naked capitalism

Ghost hunters: On the trail of a ‘living fossil’ BBC

Dachshund U.N. – a sign of hope for dogs and mankind Culture Mulcher (hat tip reader Crocodile Chuck)

Radioactive fish near nuclear plant said ordinary Washington Post (hat tip reader MindTheGAAP)

BP facing multimillion-dollar legal claim from British pension fund Guardian

Trust your senses Gulf Oil Blog

How BP’s Deepwater Horizon oil find was originally reported in September 2009 Ed Harrison

Hurricane Season Complicates Gulf Oil Spill Huffington Post

Bankers’ ‘doomsday scenarios’ under fire Financial Times. I take Cecchetti seriously here; his bias is to be bank friendly, and he is taking them very much to task.

Courts hit by a deluge of civil credit crunch cases Independent

Some Say European Central Bank May Be Missing Deflation Threat New York Times

The Pain Caucus Paul Krugman, New York Times

Obama Talks Left To Move Right, As Wall Street Criminals Are Given A Free Pass And Reforms Are Watered Down Danny Schechter

The Role of Home Equity Extraction Peter Dorman

The “gas now, pay later” myth billy blog

Antidote du jour:

Reader Richard Smith provided a sighting of bank boosterism, courtesy The Economist:

The happy secret of Western banking is that the system in aggregate now has lots of capital (see chart) relative to the net losses experienced over the crisis. The kind of erosion of capital forecast by the Federal Reserve’s stress tests last year, for example, has simply not materialised. That means the Basel club can legitimately argue that banks in aggregate do not need to raise much new capital.

Richard’s comment:

You know, I’ve got an idea why these losses might have simply not materialized. I have a little hunch that assets not marked to market, assets reinflated by ZIRP, assets sliding onto Government balance sheets via purchase programs, and loans not foreclosed, might all have something to do with it.

Yves here. That’s accurate. When you look at bank earnings, they are due almost entirely to revaluation of assets, yield curve arbitrage (super low rates, courtesy the Fed and other obliging central banks, has produced particularly fat profits from what used to be called “borrow short/lend long” but today looks more like “borrow short/park dough in Tresuries”) and underreserving. Only the yield curve arb is real cash earnings; the rest is accounting fictions (although the Treasury and Fed keep claiming that the current elevated prices of toxic assets are real, and their former values were irrational). We’ll turn the mike over to hedge fund manager Scott on the subject of underreserving. From his March 31 letter to investors:

FDIC-insured banks collectively showed profits of a little over $900 million dollars in their recently-reported fourth quarters. They made money! How did they do so? They reduced reserves for bad loans by $1.7 billion, even as the number of their past due loans increased. The FDIC’s press release notes that “asset quality indicators worsened in the fourth quarter” and net charge-offs (write downs of bad loans) increased by $2 billion, but the reserves banks established against future losses fell by $1.7 billion from the third quarter. Had banks simply maintained reserves at a constant percentage of delinquent loans, their $900+ million profit in the quarter would have been transformed into a loss of over $6 billion.

Yves here. Annaly Salvos, in “Bank Profit Mirage III: From FASB With Love?” provides more detail:

May 20th saw the release of the FDIC’s Quarterly Banking Profile (QBP) for the first quarter of 2010, trumpeting the headline: Industry Net Income Improves to a Two-Year High of $18 Billion. As we’ve shown in previous quarters, the banks have been serially under-reserving for losses in order to show headline profits, despite non-performing assets (NPAs) that continue to rise. We expected a similar story in the current quarter, and indeed we are told that provisions fell in the first quarter in the face of increasing NPAs. In fact, for the first time since 2005, provisions didn’t even cover charge-offs for the period….

As the graph shows, there has been continued credit deterioration, but the coverage ratio improved thanks to the large increase in reserves. The reserve against loan losses showed a build of $34.5 billion during this quarter, by far the largest single quarter build ever recorded (even larger than 2Q 2008’s $23.3 billion). But wait, the FDIC press release stated that the banks recorded profits of $18 billion as a result of reduced provisions against loan losses. And we already know that charge-offs exceeded provisions during the quarter. Maybe you’re asking the same question we are: so how did the banks manage to build reserves, when provisions fell short of charge-offs?

Spoiler alert: it’s related to the implementation of new accounting standards. In simple terms, the adoption of FAS 166/167 requires that beginning January 1, 2010, companies must bring certain off-balance sheet entities onto their balance sheets. We’ve mentioned this before as it relates to the weekly Fed H.8 report, so we won’t go into more detail here.

According to the FDIC QBP press release (emphasis is our own):

“The large jump in reported reserves was associated with the requirements of FASB 166 and 167, as affected institutions converted equity capital directly into reserves. The increased reserves caused the industry’s “coverage ratio” of reserves to noncurrent loans and leases to increase for the first time in 16 quarters, from 58.3 percent to 64.2 percent, even though slightly fewer than half of all insured institutions (49.2 percent) improved their coverage ratios during the quarter.”

