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« August 2008 | Main | October 2008 »

Now What?

The House defeat of the bailout bill was good for both our democracy and our economy. Even the prospect of Wall Street holding a gun to its own collective head and threatening to pull the trigger - even the prospect of not getting the next round of campaign contributions – was not enough to make a majority of the representatives, every one of whom is up for reelection, vote against the wishes of the vast majority of their constituents. Special appreciation to Vermont Democratic Congressman Peter Welch who has no significant re-election opposition but voted his conscience against the bill.

I just bought some stock on the news after the Dow's latest swoon. Not that I think I can pick an absolute market bottom and certainly not that we're out of the economic woods but I would've sold had the bailout passed because of the damage I feared it would do the economy.

So would should our government do and not do? Here are a few suggestions:

  1. Don't raise the per account limit on FDIC insurance more than to $250,000. I would've been for this a little while ago; but, If money flow is drying up from the central banks, it's better that those who want the security of FDIC insurance spread their money over many local and regional banks so that they'll have money to lend; but some increase is justified to balance the temporary insurance of money funds and because this limit hasn't been raised in a long time.
  2. Do make sure there is enough standby money for the FDIC to handle a large number of bank failures and assure people that there'll be no need for a run on banks.
  3. Consider buying unsold houses in hard hit areas to resettle people from flood-prone areas who've lost their homes. No financial purpose in building more housing inventory now.
  4. Do take the money that is flowing into Federal bonds at low interest rates and invest it as quickly as possible in infrastructure projects including rebuilding the power grid, fixing highways and bridges and waterways, and broadband for rural areas (OK, I'm a special interest, too).
  5. Share some of that Federal bounty with the states either in the form of municipal bond insurance or grants so that the states can build infrastructure as well. The cost of borrowing for local governments has gone up alarmingly and it would be very damaging to have them halt instead of increasing infrastructure projects.
  6. Backstop student loans. We do need more training; we don't need more people entering the workforce in the short-term.
  7. Don't bail out the auto manufacturers either but do invest in basic research on batteries, plan for the disposal of batteries, and consider resource investment for pumping hydrogen, natural gas, or electricity to the next generation of refueling stations.
  8. Quickly replace the Federal fleet of gasoline vehicles with anything that uses less or preferably no oil-based fuel. This step both saves manufacturing job and helps solve the chicken-and-egg problem of not having an infrastructure for alternative fuel vehicles because there aren't enough alternative fuel vehicles for the infrastructure to serve.
  9. Don't try protectionism – the Smoot-Hawley is widely believed to have worsened the great depression.
  10. Don't revive the Wall Street portion of the bailout.

Toxic Debt Recipe with Free Spreadsheet

Now that it looks like the Wall Street bailout will pass - unfortunately, there's no point in crying over spilled milk; better that we all learn to make toxic debt since the government will be creating a market for it. We can't afford to waste time making software, growing crops, or building stuff – too risky if you fail. Ever eager to help in the retraining of America, Fractals of Change has managed to obtain a tested toxic debt recipe. It can be made with ingredients available almost everywhere.

First purchase $275,000,000 face value of 7% fix rate mortgages – the face value is the amount actually lent if you were afraid to ask. You buy these from an institution which lent money to someone to buy a house or from someone who bought the mortgage from someone who bought the mortgage from someone who lent money to someone who bought a house. These mortgage originators are entitled to some profit, of course, so you'll probably pay about $280,000,000 but not to worry.

Now that you have the mortgages laid out on your computer, you have to dice them into tranches. This recipe absolutely depends on your dicing skill so be sure to practice with the spreadsheet I've supplied before making the actual debt dish.

We'll try three tranches for our first exercise although good financial chefs can dice a pool of mortgages into dozens and dozens of tranches. Actually this recipe only yields one tranche of toxic debt and two rather pedestrian tranches but some waste is inevitable in all cooking.

Now the big secret of this recipe is that no one knows which mortgages are in which tranche; the tranches are distinguished by the repayment rights that go with them and the interest rates which they pay. Don't worry, I'll give an example. The total amount of the tranches, however, has to add up to the total you paid for the mortgages plus a little extra to reward you for your trouble in creating this valued product so let's say you are going to have $300,000,000 of debt to sell once you are through whipping up this batch.

The first tranche of $75,000,000 will be entitled to all of the payments which come in until it gets back all the principle it is due in a particular month plus 4% interest. This tranche is very, very safe because there would be enough money to pay it off even if more than three-quarters of the mortgages went into default. Because it's so safe, it pays very little interest. This is NOT toxic debt, just a byproduct.

