Everyone agrees that we’re in a crisis. Officials and politicians point everywhere and say – Hey look! Green shoots! The worst is over.  Others urge us to ignore the green shoots, the worst is yet to come.

I’ll stick to something I know a little about. Oil. I have said repeatedly that we won’t be in recovery until oil is in the $70-$90 US$/bbl range for some time. Well, it has been in the range, only just, for some time now. The $70 – 90 range is the cost of bringing new oil online, as opposed to the cheap and easy oil we still get from our declining elephant fields.

My question is whether our hovering in the $70/bbl range is a sign that the global economy is coming through the crisis, a sign that we’re being forced to drill new oil because of cheap oil’s decline, or is it the result of a false optimism in the markets, driven by the US printing printing money/debt like there is no tomorrow.

I’m beginning to think it’s a bit of all three.

Meanwhile, our mortgage crisis deepens. When will the awkward bubble in high debt dairy burst?

What do you think?

Green shoots or growing rot?

• New Zealand does not have adequate mandatory disclosure requirements;
• Our Securities Commission is not sufficiently resourced and;
• Our taxation regime does not encourage long-term investing.

The report is the first of what will inevitably turn into a deluge of recommendations for reform of an industry that recently self-destructed. It’s in harmony with some of the key themes to have emerged already from abroad-enhanced disclosure, stronger regulation, and better market discipline.

What has been our Government’s response to date to the financial crisis? The Securities Disclosure & Financial Advisers Amendment Bill. Simon Power proudly introduced the Bill to the House as “a response to the global financial crisis.” But this Bill actually lessens the need for full financial disclosure in many cases. Moreover, the Bill was drafted and consulted upon in 2006, some time before the collapse of the world’s financial markets. This is law for a whole different era.

The Greens will be moving amendments to this legislation in the House if the opportunity arises. The recommendations within the Morningstar report which the Greens support will lead to much greater transparency and consistency of disclosure in the financial sector. Such measures might include:

• Presenting information in prospectuses about fees and expenses in a standardised format to allow for easy comparison between different financial products.
• Setting up a centralised independent web site to house disclosure documents.
• Requiring complete disclosure of portfolio holdings of mutual funds so potential investors can see where the risks lie.

We’re talking about small practical measures that a well-intentioned Government might actually be implementing as a strategic response to the global financial crisis. But you could say the same about the other obvious looming crisis—climate change—and begin to see this Government seems to have their mind on something else altogether.

Futher comment from me: http://www.greens.org.nz/node/21195

An analogy: Imagine frog taking out his own insurance policy on one of Tony Friedlander’s separately insured trucks. I pay my premiums. Tony pays his premiums. And we both collect when Tony crashes, which I expect is likely, hence my gamble. When this happens enough between big players like major banks, there emerges a problem where banks become too connected to fail. Enter the taxpayer.

In the IMF’s own words:
The ongoing crisis has shown how financial innovations have enabled risk transfers that were not fully recognized by financial regulators or by institutions themselves, complicating the assessment of a “too-connected-to-fail” problem. It is thus essential to improve our understanding and monitoring of direct and indirect systemic linkages.

Here’s an excerpt:

CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS
Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another’s businesses.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation’s financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.

Today’s action followed a rich Congressional debate about the history of finance in America in this century, the causes of the banking crisis of the 1930′s, the globalization of banking and the future of the nation’s economy.

Administration officials and many Republicans and Democrats said the measure would save consumers billions of dollars and was necessary to keep up with trends in both domestic and international banking. Some institutions, like Citigroup, already have banking, insurance and securities arms but could have been forced to divest their insurance underwriting under existing law. Many foreign banks already enjoy the ability to enter the securities and insurance industries.

”The world changes, and we have to change with it,” said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ”We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.”

In the House debate, Mr. Leach said, ”This is a historic day. The landscape for delivery of financial services will now surely shift.”

But consumer groups and civil rights advocates criticized the legislation for being a sop to the nation’s biggest financial institutions. They say that it fails to protect the privacy interests of consumers and community lending standards for the disadvantaged and that it will create more problems than it solves.

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930′s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. ”I wasn’t around during the 1930′s or the debate over Glass-Steagall. But I was here in the early 1980′s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ”seemed determined to unlearn the lessons from our past mistakes.”

”Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,” Mr. Wellstone said. ”Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.”

Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.

The US balance of payments deficit has grown rapidly during this decade, and one of the big drivers of that has been the rising cost of imported oil and other petroleum products. In 2002 we spent $102 billion importing oil, but that figure rose to $300 billion in 2006, and to $328 billion last year. Those imports (along with Jim Kunstler’s salad shooters and all the other things we buy) had to be financed, to the tune of $2 billion a day by last year. We convinced the Chinese, Japanese, and many others that our MBS were safe because they were sorta guaranteed (wink, wink) by Freddie Mac and Fannie Mae. We needed the oil, so we needed product to sell to finance our “addiction.” Our suppliers wanted bonds, the government deficit wasn’t large enough, so we created an endless supply of MBS to sell. Nobody – the government, the American people, the Wall Street crowd, mortgage brokers, home builders – wanted to take away the punch bowl, or look too closely at what was being produced. Rising oil import volumes multiplied by rising prices contributed to the crisis we are now experiencing.

This leaves oil producers in a quandary. They can’t afford to have the price fluctuating (Especially not downwards) at just the same time as cost of extraction is rising. Interestingly the Organization of Petroleum Exporting Countries, OPEC, announced two weeks ago:

Amid growing unease over this situation, the Organization of Petroleum Exporting Countries has decided to hold an Extraordinary Meeting of the Conference on Tuesday, 18 November 2008, in Vienna to discuss the global financial crisis, the world economic situation and the impacts on the oil market.

The Organization reiterates its determination to ensure that oil market fundamentals are kept in balance and market stability is maintained.

Then one week ago:

It has been decided to re-schedule the Extraordinary Meeting of the OPEC Conference. This will now take place at OPEC Headquarters, Vienna, on Friday 24th October 2008, rather than on 18th November 2008, as previously announced.

That gives a good sense of their urgency. OPEC is now going to try to drive the price back up to somewhere between US$70 and US$90 a barrel. As this market advisory website notes:

OPEC seems determined to take back control. The crash back to $70 reduced cash flow so severely that everyone is now paying rapt attention and if you can believe the news reports they are ready to take quick and decisive action once again. The fear prompting their call to action this time is the rapidly accelerating global recession prompted by the financial crisis. Demand has been falling sharply over the last eight weeks and some believe 2009 could be the first decline in demand on a global basis since 1983.

And:

All of these moves are symptoms of peak oil although most would not believe a temporary excess in production is peak oil problem. Most peak oil theorists believe in an extended plateau where production and demand are nearly equal. As demand briefly exceeds production prices rise sharply. As prices rise demand declines sharply as we have seen over the last few months. Production suddenly exceeds supply again and prices drop sharply in response… The pattern then repeats over and over with overall demand eventually exceeding production on a permanent basis. This could take numerous cycles before the eventual permanent decline.