2 posts: (1) Health Care: Can Regulation Match Bio-Profile Medicine?--The Home Front; (2) Dark Matter at the South Pole?--Cyber-Serendip. N.B., Mumbai & more Monday 12/1.
Manhattan Institute scholar Peter Huber profiles biotech drugs that target individual genetic make-up, and sees signs that regulators are beginning to recognize this trend and calibrate new rules accordingly. A fascinating 10-pager worth a contemplative read.
A New York Times front-pager this week reported on how scientists at the South Pole have detected what may be dark anti-matter particles emitted by a pulsar--what is created by a supernova explosion. Enjoy 5 pages away from the mess of current events and contemplate the greater cosmos for a few minutes. Savor, too, the amusing goof the Times admits to at the end--one anyone, myself included, could make--which I note only for a chuckle at our common human propensity to commit bloppers.
5 posts: (1) Citi, New York & Asia: Financial Center of Gravity Shifting?--"It's the Earth Stupid!; (2) Pirates of Petroleum--Us v. Them; (3) War Tour: Iraq, Afghanistan, Georgia--Us v. Them; (4) Energy: Nuclear, Wind & Electric Cars--"It's the Earth Stupid!"; (5) Climate Change Missiles of October--"It's the Earth Stupid!" N.B. LFTC will post two special, intriguing science-related articles this Friday, the kind that are rich food for thought over a holiday weekend, somewhat removed from the daily fare.
Manhattan Institute scholar Nicole Gelinas sees the end of a financial era in Citi's rescue. NG sees an affirmation of the power of markets to force the truth about weak assets, even at storied institutions, to the surface, even given the desire of governments to help paper over the bad news. She writes:
What the world doesn't see is that what failed wasn't capitalism but the firms that naively adopted the financial model in vogue for the last decade: the idea that any loan, bond or other bank asset could be sliced up and turned into an instantly liquid, priceable and tradeable security, with all its risks engineered away.
Citigroup and the rest of the financial-industry giants embraced that business model. Its abject failure now leaves much of the rest of the industry dependent on the government's explicit willingness to prop them up.
Further, vulture investors may force mortgage repricing:
As funds like John Paulson's start buying mortgage-backed security assets and the like at rock-bottom prices, they'll help the market discover the mortgage-related securities' true value over time - and help push that value up.
These funds will likely use their clout as big investors to make changes in the unaffordable, unsustainable mortgages underlying the securities that they buy up.
Markets are already predicting big losses in those mortgages, depressing those securities' prices. So credible changes to the securities to prevent such an outcome will raise their prices over time.
This process will be good news for some of the 5 million to 7 million US households that could face foreclosure over the next few years.
That is, because investors will buy up the securities for, say, 30 cents on a dollar of face value, they'll be able to force a renegotiation of the underlying mortgages to, say, 50 cents on the dollar - making the mortgages affordable (and thus keeping them out of default) and still coming out ahead.
NG's full column is well worth reading.
But what of Asia, with all those dollars in bank reserves and stock markets?
The LA Times reports that Hong Kong anticipates gaining economic power, as demand for its financial resources grows. Talent is expected to migrate there from NYC and London; HK led NYC in IPOs this past year. Pollution is a problem, but China's growth--70 percent of HK's economy is linked to the Mainland--is driving HK, despite a 50 percent HK stock market drop this year. Singapore is a potential rival to HK.
Our preoccupation with legal rules hamstrings efforts to curb the growing piracy threat. The morass of legal issues Western nations face is detailed by ace international legal eagles David Rivkin and Lee Casey. Their highly informative article illustrates the countless permutations that emerge when legalist societies entangle themselves in knots in order to assure their citizens that no one, anywhere, anytime, is suffering abridgement of "rights" claimed under international and domestic law, broadly construed despite unlawful combatant or outlaw status.
Roger Kaplan explains that Thomas Jefferson knew better than to ask lawyers how to cope with the Barbary Pirates. Saith the Sage of Monticello then: "Weakness provokes insult and injury, while a condition to punish, often prevents them." Yet Jefferson sent not enough of an expeditionary force, and ended up paying discreet ransom to free captives. It took Steven Decatur's return to the Barbary Coast, in 1815, with Captain Bainbridge again (he had been taken hostage in 1804, then released per ransom paid) to end matters. Writes Kaplan:
In 1815, after the continuing troubles with Great Britain were settled by the War of 1812, the problem of Barbary piracy returned, as Algiers reneged on the tribute deal and captured an American vessel. Congress declared war. Lt. Decatur and Capt. Bainbridge returned to the Mediterranean with much more power than the first time and brought memories of Carthage to Algiers. Great Britain, meanwhile, encouraged by the American example, gave up its policy of paying tribute and instead joined in the naval operations, which included heavy bombardments. Algiers accepted treaties, abolishing tribute; Tunis and Tripoli soon did likewise. Although lone-gun pirates continued to infest the North African coastline until the French established their hegemony there in the 1830s, state-sponsored piracy in that part of the world was finished -- until the 20th century.
Two international law mavens expose European hypocrisy on international law. Put simply, Europeans disregard international law when it suits their strategic purposes, or when they perceive their own legal systems as being in conflict.
WSJ pundit Bret Stephens asks readers why "Hang 'em high!" no longer is the cry regarding pirates. In earlier times this was the rule, and piracy was ended. He notes the the UN Law of the Sea Treaty prohibits (Art. 110) simply firing on pirates; the US has yet to ratify LOST, but Obama may well do so. Stephens notes that 12 percent of oil shipping traffic transits pirate zones.
Here is more detail on the cost of piracy as to shipping. Notably, the 320,000-ton supertanker the pirates hijacked was not transiting via the Gulf of Aden, but was headed to the Cape of Good Hope. Thus both routes that are usable to oil transit by sea are now captive to the pirate threat.
.Stephens ends his column thus:
Piracy, of course, is hardly the only form of barbarism at work today: There are the suicide bombers on Israeli buses, the stonings of Iranian women, and so on. But piracy is certainly the most primordial of them, and our collective inability to deal with it says much about how far we've regressed in the pursuit of what is mistakenly thought of as a more humane policy. A society that erases the memory of how it overcame barbarism in the past inevitably loses sight of the meaning of civilization, and the means of sustaining it.
Somali pirates are imposing insurance costs that may add 30 percent to shipping costs--billions in the vast international shipping markets. This is simply intolerable. How then to deal with them? Suggestion: Dedicate Predator drones to fly patrol over the affected area. If pirates approach a tanker, pull the trigger. No courts, no lawyers, no seized ships. Get the Gulf States, whose tankers are at risk, to share in the cost. No need to re-invest Somalia and chase around the bad guys. No need to deal with the Somali pseudo-government.
This will, naturally, never happen. It is to clear a solution. We prefer to tie ourselves up in knots.
Soldier-blogger Michael Yon proclaims victory in Iraq: routine life is returning, and the Iraqi National Police, long the Achilles' heel of securing the country, have finally meshed into a credible police force. Former Defense Secretary Donald Rumsfeld weighs in with an op-ed in which he argues that the success of the surge in 2007 ws made possible by success in 2003-2006 in killing insurgents and training troops. It is a hard argument to swallow, but the op-ed merits a read. Re Afghanistan, DR argues for more training of Afghan security forces, plus targeted aid to friendlies. Makes sense.
