite up to the task and the externality in this case could become a major environmental nightmare.

The case for "drill, baby, drill!" or in this case "spill, baby, spill!" has never made much sense. More drilling means both more carbon in the atmosphere and more environmental degradation. Federal R&D for carbon-neutral technology deserves a strong influx of funds (probably on the order of what will be spent cleaning up the BP Spill), but isn't getting it. Oh, wait a minute, the Oil & Gas Industry make huge campaign contributions. Solar cell, wind-turbine, geo-thermal and other renewable energy industries aren't even on the list.

Turn Off the Bubble Machine

Today on NPR, Michelle Norris interviewed Lloyd Blankfein, the CEO of Goldman Sachs. When asked what Goldman might do in the future to prevent Financial Crises, Blankfein said "...recognize bubbles." On April 27, NOVA presented "Mind Over Money" asking "Can markets be rational when humans aren't?" Taken together, the Blankfein interview and the NOVA program beg a lot of questions.

First, it's not difficult to recognize bubbles (see earlier posts here). Even if Goldman were smart enough to recognize bubbles (I assume they are since they are the "smart money"), it's not their job. What would they tell the "dumb money"? Sorry, we won't place your bets! What would remain of investment banking? In fact, Matt Taibbi thinks Goldman Sachs is "The Great American Bubble Machine." If we wait for Mr. Blankfein and Goldman to recognize and do something about bubbles, we'll be waiting a long time.

How about the Federal Reserve? The Fed also failed to recognize past bubbles since it is the Fed's job to create growth rather than keep the economy from growing too fast.

How about the short-sellers who recognized the bubble and bet against it? They did their job and made a lot of "smart" money, but short-selling neither created nor defused the bubble.

Are there any other institutions that have the power to recognize and control bubbles? I can't find any and I'm not sure that breaking up Goldman would actually solve anything.

As with a lot of political issues, we probably aren't looking at the root cause. Since, 1990 there has been a sharp increase in the share of pre-tax household income held by the top 1% in the US. In 2005, it had almost reached 20%, the same level it had reached in 1929 before the Great Crash. There's a lot of money being held by people who's only objective is to make more money and Goldman is there to help them out (smart) or relieve them of their burden (dumb).

Even Alan Greenspan thinks income inequality is a problem (but doesn't connect it with bubbles) and the cause appears to lie in US politics.