Margaret Wente, in the Globe and Mail this week, writes that we live in an era of big “blow ups” that cannot be stopped.

The problem, as I see it, is not that Wente’s smartest people in the world have no idea how to stop it.  It is a combination of:

• People who think they are the smartest, but are not, trying to control things they don’t understand or refuse to understand the law of unintended consequences…
• The smartest people being sidelined because they make the “not smartest people” fearful
• The smartest people being prevented from do what would solve the problems because of bureaucratic restrictions, fear of retribution, or fear of being second-guessed.

On the subject of economics, the problems of the last few years are not failures of free market capitalism.  They are failures of government regulation to foresee how the free market would react to such regulation.   Reducing interest rates to sub 5% levels for nearly 10 years, coupled with government policies to restrict housing development in many areas, coupled with government policies created to increase home ownership did two things – it drove up demand and reduced supply.  Prices rose – as should be expected under a free market.  The problem became that people, and businesses, believed that prices would continue to rise, and therefore boring at very low interest rates against such assets was a good idea.  And for those individuals, this was a perfectly rational decision – except that the party couldn’t continue, because there was too much debt piling up and interest rates can’t stay at zero forever.

If interest rates were set in the free market (solely), they would have risen significantly as the level of debt in society increased – because lenders would fear defaults and want a larger return for the larger risks they were taking.  But with the government setting interest rates and backstopping banks lending into the market, the free market was solely distorted.

On the subject of oil drilling and the safety and environmental issues, it is only in times like this that the engineers are tasked with the exciting job of “fix it now and cost is no object”.  The problem is that it should have been avoided.  But how many businesses will keep working with a piece of machinery that is dangerous because stopping to wait to replace it will have significant negative financial impacts.  And what if the person who should make that decision, to shut down the plant to replace the equipment, has their job on the line based on the financials?  In some cases, those individuals will take the risk on the unsafe equipment because the risk to themselves (their livelihood) is greater than the potential consequences of the failing equipment.   As many incidents have shown, both in industry safety and the financial markets, the human ability to quantify risks is skewed.  Very unlikely events with very bad consequences are often underestimated because of their low probabilities – if you ever hear someone say “but that will never happen”, they have done exactly that.  The history of industrial accidents is filled with such events.  The financial crisis and the Deepwater Horizon incident follow this pattern.

Sometimes, mathematically modeling can help – as it does in the case of real insurance in large markets.  It makes senses to buy insurance for some events because it is cheaper for all of us to pool the risk.  This is even the logic of the hedge funds that try to “hedge” out risk.  But if the risks are underestimated (or misunderstood), when they happen all hell can break loose.

But sometimes, you just need to rely on the smart people, be it the engineers, financial wizards, scientists – to be allowed to make a call and the rest of us have to accept they won’t always be right – but we might be better of than demanding they always be right and therefore are too frightened to speak out or act.

Prof. Ignatieff is proposing that the government get MORE involved in the production and sale of food in Canada, to help farmers, help Canadians eat healthier, and improve exports…

Wait, one of the reasons why many Canadian agricultural products aren’t exported is because of the supply management systems that make Canadian dairy, poultry and eggs uncompetitive on the world market.

And past government “help” for farmers has meant higher prices for Canadian consumers – so I want no part of this.

And Kevin Libin showed months ago in the National Post that local produce often has a higher GHG footprint than food from distant locales simply because growing some produce in Canada is inefficient.

Mr. Ignatieff – get out of the way and let the free market do the job it does best.

Last night, 60 Minutes reported on Bloom Energy and their BloomBox technology.  You can read a transcript of the story here.   Bloom appears to have developed a reasonably priced fuel cell technology.

My thought on this was that if they can sell me one for cheap (like less than the $3000 quoted in the story) to power my house using natural gas, it might pay for itself in a reasonable amount of time.  It would be even better if the power company would let me sell electricity back to the grid – because a fuel cell operating in the 90+% efficiency range would allow a BloomBox owner to generate electricity for about half the price of a combined cycle natural gas fired power plant.  I won’t hold my breath for that one though – this being Canada where government regulation never saw a novel idea they couldn’t kill to protect the status quo…

My first thought on seeing this story though was “OMG, it’s a Shipstone!” from the Robert Heinlein novel, Friday (buy here).  Now it’s not quite as magical as a shipstone, but it is interesting how science fiction turns out not to be so fictional after all…

There have been a few stories in the news lately concerning the Alberta Oil Sands and the various moves toward or away from this resource.  A couple of interesting stories:

Canada looks to China to exploit oil sands rejected by US

BP risks investor outrage at ‘dirty’ oil deal

Chinese, Korean and Japanese firms have been interested in the oil sands for a while now, and some other firms from outside Europe / USA have slowly been investing as well, such as TAQA of Abu Dhabi.  In the BP story, apparently RIL of India may be willing to pay even more than BP for the assets of Value Creation.

Shell seems to be “slowing down” investment, and shareholder resistance to StatOil and BP investment are well documented.  The question for Canadians is – are we ok with all these foreign firms investing in the oilsands?