Anne Applebaum recently blamed Georgia for provoking Russia's August 8 invasion. Yet in her column, she wrote:
We knew that about him -- and so did the Russians. That was why they spent much of the previous year taunting and teasing the Georgians, shooting down their planes, firing on their police officers, attacking their villages, all in an attempt to create a casus belli, either in South Ossetia or in Abkhazia, another Russian-dominated, semi-autonomous mini-enclave inside the Georgian territory. And when Saakashvili did what they were hoping he'd do, they were ready. As one Russian analyst pointed out, Moscow's response was not an improvised reaction to an unexpected Georgian offensive: "The swiftness with which large Russian contingents were moved into Georgia, the rapid deployment of a Black Sea naval task force, the fact that large contingents of troops were sent to Abkhazia where there was no Georgian attack all seem to indicate a rigidly prepared battle plan." There was, it seems, one minor miscalculation: As a very senior Russian official recently told a very senior European official, "we expected the Georgians to invade on August 8, not August 7."
No matter: Once their own well-planned invasion had been launched, the Russians rampaged across the Georgian countryside, systematically destroying seaports and factories, killing civilians, and rolling their tanks into the middle of the country, as if preparing to cut off Tbilisi. Though in the end they didn't invade the capital, I have no doubt that their intention was to prove that they could have done so if they had wanted to -- and that next time they will. The operation succeeded: The Russians went home, declared themselves the defenders of human rights in South Ossetia, exaggerated the number of Ossetian civilian casualties by a factor of 20 and denounced Saakashvili as a "Soros paid, CIA/MI6 controlled puppet."
Sounds like WHOSE fault? Earth to Anne, read your own column from now on.
Nuclear. Manhattan Institute scholar Peter Huber explains the virtues--considerable--of switching from fossil fuels to nuclear power for provision of non-transport energy, which is 70 percent of total domestic energy use. PH is a brilliant and elegant writer, and his 8-pager merits a full read. But I will extract certain highlights for LFTC readers.
Begin with PH's perspective on our energy usage:
The U.S. today consumes about 100 quads—100 quadrillion BTUs—of raw thermal energy per year. We do three basic things with it: generate electricity (about 40 percent of the raw energy consumed), move vehicles (30 percent), and produce heat (30 percent). Oil is the fuel of transportation, of course. We principally use natural gas to supply raw heat, though it’s now making steady inroads into electric power generation. Fueling electric power plants are mainly (in descending order) coal, uranium, natural gas, and rainfall, by way of hydroelectricity.
This sharp segmentation emerged relatively recently, and there’s no reason to think it’s permanent. After all, developing economies use trees and pasture as fuel for heat and transportation, and don’t generate much electricity at all. A century ago, coal was the all-purpose fuel of industrial economies: coal furnaces provided heat, and coal-fired steam engines powered trains, factories, and the early electric power plants. From the 1930s until well into the 1970s, oil fueled not just cars but many electric power plants, too. And by 2020, electricity almost certainly will have become the new cross-cutting “fuel” in both stationary and mobile applications.
That shift is already under way. About 60 percent of the fuel we use today isn’t oil but coal, uranium, natural gas, and gravity—all making electricity. Electricity has met almost all of the growth in U.S. energy demand since the 1980s. About 60 percent of our GDP now comes from industries and services that use electricity as their front-end “fuel”—in 1950, the figure was only 20 percent. The fastest growth sectors of the economy—information technology and telecom, notably—depend entirely on electricity for fuel, almost none of it oil-generated. Electrically powered information technology accounts for some 60 percent of new capital spending.
A tectonic power consumption shift is that of the electrification of transport:
Once you’ve got the wheels themselves running on electricity, the basic economics strongly favor getting that electricity from the grid if you can. Burning $2-a-gallon gasoline, the power generated by current hybrid-car engines costs about 35 cents per kilowatt-hour. Many utilities, though, sell off-peak power for much less: 2 to 4 cents per kilowatt-hour. The nationwide residential price is still only 8.5 cents or so. (Peak rates in Manhattan are higher because of the city’s heavy dependence on oil and gas, but not enough to change the basic arithmetic.) Grid kilowatts are cheaper because cheaper fuels generate them and because utility power plants run a lot more efficiently than car engines.
The gas tank and combustion engine won’t disappear anytime soon, but in the imminent future, grid power will (in effect) begin to top off the tank in between the short trips that account for most driving. All-electric vehicles flopped in the 1990s because batteries can’t store sufficient power for long weekend trips. But plug-in hybrids do have a gasoline tank for the long trips. And the vast majority of the most fuel-hungry trips are under six miles—within the range of the 2 to 5 kWh capacity of the onboard nickel-metal-hydride batteries in hybrids already on the road, and easily within the range of emerging automotive-class lithium batteries. Nationally, some 10 percent of hybrid cars could end up running almost entirely on the grid, as they travel less than six miles per day. Stick an extra 90 pounds—$800 worth—of nickel-metal-hydride batteries in a hybrid, recharge in garages and parking lots, and you can shift roughly 25 percent of a typical driver’s fuel-hungriest miles to the grid. Urban drivers could go long stretches without going near a gas station. The technology for replacing (roughly) one pint of gasoline with one pound of coal or under one ounce of uranium to feed one kilowatt-hour of power to the wheels is now close at hand.
So today we use 40 percent of our fuel to power the plug, and the plug powers 60 percent of GDP. And with the ascent of microwaves, lasers, hybrid wheels, and such, we’re moving to 60 and 80 percent, respectively, soon. And then, in due course, 100/100. We’re turning to electricity as fuel because it can do more, faster, in much less space—indeed, it’s by far the fastest and purest form of power yet tamed for ubiquitous use. Small wonder that demand for it keeps growing.
Nuclear power is vital to provide the 20 percent more electric power we will need:
We’re burning our 40 quads of raw fuel to generate about 3.5 trillion kilowatt-hours of electricity per year; if the automotive plug-and-play future does unfold on schedule, we’ll need as much as 7 trillion kWh per year by 2025. How should we generate the extra trillions of kilowatt-hours?
With hydrogen, the most optimistic Green visionaries reply—produced by solar cells or windmills. But it’s not possible to take such proposals seriously. New York City consumes so much energy that you’d need, at a minimum, to cover two cities with solar cells to power a single city (see “How Cities Green the Planet,” Winter 2000). No conceivable mix of solar and wind could come close to supplying the trillions of additional kilowatt-hours of power we’ll soon need.
Nuclear power could do it—easily. In all key technical respects, it is the antithesis of solar power. A quad’s worth of solar-powered wood is a huge forest—beautiful to behold, but bulky and heavy. Pound for pound, coal stores about twice as much heat. Oil beats coal by about twice as much again. And an ounce of enriched-uranium fuel equals about 4 tons of coal, or 15 barrels of oil. That’s why minuscule quantities contained in relatively tiny reactors can power a metropolis.
PH's article is truly superb, a must-read. He discusses in passing the safety issue, but that subject is more prominently pursued in William Tucker's classic "Terrestrial Energy." Put simply, nuclear power should become our prime base-load power source, thus accelerating electrification of our energy usage and enabling us to migrate away from fossil fuels--especially, oil, that we may stop sending money to petrostates with strategic interest s that diverge from ours.
Wind. Meanwhile, studies of wind power in Europe, notably in the windswept UK, augur ill for wind energy prospects, showing higher cost and low availability. The New York Times reports that economic decline is undermining efforts to move towards alternative energy usage. Not only is there less money to go around, but recession reduces production and consumption, and thus, pollution.
Electric Cars. The Washington Post reports that current electric cars have proven uneconomical money-losers for their manufacturers. A declining economy, with auto sales expected to drop close to 40 peercent (from 18 to 11 million cars) next year is hardly ideal for a technology phase-in that will take at least a decade. The WP story adds:
But there's no guarantee that the new business model would be any more viable than the current one. Automobile experts estimate that the battery in a plug-in vehicle could add at least $8,000 to the cost of a car, maybe considerably more. Most Americans will be unwilling to pay the extra price, especially if gasoline prices languish around $2 a gallon.
