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Tuesday, June 22, 2010

Oil spills, financial debacles, and the limits of current institutions

From Bob Garfield at Ad Age (he also does public radio’s On the Media):

“President Obama is under pressure to explain why he hasn't fixed the problem (of the BP oil spill).

“That's rich. Fix the problem, how? By executive order? By tasking the National Deepwater Oil-Rig Blowout Plugging Agency? Lowering taxes? Telekinesis? Mind-bendingly, the same critics who accuse the president of seeing government as the solution for everything, now berate him for not miraculously, governmentally plugging the leak. This is "Alice in Wonderland" material.”   http://adage.com/article?article_id=144553

Clearly there is a failure here at the interplay between government and business.  The oil spill is in many ways like the subprime mortgage meltdown – a failure to properly consider risks either on the business side or in the governmental regulating that attempt to govern the business side.

But it’s hard to have much faith in governmental regulating.  The SEC investigated Bernie Madoff several times, but was unable to find the gigantic Ponzi scheme.  Fannie Mae and Freddie Mac, quasi-governmental bodies, are among the worst of those involved in the subprime mortgage mess that has thrown the world economy into recession. The oil regulators seem not to have thought about what might happen if the “fail safe” valve structure failed, any more than BP did.

Government obviously can’t fix the current oil spill because government doesn’t have the equipment or the know-how – that’s all in the oil service industry. You can’t just send in the Marines and tell them to fix the well. The depressing thing is that we might not be any better at regulating the financial services industry.  Many of the expensive problems were because large institutions were “too big to fail” – but there seems to be no serious attempt to break them up so that the pieces are small enough to fail.

Sure, that’s less of a problem of lacking equipment and expertise. It’s question of lacking political will (and the heavy contributions and lobbying by the financial industry), and the tendency of regulators to become less effective over time. But the net effect is depressingly similar: big problems that we don’t seem able to deal with on either the industry or governmental side.