The second tranche of $200,000,000 starts getting paid off once the first tranche has been satisfied each month and gets 5.5% interest. Normally this wouldn't be considered toxic either since it can't have losses until more than one sixth of the mortgages go into default

No payments go the third tranche of $25,000,000 until all payments made to the first two tranches have been satisfied. Holders of the third tranche receive a whopping 13.5% interest if there are no defaults or if defaulting properties are always sold for enough to make the mortgages whole. So how much risk is there in that? And look at the reward! Don't forget to put a sentence about risk in your prospectus, though; no one'll read it except lawyers but they'll get you if you leave it out.

So not a bad business; you sell $275,000,000 worth of mortgages which cost you $280,000,000 for $300,000,000. Of course you could do better with ten tranches and a billion dollars but you should practice this simple recipe first.

Where you might get in trouble is if you eat your own toxic tranche. This is meant for the guests but not for you; you could get sick. Read what Andy Kessler said about the pigs eating the sausage.

And don't unhide columns F through K of the spreadsheet. It's bad manners to calculate the effect of defaults during dinner. Someone might get nauseated if they see that the value of the toxic tranche drops from $25 to $7 million with a 10% default rate (net of foreclosure receipts). But that's what bailouts are for.

Instructions for spreadsheet:

  1. Fill in the values in green only. The spreadsheet will calculate the interest rate for the toxic tranche,
  2. Make sure the total face amount in C7 is less than the sum of the tranches. You need to make a profit.
  3. Unhide the default rate assumptions by selecting columns E and L, right click, and select "unhide".
  4. Don't eat the sausage.

Buffett’s Bailout Blackmail

"

From the Wall Street Journal:

"If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will "get killed, and so will all our other investments.""

This article and others explain how Buffett stands to make a large profit if his deal to buy Goldman goes through. Fine for Buffett to make a profit; he does that well. Not fine for that profit to be created by an expenditure of government funds. It's too bad about his other investments, but we don't need to bail them out either.

Apparently the bailout deal is not yet done; the people's House of Representatives may stand firm against the mandarins of the Senate. Actually it's the way the system was supposed to work – good job, Founders. All those representatives are up for reelection this Fall; their mail is almost unanimous against the bailout and it's real mail and email and phone call from real angry people – not something generated by pressure group bots. For someone up for reelection the public outcry may be drowning the din of the big contributors calling to they may not be able to pay the next installment on their contributions if they don't get bailed out.

Letters and calls today will make a difference.

But what about the claim that we'll have a depression if this bailout doesn't pass? I'm sure some of the people making the claim believe it; even the fact that the claim has been made will intensify a short-term negative reaction in markets if the bailout bill fails. I can't disprove this. I also can't disprove the theory that, if all say "OM" at the same time, markets will miraculously recover.

It's up to those who make such scary statements and propose such expensive solutions and advance the proposition that we have to bail out the super rich to save ourselves to prove these statements and propositions. That hasn't happened. The excuse for not "proving" that there were weapons of mass destruction in Iraq was that we couldn't compromise intelligence sources – pretty good excuse. Now we're being asked to risk as much as we spent directly on the Iraq war but all we're getting to justify both the expenditure of cash and the enormous damage that a bailout'll do to the principles of free enterprise and fairness is inchoate fear and threats by banks to shoot themselves if we don't pay ransom.

What should the government do?

Build up the Main Street defenses. We've already re-nationalized Freddie Mac and Fannie Mae to keep mortgages flowing. The quick move taken to stop a panic in money market funds was a good one. Make sure there is a standby appropriation for Federal Deposit Insurance. Get some massive public investment underway in thing there ought to be public investment in: the electric grid, maybe broadband, government energy efficiency, bridges and roads. Banks are not public infrastructure; they're not where we ought to be investing public money.

Meanwhile, the real economy is working towards its own cure. People are breaking up their big deposits and CDs into $100,000 chunks covered by the FDIC. The big deposits tended to be in big banks; the chunks get distributed to local and regional banks (because there are more of them). Money is flowing but not the way Wall Street wants it to. The proposed bailout reverses the flow and pumps money back uphill to Wall Street.

Housing prices were down again last month; but lower prices are bringing buyers back into the market (surprise). The inventory of unsold homes was also down significantly for the month. Artificially keeping prices high doesn't end the pain from a burst bubble; it prolongs it.

Oil imports are down and gasoline prices still falling. Sure, we cut back out of pain but we cut back.

Now Mr. Buffett may need to cut back a bit, too. We shouldn't bail him or the rest of Wall Street out; we shouldn't let ourselves be panicked into a bailout. The stock market's going to try to scare us this morning with a swoon; we shouldn't buy the histrionics. The real buying opportunity is if the bailout fails; we can benefit from Wall Street's panic and buy into an economy and a country strong enough to withstand the anguish of its superrich.