That's why one of the mysteries about GM's plans to introduce the Volt in 2010 is how much it will cost to buy one. "What's the Volt going to cost? I would be happy to answer that if you can tell me the price of oil in 2010," said Robert A. Kruse, GM's executive director of global vehicle engineering for hybrids, electric vehicles and batteries. "I can tell you to the penny what it will cost GM, but pricing is much more related to market conditions."
The hurdles ahead for the Volt and other cars with new technologies pose dilemmas for automakers trying to gauge a market that is still very young for cars that don't exist while trying to stay in business during a downturn.
These concerns hold despite P-E Obama's campaign pledge to offer hybrid car buyers a $7,500 tax credit, which only would help those with enough income--$50,000--to take advantage of the tax credit. So where can we go?
If energy independence is our goal, economics alone cannot determine our decisions on whether and, if so, how, to shift energy consumption. Factor in, as well, that for a Green-oriented administration and with $2 gasoline, "Drill, baby, drill!" is a dead letter.
Imagine, then, a subsidy--whether to Detroit or to other suppliers, or both--of $10,000 per car for production of plug-in flex-fuel hybrids, per an Open Fuel Standard. (OFS adds about $100 per car cost.) That would equate to $10B per year for one million cars. For 18 million it would be $180 billion annually, a tax we would pay to ourselves. Now these are real numbers, but a slow economy pushes the larger bill down the road. In all, replacing 250M cars & trucks with electric, at today's prices, would mean $2.7TR subsidy. It is cheaper to incorporate OFS prospectively rather than retrofit the fleet.
But that assumes no advances that cut cost. Peter Huber's numbers given above: at $2 gas the per kilowatt-hour cost of hybrid on-board battery power is 35 cents, versus 2 to 4 cents for off-peak power if recharging is done in garages, parking lots, etc. That means first phasing in a modern electric super-grid backbone (go to Archives and find my November 13 posting on this vital infrastructure proposal). Putting in the electric grid upgrade first effectively defers for years costs of subsidizing a switch to electric plug-in OFS hybrids.
This gives the economy time to recover, when cost burdens are maximal. But when it does we will again send more billions to petrostates. Thus, in the short-term we should subsidize production of the first-generation of electric cars, to learn more about them and how to reduce transport electrification costs when true mass production levels are reached.
Wes Pruden shivers during an October colder than 70 of the past 114. Wes, at his acerbic best, gives us the latest globaloney on climate change:
The polar ice is accumulating faster than usual, and some of the experts now concede that the globe hasn't warmed since 1995. You may have noticed, in fact, that Al and his pals, having given up on the sun, no longer even warn of global warming. Now it's "climate change." The marketing men enlisted by Al and the doom criers to come up with a flexible "brand" took a cue from the country philosopher who observed, correctly, that "if you've got one foot in the fire and the other in a bucket of ice, on average you're warm." On average, "climate change" covers every possibility.
This is similar to the science practiced by Dr. James Hansen at NASA's Goddard Institute for Space Studies, the source of much of the voodoo that Al Gore has been peddling since the doctor showed up at a Senate hearing in 1988 and told ghost stories that Al swallowed whole. Only last month Dr. Hansen's institute announced that October was the hottest on record, and then said "uh, never mind." The London Daily Telegraph calls this "a surreal blunder [that] raised a huge question mark about the temperature records that underpin the worldwide alarm over global warming."
In this account, the institute had to make the humiliating climb-down after two leading skeptics of the global-warming scam, Anthony Watts, an American meteorologist, and Steve McIntyre, a Canadian computer analyst, discovered that temperature readings from September had been carried over and repeated for October.
Wall Street financial model wizards, move over. You've got company.
Cynthia Grenier recounts episodes of harassment directed at author Christopher Horner, who has written a book on climate change ("Red Hot Lies About Global Warming"). She quotes Horner:
“And as I discovered writing this book, a school denying me access to its broadcast facilities [details of the incident are given earlier at length] was child’s play compared to the depths to which so many now willingly sink, including calls for imprisonment, violence and even death for the supposed ‘crime' -- though, in fact, heresy -- of refusing to accept a dogma that stands on the weakest of premises.
“These changing norms of behavior we are witnessing are in the cause of an ideological and political agenda threatening great cost to our individual and economic liberties. That doesn’t seem to matter. It is clear that dissent can no longer be tolerated, and no one is above using their position -- be it academic, governmental, political or otherwise -- to stifle thought that frightens them or threatens to upset the gravy train.”
Shades of Galileo and 17th century orthodoxy. This hardly means that global warming advocates are necessarily wrong--no one knows what global temperatures will be a decade hence, let alone a century. It means, rather, that the global warming hawks possess certitudes that are astonishing, trusting climate models which cannot predict today's climate when plugged into past data.
3 posts: (1) Citi Investing: China Nesting--"It's the Earth Stupid!; (2) Bailouts: Detroit's Busted Flush; Housing's Bum Rush; Flushing Law--The Home Front; (3) Monetary Mess: Sinking With Floating Exchange Rates?--"It's the Earth Stupid!
The New York Times details the government's rescue plan for Citigroup: injecting $20B of capital into the $2 trillion bank in the form of preferred stock, with Citi issuing an additional $7B preferred stock to the government, guaranteeing $306B in toxic assets without actually buying them, limiting executive compensation. The preferred stock will pay an 8 percent dividend; Citi's common stock dividend will fall to $.01 per share. Citi's stock, $30 as recently as last year, had fallen to $3.77, nearly 90 percent. The Swiss government entered into a similar arrangement with UBS (Union Bank Switzerland), which is saddled with $60B of toxic assets. A former Comptroller of the Currency salutes the Citi bailout, and advises the following course of action to clean up the nation's bank balance sheets:
Fortunately, it is not too late to arrest this wrenching cycle. There are three principles that must be part of any solution. First, take troubled assets out of the system and work them out. Second, inject capital as needed, but only after bad assets are excised; don't squander capital or force it on companies that don't need it. Third, and above all, do everything possible to keep people in their homes and reward their good-faith efforts by making judicious but creative use of loan modifications.
He advocates a rescue bank structure, as was done with the savings & loan collapse in the 1990s:
I have advocated for some time for a mechanism like the Resolution Trust Corporation to purchase bad assets. A good bank/bad bank model has many of the same attributes of an RTC-like structure. The bad assets have to be valued, removed from the bank and eventually resold to the marketplace. In many ways the Citi solution underscores the efficacy of the RTC-like approach by recognizing that the troubled assets need to be isolated and losses crystallized once and for all.
However, a piecemeal solution like the Citi approach does not solve a national problem. What is needed is a large holding tank -- an RTC-like structure, or "bad bank" -- to house all the troubled assets while they are worked out.
A WSJ editorial argues for more principle and less ad hoc action in bailouts, and also suggests that if Citi is "too big to fail" it should be sundered. As to the first argument, regulators, alas, simply may not know enough to fashion a recipe; as to the second, good idea, except that smaller units, if entangled, can create chain-reaction problems. Thus was Long-Term Capital, a small hedge fund, linked to so many top banks that its failure in 1998 was deemed systemic. It was bailed out to avoid a feared global financial collapse. Larry Kudlow assesses the Obama economic team and deems it right of center; his column is persuasive.
Fareed Zakharia identifies China's $2 trillion bank reserves as a potential source of financing. Disregard his citation of historian Niall Ferguson's concoction "Chimerica" for China + America--call it chimerical and leave it at that. But China eventually has to decide if it can ignore America's economic slump, given its export-driven economy. Stay tuned.
L. Gordon Crovitz, a keen mind at the WSJ, discusses credit default swaps, citing AEI's Peter Wallison, one of those who called the collapse of sub-prime well in advance. Put simply, the astronomical "notional value" of all CDS contracts is a meaningless number; its is how these derivative contracts net out in settlement that matters. For Lehman Brothers, $400B of notional CDS value netted out at $6B--1.5 percent. Were that taken as a proxy for the entire CDS sector's $60TR notional value, a simplifying assumption for purposes of analysis, it nets out at about $1TR.