This reduction in equity capital clearly didn’t flow through the income statement, as reserve builds normally would. That’s because in the adoption of FAS 166/167, companies aren’t required to run these kinds of losses through the current year’s income statement; instead, a one-time adjustment is made in retained earnings on the balance sheet. The rules don’t require restatement of prior period earnings, but strangely enough, there were substantial revisions to previously reported numbers. Remember last quarter’s happy headline of $914 million in profits? That’s been revised away and now stands at a loss of $1.3 billion. The other 3 quarters in 2009 feature nearly $3.5 billion in additional downward revisions to previously reported earnings. We have to assume that these previous restatements are unrelated to the accounting change, but we are simply unsure and there are no notes about previous restatements in the release…

Lest we forget our usual FDIC reserve math machinations: even after this quarter’s stealth reserve build, it will take $146.4 billion of future earnings to simply get the coverage ratio back to 100%. That’s one hell of a headwind.

Yves here. In other words, those peachy-looking bank earnings don’t stand up under close examination. Which takes us back to the main thread, the happy talk from The Economist:

Where Basel 3 will almost certainly have to retreat is in its proposal to force banks significantly to cut their structural reliance on short-term funding. Credit Suisse reckons the regulators’ proposed “net stable funding ratio” would require European banks to raise €1.3 trillion ($1.6 trillion) of long-term funding. Even over the course of several years, finding enough deposits or issuing enough bonds to meet that requirement is a hair-raising prospect—not least because of regulators’ parallel efforts to remove the implicit guarantee that bank creditors still enjoy.

As Richard Smith observes:

In other words, The Economist thinks there’s not much of an appetite to dismantle the European shadow banking system. And with the US financial reform program leaning hard on the promise of Basel III, I’m sure American banks will be quite happy that the stable door is going to stay wide open. Tim Geithner too, perhaps: things seem to be panning out as suggested in my last post.

Yves here. It should be no surprise that US bank regulators are continuing to prop up banks, but it’s disappointing when the media gives them and the bank earnings phony-baloney they enable a free pass.

As previous posts on this blog have discussed, trying simultaneously to shrink total private sector debt levels and government debt levels at the same time, absent very aggressive currency depreciation or other measures to increase net exports, is likely to result in a fall in GDP and deflation. Ironically, that means overly aggressive measures to reduce debt levels will make it even more difficult to service outstanding debt. As Rob Parenteau explained, using the example of Spain:

Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0

Again, keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong….

We can apply the financial balances approach to make the current predicament plain. If, for example, Spain is expected to reduce its fiscal deficit from roughly 10% of GDP to 3% of GDP in three years, then the foreign and private domestic sectors must be together willing and able to reduce their financial balances by 7% of GDP. Spain is estimated to be running a 4.5% of GDP current account deficit this year. If Spain cannot improve its current account balance (because remember, it relinquished its control over its nominal exchange rate the day it joined EMU), the arithmetic of sector financial balances is clear. Spain’s households and businesses will need to spend 7% of GDP more than they earn over the duration of the next three years, thereby adding more private debt to their balance sheets.

Spain already is running one of the higher private debt to GDP ratios in the region. In addition, Spain had one of the more dramatic housing busts in the region, which Spanish banks are still trying to dig themselves out from (mostly, it is alleged, by issuing new loans to keep the prior bad loans serviced, in what appears to be a Ponzi scheme fashion). It is highly unlikely Spanish businesses and households will voluntarily raise their indebtedness in an environment of 20% plus unemployment rates, combined with the prospect of rising tax rates and reduced government expenditures as fiscal retrenchment is pursued.

Alternatively, if we assume Spain’s private sector will attempt to preserve its estimated 5.5% of GDP financial balance, or perhaps even attempt to run a larger net saving or surplus position so it can reduce its private debt faster, Spain’s trade balance will need to improve by more than 7% of GDP over the next three years. Barring a major surge in tradable goods demand in the rest of the world, or a rogue wave of rapid product innovation from Spanish entrepreneurs, there is only one way for Spain to accomplish such a significant reversal in its current account balance.

Prices and wages in Spain’s tradable goods sector will need to fall precipitously, and labor productivity will have to surge dramatically, in order to create a large enough real depreciation for Spain that its tradable products gain market share (at, we should mention, the expense of the rest of the Eurozone members). Arguably, the slack resulting from the fiscal retrenchment is just what the doctor might order to raise the odds of accomplishing such a large wage and price deflation in Spain. But how, we must wonder, will Spain’s private debt continue to be serviced during the transition as Spanish household wages and business revenues are falling under higher taxes or lower government spending?

Yves here. Now there is another route, which is sufficient currency depreciation to lift all boats in the EU high enough to . Wolfgang Munchau in the Financial Times hazards what might be required:

….the euro’s exchange rate has indeed weakened, and may weaken further. But it will probably not do so sufficiently to solve southern Europe’s competitiveness problems. In Greece, for example, tourism is the main export industry. A slump of the euro against the dollar is not going to change the country’s relative competitive position against the eurozone nations of the Mediterranean Sea. It could improve competitiveness against Turkey and Croatia, for example, but only to the extent that the lira and kuna also revalue. For the euro exchange rate alone to do the heavy lifting in restoring southern European competitiveness, it would take a massive further depreciation – to about 60 or 80 US cents to the euro.

