Friday, 18 June 2010

McCarthy is alive...

and well, and currently grilling BP. A whole string of papers in international macro and finance argues that the US is uniquely good at translating corporate cash flows into paper that someone wants to hold. This superior "security production technology" is all about respect for the law and property rights. I always thought that Enron should have put paid to much of that literature, but it is doing well. Now we have the enormously awkward spectacle of the Obama administration first putting almost unlimited liabilities on a company, with the idea of oil workers who can now no longer work on drilling rigs being compensated; then the 20 bn$ escrow account, outside the control of BP; and the grilling of Tony Hayward, CEO of BP, in front of a Congress committee that reminds me of Stalinist show trials and the worst excesses of McCarthy and friends. I am not saying that the environmental damage isn't real, or that BP should be let off lightly. But limited liability is there for a reason, as are rules on the maximum that, say, an airline can be made to pay for a crash. There is no reason to put all of the costs of a disaster on a private company, because - ex ante - this may discourage many good projects. As long as penalties are severe, firms will be careful anyway, and I don't see anything in the current share price of BP to suggest that private investors got a free lunch... So my sense is that, while the company should be made to pay a lot, the US is shooting itself in the foot, by trampling on due process and the law, and conducting its liability determination process in a way that one would have expected from Hugo Chavez.

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