The Bottom Line. We are experiencing a crisis of confidence and trust, which has sidelined trillions of investment dollars. Government rescue plans are a limited tool, but pretty much all we have to ultimately unblock a financial system undergoing de-leveraging and discovery, the latter meaning finding out what complex instruments are actually worth. Clearinghouses that trade toxic assets will reveal the value investors will place on them.
Credit comes from the Latin credere, to believe. Loss of trust in the valuation of instruments and management of financial firms is at the root of this crisis, compounded by loss of trust in the ability of officials to manage government policy. These are not easily restored.
In economic terms, the classic equation MV = PT--Money (the supply--quantity--of money) x Velocity (how fast & often money circulates) = Price x Transactions. PT is, essentially, GDP. What we are seeing is massive sidelining of consumer and investment funds. The resulting steep drop in V is far greater than that in a normal, cyclical recession. This is why governments are pumping out massive sums--trillions--of M. If V were to go to zero, M could be infinite, and MV would still, in mathematical terms, be zero. So then would the other side of the equation, the PT that equates to GDP, be zero. That, fortunately, will never happen.
But what can happen is that V plummets so steeply that, though still above zero, it is low enough to cause T--transactions--to plummet. Sellers then desperately cut P to attract buyers. If P plummets continually for more than a brief time, a deflationary price spiral sets in, causing consumers and investors to await still cheaper prices. That is the Great Depression and Japan Disease specter that our financial regulators are fighting now.
The Fed announced its willingness to commit up to $7.4TR--of which $2.8TR is already pledged--to unfreeze credit markets. To put these numbers in perspective, given a $14TR GDP, an amount equal to 20 percent of GDP is already committed, with more than 30 percent more of GDP behind it. As GDP is falling, the standard round-figure $14TR figure may be too high, so the actual percentage commitments are thus even higher.
Until de-leveraging from 30:1 to 10:1 is complete, several years from now, and until the market value of complex instruments is revealed through clearinghouse trades, uncertainty will impair confidence. Sustaining what little confidence remains requires supporting the financial system at all costs. If this strikes some as socialist, there is simply no alternative. A functioning financial system is the predicate for markets to operate.
Modern economies are made possible by leverage. Starting with the Bank of England, chartered in 1694, commercial credit was leveraged. Without financial leverage the Industrial Revolution could never have taken off. But leverage comes with a kicker: losses are steeper on the way down. So, too much financial leverage can lead to the mess we are now in. A little leverage is a good thing; lots is dangerous.
Financial maven Christopher Wood explains why we already are locked into a deflation-bust cycle, with $4TR in housing and $9TR in market values destroyed in the US alone. Wood criticizes both Keynes and Milton Friedman. He fears that the Fed is running out of ammunition. With interest rates nearing zero, the Fed will have to issue longer-term bonds, to lower long-term rates. His article merits a close read. Robert Samuelson sees the meltdown causing a permanent reversal of the "wealth effect"--consumers spend more when asset values rise, and less when asset values fall. He likely is correct.
So the financial world is re-pricing risk, via de-leveraging. This process is inevitable, and no fix can stop it. Discovery of assets is also essential. The task of financial regulators is to prevent a crash landing. The biggest two-day market rally since the Crash of 1987 is but a brief respite in a long siege.
Detroit. Economist Irwin Stelzer bursts the bailout balloon for the Big Three automakers. A toxic trifecta of bad management, hardball union bargaining and militant Green-pushed mileage standards (CAFE: Corporate Average Fuel Economy) has left GM, Ford & Chrysler with an unsustainable business model. Keeping them in business will cost lots more than $25B, and would damage domestic subsidiaries of foreign auto manufacturers employing thousands of American workers in plants down south.
Arguing the counter-case, former Michigan GOP Senator Spencer Abraham warns that a Chapter 11 re-organization under the bankruptcy laws will inevitably turn into a Chapter 7 liquidation, with severe ripple effects in the industrial economy. All this may be true, but without a sustainable business model the bailout case seems moot. Just how inflated the United Auto Worker contracts are is detailed by Jed Babbin; read the full article, but let me throw out one nugget: GM's per-worker health benefit cost is roughly eight times that for Toyota. A gazillion work rules, and seniority provisions--contained in a 2,200-page contract!--also hamstring the Big Three; the UAW can veto which cars are made in which plants and when. Former Economist editor Clive Crook recounts how British union militancy destroyed industry in the 1960s & 1970s, which did not turn around until Margaret Thatcher destroyed militant unionism.
On top of all this Detroit's most powerful Hill ally, John Dingell, was unseated as chairman of the House Energy & Commerce Committee, for Green militant reasons discussed at NRO.
Pretty much says it all, doesn't it?
Housing. Ex-CEA chairman Lawrence Lindsey proposes a workout solution for home mortgages: issue new, lower-interest--perhaps 4 percent--mortgages to borrowers who will trade in their non-recourse loans for full-recourse loans; lenders could then levy against virtually all assets of defaulting borrowers who elected to take the lower-rate loan. Question, though: How many deadbeat borrowers will voluntarily take this swap? That, Lindsey says, is the point. Deadbeats will be written off, after other mortgages are refinanced--an estimated $9TR. About 18 percent of residential mortgages are underwater. One thing aid cannot do: get rid of 3 million empty homes.
Law. George Will acridly complains that bailouts are unconstitutional, as violation's of the "non-delegation doctrine"--which holds that Congress cannot delegate all its power to any other source of power. Will makes two arguments, one legal, the other practical. Begin with his legal argument:
Improper delegation is inherent in unlimited government, under which hyperkinetic legislators, for whom Attention-Deficit Disorder is an occupational hazard, are jacks of all trades and masters of none. Their expertise is inadequate to their pretensions of omnicompetence. Their desire to intrude government into every nook and cranny of life requires that their attentions be spread thin. So the "laws" they pass are often little more than endorsements of vague aspirations. If a law is a substantive rule that regulates private conduct or directs the operations of government, many laws are effectively written by the executive branch, exercising vast discretion in administration and rulemaking.
Now the practical one:
First, the government is operating in an environment without rules, or—what is much the same—in an environment of constantly changing rules. Second, constant, fog-shrouded improvisation is one consequence of operating without reliable prices. Prices are information; markets are information-generating mechanisms. Government has plunged into allocating wealth and opportunity even though proper prices for important assets cannot be known because markets are not functioning. When prices are arbitrary, which they must be when not set by markets, you have the essence of socialism. The results must be irrationality and, eventually, corruption. Socialism is not merely susceptible to corruption; it is corruption—the allocation of wealth and opportunity by political favoritism. Under democratic socialism, such favoritism is then rewarded by financial support, by those favored, of the dispensers of favors.
This is undeniably true. But when one is up to one's...asset portfolio swamp in alligators...The reality is that Constitutions are no exception to the "nothing fits everything" rule of problem solving. Suppose the government had stood on such legal niceties, and the markets had gone into full core meltdown, triggering global economic depression. Would such be acceptable to the public as the necessary price of fidelity to principles of the constitutional separation of powers?
International monetary ace Judy Shelton says that we need a stable monetary order for financial recovery. She notes that the $684 trillion notional value of swaps outstanding is 75 percent currency-based swaps, which derive from floating rates. She also notes that the G-20 hold 2/3 of world gold reserves; add in the IMF, European Central Bank & Bank of International Settlements and the total nears 80 percent. Time for a commodity standard rather than the chaos of floating rates. Well worth a full, careful read.
5 posts: (1) Mr. Obama's Cabinet--The Home Front; (2) John McCain: Will "The Maverick" Flip Yet Again?--The Home Front; (3) Pakistan Imploding?--Wobble Watch; (4) Arctic Energy--"It's the Earth Stupid!"; (5) It's Official: Einstein Was Right!--"It's the Earth Stupid!