It's time to just say NO.

Two other differing views from people I respect:

Fred Wilson is persuaded that we do need some form of a bailout but wants to see real upside for us, the investors in the bailout.

Andy Kessler who is a cynic and knows a lot about financial markets thinks that we the people will make a killing on all this bad debt, that "Paulson's Folly" will be a bonanza.

Just Say No

I've been wrong to advocate hedging the bailout bill with conditions; we should just say "NO".

We can take a fraction of the $700 billion dollars we save and use it for specific anti-recession measures. Let's start rebuilding our power grid; fix some bridges; maybe even help some homeowners with their mortgages where warranted. But no bailout for Wall Street; none.

If we say "yes" to the bailout bill, the Dow will go up. Great time to sell your stocks because we will have damaged the economy and our competitiveness for a long time to come.

If we say "no" to the bailout bill, the Dow will plummet – for a while. Big deal; that's what the Dow does; it'll create a buying opportunity.

If we say "yes" to the bailout bill, the dollar will plummet. That $700 billion to bailout the world's financial institutions comes from printing more dollars and devaluing every dollar already in existence. A plummeting dollar means higher imported energy costs. That really hurts Main Street, the real economy, and national security.

If we say "no" to the bailout bill, investors like Warren Buffet and Bank of America will continue to pick up assets from distressed banks cheaply. More power to them; they can deal with the problem of overpaid executives. They are showing us the right way out of this mess.

Normally The Wall Street Journal would have been against the bailout on economic terms and The New York Times against it on populist terms. Apparently our two great national newspapers are too much the hometown newspapers of New York City to see straight. When you look out the windows of their editorial offices, you're more likely to see out-of-work bankers and empty restaurants than people struggling to pay for gas and home heating oil – or to keep their small businesses running or stay in their homes. So we have to do without their leadership on this issue.

Fortunately three out of the four candidates in the Presidential sweepstakes are senators; they have to vote on the bill (unless it dies in committee). My vote for President is up for grabs. If there were contested house or senate races in Vermont, my vote for them would be up for grabs as well.

The upcoming election gives us a chance to save ourselves from the horrendous mistake this bailout bill would be. Don't wait for the pollsters to call; write your senators and congressperson today.

 

Capping Executive Salaries in the Bailout

Update: I was wrong to try to hedge the bailout with conditions. We should just say "no". see http://blog.tomevslin.com/2008/09/just-say-no.html

Treasury Secretary Henry Paulson believes that his ex-colleagues on Wall Street would let their companies and the economy go belly-up if their compensation is reduced. Here he is quoted in The Wall Street Journal:

"Mr. Paulson is resisting efforts to limit the pay of executives whose firms participate in the program and plans to fight it "hard," according to a person familiar with the matter. He fears that provision would render the program moot, since many firms might choose not to participate."

This is very helpful because it tells us that Paulson will NOT limit executive pay if granted the hugh powers proposed in the administration draft of the bailout bill. That makes it essential that such limits ARE written into the law. It also makes me doubt whether his judgment is good enough for anywhere near such broad powers.

It is a good thing, of course, if strong companies do NOT participate in the bailout; they don't need the help and the cost to taxpayers is reduced. So that's not a problem.

If the weak firms are really going to go bankrupt, their executives will get neither their salaries nor their outsized pensions; so certainly they'll take the bailout even with salary caps. In case they won't, regulators will be able, in most cases, to force their dismissal as will the pension funds and other big shareholders – or even little shareholders who can sue. Henry, what are you thinking?

Some commenters on yesterday's post have said that we don't want the best and brightest to leave the firms that need help. That's more rational than Paulson's argument but doesn't convince me. We DO want the leaders who got the firms into the mess to go. We don't leave losing managers in charge of sports teams and they shouldn't be allowed to stay in charge of companies either. They'd be gone in bankruptcy and they ought to be gone in bailout.

Could we get good new leaders for these firms for "only" a million dollars/year? That's the most important question. The answer is "yes, of course". There are many less jobs for bankers than there were a year ago – not altogether a bad thing. Where are the bankers who want higher compensation going to go? Are they going to become rock stars or athletes? The strong banks have also had layoffs; they don't need many more high-priced executives. For the confident and ambitious, the resume opportunity in saving moribund enterprises will be priceless. For those whose life styles can't be supported at this level, too bad.

In fact the bailed-out banks will do better without the drain of excessive executive compensation. That may even put pressure on their stronger competitors to reduce their overpayments. But maybe that's wishful thinking.

