Does Europe matter?
The other Obama transition
As Edward Luce reported in yesterday’s FT, Obama’s sensibly merged his campaign team with the pre-election transition team headed by former White House chief of staff John Podesta, thus trying to avoid the mistakes of the newly elected Clinton Administration in 1992:
Many Democrats believe with hindsight that Bill Clinton’s hazard-prone first term was derailed even before inauguration day in January 1993. A brilliant but mercurial leader, Mr Clinton was also chronically undisciplined. Much of the time that should have been spent fastening the nuts and bolts of an incoming administration was wasted on in-fighting between his campaign team, which decamped to Little Rock, Arkansas, and his ineffectual transition team in Washington DC.
But even if Obama manages to pull off a smooth segue between his top-level planning staffs, you can’t help but wonder what will happen on the public engagement front. For Obama’s challenge now is not merely that the many tens of thousands of people who signed up to help his campaign are likely to have unrealistic expectations of how much he’ll be able to achieve in the context of the appalling policy mess he’s inherited. More fundamentally, just imagine the comedown his supporters will be about to experience after the incredible adrenaline surges of recent weeks.
When central banks lose control of interest rates
Just after the Bank of England’s stunning 150 basis point cut yesterday, BBC business editor Robert Peston noticed an alarming signal of problems ahead. He wrote:
I’ve just had a call from an astonished individual who has several hundred million pounds that he puts on deposit in various banks. As of 10 minutes ago, a leading British bank was offering to pay him almost 7% interest for his cash. That was after the Bank of England’s policy rate had been slashed by 1.5 percentage points to 3% – an unprecedented reduction in the history of the Bank’s Monetary Policy Committee.
Why does it matter that this holder of squillions is still being offered almost 7%? Well, if he’s being paid almost 7%, what chance is there that small businesses will be able to borrow at less than 10, 12, 14% or more (with the actual rate depending on an assessment of their credit-worthiness)?
Peston’s conclusion: “the transmission mechanism from the Bank of England’s policy rate to the interest rates we pay has broken down“. This morning, the front of the FT confirms the problem:
All but two UK banks snubbed government calls to pass on Thursday’s dramatic interest rate cuts to new customers and more than 20 lenders withdrew deals that would have slashed borrowers’ monthly mortgage repayments … Lloyds TSB and Abbey were the only two lenders to say they would pass on the full rate cut in their standard variable rates.
What’s at stake here is potentially rather larger than simply the question of providing some much-needed relief for mortgage holders and small businesses, or the political issue of whether banks in receipt of taxpayer bailouts have a duty to pass on the rate cut.
No, the bigger question is about the degree and efficacy of state control over monetary policy – full stop. Here’s how it’s supposed to work in the words of the Bank of England:
When the Bank of England changes the official interest rate it is attempting to influence the overall level of expenditure in the economy. When the amount of money spent grows more quickly than the volume of output produced, inflation is the result. In this way, changes in interest rates are used to control inflation.
The Bank of England sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers.
Well, that’s the theory, anyway. But what happens if it no longer works?
This year’s World Energy Outlook
Next week sees the publication of the International Energy Agency’s latest flagship World Energy Outlook, which has been heavily leaked to the Financial Times. The report makes the same point that I’ve been arguing since prices started to slide from their peak of $147 over the summer (to around $60 today): oil prices are going to go back up. A lot. As Javier Blas and Carola Hoyos summarise in the FT,
The world economy will witness a $2,000bn shift in wealth and power from oil-consuming countries to members of the Organisation of the Petroleum Exporting Countries as oil prices rise to $200 a barrel by 2030.
The IEA says that Opec oil reserves are big and cheap enough to increase production and cap oil prices, but it warns: “Investment by these countries is assumed to be constrained by several factors, including conservative depletion policies and geopolitics. “There remains a real risk that underinvestment [bet-ween now and 2015] will cause an oil supply crunch” the report states…
In its report, the IEA sees oil prices reaching $200 by 2030, almost doubling last year’s forecast of $108 by the same year. The report suggests that current oil prices – below $70 a barrel and less than half their peak summer level – are a temporary effect of the economic crisis.
The $200 a barrel figure is the same one mooted by a Chatham House report on oil published in August, which shared the IEA’s concern that the investment needed to bring new production on stream just wasn’t happening fast enough. The IEA was already worried about that point when it published last year’s Outlook, remember – the fact that prices have crashes to less than half their peak level since then will hardly have helped to bring new investment on stream.
Exactly as with food prices, then, it’s the recent fall in prices that represents the blip – and the recent highs that represent the start of a long term trend. The IEA’s report is just the latest in a series of very good reasons why policymakers need to get their act together quickly on agreeing collective approaches to resource scarcity issues while the political heat on them is – for a little while – off.
But to repeat what I said in July, massive investment in new oil production just can’t be squared with what needs to happen on climate change. The global deal that we really need for managing energy security and competition for oil resources is a global framework for climate policy that manages the problem over the full term of its lifecycle – not just the next few years, as with Kyoto, as this is far too short term to give real investment certainty – and that has targets for all countries, not just developed ones.
That, of course, takes us straight back to David’s recent question on developing country participation. More on that in another post shortly…
Why not to be the first person off the plane in Nigeria
This morning, at the airport in Brussels, I was chatting with a retired Scottish aid worker. He told about his friend who got on a flight in Lagos to find it completely full…plus one. One person was standing in the aisle with no seat. The flight attendants went through and checked that everyone had a boarding pass, which they did. (Apparently someone had a forged pass; welcome to Lagos.) The staff then made an announcement that everyone was going to de-plane and that they were going to check everyone’s boarding pass carefully.
As soon as the first person stepped off the plane, the staff slammed and locked the airplane door, despite the person’s cries and banging on the door. Problem solved.
Via Chris Blattman.