Begin with Fox News Cabinet as a running interactive guide to finding who is already on board, who may be about to board and who may be en route to the station. So far, with the exception--a notable one, at that--of Attorney-General nominee Eric Holder, President-Elect Obama's choices are well within the range of reason. Defense, of the Big Four, remains unfilled.
Treasury. Timothy Geithner is, like his new boss-to-be, a hotshot at age 47. He is highly regarded on Wall Street, if unknown to Main Street. His government experience includes a stints at Treasury in three administrations, for five Treasury Secretaries. He also worked at the International Monetary Fund. As New York Federal Reserve chief, he has been in the thick of the rescue efforts.
State. Hillary Clinton is the third iconic choice for the post within this decade. Icon of State just might be a better label. Her one shortcoming is that she may not have the managerial ability to keep State's bureaucracy in line; we shall, in the event, see. But she brings many assets to the position: As "Ms. 3 AM Phone Call" Hill in effect tells the world that she is behind the new president. She has enormous Washington savvy and international star power. Her husband will have to behave--at least, to the extent of avoiding serious headlines. The GOP would be wise to climb aboard, as Hill's move out of the Senate will lead to a less powerful successor there, and take her out of the health care debate, a cause she has wanted a second chance at for 15 years. Ted Kennedy's refusal to step aside for her on this issue may have sealed her decision to leave. Attacking Hill will only undo some of the good Sarah Palin's VP nomination did for the perception of the GOP among women. By the way, does anyone think that Joe Biden, selected as VP nominee for his foreign policy smarts, is going to step between Hillary and President Obama?
Attorney-General. Eric Holder is a partisan player, whose hand in the pardons of Puerto Rican FALN terrorists and of fugitive financier Marc Rich, plus his helping bypass an inconvenient judge to enable Janet Reno's goons to kidnap Elian Gonzalez at gunpoint in 2000 (photo here) & send him to his hitherto absent father, toadying to Fidel Castro (thus sealing Al Gore's fate in Florida) make him a poor candidate. But taking after him would be a huge error, for what would likely be the Lani Guinier Effect: as with Guinier, Holder would likely be followed by an even worse pick--quite possibly, the person who succeeded Guinier, Massachusetts Governor Deval Patrick. Also, attacking a prominent African-American nominee at the start of the first African-American presidency would be a cinch to backfire. Note, however, Holder's 2002 statement to CNN that presents a refreshingly realistic view of the limits of using Geneva Convention rules to govern treatment of unlawful combatants held in detention. Perhaps Holder can persuade his new boss on this.
Homeland Security. Janet Napolitano brings experience as a successful state governor (Arizona) whose immigration policy has the support of her state's constituency, plus having been a U.S. Attorney. She has never held a Washington post, but no doubt has the savvy to catch on quickly. She is surely no Rudy Guiliani, but is probably the best the GOP can expect from this administration.
Health & Human Services. Tom Daschle is a hard-nosed partisan who fought the GOP tooth & nail as Senate Majority Leader & then Minority Leader during the first Bush II term. He will do less damage at HHS then he would have done in the White House as chief of staff. HHS has a tendency, like quicksand, to swallow its nominal chiefs.
Commerce. Bill Richardson brings extensive government experience, having held the Secretary of Energy and the UN Ambassador portfolios during the Clinton years, and pays off Hispanic voters for their support. Commerce usually is a backwater, a place often given to cronies. The last superstar Commerce Secretary was the late Malcolm Baldrige, who held the post for seven years during Reagan's terms, until he was killed in a rodeo accident. Baldrige was a real dynamo. Richardson will be pushing exports in an administration that leans towards protectionism. Why BR would give up the governorship of New Mexico for this is a mystery, from a standpoint of his career, so I will presume he was asked and decided "yes" for reasons of patriotism, seeing his country in trouble.
Non-Cabinet Key Posts. White House chief of staff Rahm Emanuel has Daschle's sharp political elbows, but got 60 or so Democrats--mostly moderate and some even conservative--elected in the past two cycles, giving his party strong Democratic control. Gregory Craig, slated for White House counsel, is a top Beltway lawyer, best known for playing key roles in fending off the conviction of Bil Clinton in his 1999 Senate trial, and also for pushing for the return of Elian Gonzalez and opening up to Fidel Castro. Lawrence Summers will head the National Economic Council, a Clinton advisory group established to bring policy focus within the White House--while the Council of Economic Advisers offers economic analysis, less related to day by day policy. Summers, a former Treasury Secretary, is brilliant and justly highly respected.
GOP: Beware. President Obama will enjoy a honeymoon of not only longer than 100 days, but an unusually intense love affair fueled by a public glad an unpopular president has departed (however possibly he may ultimately look better in light of history, a decade hence), by a fawning media eager to play First Cheerleader, by his iconic status as first African-American president, and so on. A political party whose brand proved toxic for the past two election cycles must find better things to do than immolate itself upon the anvil of executive branch confirmation battles, likely to be futile. The first Supreme Court nomination is the one for which the party's ammunition had best be husbanded, if need be.
WSJ pundit Kimberley Strassel writes that John McCain may be strongly tempted to regain his former star status with MainStream Media. MSM honors Republicans who make life difficult for the GOP--especially, for conservatives therein. Writes KS, of Big Mac's meeting last week with P-E Obama:
Contrary to most reporting, Mr. Obama's meeting with his rival wasn't aimed at a cabinet post, or even at a show of national healing. It was directed, pure and simple, at co-opting Mr. McCain's help against what Mr. Obama understands is now his biggest obstacle: Senate Minority Leader McConnell.
Strassel lists possibilities:
A few of the passions to which Mr. McCain will turn to cement his legacy are shared by the president-elect. The most obvious is global warming. Senate Democrats' most recent attempt to break a filibuster on climate-change legislation, in June, had the support of at least 54 senators. After this month's Senate reshuffle, Harry Reid is going to be tantalizingly close to breaking the barrier. Mr. Obama wants Mr. McCain's help.
The question is this: What else might Mr. McCain be prevailed upon to fulfill his pledge to help the new president? He won't likely budge on issues that he has used to build a career -- say, controlling spending and earmarks. But others? He ran on a free market health-care plan, but it wasn't a comfort zone. He promised to retain the Bush tax cuts but once voted against them. He was the architect of the Gang of 14, a Senate dodge on stalled Bush judicial nominees. On these questions and more, Mr. Obama's hope is not just to win over Mr. McCain, but to set him up as an example that other GOP members should follow.
Thus, if P-E Obama's toughest job as President may well prove to be a runaway Democratic lefty fringe in the House, John McCain--who counts Senate Minority Leader Mitch McConnell a major intra-Party adversary, having stuffed Big Mac's anti-tobacco legislation and litigated all the way to the Supreme Court fighting campaign finance--may prove the biggest problem for the GOP in opposition.
As KS says at the end of her piece: Let the (Senate) Games begin.
NY Times columnist Nicholas Kristof, knowledgeable about matters Asian, reports from his latest visit (he has been going to Pakistan for 26 years) to Pakistan that the country is teetering on the brink of total collapse. His op-ed merits a full read.
Yahoo reports that finally--103 years later, a definitive mathematical proof has been published, proving once and for all that Einstein's famous E = mc squared formula is...the envelope please...CORRECT. Albert, go to the head of the class....
Nuclear experts analyzing Iran's latest report state unequivocally that Iran now has enough nuclear fuel material to make an atomic bomb. A few months' enrichment would make for weapon's grade uranium, sufficient for a Nagasaki-size bomb. Whether Iran knows enough for warhead design is not known, but Iran could buy a warhead. North Korea, which helped Syria, might help Iran, too. Iran continues to block full inspection of its program, and declines to supply all requested material. Fun for the (mullah) family.