The most important favor Paulson has done us with this position is to make it clear that a blank check bailout will be worse than no bailout at all – it'll turn into an executive relief bill. I appreciate him being so frank; he coulda said he'd study executive compensation later.

Just in case we don't have a bailout, Jeff Jarvis has suggested some other uses for $700 billion here.

Comments on yesterday's post were particularly lively thanks to Fred Wilson's courtesy; he quoted part of the post BUT asked his readers to do their commenting over here on Fractals of Change.

Bailout equals Bankruptcy

Update: I was wrong to try to hedge the bailout with conditions. We should just say "no". see http://blog.tomevslin.com/2008/09/just-say-no.html.

Let's assume there really are toxic weapons of mass economic destruction in the portfolios of the world's banks which need to be seized before they destroy us all. I'm not there, BTW, but there's gonna be a bailout so let's think about the rules. They ought to be similar in pain to what bankruptcy would entail.

Rule #1: Cut salaries now

Part of the bailout bill ought to be that any organization which proffers securities for government purchase must agree not to pay any employee or contactor more than $1 million per year for the next four years. No cheating with trips to events on the corporate jet or other perks with draconian penalties TO THE RECIPIENT for violations.

Rule #2: No new golden parachutes

Some executives have contracts which entitle them to huge golden parachutes – especially if their pay is cut. These need to be annulled.

Rule #3: End payment on old golden parachutes

Payments on existing golden parachutes should be stopped.

But wait a minute…

How can we invalidate existing contracts? What about the rule of law? Well, let's think about it. We're told that these institutions'll go bankrupt if we don't bail them out. If they weren't – individually or in the aggregate – too big to fail, we'd let'em go bankrupt. If they went bankrupt all these employment contracts and golden parachute payments would be subject to the bankruptcy court. Golden parachuters aren't very high on the pecking order of creditors in a bankruptcy. They shouldn't be in a bailout either. Maybe the bailout needs to be accomplished under an amendment to the bankruptcy act: chapter 11A.

No company has to apply for bailouts. But it'll be interesting to see the stockholder suits against a company which refuses to get bailed out to protect executive salaries.

Speaking of shareholders:

Rule #4: No dividends for a year

This seems harsh to us shareholders who may have bank securities in our portfolio, but it's not. Clearly an organization which is being bailed out needs to conserve cash to survive.

Advantages of this plan

  1. Taxpayer money not spent on absurd salaries, preserving golden parachutes, or dividends to shareholders.
  2. Strong institutions which don't need a bailout will decide they can handle the disposal of their own toxic securities just as strong companies don't seek the protection of the bankruptcy court.

And BTW

Same rules for auto companies or anyone else with their hand out for a hand out.

More on executive compensation and especially Treasury Secretary Paulson's stand AGAINST reducing it here.

Now For the Good News…

It's tempting not to put any content into a post with this title today. Even a perpetual optimist like me finds his irrational exuberance dampened by what's happening in the world's financial markets. But there is good news and it's more fun to write about than doom and gloom.

Inflation was down last month

The consumer price index DECLINED 1% month-over-month in August as energy, housing, and food prices fell. This trend will continue at least another month based on what's been happening in September to those same three components. Obviously good news for people on a fixed income. Also good news because the Fed can concentrate better on recession-fighting when it doesn't have to also worry about inflation and the possible misery of stagflation. Needless to say, the Fed is grateful for all the help it can get.

Oil prices are down

Oil prices are below the $100/barrel price they were at last winter (although have moved up in the last few days). This means it may NOT cost significantly more to heat our homes this winter than last. I put my money where my mouth is and didn't sign a fixed price agreement for heating fuel but I'm nervous about this bet. It also means, for now, pressure has lightened on consumer wallets.

Oil consumption is down

Low prices together with low consumption mean that a lot less money is flowing out of the country to pay for oil – even less than was last winter. Bad for the bad guys that sell us oil; good for us because we need the money here at home. Note that the markets are punishing Putin more for the invasion of Georgia than Europeans dare to; When oil process are falling and you're wondering which oil producing country not to invest in, one which doesn't respect either international law or property rights (markets care a lot more about the latter than the former) is a good target. Guess where that investment'll end up if we allow offshore drilling?

The government is having an easy time borrowing money

People are flocking to the safety of federal debt lowering the cost of financing our deficit and making cash available to the feds; good thing when the feds have so many bailouts on their plate. Long term it's very bad to see money only available when it flows through the government.