I would say YES, and even more that we want to encourage investors who are interested in exporting the products of the oil sands outside the North American market.   One of the dangers facing the oil industry in Canada is the Low Carbon Fuel Standard (LCFS) movement in the US, whereby states and business want to avoid using so-called dirty oil that has a high carbon footprint (I of course find is most interesting is when California went this route they exempted the oil from the Kern River field which has some of the highest CO2 emissions per barrel in the world, simply because it is in California…)  A good way to mitigate this risk to Canada’s economic growth is to develop other markets for our product.  And with investment coming from Asia, this should provide more impetus for Enbridge to build the Northern Gateway Pipeline from Edmonton to Kitimat, BC.  This will protect producers in the oil sands from being solely dependent on the fickle US market and may cause those in Washington to question they have looked a gift horse in the mouth…

Jeffrey Simpson, writing in the Globe and Mail, sometimes surprises me.  He hits the nail on the head that Canadian businesses need to look beyond the US market and find more customers overseas – even if that is hard.

Mr. Simpson wrote a good book review a couple of years ago, on the same subject.  But my question is, does he now accept and understand that the government is a big part of the problem – coddling local industries and throwing wrenches in trying to pick winners – that he tried to pass off as the lesser of the complaints in the book.   While I agree that Ms. Mandel-Campbell’s book pointed out the failings of Canadian business people on the international stage, I can understand if one company is badly run – it really only affects that one company.  But when the government gets involved it screws up everyone.  Be it the wheat board, the dairy marketing system and tariffs, the way EDC is structured or government intervention in international trade in an attempt to protect/help a single “national champion”, the government isn’t helping.  They are part of the problem.

We need to get rid of marketing boards, cultural protections for bookstores and broadcasters, restrictions on foreign investment and foreign competition and put the EDC on the footing to HELP Canadian businesses export – and not by demanding domestic borrowers or foreign buyers be restricted to EDC financing or other Canadian suppliers who may not be competitive.

OK, given that the evidence is now out on climate change, I am very disappointed that the Government of Canada insists on going along with the charade of Copenhagen by committing us, in a non-binding way, to a reduction of 17% in CO2 emissions from 2005 levels by 2020…

Let’s work out how much that is going to cost…  Since we didn’t reduce emissions from 2005 through 2009 (they went up, even with the reductions from economic contraction), we have to cut deeper now.  That means that to meet the goal, reductions must be of 1.75% every year starting in 2010.   The total reduction in emissions will need to be 744 Million tonnes.  From studies I’ve been involved with indicate carbon capture and storage will cost between $40 – 100 per tonne.  So this will cost at a minimum $30 Billion (today, inflation will drive this up).  The government’s own study in 2007 said that the price of CO2 (carbon tax or credit value) needed to change behaviour sufficiently to reduce emissions would be $195/tonne.  That pushes up the cost over the next 10 years to $145 Billion.  That’s $14.5 billion per year that will be REMOVED from the economy.  And that excludes any knock-on effects that reduce economic growth because investors would rather spend their money in countries that don’t waste money on things like this.  Or impose such regulations.   And it excludes the knock-on effects of the blackouts we are going to have because we can’t build enough nuclear plants in 10 years to counter-act the shutdown of all the coal-fired power plants we will have to shutdown to meet the goal.  An wind and solar aren’t going to replace the coal-fired because they aren’t reliable enough (wind) or don’t work well in the darkness that is a Canadian winter (solar).

Do you want to pay $15 Billion a year to make us “look kinda ok” on the world stage?  Or should we say no and stop chasing this non-existent problem?

In today’s National Post, there is an article about the elimination of a report card in Elementary schools in Ontario, replacing it with a “kinder, gentler progress assessment”.

This is a stupid idea.  You cannot fix what you don’t measure.  And fluffy, feel-good assessments don’t measure.

Mary-Lou Donnelly of the Canadian Teachers’ Federation is quoted as saying:

Assessment is very complex, it’s not just a right or a wrong and a test mark. It is an accumulation of how the student is doing in many, many different areas,

Except that measuring whether a student is absorbing and understanding the material is just a right or wrong question.  It can, and must, be measured by a test score.  Yes, there are other things that teachers should be communicating to parents about their child’s behaviour, attitude, etc – but the test score should be the opening part of the discussion.  If this kid is failing to learn the material – then let’s talk about why.   But without grade letters or percentages or some hard measurement, we can’t tell if the child is succeeding or not.

It also does a disservice to the child as they grow up.  How many businesses and career paths don’t involve hard measurement of performance?  In my field, measuring performance is critical to our success.  We measure the productivity of employees and groups of workers so we can realistically predict outcomes.  This is how the real world works – if you can’t measure it, you can’t figure out where the problem.  The movement in business over the last 20 years has been to quantify performance.  And our education system is moving as fast as it can AWAY from this model.