One has to marvel as the tone-deaf political ear of the Big Three Automobile CEOs corporate-jetting in to a bailout hearing on Capitol Hill at which they were to ask taxpayers to kick in $25 billion dollars. But the backlash such a bailout would produce would be immense, writes Matthew Slaughter, a former member of the Council of Economic Advisers. Put simply, foreign countries would underwrite their companies competing against the overseas subsidizes of automakers--GM's market-leading share in China might be put in jeopardy. And foreign investment in America could sharply fall off, at a time when it is most needed. Slaughter's article is chock full of valuable detail, and merits a full, careful read.
One major impact that a bailout, or failure to bail out, would have is shifting the center of gravity of the manufacture of autos in America from Detroit's environs to several southern states, where non-union workers are employed by foreign firms. A Wall Street Journal editorial spotlights how Democrats in Congress are refusing to remove "green strings" from the $25 billion Congress loaned the industry recently. Environmental goals, for many Democrats, trump economics. And in a major development, House Democrats ousted Old Bull John Dingell, 137-122, from his chairmanship of the House Energy and Commerce Committee. Dingell, 82, the second longest-serving Member in the history of the House, is a longtime defender of the auto industry; Waxman, 69, is a militant Green. This attests to the power the hyper-liberal wing of the House Democrats intends to wield come 2009.
Charles Krauthammer explains why a financial sector bailout differs from an industrial sector bailout: the former is a utility that enables the rest of the economy for functionas, in effect, part of America's economic infrastructure. The latter is a major industry, but not akin to a utility.
John Bolton, national security ace, advises the new administration to weigh its steps carefully on missile defense. He offers history as a guide, and his piece is well worth reading.
A Wall Street Journal editorial details the Big Apple's sharply worsening financial picture. Having lived in Manhattan during the financial breakdown of the 1970s, I sense that even with a mayor vastly savvy about Wall Street and money matters, the city is headed yet again for the abyss, hemmed in by militant unions the mayor is not willing to confront. Two years ago Mayor Mike blew it when the transit workers, unconscionably, went on strike during XMAS season's last weekend, just to show off their political muscle, rather than negotiate while working. The city lost over $1 billion in lost business, and residents were living in total gridlock chaos for four days. But the union escaped with a slap on the wrist.
Sound familiar to those of a certain age? Back in January 1966, then newly-elected Mayor John Lindsay, a liberal Republican, let himself be taken down by the same union, then run by a tough Irishman named Mike Quill. Lindsay had threatened never to give in, etc. Quill called his bluff. And one fortnight into the first of his two four-year terms, John Lindsay's mayoralty was effectively over, fatally compromised by showing weakness. One union after another called his bluffs, and within a decade the Big Apple was insolvent.
It was the Spanish philosopher George Santayana who warned that those who do not remember the past are condemned to relive it.
George Will's elegant portrait of Senate Minority Leader Mitch McConnell (R-KY), re-elected for a fifth term this month, is crisp and full of Will's astringent wit. Enjoy, and learn more about the impressive Senate pedigree of the man Will predicts will be Washington's second most powerful come January.
Ace terrorism prosecutor Andy McCarthy counsels the President-Elect to move carefully on what to do with detainees (some 255) held at Gitmo, and reconsider his campaign positions in light of harsh reality. His 3-pager merits a full read, but here is a key point that the P-E should ponder with care:
Finally (at least for now — there is so much more to say about all this), President-Elect Obama must not merely repeat his trope about our commitment to the “rule of law.” He must come to terms with what that ideal really means. The phrase is not the equivalent of “trial by jury in federal court.” It means doing what is lawful — a critical distinction for the commander-in-chief responsible for our security.
The rule of law includes, and has always included, detention without trial for wartime captives. Leaving its common sense aside (how do you win a war if you keep releasing the other side’s fighters?), such detention has long been proper under the laws of war. Furthermore, it was reaffirmed by the Supreme Court in the 2004 Hamdi case — a ruling that approved the wartime detention without trial of an American citizen combatant.
Holding combatants until the conclusion of hostilities, or at least until they can be repatriated in a way that renders them no longer a threat, is not just appropriate; it has been the default state of affairs in every war ever fought by the United States.
Put another way, the P-E should avoid what LFTC has long termed "suicide pact jurisprudence."
Last Wednesday the Supreme Court held 5-4 that the Navy can continue to use sonar, even if if kills marine mammals. This Human Events article excerpts nuggets from Chief Justice John Roberts's Court opinion, plus from Ruth Bader Ginsburg's dissent. A Wall Street Journal editorial adds more neat nuggets. The quotations establish the difference between a Justice serious about national security, and one to whom national security is an abstraction.
Winter v. Natural Resources Defense Council (Nov. 12, 2008), reversing the ultra-liberal Ninth Circuit Court of Appeals, is a landmark defeat for environmental extremism. It is a good thing, this case, coming before President-ElectObama appoints someone to replace the 5 Justices who comprised the majority--4 conservatives + swing Justice Anthony Kennedy, who this time got out of the right side of bed.
Much of the decision turns on several lower court rulings whose ceaseless juggling illustrates just how much in the way of hoops the military must jump through to conduct essential training exercises, due to the foolishness of Congress in giving Green groups a license to endlessly seek to disrupt military operations, so that their Green passions be put ahead of military needs and national security, the latter two being things Greens always deny will result from their actions.
The Court's 24-page opinion, written by the Chief Justice, is his usual model of clarity and elegance, and merits a full read. Instructive is that the record--conceded even by the appeals court immediately below, contained no evidence of so much as a single documented case of harm to marine life due to the sonar tests--in 40 years of exercises--although the Navy concluded in one case that probably harm did result. Yet based on studies by "experts" the trial court concluded that harm was a "near certainty." Roberts wrote for the majority that the contest of competing public interests "does not strike us as a close question."
Justice Breyer's 11-page partial concurrence (and partial dissent), to be fair, did attempt to weigh both sides. I disagree with where he came out--delaying sonar exercises until an environmental impact statement is finished this January--but at least he tried to consider the military's interests in a serious way.
In contrast, Justice Ginsburg's 12-page dissent, in which Justice Souter (who else?) joined, is utterly cavalier in its cursory dismissal of the Navy's interests. It simply ignores--as did the lower courts--extensive testimony from senior Naval officers on how restrictions sought by the Greens would severely degrade the value of the training exercises, which are essential for combat readiness. Ginsburg dismisses as "self-serving" the determination by the White House that wavier of environmental studies was essential for security. And she concludes that estimated injury to marine life "cannot be lightly dismissed, even in the face of an alleged risk to the Navy's 14 training exercises." (N.B., alleged risk.) But even though she concedes that "critical interests" are served by the test, she wants the Navy to go back to Congress and ask that the National Environmental Policy Act of 1969 be amended to allow the tests.
Courts take forever. Wars do not wait. The entire case is instructive reading that shows how lawyers and judges--and Greens--can lose a war, but cannot win one.
An Arizona law professor urges the new administration to play the strongest card against Iran short of a military strike, a card both candidates said during the campaign that they would play: work to impose, outside the UN Security Council and thus free of a Russian or Chinese veto, sanctions on exports of refined oil into Iran. Iran gets its oil from five companies, one each from Switzerland, France, Britain, the Netherlands and India. America has some economic leverage re these firms, described in the article. LFTC has long supported this essential idea. It may indeed prove our last, best hope of stopping Iran's nuclear program, as neither Russia nor China can step in to save the day, since neither has the refinery capacity to do so.