Yves here. A fall of that magnitude has good odds of being more than a tad destabilizing, both from an economic and a geopolitical standpoint. It’s likely to precipitate either retaliation (selective tariffs) and/or deliberate efforts by other countries to devalue their currency versus the euro.

Ambrose Evans-Pritchard at the Telegraph points out that ratings agencies and commentators in Spain are taking note of the demand-dampening impact of the austerity measures now planned:

For Spain it has been a horrible week. The central bank seized CajaSur and imposed draconian write-down rules on banks to restore confidence. The Spanish Socialist and Workers Party (PSOE) of Jose Luis Zapatero then rammed a 5pc cut in public wages through the Cortes by a single vote, shattering consensus. The government cannot hope to pass a budget. Its own trade union base is planning a general strike.

The sub-text of Fitch’s 32-page report shows Mr Zapatero’s self-immolation to be futile in any case. The agency has not downgraded Spain for lack of austerity. Its implicit conclusion is that the policy of 1930s wage cuts – or “internal devaluations” – being imposed on southern Europe’s humiliated states as a quid pro quo for the EU shield is itself part of the problem. Ultra-austerity will bleed the economy, shrivel tax revenues and fail to close deficit anyway. “Fitch believes the risk that economic growth will fall short of the government’s projections,” it said.

El Pais spoke of a “perverse spiral” in its editorial. “The Fitch note drives home the apparently unsolvable contradiction in which the Spanish economy finds itself. To maintain debt solvency Spain must squeeze public spending: yet this policy undermines the chances of recovery which itself causes further loss of confidence.”

Yves here. We are not suggesting that there are pretty or painless ways out. But the course of action underway makes shielding Eurobanks from losses one of its top priorities. Yet any program that is going to make average workers take big hits (remember, wage cuts will hit all workers, irrespective of whether they were prudent or reckless) also needs to have at least the patina of shared sacrifice. More costs need to be imposed on banks and bank investors. Equity and bond investors are risk capital, yet they are being shielded again and again from the consequences of their poor decisions. The longer that goes on, the greater the odds of political blowback that will undermine efforts to create greater stability within the eurozone.

Horned dinosaurs ‘island-hopped’ from Asia to Europe BBC

How to sue your tech vendor — and win InfoWorld

“It’s BP’s Oil” Mother Jones (hat tip reader Francois T). From last week, but still relevant

Gulf oil well disaster could mean explosive profits for HalliburtonKansas City Examiner (hat tip reader John D)

Documents Show Early Worries About Safety of Rig New York Times (hat tip reader Glenn Stehle)

Gulf Oil Spill: Media Access ‘Slowly Being Strangled Off’ Associated Press

How Did the CEO Who Presided Over the Company that Paid a $1.7 Billion Fraud Settlement Become a Credible Candidate for a State Governorship? Health Care Renewal (hat tip reader Francois T)

Shot in Iraq, soldier gets bill for missing equipment Raw Story

Dems Kill COBRA For Older Unemployed – Health Care Reform Subsidies Next? Dave Johnson

“Science vs. Religion” discovers what scientists really think about religion Washington Post

3,000 Pages of Financial Reform, but Still Not Enough Gretchen Morgenson, New York Times

When Germ Warfare Happened Judith Miller, City Journal (hat tip reader Paul S)

Antidote du jour:

From the Washington Post, as foretold earlier by George Washington:

BP Chief Operating Officer Doug Suttles said the company determined the “top kill” method had failed after studying it for three days. The method involved pumping heavy drilling mud into a crippled well 5,000 feet underwater.

“We have not been able to stop the flow,” Suttles said. “We have made the decision to move onto the next option.”…..

BP says it’s already preparing for the next attempt to stop the leak. Under the new plan, BP would use robot submarines to cut off the damaged riser from which the oil is leaking, and then try to cap it with a containment valve. The new attempt would take four days to complete.

“We’re confident the job will work but obviously we can’t guarantee success,” Suttles said of the new plan.

Um, didn’t BP peg the odds of success of the top kill at 60% to 70%? I don’t have much confidence in their “confidence”.

San Jose union begins organizing pot workers SF Gate (hat tip reader John D)

Out-of-office reply: got the message? Tyler Brûlé, Financial Times. I suspect quite a few readers will take issue with this. And Brûlé also ignores the fact that there are places short of outer Siberia where there really is no cell phone signal (take big chunks of coastal Maine, for instance)

Headline of the Month: Why a Pigeon Is Under Armed Guard in India DoctoRx

Gulf oil spill is public health risk, environmental scientists warn Guardian

Morgan Stanley Holiday Weekend SEC Filing: Mack’s Salary Doubled WSJ Deal Journal

Whither Spain – Towards Finland or Argentina? A Fistful of Euros

House Votes to Eliminate Hedge Fund Tax Break New York Times

Number of the Week: 16% of Bonds Misrated Even Using Lenient Standards WSJ Economics Blog

“Angry Old White Men” Mark Thoma

Antidote du jour:

During the crisis of 2007-2008, there was fair bit of discussion of the so-called Minsky Moment, when an economy that has built a house of cards of speculation and over-leveraged “Ponzi units” (creditors that could never make good on their commitments, and are viable only by finding new suckers to give them new debt to pay old lenders) starts to collapse.

