Get one thing strait: Iran’s tanker stand-off

Hello and welcome to The Intelligence on Economist Radio. I'm your host, Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world. Have a look at recent election results, particularly in Europe, and there's a troubling rise of populists. They're angry, railing against the status quo, promising radical change. Yet voters will tell you they're feeling pretty good. We dive into this happiness paradox. And big banks have long been lending to clients accepting their artworks as collateral. But the practice is spreading, with art-minded boutique lenders popping up. And depending on where you are, you might even be able to keep your leveraged Leonardo on the wall. But first, in the Strait of Hormuz on Friday, an Iranian Revolutionary Guard patrol boat ordered a British-flagged oil tanker bound for Saudi Arabia to alter its course.

If you obey, you will be safe. Alter your course to 360 degrees immediately. If you obey, you will be safe. Over.

A Royal Navy frigate, too far away to intercept, responded with warnings of its own.

7 Navy patrol boat, this is British warship Foxrot 236. Sir, your requests that you are transmitting to the Stena Impero hinder and impede her passage.

Shortly afterwards, the tanker, the Stena Impero, was boarded and seized. The 30,000-ton vessel and its 23 crew members are now being held by Iran. The reason given for the seizure was that the ship was failing to respect international maritime rules. It shouldn't have come as a surprise. Iran had threatened retaliation for Britain's seizure of an Iranian tanker off Gibraltar on July 4th. It was believed the vessel was carrying Iranian oil to Syria, which is under European sanctions. Today, Theresa May, the outgoing prime minister, will chair an emergency meeting to consider Britain's response. In attendance, one of the candidates to replace her, the foreign secretary, Jeremy Hunt.

It raises very serious questions about the security of British shipping and indeed international shipping in the Straits of Hormuz.

Underscoring all Adding to this are the tough economic sanctions imposed by America on Iran following the US withdrawal from the 2015 nuclear agreement. There appears to be little appetite for negotiation, and it seems hostilities will continue to play out in this strategic shipping lane.

The Strait of Hormuz is a narrow waterway that goes between the Persian Gulf and the Indian Ocean. It has Iran to the north and it has the Arabian Peninsula to the south.

Greg Carlstrom is our Middle East correspondent.

What's important about it is about one-fifth of the world's oil and also a large proportion of its liquefied natural gas passes through this waterway on its way to markets in Europe and Asia and elsewhere.

And what power does Iran have to control or impede movement in the strait?

Despite the threats that we've heard from Iranian officials over the past few months, they don't have the power to actually block the strait. What they are able to do, as we've seen now over the past few days, is to go after individual ships, to detain individual ships there, but the threat of blocking the entire strait, it would require them to effectively mine it, which would then also prevent Iran from being able to move goods and oil in and out. So what they're able to do is, again, what we've seen since Friday, which is to target individual foreign ships.

And how much do you think that this is a straightforwardly tit-for-tat reaction to the seizing of the Iranian tanker?

That's how Iranian officials have described it. They've warned since the July 4th seizure of this Iranian tanker off Gibraltar that if that ship was not released, we would seize a British tanker in return. But of course, this has now been caught up in the broader dispute between America and Iran. The Iranians think that Britain took that tanker earlier this month at the behest of the Americans to enforce American sanctions on Iran's oil industry. Britain insists that wasn't the case. They say the issue was the destination. That tanker was bound for Syria in violation of European sanctions on Syria. But for the Iranians now, all of this has become connected. So while the proximate cause for this was the seizure of this one tanker, it's become part of this much bigger dispute.

What happens now after this sort of tit for tat, okay, if you take mine, I'll take one of yours? What happens next? What's the strategy here?

Well, it seems contradictory on the surface because Britain, along with France and Germany, is trying to preserve the 2015 nuclear deal with Iran. They're trying to find ways to blunt the impact of America's economic sanctions on Iran. On the face of it, seizing a British tanker, even if it is part of this tit for tat, it seems like it's counter to what Iran is trying to accomplish here. It's going to erase any goodwill that Iran might have had in the UK. But what they're keen to do on a broader level is to show America and its allies that they can impose a cost for these economic sanctions. For about a year, they continued to abide by the nuclear deal. Their response to America's withdrawal was very restrained. But what we've seen over the past few months with the seizure of this tanker, with the sabotage of oil tankers in the Gulf, for which Iran is allegedly responsible, various other actions around the region. The Iranians are trying to, again, raise the cost of America's unilateral sanctions and demonstrate that there will be a price for that. You even have someone like the Iranian foreign minister who just last week made a diplomatic proposal to try and resolve this crisis with America. Now, after the seizure of the oil tanker, even he is sounding quite belligerent in his language.

