Archive for January 7th, 2015

by lizard

Two of my favorite writers regularly featured at Counterpunch have articles worth checking out. While the articles are about two different topics, both could be filed under unintended consequences.

The first article, by Michael Whitney, is titled Oil Price Blowback. Here is the opening of the article:

It’s hard to know which country is going to suffer the most from falling oil prices. Up to now, of course, Russia, Iran and Venezuela have taken the biggest hit, but that will probably change as time goes on. What the Obama administration should be worried about is the second-order effects that will eventually show up in terms of higher unemployment, market volatility, and wobbly bank balance sheets. That’s where the real damage is going to crop up because that’s where red ink and bad loans can metastasize into a full-blown financial crisis.

Later in the article Whitney explains in detail what could happen if prices remain low:

Many of the oil-drilling newcomers set up shop to take advantage of the low rates and easy money available in the bond market. Now that prices have crashed, investors are avoiding energy-related junk bonds like the plague which is making it impossible for the smaller companies to roll over their debt or attract fresh capital. When these companies start to default en masse, as they certainly will if prices don’t rebound, the blowback will be felt on bank balance sheets across the country creating the possibility of another financial meltdown. (Now we ARE talking about a financial crisis.)

The basic problem is that the banks have bundled a lot of their dodgy debt into financially-engineered products like Collateralized Loan Obligations (CLOs) and Collateralized Debt Obligations (CDOs) that will inevitably fail when borrowers are no longer able to service the loans. The rot can be concealed for a while, but eventually, if prices don’t recover, a significant number of these companies are going to go under which will push the perennially-undercapitalized banking system to the brink once again. That’s why Washington’s plan to push down oil prices (to hurt the Russian economy) might have made sense on a short-term basis (to shock Putin into submission) but as a long-term strategy, it’s nuts. And what’s even crazier, is that Obama has decided to double-down on the same wacky plan even though Putin hasn’t given an inch. Check this out from Reuters on Monday:

“The Obama administration has opened a new front in the global battle for oil market share, effectively clearing the way for the shipment of as much as a million barrels per day of ultra-light U.S. crude to the rest of the world…

The Department of Commerce on Tuesday ended a year-long silence on a contentious, four-decade ban on oil exports, saying it had begun approving a backlog of requests to sell processed light oil abroad.

The action comes at a critical juncture for the global oil market. World prices have halved to less than $60 a barrel since the summer as top exporter Saudi Arabia, once a staunch defender of $100 oil, refused to cut production in the face of surging U.S. shale output and tempered global demand…

With global oil markets in flux, it is far from clear how much U.S. condensate will find a market overseas.”
(Analysis – U.S. opening of oil export tap widens battle for global market, Reuters)

Obama is adding supply, which will further drop prices. There will be long-term consequences to this economic war against Russia. Republicans trying to get the Keystone XL pipeline passed have themselves been passed by the reality of low prices killing profits for Canadian producers (of course Republicans haven’t lived in reality for awhile now).

The other article is from Dave Lindorff, and it examines the unintended consequences of the NYPD work stoppage, which raises the following question: if stopping broken windows arrests doesn’t result in anarchy, why resume it? From the link:

For two weeks now, the largest police force in the nation has essentially stopped making arrests. According to a lead story in the New York Timestoday, ticket issuance by police in this city of 8.4 million is down by 90 percent. The paper reports that:

Most precincts’ weekly tallies for criminal infractions — typically about 4,000 a week citywide — were close to zero.

And yet, New York continues to function normally, with people going about their business, secure on sidewalk, street, public transit and in their homes.

Could it be that the city has been wasting much of the nearly $5 billion it spends annually on its over 34,000 uniformed cops (15% of the city’s budget)? Could it be that having all those cops cruising around neighborhoods harassing people — mostly, statistics show, people of color and poor people — by stopping them and frisking them, by busting them for “crimes” like public urination, smoking a joint, drinking a beer outside, selliing trinkets or “lossie” cigs, or just “looking suspicious” — has been doing nothing to reduce major crimes and violence after all?

The NYPD may want to rethink their tactics. Resuming the racist policy of stop and frisk justified by the increasingly debunked theory of broken windows policing will become more difficult with each passing day.

It will be interesting to see how these two issues develop.

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