But the idea of a Wile E. Coyote moment was less widely discussed. Wile E. Coyote was the famous Warner Brothers character ever in pursuit of Road Runner. One regular bit of shtick was having him run off cliffs and proceed quite a way in thin air, falling only when he looked down and saw the gulf below him.

Despite some occasional sharp falls in equity values in May, and a significant depreciation of the euro, most investors recognize that some serious adjustment is inevitable, starting with a restructuring of Greece’s debt. Yet in a peculiar parallel to the US’s extend and pretend with its financial system, the officialdom seems to hope that if things can be kept on even keel long enough, the system will self-repair, or at least be better able to handle the shock. Yet the contrary evidence continues to mount, with Fitch’s downgrade of Spain to AA+ leaving Moody’s as the sole rating agency that pegs Spain at AAA.

Some of my readers who have high-level political contacts say that the plan in policy circles in the US is for banks to continue to get the soft glove treatment (in particular, super low interest rates) so they can rebuild their balance sheets. Funny how their managements are still being allowed to siphon of a lot of these subsidized profits via outsized bonuses. This may also be true for Eurobanks, whose are even less far through writing down dodgy debt than their US peers.

The problem is that it looks virtually certain that dislocations will hit Europe well before banks are off their covert life support programs. Yet while a restructuring of Greece’s sovereign debt is seen as inevitable by most analysts (well, save maybe Jeffrey Sachs), the denial among the Eurozone leadership appears profound. From an article yesterday by Gillian Tett in the Financial Times:

Last week, some of China’s most powerful sovereign wealth fund officials held discreet discussions with investment banks about the outlook for the eurozone. And one of the hottest topics was the thorny issue of haircuts.

More specifically, as the eurozone writhes in turmoil, what the Chinese (and others) are trying to work out is just how big the losses on government bonds might be if, say, Greece were to restructure. Equally crucial, they (and others) are also trying to work out who might take that haircut.

It is a crucial question for the bond markets. Unfortunately, however, it is also a topic that eurozone leaders are adamantly refusing to discuss – or even recognise.

As Tett points out, holders of sovereign debt in the weaker Eurozone nations are in a not-pretty situation. Bailout-related borrowings are to be senior to existing debt, so if these rescues merely postpone the inevitable and Greece’s (and other) debt is restructured, they are likely to be worse off than if it were to happen now.

It isn’t hard to see, given that the bailouts simply shift risk from the periphery states to the core, that would be better to do triage, and make a first cut at which borrowers simply won’t make it, and restructure those debts. The current program instead is ultimately about protecting Eurobanks from losses, and is destined to fail. John Mauldin, in his newsletters, has been featuring the work of Rob Parenteau, as featured first here on Naked Capitalism (and a source of much reader ire): that deleveraging the public sector and the private sector at the same time is impossible absent a big rise in exports. Pretty much every major economy is on a “reduce government debt” campaign. Many are also on a “deleverage the private sector” program too (which is warranted, given the amount of profligate lending that occurred). The problem, however, is that these states can’t all increase exports, particularly to the degree sought. As Mauldin notes:

Let’s divide a country’s economy into three sections, private, government and exports. If you play with the variables a little bit you find that you get the following equation.

Domestic Private Sector Financial Balance + Governmental Fiscal Balance – the Current Account Balance (or Trade Deficit/Surplus) = 0

… As Rob [Parenteau] noted, “…keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong.”…

The implications are simple. The three items have to add up to zero. That means you cannot have both surpluses in the private and government sectors and run a trade deficit. You have to have a trade surplus…

Going back to the equation, if Greece wants to reduce its fiscal deficit by 11% over the next three years, then either private debt must increase or the trade deficit must drop sharply. That’s the accounting rules.

But here’s the problem. Greece cannot devalue its currency. It is (for now) stuck with the euro. So, how can they make their products more competitive? How do they grow their way out of their problems? How do they become more productive relative to the rest of Europe and the world?

Barring some new productivity boost in olive oil and produce production, there is no easy way. Since the beginning of the euro, Germany has become some 30% more productive than Greece. Very roughly, that means it cost 30% more to produce the same amount of goods. That is why Greece imports $64 billion and exports $21 billion.

What needs to happen for Greece to become more competitive? Labor costs must fall by a lot. And not by just 10 or 15%. But if labor costs drop (deflation) then that means that taxes also drop. The government takes in less and GDP drops. The perverse situation is that the debt to GDP ratio gets worse even as they enact their austerity measures.

Yves here. Rob Parenteau drew out the implications in an earlier post:

….if households and businesses in the peripheral nations stubbornly defend their current net saving positions [continue to reduce debt levels], the attempt at fiscal retrenchment will be thwarted by a deflationary drop in nominal GDP. Demands to redouble the tax hikes and public expenditure cuts to achieve a 3% of GDP fiscal deficit target will then arise. Private debt distress will also escalate as tax hikes and government expenditure cuts the net flow of income to the private sector. Call it the paradox of public thrift.