Author Michael Lewis, who two decades ago wrote a classic book on Wall Street, explains why the Street of yore has passed into history. Lewis is an astute observer, so his 19-pager merits a read. A Wall Street Journal editorial chides President-Elect Obama for market-unfriendly ideas like high corporate taxes, raising capital gains taxes, and bailing out Detroit's auto manufacturers. The WSJ editors note that the Dow Jones industrial Average has tanked 14 percent--1,342 points--since The One won. Which makes one wonder if Barack Obama aspires to be the 21st century's Herbert Hoover. Thousands of unsentimental traders, unfazed by The One, are wondering too.
Brooke Goldstein, filmmaker extraordinaire, co-authored a TAS piece detailing atrocities galore with kids being used as bombers, often deceived as to what they are doing. Islamism is sinking in its own stupefying barbarism. Unable to attract adults it simply moves down the age chain. And the world's "human rights advocates" remain largely mute re this. Oh, surely they disapprove. But Guantanamo is for them a juicier target.
Hedge fund star Barton Biggs counsels investors to be patient, hedge their bets, so to speak, and believes that the worst is over. He offers numbers worth considering. And yesterday Treasury Secretary Hank Paulson hedged his, admitting publicly that his original plan to purchase toxic assets of opaque value to help financial firms in distress was flawed. Paulson jettisoned the idea, and when asked about his reversal, told a reporter that he decided that he had made a mistake. Because he now sees the facts differently than he did in September, Paulson said, he did what a CEO should do: admit error and change policy. Compare this to Barney the Dinosaur, who still thinks Fannie & Freddie's mortgage-backed securities portfolios are just fine and thus require no change....
Energy expert Peter Huber (who is expert on practically everything) proposes in his column an electric grid backbone (see also executive summary of his full-length report--well-worth reading in full, "The Million-Volt Answer to Oil") that is precisely the kind of infrastructure program that the Obama administration can use as part of its economic recovery program. Along with bridges and highways to Somewhere (and fewer bridges to Nowhere) we need more Electricity Everywhere. A $75 billion, 21,000-mile backbone would go a long way towards solving one of the main problems with our electric grid today: wasting capacity. Currently our grid is divided into three distinct, largely isolated segments: west of the Rockies, east of the Rockies and in the south, in Texas. These three regional grids should be linked, so that power can be shared among them economically. This would reduce idle capacity (waste) in the system, by enabling spare power to be shipped anywhere in the country where excess peak demand power is needed. Because the backbone would operate at ultra-high voltage it would distribute electric power ultra-efficiently, saving costs despite the vast distance of carriage.
We use as much raw energy
generating electricity as we get out of the 7 billion barrels of oil we
burn every year. At $70 a barrel we spend four times as much on oil as
we do on the fuels used to generate electricity, yet big electric power
plants turn their fuel into a lot more useful power than we get out of
oil-fired engines and furnaces. The huge capital investment in our
power plants isn't fully used, either. Idle capacity could power just
about all the miles we drive, at a cost comparable to buck-a-gallon
gasoline. A further 10% boost in electrical output could take care of
all the heating supplied by oil-fired home furnaces, and at off-peak
prices electric heat is cheaper than heating oil. The price of electricity varies all over the map. Demand moves from
east to west with the sun, tracking human activity and afternoon peaks
in air-conditioning loads. At many hours on most days some utilities
are burning expensive gas as they strain to meet peak demand while
others have cheap capacity standing idle. Often someone is selling
wholesale electricity for 20% to 50% less than others are paying
elsewhere. Several hours later many of the cheap sellers and expensive
buyers have traded places. This happens because the grid's three main
"interconnections"—east of the Rockies, west of the Rockies and
Texas—are hardly linked to one another at all, and within each there's
too little transmission capacity to deliver much of the cheap power to
the expensive buyers. A single 765,000-volt transmission line can move about 1% of the
total average U.S. electric load. Thousands of miles of these lines are
already up and running. It will take another 22,000 miles to knit the
existing wires together into a national grid. This backbone will be
able to move about 25% of our current electricity consumption over
distances that span significant fractions of the continent. Electrical
losses will be modest, because very high voltage lines are
fantastically efficient. The backbone will cost $75 billion to build.
It will add about 0.3 cents of transmission cost per kilowatt-hour to
the retail price of electricity, which currently averages about 9 cents. There is more. Electric power costs could fall 30 to 50 percent. Massive savings would be achievable by shipping excess power around the country at night, when much business and residential use is low. Two key applications, recharging car batteries of hybrid plug-ins, and heating plants, which peak at night, would be economic, and reduce oil and gas use for transportation and heating. Here are the benefits, enormous in magnitude: By pooling supply and
demand nationwide, the backbone will cut the average cost of generating
electricity by somewhere between 30% and 50%. And it will reduce it
still more over the longer term, by allowing producers to locate power
plants where the land is cheap, the neighbors are friendly, the coal,
uranium, gas, wind or sun is most readily available, the ecosystems are
durable and the obstructive lawyers are scarce. By providing cheap access to the cheapest power, a backbone grid
will also accelerate electrification. Plug-in hybrid cars will recharge
mainly at night. Heating loads peak at night, too. Using idle capacity
in plants and wires to compete in these two big, oil-dependent sectors
will further level out supply and demand and thus further lower the
cost of electricity. If other fuels displace the gas currently used to generate
electricity, that amount of gas can then displace about 10% of the oil
used for transportation. Using electricity to displace oil and gas in
the heating sector would put another 15% of the U.S. oil market into
play. Electrifying light-duty cars and trucks would displace another
30%. These numbers will sound unrealistically big only to people who
don't grasp how big electricity already is. Not only is this a grand Big Idea. it dovetails perfectly with the program of an incoming administration. And it would benefit everyone. It is fully compatible with use of renewable energy and reduction of carbon emissions, too. President Obama has said he wants to be President of all the people, even those who did not vote for him. This idea is perfect to fit that bill.
We use as much raw energy generating electricity as we get out of the 7 billion barrels of oil we burn every year. At $70 a barrel we spend four times as much on oil as we do on the fuels used to generate electricity, yet big electric power plants turn their fuel into a lot more useful power than we get out of oil-fired engines and furnaces. The huge capital investment in our power plants isn't fully used, either. Idle capacity could power just about all the miles we drive, at a cost comparable to buck-a-gallon gasoline. A further 10% boost in electrical output could take care of all the heating supplied by oil-fired home furnaces, and at off-peak prices electric heat is cheaper than heating oil.
The price of electricity varies all over the map. Demand moves from east to west with the sun, tracking human activity and afternoon peaks in air-conditioning loads. At many hours on most days some utilities are burning expensive gas as they strain to meet peak demand while others have cheap capacity standing idle. Often someone is selling wholesale electricity for 20% to 50% less than others are paying elsewhere. Several hours later many of the cheap sellers and expensive buyers have traded places. This happens because the grid's three main "interconnections"—east of the Rockies, west of the Rockies and Texas—are hardly linked to one another at all, and within each there's too little transmission capacity to deliver much of the cheap power to the expensive buyers.
A single 765,000-volt transmission line can move about 1% of the total average U.S. electric load. Thousands of miles of these lines are already up and running. It will take another 22,000 miles to knit the existing wires together into a national grid. This backbone will be able to move about 25% of our current electricity consumption over distances that span significant fractions of the continent. Electrical losses will be modest, because very high voltage lines are fantastically efficient. The backbone will cost $75 billion to build. It will add about 0.3 cents of transmission cost per kilowatt-hour to the retail price of electricity, which currently averages about 9 cents.
There is more. Electric power costs could fall 30 to 50 percent. Massive savings would be achievable by shipping excess power around the country at night, when much business and residential use is low. Two key applications, recharging car batteries of hybrid plug-ins, and heating plants, which peak at night, would be economic, and reduce oil and gas use for transportation and heating.