They do not negotiate with terrorists. We do not negotiate with terrorists because this is economic terrorism, what they're doing.

And so what do you think the American administration will have made of this?

I think for most people in the White House, this will confirm their belief that Iran is not interested in changing its behavior and Iran is not worth negotiating with. President Trump has been hot and cold. Sometimes he's quite open to talking with the Iranians, sometimes he's not. After the tanker was seized, he certainly sounded like he was not in favor of it.

And this only goes to show what I'm saying about Iran. Trouble. Nothing but trouble. And remember this: the agreement, the ridiculous agreement made by President Obama expires in a very short period of time. It was a short-term agreement. That was a ridiculous agreement.

Now, that was President Trump over the weekend. You can go back weeks earlier and find clips of him talking about how he would negotiate with Iran and he would be in favor of signing a new nuclear agreement with Iran. Stay tuned, that may very well change.

But in the meantime, we have what looks like a fairly delicate diplomatic situation. Do you see a delicate diplomatic way out of it?

The Iranians still seem to be treating this as a tit for tat. If Britain were to release the tanker it's holding, Iran would release the tanker that it's holding. But I think the longer this goes on, the more political cost there is for the Iranians within their own system. To release this. The Revolutionary Guard has control of this tanker. They've released some quite ebullient videos showing their soldiers landing on the ship and even playing the Muslim call to prayer from the decks of the ship. It's become a public relations coup for the IRGC, and I think, again, the longer this goes on, perhaps the less willing they'll be to part with this victory.

When you say a PR coup, I mean, for what audience?

In front of a domestic audience. When the nuclear deal was signed in 2015, Iranians were broadly supportive of it. They were enthusiastic. They thought it was going to bring economic opportunity and investment and help reintegrate their country into the world after decades of isolation. That has changed over the past couple of years since Trump withdrew from the nuclear deal and reimposed sanctions. It's validated the argument from the more hardline figures in Iran's system that we can't trust the West. And so you've seen public opinion shifts certainly against the United States, but even against Europe over the past number of months because European countries have not been able to blunt the impact of these sanctions and hold up their end of the nuclear deal. So the hardliners seem ascendant within the Iranian system, and something like this helps the Revolutionary Guard in the court of public opinion at home. People are suffering from economic sanctions. The Iranian currency has collapsed. The medicines have become unaffordable for many people. Even basic foodstuffs have become unaffordable. None of this, despite the hope, I think, of people in Washington and elsewhere, none of this yet threatens the stability of the regime, which has survived much worse over the 40 years that it's been in power, but it certainly has empowered the hardliners within the Iranian system.

Doesn't that mean that we'll see more of this kind of grandstanding, this showboating, should I say, from the IRGC and for the benefit of that same audience?

It does. This is a crisis that doesn't seem to have a diplomatic off-ramp. The United States constantly changes what it wants from the Iranians. Sometimes it seems to be regime change, sometimes it seems to be asking Iran to completely reorient its regional policy, sometimes the goals are much narrower and it's just about creating a new nuclear agreement. We've heard very inconsistent messages from Washington. The Europeans are really powerless to affect this, and the hardliners who are now in control in Iran are not interested in negotiating with the United States. It seems like though many people on both sides do not want escalation, we are on a path that will inevitably lead that way.

Greg, thank you very much for your time.

Thank you.

It can seem at times like political discourse has never been angrier.

I'm on the rally. This is the reality. The reality is this is a war.

Populist political parties upset with the status quo have increased their share of the vote in almost every European country.

Angry populist parties have been getting into power in lots of European countries, usually by being members of the governing coalition.

John Parker is an international correspondent for The Economist.