As it turns out, pursuing fiscal sustainability as it is currently defined will in all likelihood just lead many nations to further private sector debt destabilization. European economic growth will prove extremely difficult to achieve if the current fiscal “sustainability” plans are carried out. Realistically, policy makers are courting a situation in the region that will beget higher private debt defaults in the quest to reduce the risk of public debt defaults through fiscal retrenchment. European banks, which remain some of the most leveraged banks, will experience higher loan losses, and rating downgrades for banks will substitute for (or more likely accompany) rating downgrades for government debt. A fairly myopic version of fiscal sustainability will be bought at the price of a larger financial instability…

It is not out of the question that fiscal rectitude at this juncture could place the private sectors of a number of nations on a debt deflation path – the very outcome policy makers were frantically attempting to prevent but a year ago…

Or to put it more bluntly, if European countries try to return to 3% fiscal deficits by 2012, as many of them are now pledging, unless the euro devalues enough, then either a) the domestic private sector will have to adopt a deficit spending trajectory, or b) nominal private income will deflate, and Irving Fisher’s paradox will apply (as in the very attempt to pay down debt leads to more indebtedness), thwarting the ability of policy makers to achieve fiscal targets. In the case of Spain, with large private debt/income ratios, this is an especially critical issue.

Yves here. As we have said before, the stresses on the Eurozone could be alleviated if an effort was underway to rebalance internally, meaning increase German consumption. But Germany is also on an austerity kick. Thus the result is very likely to be deflation, which as Rob pointed out, will lead to widespread private sector defaults. That is almost certain to blow back to the financial system. With banks like Deutsche Bank, SocGen, and Paribas part of the core global debt market infrastructure, the potential for another act of the global financial crisis is real. The only other way out is a very large fall in the euro, which as we have pointed out before, would not be well received in the US, China, or Japan, since a deflationary shock that large has high odds of putting their recoveries into reverse gear.

This feels like 2007 all over again, with the authorities insistent that Things Will Be Fine, when a realistic assessment suggests the reverse.

One of the odd things I observe is the way some posts or issues regularly elicit heated reactions. For instance, early in the days of euro wobbliness, some readers in Europe would go a bit off the deep end at the suggestion that the Eurozone has serious structural weaknesses. It wasn’t so much that these readers found weaknesses or shortcomings in the post; it’s that its conclusion was clearly deeply offensive to them. While many of the upset reactions still addressed the substance of the argument, others, when you cut to the chase, simply attacked the source or were otherwise incoherent.

The problem is the difficulty of recognizing when one’s mental model of how the world works maps reasonably well onto currently available information, and the difficulty of dealing with “information” (which can include statistics, anecdotes, opinion from Credible Experts) that is inconsistent with that framework. Few of us have the intellectual flexibility of Keynes, who defended his repudiation of some of his earlier work by saying, “When the facts change, I change my mind. What do you do, sir?” When dissonant facts start showing up, is it that the data is suspect or the model that is out of whack?

A disconcerting tendency that may also impair adaptability (and this seems to be particularly pronounced in the US) is the tendency to engage in black and white thinking. If (in someone’s mind) the only alternative to one view is its polar opposite, that makes it hard to adjust one’s perspective.

Ars technica presents a more specific example of this phenomenon, of how people defend their mental models in the face of confounding evidence. A study from the Journal of Applied Social Psychology looked into some of the mechanisms that individuals use to reject scientific information that is at odds with their views. Admittedly, this is a small scale study, so one has to be cautious in generalizing from it. But it does seem consistent with some of the strategies I routinely seem in comments.

From ars technica:

It’s hardly a secret that large segments of the population choose not to accept scientific data because it conflicts with their predefined beliefs: economic, political, religious, or otherwise. But many studies have indicated that these same people aren’t happy with viewing themselves as anti-science, which can create a state of cognitive dissonance. That has left psychologists pondering the methods that these people use to rationalize the conflict.

A study published in the Journal of Applied Social Psychology takes a look at one of these methods, which the authors term “scientific impotence”—the decision that science can’t actually address the issue at hand properly. It finds evidence that not only supports the scientific impotence model, but suggests that it could be contagious. Once a subject has decided that a given topic is off limits to science, they tend to start applying the same logic to other issues…

Munro polled a set of college students about their feelings about homosexuality, and then exposed them to a series of generic scientific abstracts that presented evidence that it was or wasn’t a mental illness (a control group read the same abstracts with nonsense terms in place of sexual identities). By chance, these either challenged or confirmed the students’ preconceptions. The subjects were then given the chance to state whether they accepted the information in the abstracts and, if not, why not.

Regardless of whether the information presented confirmed or contradicted the students’ existing beliefs, all of them came away from the reading with their beliefs strengthened. As expected, a number of the subjects that had their beliefs challenged chose to indicate that the subject was beyond the ability of science to properly examine. This group then showed a weak tendency to extend that same logic to other areas, like scientific data on astrology and herbal remedies.