Here are the benefits, enormous in magnitude:
By pooling supply and demand nationwide, the backbone will cut the average cost of generating electricity by somewhere between 30% and 50%. And it will reduce it still more over the longer term, by allowing producers to locate power plants where the land is cheap, the neighbors are friendly, the coal, uranium, gas, wind or sun is most readily available, the ecosystems are durable and the obstructive lawyers are scarce.
By providing cheap access to the cheapest power, a backbone grid will also accelerate electrification. Plug-in hybrid cars will recharge mainly at night. Heating loads peak at night, too. Using idle capacity in plants and wires to compete in these two big, oil-dependent sectors will further level out supply and demand and thus further lower the cost of electricity.
If other fuels displace the gas currently used to generate electricity, that amount of gas can then displace about 10% of the oil used for transportation. Using electricity to displace oil and gas in the heating sector would put another 15% of the U.S. oil market into play. Electrifying light-duty cars and trucks would displace another 30%. These numbers will sound unrealistically big only to people who don't grasp how big electricity already is.
Not only is this a grand Big Idea. it dovetails perfectly with the program of an incoming administration. And it would benefit everyone. It is fully compatible with use of renewable energy and reduction of carbon emissions, too. President Obama has said he wants to be President of all the people, even those who did not vote for him. This idea is perfect to fit that bill.
The New York Post's Page Six column quotes Katie Couric offering friendly advice to Sarah Palin. Says Katie, "I think she should keep her head down, work really hard and learn about governing. But I'm not anyone to give advice to anyone about anything," Ummm, Katie, you just did what you said you weren't gonna do. Movin' right along....
Now, governing is one thing Palin manifestly has done, something neither of the pair on the winning ticket, nor her own running mate, has on their resume. Palin has run for nearly two years the country's largest land mass--1/6 the geographic US area, with a small population, to be sure, but a budget this year three times Governor Bill Clinton's last Arkansas budget. Palin's is $12B, and Clinton's was $3B in 1992 dollars--adjusted for inflation, Bill's was $4B.
Now, Palin has received lots of fire for not being what few Governors are: foreign policy whizzes. Barack Obama is hardly such a whizbang, having but a few months briefings head start on Palin, yet escaped most media criticism. Hillary and Big Mac tried but failed to put the issue at the top. But Commanders-in-Chief have more often been Governors than Senators, and part of being a C-in-C is knowing how to govern. Plain has "walked the walk" here.
Seems Katie needs a civics course. She can start with this question: What do Governors do? Answer: Governors govern! Next question: Among those you interviewed during Campaign 2008, which candidate saw FDR on TV in 1929?
6 posts: (1) Campaign Finance: "Don't Play, Don't Pay, Don't Look, Don't Find"--The Home Front; (2) 2-D, 3-D, 4-D Global Economy: De-Leverage & Discover, + Deflate? + Defeat?--"It's the Earth Stupid!; (3) Obama Energy: Green Light for Greens--"It's the Earth Stupid!"; (4) Recovery Recipe: A GOP Rising Star Cooks--The Home Front; (5) Broun Out of Bounds: GIP Whiffs--The Home Front; (6) Presidential Selection: Mob Rule--The Home Front.
Politico reports that the Federal Election Commission apparently plans to give Team Obama a pass on auditing its campaign contributions, despite epic fund-raising, including massive unidentified $200 contributions. Donors perhaps having aggregated multiple $200 gifts seems not to be a concern. The order of the day is "Leave us not embarrass The One" upon his first year in power. Team McCain, however, will get a thorough going over, as required by McCain-Feingold, for anyone taking $84M from the taxpayers. Mac deserves this, for being such a scold in pushing this idiotic law. But voters, who have never cared re such issues, nonetheless deserve to know whether the election was purchased in part with overseas money.
So Mac will have to pay for playing in the sandbox his own law created. Barack will not pay, as he did not play, and the FEC knows not to look for anything, lest they find something. Nice trade.
Robert Samuelson paints a chilling portrait of deflation, deadliest economic danger of all if it persists more than briefly: falling prices, hoarded savings and liquidity languishing. At a recent briefing on the government's troubled assets program, the chief of Carlyle Group observed that American companies were leveraged at 20 percent of GDP--that is GDP covered liabilities (loans) 5 times; in 2008 the leverage is now 120 percent of GDP--liabilities exceed GDP 6:5. In its effort to stem the tide the Federal Reserve has dished out nearly $2 trillion in emergency loans, but refuses to disclose where it has placed all that taxpayer money.
The coming economic crackup is in emerging markets. The WSJ op-ed by a London finance maven explains how overseas economies are even more vulnerable. China is investment-driven, at 42 percent of its economy, versus 36 percent driven by the consumer; in the US the consumer drives 70 percent of the economy. Export contractions and price drops and de-leveraging will hit weaker economies harder.
In the classic formulation of economics, MV = PT (money x velocity = price x transactions). GDP rises when "T" increases, as more transactions mean money circulates faster--"V" rises. When "T" falls, so does "V". To sustain the economy, the Fed then pumps out more "M". It can do so without causing inflation when "V" is falling. Which is what it is doing now. Business then cuts prices--"P"--to try to stimulate demand. But if "P" falls, consumers & investors hoard savings, dropping "V" faster. Falling "V" leads to falling "T". That vicious circle can lead to a deflationary spiral: "V" going toward zero, & "PT" plummeting. At zero V, the money supply--"M"--can be infinite and the equation still remains at zero. That extreme outcome will not happen. But deflation can happen. Not definitely coming, but not a pretty scene if it does come to pass.
Meanwhile the Economist reports that the Gulf States, rolling in trillions, are sitting fat and happy amidst all the economic misery elsewhere. The one good thing: they would be perfectly happy to see America or Israel take out Iran's nuclear program. Frank Gaffney warns that Mideast money into the US comes with new strings: Sharia-Compliant Finance (SCF). Not just a benign genuflection to ordinary Islamic practice, it can include using funding leverage to influence American policy, and using libel, slander and blasphemy laws to silence Western free speech. Beware.
Energy maven William Tucker warns that the country, as Team Obama enters, seems headed for a rerun of California's energy disaster. Mesmerized by Green utopian fantasies of an-all "renewable" economy, nuclear power is pushed aside, stalled by green militancy applied via the courts, while windmills float along merriiy. That nuclear plants are 90 percent efficient, coal 70 perrcent and windmmills only 20 peercent--no matter. And reports are that Obama is considering RFK Jr,., a Green fanatic, for EPA. Write off another decade in our search for energy security. A WSJ editorial flags changes that Beverly Hills global warming super-hawk Henry Waxman would bring if he unhorses moderate liberal John Dingell as chairman of the Hosue Energy & Commerce committee.
Republicans have been rightly outraged at over-the-top criticism of President Bush and Republicans, such as as "Bush lied, people died" and "Republicans are evil," etc. So comes now Rep. Paul Broun of Georgia, likening President-Elect Obama's national security policy of Nazi Germany and Soviet Russia. Republicans should take pains to behave better than democrats have done in opposition. Given how off the charts many Democrats were in the past 8 years, it will not be hard for Republicans to do this. Rep. Broun is making the task harder. He should take a Valium, and apologize to President-Elect Obama.
George Will writes that Obama's win completes the erasure of the Founders' intent: a process of selecting a president free of demagogic appeals to a mob which picks nominees. Will suggests we go back to the drawing board. He is right, and his column is crisp, and as always leavened by historical perspective.
HAPPY VETERANS' DAY. 5 posts: (1) VETERANS' DAY Remembrance--The Home Front; (2) Special Ops: Gray Lady Goes "Bombs Away!; MSM's Obama Tank"--MSM Murders; (3) Bio-Terror: The First WMD Strike?--9/11, 3/11 & N/11; (4) Elections: The Comedy Factor--The Home Front; (5) Elections: Minnesota's "Stalin Senate Vote"--The Home Front.