Good examples are the recent elections to the European Parliament, where The French National Rally was the largest party. Vive la France! Et vive les nations d'Europe! In Italy, the Northern League doubled its vote. The Brexit Party, which came from nowhere to top the polls in Britain. I come back to a place that has been humbled and humiliated. The European Council stitch-up has rendered this place impotent until today. I thought the success of the populists was a reflection of an angry electorate. Essentially, voters were disappointed by the biggest economic problem since the Great Depression in 2008, that they had a feeling that they were being left behind by globalization, and that therefore angry, dissatisfied voters were sending protest votes about the whole system by electing, you know, the most sort of angry populists of left and right.

But that's not what you found.

The peculiar thing is that if you look at measures of what's called life satisfaction, so that typically means how satisfied are you with your life, are you very satisfied, somewhat satisfied, and so on, at least in Europe, you'll find that people are happier than they've ever been. It's an enormous paradox. You know, politically, you would think that everyone's incredibly angry. You might think that from the state of the economy too. I mean, wages have been pretty flat for a very long time. So if you look at what people say that they feel about themselves and about life in general, they're all incredibly happy. When you look at how they vote, they all seem incredibly unhappy. And that's just very odd. If you're happy with the status quo, you'd probably vote for like a party of the status quo, right? I mean, that, that seems intuitive. There have actually been some studies on this, and surprisingly enough, the studies have shown, you know, what you'd expect. So there was, uh, run by a researcher in Zurich who found that people who said that they were happy were slightly more likely to support the incumbent party in Britain. It was a more powerful predictor of a vote for the incumbent than economic success was. And that was a big surprise. For years and years and years, governments have basically had in their minds the target for what we should be aiming at is like a healthy economy, good GDP growth, good job growth, low unemployment. 'And if we do that, people are going to reelect us.' Except there's this weird paradox that that doesn't seem to be happening so much as you'd expect in Europe in the last 10 years.

So why do you think that's happening?

There are 3 possible reasons. It could be that both sort of support for populism and happiness goes up as people get older. And you see that in the Brexit vote. Disproportionately large number of retired people voted for Brexit. It's also the case, what we know, that older people tend to be happier. Than people who are working. But I've got to say that that's not a widespread explanation for Europe as a whole, because parties like the National Rally and the Northern League and so on are really parties of the young and middle-aged workers. A second possibility is that happiness does influence elections, but not the kind of happiness that we're usually studying. Psychologists make a distinction between two different kinds of happiness. One is called evaluative happiness. How do you rate your life? Happy, not happy, and so on. The other's called hedonic happiness. I love hedonic, and it tends to mean were you happy yesterday? Were you angry yesterday? What did you feel yesterday? So it's possible that the evaluative happiness in Europe was going up, but the hedonic happiness— how did you feel yesterday— was actually going down. People were evaluating their lives more highly, but from day to day were more and more angry. And so it could be that the elections are driven more by these sort of passing whims, by the hedonic happiness. And there is some evidence to that. There have been some studies which show that when college football wins take place in America, you know, you get incumbents in local elections tend to win more. The third possibility is that populists sort of do well in countries with lots of happy people. Even if the happy people don't vote for the populist. So the idea here is that countries with lots of happy people have them because they tend to be richer. And in countries which are richer and where the economy is doing quite well, some substantial group of people are willing to take a risk on populist parties. And there's actually been some work which suggests that that has been happening in Europe.

All of the examples that we've heard so far though have tended to be right-wing populists. I mean, if this arithmetic applies, why are we not seeing examples on the left wing of the populists?

Well, you did see it a bit 5 years ago and more. For example, Syriza in Greece. And I think that was an example where the economy was really bad and if you voted for the populist left, the worst that might happen was that They'd be ineffective, but if they really were good, they might redistribute wealth to you. So populists did vote for them. But as economies got a bit richer, people had more to lose. So I think they were more worried about the populist left screwing things up than they were about the populist right screwing things up. Because if the populist right screwed things up, well, that wouldn't affect the redistribution side, so they probably wouldn't lose anything themselves.

And all of these examples that we've talked about so far have come out of Europe. What about the rest of the world? Does this same sort of upending of things going on?