A second group went through the same initial abstract-reading process, but were then given an issue to research (the effectiveness of the death penalty as a deterrent to violent crime), and offered various sources of information on the issue. The group that chose to discount scientific information on the human behavior issue were more likely than their peers to evaluate nonscientific material when it came to making a decision about the death penalty.

Yves here. I’m not certain whether the authors are being tongue in cheek in this section:

….it might explain why doubts about mainstream science seem to travel in packs. For example, the Discovery Institute, famed for hosting a petition that questions our understanding of evolution, has recently taken up climate change as an additional issue (they don’t believe the scientific community on that topic, either). The Oregon Institute of Science and Medicine is best known for hosting a petition that questions the scientific consensus on climate change, but the people who run it also promote creationism and question the link between HIV and AIDS.

Yves again. It is worth considering whether some of this “science can’t evaluate this area” meme exists is at least in part because it is being marketed. Perhaps I lead a cloistered life, but when I was younger, say 20 years ago, I can’t recall encountering this line of argument.

The book Agnotology: The Making and Unmaking of Ignorance gives a detailed account of how the tobacco industry first tried to keep research about smoking-related cancers out of the public eye, and when that started to fail, to attack the science (“Doubt is our product”). One of its late-stage techniques was to promote the idea that the topic wasn’t settled when a tally of the then-available research would say otherwise. Given that knowledge is often the product of political and cultural battles, promoting higher-order anti-science ideas (“science has very considerable limits, there are a lot of areas outside its ken”) gives those who would seek to reshape mass opinion more freedom of action.

Truth be told, I’m not certain whether this is alarmist or accurate. While Simmons does deserve credit for being early to focus on peak oil, he was notably wrong in 2008.

This is a different sort of call here. Given Simmons’ reputation, it is quite conceivable that he does have better access to information than MSM journalists. Regarding his suggestion of using a nuclear weapon to stop the leak(s) (which I have advocated too) note that some readers have argued it would not work on the soft ocean floor in the area of the leak(s).

Via Bloomberg (hat tip Michael Shedlock):

Snails yield drug addiction clue BBC

New proposal would require identification to buy prepaid cellphones Washington Post

BREAKING: If Top Kill Doesn’t Work, U.S. Navy To Take Over Spill The Hayride (hat tip Oil Drum)

Safety Rules Can’t Keep Up With Biotech Industry New York Times

Falling sales dampen recovery hopes Times Online

Warren Buffett to testify under FCIC subpoena after resisting commission’s request Fortune. It’s well known that the author of this piece, Carol Loomis, has a long standing friendship with Buffett. Even so, this piece is pure PR placement “oh the Sage of Omaha really doesn’t belong before the FCIC. Pretty much only the bad guys are asked to testify.”

Fed’s Next Move Could Be Reduced Rate on Dollar-Euro Swaps Wall Street Journal

Whistling Past The Graveyard? Karl Denninger

Special Report: For some people, CDOs aren’t a four-letter word Reuters (hat tip reader Tim S)

Mark Hoban says investment banks likely to face competition review Guardian

Goldman seeks settlement with SEC on lesser offence Financial Times

Good Government vs. Less Government Baseline Scenario

The pictorial, speculative, yen carry trade FT Alphaville

On writing fiction billy blog

Is Europe heading for a meltdown? Edmund Conway, Telegraph

Banking split essential to avoid new financial crisis, warns OECD adviser Guardian

BREAKING THE CYCLE: A Conversation with Emanuel Derman Edge

Antidote du jour:

By Mirco Tonin and Michael Vlassopoulos, lecturers in economics at the University of Southampton; cross posted from VoxEU

Aside by Yves; I have very mixed feelings about publishing this article. First, any study that reaches men v. women generalizations has to be viewed with a lot of skepticism. For groups as large as men and women, the variations in behavior within each class are going to be greater than the variations across classes. So I wonder whether this sort of thing merely reinforces and legitimates the propensity to stereotype. Second, the authors cite pre-existing research, and their study findings were consistent with that research. This study was not double blind. Query whether researcher bias influenced the results.

To the article:

What motivates workers in their job? This column presents evidence from a recent field experiment suggesting that women are motivated by concern about the social cause pursued by their employer, while men are not. This may provide new insight into the gender earnings gap.

What motivates workers? The canonical view in economics is that workers respond to monetary incentives. In line with this perspective, a large literature has been devoted to analysing how compensation contracts should be designed in order to induce workers to be more productive (Prendergast 1999).

Recently, economists are becoming increasingly aware that this may not be enough for certain types of workers. Besides extrinsic rewards such as bonuses or promotions, an important driver is a concern about the social cause pursued by the organisation for which they work or a sense of altruism towards the welfare of a third party who is the recipient of the good or service being produced in their workplace.

A worker with this type of motivation will provide more effort and require less monetary compensation compared to a worker solely motivated by monetary rewards. This type of altruistic motivations is potentially very important in organisations engaging in the provision of education, health care, childcare, and social services – as well as in charities and non-government organisations.

“Warm glow” or “pure altruist”?

