Monday, May 26, 2008

Futures, I mean insurance, I mean futures...

The Sunday NY Times business section had two stories which had an interesting overlap.

First, Gretchen Morgenson, in reporting on how Fairfax Financial Holdings profited from credit derivatives, described those financial instruments as "insurance contracts that allow investors to bet for or against a corporation's bonds." (Good luck getting anyone in the financial industry to give you an opinion in writing calling a derivative "insurance.").

The second piece, by Nelson Schwartz, reported on Congressional efforts to control energy prices. Of note, Rep. John B. Larson proposed legislation that would ban unregulated (over the counter) trading in energy futures where the parties would not take delivery of the commodity, i.e. the positions would be settled in dollars. This proposal is fascinating in its own right, but where it gets very interesting, and how it really relates to the first article is in this quote from John Damguard, the president of the Futures Industry Association.
"The over-the-counter markets are a very important part of the way industry and institutions manage risk."
Well, he certainly makes over the counter deals sound a lot like insurance. Of course, most of the trades entered are not for true hedging purposes, e.g. futures purchased by airlines, but are instead large, heavily leveraged bets sold by traders and investment banks to investors seeking above market returns. And of course, if these deals were actually "insurance" as opposed to speculation, they (and the dealers who package and sell them) would fall under an entire class of regulation.

So, if we shouldn't regulate over the counter deals because they fill a important need of managing risk, then why aren't they regulated as insurance? It seems like the insurance industry should get on this one, and use a favorable bill to steal part of an industry away from Wall Street.

Saturday, May 24, 2008

Judicial "Activism"


Apparently judicial activism is back on the conservative radar with the California Supreme Court decision on gay marriage.

Judicial activism is one of the great myths of conservatives. Not only does it critique courts for exercising essentially any form of constitutional review (See, e.g., Marbury v. Madison), but it is based in a false "separation of powers" argument.

The classic version of separation of powers that we all learned in high school goes something like, "Congress makes laws, the President enforces the laws, and the Courts tell us what the law is."

Never mind that even this simplistic version gives courts great powers, but what is more important is that the divisions of legislative, executive, and judicial power are not in discrete categories. The President, e.g., has legislative powers in the form of the veto. Congress has judicial powers in that it control the jurisdiction of federal courts. The Courts have legislative power in that they can review and interpret laws.

No one claims that the Executive is "activist" when he veto's a bill, or otherwise asserts the power of his office. No one claims Congress is "activist" when it restricts the jurisdiction of federal courts to hear habeas corpus claims. So why is a Court "activist" when it says that a law violates the right of people?

Dahlia Lithwick has a great piece on this here.

Friday, May 23, 2008

Is O'Connor back on the Court?

Linda Greenhouse on the dearth of 5-4 decisions this term (although there are still 32 decisions yet to come).

While quoting political scientists on the supposed "election effect" on the Court, i.e. not wanting to create or become an issue in an election year, she also noted the narrowness of the decisions.

...the lethal injection and voter ID decisions hewed closely to the facts of each case. Kentucky’s lethal injection protocol passed muster, but the court left open the possibility that another state’s practice might not. The voter ID challenge reached the court on a nonexistent record, so perhaps a stronger case could be made at a later time. Justice Antonin Scalia’s majority opinion in the child pornography case construed the statute so narrowly as to allay the First Amendment concerns of Justices Stevens and Breyer and win their full concurrence.

This reminds me of a feature of the O'Connor jurisprudence which is not always a bad thing--treating each case on its merits, and addressing the facts in that case on their own terms, as opposed to conducting broader ideological battles in each decision.

There is a certain justice in this process in that each person gets their day in (the Supreme) Court to have their case heard on its merits--not in terms of a broader political struggle.

The problem is that many cases are brought as part of a political struggle, and that in some sense it is the job of the Court to engage in a fair degree of looking forward as to the effects of each decision (although who could have guessed the legs that Chevron would have).

Thursday, May 22, 2008

Softwood Lumber in the Farm Bill

You would have thought that after complaining for over 20 years about disguised Canadian subsidies (in the form of below market stumping fees) to its softwood lumber industry, the U.S. would think twice before giving new support to its own softwood producers.

Think again...

I was watching Bloomberg three nights ago and saw it reported that there was a more favorable depreciation schedule for the softwood industry in the 2008 Farm Bill. I have not been able to verify this yet, but if included, it certainly shows bad faith on the part of the U.S.

This is in addition to the new reporting requirements included for U.S. lumber importers in the Softwood Lumber Act of 2008. Thanks to Akin Gump.

Gas prices....who's to blame?

Yesterday was filled with stories about how gas and oil prices are reflecting supply and demand, as opposed to being driven up by speculation, and that the "windfall" profits go to the oil producers and not traders on Wall Street.

Bloomberg reported a different angle in this story that:
Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.
The House hearings have tried to investigate the effect of speculation on the commodity pricing of oil.

So who is to blame? Consumers who allow oil and gas to exist in an inelastic market? Producers who (supposedly) fail to increase refinery production? The Fed and the Bush Administration for a weak dollar? Wall Street for driving up futures through speculation? In the end, it is, as always, a combination of all these, and the only power left to consumers is to consume less.

Friday, May 16, 2008

UN Special Rapporteur on Racism to tour U.S.

16 May 2008
The United Nations Special Rapporteur on contemporary forms of racism, racial discrimination, xenophobia and related intolerance, Doudou Diène, will undertake a country visit to the United States from 19 May to 6 June 2008 at the invitation of the Government of the United States।

More at the UN's site...

Welcome back...

I have settled in at my job now, and hope to re-start my blogging. In the meantime, here is a story on the continued saga of expropriations in Bolivia, this time in the telecom sector.