I mean, the big example in the rest of the world is obviously Trump. And in America, you actually see a more traditional kind of pattern, which is to say happiness measures have been going down slowly for a while. So I think you could see Trump as an example of unhappy voters voting for the disruptive populist. To some extent, that's true in Brazil as well, which has been through a pretty bad economic period for a while. So I think the move to Bolsonaro is probably an example of unhappy voters. So there's something unusual about Europe, I think.

I mean, where we've seen a lot of this populism of all sorts play out is online. And if we're looking for something that may have changed in the past decade or so, there is certainly that.

Yeah, that's totally true. This explanation, which is a very powerful one, really shifts the focus away from the voters and We're no longer saying, you know, what's happened among the voters, and we're saying what's happened among the politicians. And I think there's quite a lot of evidence to suggest that populists are just really good at using social media. It's not exactly clear why that should be, but it could be that, like, you know, you can get your message across in 280 characters or less if you have a pretty simple message in the first place. What this tells you is that One explanation is not that the voters themselves may have changed dramatically, though I think there's some evidence of that too, but it could also be that populist politicians have just become really better at fishing for votes in the same small pool.

So the paradox broadly not entirely resolved, but we have some threads to follow.

I think that's fair. I mean, the sort of science of happiness and voting is in its In its early stage, I would say. It's something really of the past 10 years or so. I mean, it's only in the past 10 years that we've really begun to see how important happiness is in all sorts of areas of life. We've been talking about politics, but you also see it in family relations, in education, in all sorts of areas.

John, this has made me hedonically happy.

Thank you for your time.

Thanks.

If you have a Warhol on the wall or a Botticelli in the bathroom, you might think that you'd be set if you fell on hard times. But art is notoriously illiquid. It can take months or even years to sell a piece. So more and more collectors are turning to lenders to convert their canvases into cash.

Lending against art is surprisingly common.

Roland Lindenblatt writes about finance and economics for The Economist.

The value of loans against art in America recently reached $17 billion to $20 billion, and it's been growing.

And it's a new phenomenon? I mean, have people been borrowing against art for a while?

I think the first one was actually Citibank. They started this in the 1970s, but Just recently, a new type of lender came on the market, and that's boutique lenders. While private banks only have very wealthy clients and can only serve them, boutique lenders pretty much lend to anybody who has a valuable piece of art.

And so what's changed in the market then? Why is there this enormous growth in it?

Well, interest rates in general are pretty low at the moment, so that makes borrowing attractive. Also, in some countries there are public art registers. So as a lender, you can check if the art is already encumbered. Also, you want to know what the art is worth that you will lend against. So now you can look at price estimates and auction results. They're all available online, and that makes underwriting much easier for the lenders.

Okay, but how does this work? Let's suppose I have an old master's in my basement and I want to turn it into some cash. Talk me through it.

If you are very wealthy, you'd probably be a client of a private bank, and I would advise you to go there because interest rates there are lower. But you could also go and call up a boutique lender. For a piece of art that's worth $2 million, they would give you a loan for $1 million, and that could happen within 3 or 4 weeks. And what is true for both the boutique lenders and the private banks is they only accept art by very well-known artists.

And so how would it work out for me as an art owner? How does it work out for art owners in terms of what happens to the artworks themselves?

That depends where you are. Here in the US, you can actually keep the piece of art on your wall. You can look at it and still get the money for it, which is great for owners. Whereas in other parts of the world, they would take possession of it. You couldn't keep it yourself.

And so if in a low interest rate world where there are more of these boutique lenders, does it seem to you that this is going to happen more and more?

Well, there are not that many collectors of high-value art just because it is very expensive, but still the market is surprisingly small at the moment. And 90% of art-secured lending takes place in the US. There's almost as much art in Europe as there is in the US in terms of value. So I expect that the market in Europe will grow in the future.

And so how about yourself? Do you have some high-end art that you need to offload and turn into something a little more liquid?

Unfortunately, I don't. But if I had a piece of art, if I had a Monet on my wall, I would definitely borrow against it, get some money for it.

Well, especially if you can keep it on the wall.

Especially then, yes.

Roland, thank you very much for your time.

Thank you, Jason.

That's all for this episode of The Intelligence. If you like us, give us a rating on Apple Podcasts, and you can subscribe to The Economist at economist.com/radiooffer. 12 issues for $12 or £12. See you back here tomorrow.