Research on altruistic behaviour distinguishes between two types of pro-social motivation:

A worker may enjoy contributing to a cause he or she cares about. This joy that arises from the act of contributing is referred to as “warm glow” (Andreoni 1990). For example, a nurse may enjoy to be actively involved improving the lives of sick people.

A worker may be directly concerned about the well-being of others. Such individuals are referred to as “pure altruists”. For example, a nurse may be interested in the fact that patients’ health improves, regardless of whether he or she has a personal role in this.

The distinction between these two perspectives of pro-social motivation – which are of course not mutually exclusive – has significant implications. For example, if workers are pure altruists, then non-profit organisations may have an advantage in eliciting their effort compared with for-profit organisations (Francois and Vlassopoulos 2008). No such difference arises if workers are solely motivated by warm-glow altruism. Thus understanding the sources of workers’ pro-social motivation has implications for the policy debate on whether public services should be provided through the public sector, the for-profit private sector, or non-profit organisations. For example, drawing on the nurse example from above, one implication of privatising a health facility is that a pro-socially oriented and purely altruistic nurse may decrease or withdraw altogether the amount of donated labour he or she provides.

Despite the important policy implications, no attempt to quantify and discriminate the importance of the two views of altruistic motivation using non-experimental data has been made, in part because appropriate field data that would allow for sound econometric analysis are difficult to come by. In recent research (Tonin and Vlassopoulos 2009), we have performed a field experiment that aims to identify and quantify these sources of pro-social motivation in the workplace.

A field experiment with student-workers

Our research uses experimental methods in which we randomly assign workers to environments that are designed to elicit the different motivational aspects described above. We then measure the impact on productivity. An important aspect of our study is that we observe subjects providing real effort in a natural work environment, as opposed to the artificial environment of the lab where behaviour may not be representative of what happens in the field (Levitt and List 2007).

In the autumn term of 2009, we hired university students through email announcements to perform a short-term computer data entry job. In particular, workers were employed on two separate occasions lasting one hour each and taking place two weeks apart. For each session workers received £10 plus a performance bonus based on their productivity.

On the second occasion, we randomised students into three different groups. For one of the groups the second occasion was identical to the first one. This baseline condition acts as our control, as it accounts for any change in productivity due to experience, learning and so on. For the two other groups, we implemented two treatments aimed at eliciting, respectively, warm-glow effort and effort induced by both types of altruistic preferences. In both cases, personal compensation was identical to the one received in the first session and, moreover, a donation to a charity was made on the worker’s behalf based on his or her productivity. For one group the amount received by the charity was held constant, as the donation done on the worker’s behalf crowded out one-for-one a donation done on the employers’ behalf. For the second treatment group, there was no crowding out, so that the more work, the higher the total amount received by the charity.

Comparison of productivity across the three groups allows us to assess the relative strength of the two sources of pro-social motivation. In particular, comparing the changes in productivity between the treatment with crowding out and the control group, allows us to detect any effort due to warm-glow altruism, while comparing the changes in productivity between the treatment without crowding out and the treatment with crowding out, allows us to detect any effort due to pure altruism.

New insight: Gender differences in pro-social behaviour

We find that women’s effort is positively affected by an environment that induces warm-glow altruism, while there is no additional impact due to pure altruism. In particular, in the treatment condition eliciting warm-glow altruism, women increase their productivity between the two sessions by an additional 10% compared to women in the control group.

On the other hand, we find no statistically significant differences in productivity changes between the control and any of the treatment groups for male subjects. This unresponsiveness suggests that pro-social preferences are less relevant for men than for female workers in our sample. This finding is consistent with other research on gender differences in social preferences (Croson and Gneezy 2009).
The finding of a gender difference in pro-social behaviour in a workplace setting may have important implications for understanding women’s economic outcomes. If women are indeed motivated by a concern for the social cause pursued by the organisation they work for, then they will be more likely to enter occupations and sectors with characteristics that engender pro-social behaviour (such as health, education and social care) and will require less monetary compensation. Gender differences in pro-social motivation might therefore help explain the observed occupational segregation by gender that accounts for a substantial portion of the overall gender earnings gap.

While our results provide a new insight, it would be inappropriate to draw firm implications for the labour market as a whole from a single field experiment using student workers who exert effort on a short-term job. Further empirical studies are needed to evaluate whether our findings are robust in other labour market settings and populations of workers.

→ Washington’s Blog

Here’s the scoop: BP’s attempt to stop the oil spill using the “Top Kill” method has failed.

How do I know?

Well, as the New York Times notes:

BP officials, who along with government officials created the impression early in the day that the strategy was working, disclosed later that they had stopped pumping the night before when engineers saw that too much of the drilling fluid was escaping along with the oil.

Indeed, BP stopped pumping “mud” for more than 16 hours (the material gushing out of the leaking riser didn’t stop during that time).

Basically, BP has failed in trying to drive enough “mud” down the well to provide enough weight to tamp down the oil gushing out. It didn’t work.

Indeed, BP’s “re-starting” Top Kill really means that Top Kill Version 1.0 was tried and failed, and now BP will try Top Kill Version 2.0 – adding “junk” to the mix.

Unless BP can get very lucky and plug the holes with miscellaneous junk, Top Kill 2.0 won’t be any more effective than Operation Sombrero.