The big question is why?  That is simple – the teachers’ unions don’t want to be measured.  They want to get paid to do their job regardless of whether they are doing it well or not.  Measurement of performance is bad for unions because it might show that not all their members are equally good at what they do.  And poor performance is tough to use as leverage when asking for more money…

OK, so I’ve crunched the numbers on the non-agreement made at Copenhagen, using data from the IEA on emissions.

In 2006, CO₂ emissions from the world were about 28.4 billion tonnes, of which about 51.5% were from the “developed world”.  This compares to about 21 billion tonnes in 1990, when 66% were from developed countries.

So the non-treaty drafted Copenhagen indicates a goal of reducing global emissions to 50% of 1990 levels by 2050, with developed nations cutting 80% by that date.  Meeting this goal requires:

• Developed nations must reduce emissions at a rate of just about 4% a year, every year, until 2050.
• Developing nations must reduce emissions at a rate of just about 1.5% a year, every year, until 2050.

Delay in reducing emissions immediately will result in much larger cuts being required later.   For instance, if business as usual continues until just 2015, then the cuts would need to be 4.8% and 2.7% a year from then on.  It’s like compounding interest.  Time is the big factor.

When the developing nations spoke at Copenhagen (through the G77), they spoke of reducing emissions intensity.  China, India, others all spoke of reducing the emissions per unit of GDP, not gross reductions.  But the math doesn’t support them.  Even if the developed world cut emissions by 100%, the developing world will overtake global 1990 emissions by 2050 with only 1% growth in gross emissions.   And since we know that China, India and Brazil have emissions rising at rates well above 1%, this seems unlikely.

This is why China killed any agreement at Copenhagen and will do so at Mexico City in 2010.  They will refuse to reduce emissions at all, because of the negative impact on their economy.  Why?  Because reduced economic growth in China will result in political problems.

It is interesting to me that the dream of the socialist left (be they red or green) is being derailed by the largest communist nation – in the name of capitalism!

This could be a very good plan, depending on how it plays out.   Here are the reasons:

• The world wants to build more nuclear plants, but there is a problem – the availability of fuel (uranium) and enrichment capabilities may not grow as fast as demand, which could drive up the cost of nuclear power.  This could make it unattractive, but also creates opportunities.
• One solution to the uranium enrichment problem is to use natural uranium – which is only done commercial in Canadian designed nuclear power plants.
• Another solution to the nuclear fuel problem is to switch uranium reactors to plutonium cycle.  This has already been done using decommissioned nuclear weapons as fuel.  The problem is that there is concern about the availability of this fuel past 2013.
• The CANDU technology can be easily modified into a fast-breeder reactor, whereby non-fissile U-238 (the bulk of natural uranium) is converted to Pu-239/240.  This plutonium can be extracted from the spent fuel chemically, rather than via expensive centrifuge plants that separate U-235 from U-238.  Additionally, fast breeders produce U-233 that can be used again as fuel.  This modification was first done by India in the early 1970s, which produced the plutonium for their nuclear weapon test in 1974.
• India has recently produced an Advanced Heavy Water Reactor technology (son of CANDU?) that runs on the thorium cycle instead of uranium.  The possibility of running thorium cycle expands the nuclear fuel supply significantly, which makes nuclear more attractive in the future.

What Canada needs to do is figure out how to make AECL, in conjunction with the Indians, more competitive.  This is going to require an investment of public money to further develop the technology, but I’d rather we spend money on that than on subsidizing windmills.

If you think free, open-source software is disruptive to the computer and software business, consider what Bill Gurley calls Google’s “less than free” offerings:

Google’s free navigation feature announcement dealt a crushing blow to the GPS stocks. Garmin fell 16%. TomTom fell 21%. Imagine trying to maintain high royalty rates against this strategic move by Google. Android is not only a phone OS, it’s a CE OS.  If Ford or BMW want to build an in-dash Android GPS, guess what? Google will give it to them for free.

It also poses real challenges for the leading smart phone players – RIM’s Blackberry and Apple’s iPhone. Without access to their own mapping data, these vendors now face an interesting dilemma. Do you risk flying naked without free navigation or do you suck it up and swallow the above average royalty fee for each and every handset? Neither option is stellar.

Google’s brilliance doesn’t stop there.

It is hard not to have been surprised by the rapid rise in recent buzz surrounding the Google Android Smartphone OS.

With Blackberry and iPhone grabbing more and more subs, the carriers were losing control of the customer UI, which undoubtedly represents power and future monetization opportunities. With Android, carriers could re-claim their customer “deck.” Additionally, because Google has created an open source version of Android, carriers believe they have an “out” if they part ways with Google in the future.

…“so why would they ever use the Google (non open source) license version.”…. – because Google will give you ad splits on search if you use that version!  That’s right; Google will pay you to use their mobile OS. I like to call this the “less than free” business model.

Amazing – Google and the phone carriers will still make money off of the consumer via advertising, while simultaneously lowering costs…  This is technological innovation of market forces.  I want to see how RIM and Apple deal with this kind of competition.

And I want Rogers to offer me a better deal on an Android device, since they are making ad revenue from Google…