As the Guardian explains:

Doug Suttles, BP’s chief operating officer, insisted that the operation was going to plan, but admitted: “What we do know is that we have not yet stopped the flow.”

He said BP engineers would soon use additional materials to try to plug the well, suggesting heavy mud deployed so far would not work on its own.

And the Guardian’s oil spill blog (a great resource which I just discovered) notes:

6pm CDT: Doug Suttles makes an appearance on CNN ….

Asked by CNN what had happened, Suttles said: “Too much of the mud is exiting the riser as opposed to going down the well bore.” This could be fixed in several ways, including the infamous “junk shot”, using a more viscous mud type, or finally restarting pumping at very high rates.

***

7.30pm CDT: The Washington Post has more details on BP’s stop-start top kill process, and mentions that BP is considering a “junk shot” tonight:

Doug Suttles, BP’s chief operating officer, said that on Wednesday the company had blasted high-pressure mud into the leaking well two times, trying to force the oil down in a procedure compared to using one firehose against another.

After doing it twice, Suttles said, the company stopped about midnight Wednesday, and spent Thursday assessing the plumes still shooting out of broken machinery. He said that company officials believed the two efforts had probably made some progress.

“I think some people believe it has. Some people believe it’s less obvious it has,” Suttles said. “What we do believe we’ve done is successfully pumped some mud, some of this drilling mud, into this wellbore.”

But, Suttles said, oil was still coming out, despite these efforts: “What we do know is that we have not yet stopped the flow.”

He said the company would try the procedure again Thursday evening and might add chunkier debris such as rubber balls to the mix in hopes of clogging the leaking pipe. That procedure is known as a “junk shot.”

Ooh, did this writer nail it. From Dilip Hiro via TomGram. His critique of Obama focuses on foreign policy, but his opening remarks are valid across the board:

Irrespective of their politics, flawed leaders share a common trait. They generally remain remarkably oblivious to the harm they do to the nation they lead. George W. Bush is a salient recent example, as is former British Prime Minister Tony Blair. When it comes to foreign policy, we are now witnessing a similar phenomenon at the Obama White House.

Here is the Obama pattern: Choose a foreign leader to pressure. Threaten him with dire consequences if he does not bend to Washington’s will. When he refuses to submit and instead responds vigorously, back off quickly and overcompensate for failure by switching into a placatory mode.

In his first year-plus in office, Barack Obama has provided us with enough examples to summarize his leadership style. The American president fails to objectively evaluate the strength of the cards that a targeted leader holds and his resolve to play them.

Obama’s propensity to retreat at the first sign of resistance shows that he lacks both guts and the strong convictions that are essential elements distinguishing statesmen from politicians.

So now it’s official. As many feared, the Gulf Oil oil spill is the worst the US has ever suffered. No wonder BP has been trying to keep the officialdom and scientists away from it as long as possible…..

From the Washington Post (hat tip reader Marshall):

As crews pumped mud at a furious rate into the damaged blowout preventer that sits on the uncapped well at the bottom of the Gulf of Mexico, a group of scientists said the amount of oil spewing into the ocean is much greater than originally believed….

U.S. Geological Survey Director Dr. Marcia McNutt said at a news conference Thursday that two teams of scientists, using different methods, have preliminarily determined that between 17 and 27 million gallons of oil have gushed into the ocean so far.

Yves here. That puts the daily flow at 12,000 to 19,000 barrels, versus the 5,000 party line from BP. Note that the Exxon Valdez total was roughly 11 million gallons.

The good news is at least so far, the top kill appears to be working.

More commentary from Bloomberg:

“Now we know what we always knew — this spill is much larger than BP has claimed,” Congressman Edward Markey, a Massachusetts Democrat, said today in a statement. “What’s clear is that BP has had an interest in low-balling the size of their accident, since every barrel spilled increases how much they could be fined by the government.”

Oh, but BP now denies ever having made an estimate:

“We haven’t made any estimates of the flowrate from the well,” said David Nicholas, a BP spokesman in Houston. “What we’ve always said is that no matter what the estimates would be, our approach to this incident would be exactly the same. We’re trying to stop the flow of the well.”

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BP Used Riskier Method to Seal Oil Well Before Blast New York Times

BP Deepwater Horizon operations were six weeks behind schedule, documents say NOLA

Unusual Decisions Set Stage for BP Disaster Wall Street Journal. A detailed account

Oil spill may reach Bahamas by weekend Nassau Guardian (hat tip reader John D)

Obama Skips Presidential Visit to Arlington National Cemetery on Memorial Day Jesse. I assume the logic is that dead soldiers don’t vote.

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Barnier in call for Europe-wide bank tax and bailout fund Independent

US Treasury Secretary Tim Geithner calls for European action as EU is divided over bank reforms Telegraph (hat tip reader Swedish Lex)

Kraft rebuked for broken pledge over Cadbury factory Guardian

“The Economics of Immigration Are Not What You Think” Mark Thoma

Fiscal policy worked – evidence billy blog

US money supply plunges at 1930s pace as Obama eyes fresh stimulus Telegraph

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