Housing Prices are down

Huh? Good news? Yeah, it really is. Housing prices were inflated. Many people couldn't afford houses at those inflated prices. Even worse, people who couldn't afford houses at those inflated prices bought them anyway with the help of loans they shouldn't have gotten. Now prudent people – if they have a down payment and an income – can afford to buy houses again. Mortgage rates are still low. Mortgages based on t-bill rates will stay low as people flock to t-bills. This bubble had to burst so recovery could begin and the distortion of a tulip market in real estate could be cured. Not that the bubble-burst isn't very painful, particularly for those of us who overpaid and/or paid more than we could afford. But continued house price inflation would have been even worse than the cure because the eventual collapse would have been even worse.

Lehman wasn't bailed out

Hard for me to say because I have both friends and an account there. But the bailouts had to stop to make companies sell to stronger entities while they still can – as Merrill promptly did. I still don't think the bailout of Bear Stearns should have happened and think that Lehman might have avoided failure or sold itself earlier in that case. I'm not at all sure about the bailout of AIG or the form of the bailout of Fannie Mae and Freddie Mac – but there's a lot I don't know (and hope central bankers do).

The Fed didn't lower interest rates

Making money cheaper isn't the cure for every ill. There's a pretty good argument that Greenspan screwed up badly and helped ignite the housing bubble by lowering interest rates too far to deal with the aftermaths of the dotcom implosion and 9/11. When cash is trash, we're all likely to get trashed in a pursuit of higher returns.

That's probably all the good news you can stand in one day.

Invent, Baby, Invent

Tom Friedman says we ought to be chanting "Invent, Baby, Invent" rather than "Drill, Baby, Drill". Forget that this is a false dichotomy (or read this post), invention IS a good idea. I've spent most of my career inventing both technology and business models - successfully and unsuccessfully, have a handful of patents, better stuff I was too dumb to patent, and an interesting career and comfortable life to show for it so am all in favor of innovation. Unfortunately neither cheerleading nor government subsidies are very effective in stimulating invention.

Inventor invent because they can't help it – just like writers write even when no publishers'll publish. What matters to society is how many good inventions actually can be deployed. The deployment rate of invention has a lot to do with capital (and a lot to do with marketing – I've been lucky to have Mary to promote my inventions). Government capital, however, is usually harmful to the innovation process (some exceptions below). Let's take a look at energy which is what Tom Friedman is talking about.

Corny ethanol is the greatest achievement of the latest round of government-stoked energy innovation; it's a bipartisan boondoggle made inevitable by the position of Iowa in the primary calendar. It has succeeded in adding a great deal of ethanol to our fuel mix. It's dubious whether it's led to a significant reduction in either oil imports or CO2 emissions since so much energy is required to grow, transport, and process the corn and much of that energy comes from oil. It certainly has added to commodity inflation (I have no idea how much). The subsidies paid to ethanol producers tilt the scales AGAINST other less-favored forms of energy innovation. Private capital likes to bid with and not against government capital so bad choices made by government are followed and then encouraged by private capitalists who benefit from them. VCs who bet on corny ethanol and were rewarded with subsidies like to picture themselves as green – it's only become recently clear that this particular shade of green is the color of money.

The next round of private investment in solar and wind generating capacity is waiting breathlessly to see when and whether Congress gets around to passing some subsides and what those subsidies are for. If there weren't a prospect of subsidies, more of that private investment would have already been deployed. Moreover, without subsidies the capital gets deployed better because the return is determined by base economics and good execution, not whose lobbyists do the best job writing the rules for subsidy. Let's do a thought experiment: do you think Congress is hesitating on the next round of alternative energy subsidies because our representatives are diligently trying to understand the science and economics involved?  I didn't think so.

BTW, it's not that private investors are prescient or infallible. Most private investment in innovation is in dead ends. But, when the government isn't tipping the scales, private investment fans out across the landscape and the good stuff inevitably gets funded along with a lot of what turns out to be junk. Government as an investor concentrates on what'll pay the highest political dividend and, even worse, drags the private investment in the same direction and discourages diversity of investment.

Let's talk about cars. Both major Presidential candidates are in favor of $25 billion of subsidized loans to American car manufacturers; have you noticed that Michigan is a critical swing state? Is innovation, especially radical innovation likely to come from the major manufacturers? Of course not. Are innovators who aren't major manufacturers going to be able to raise the capital they need to bring their innovations to market; very difficult seeing that their competitors are getting these big gobs of taxpayer subsidy. The result of these loan guarantees will be to decrease the likelihood that America will turn the energy "crisis" to the energy "opportunity".

There is a role for government capital in enabling infrastructure – the power grid which creates a way for even yet-uninvented energy sources to distribute is, perhaps a good example. Keeping taxes low doesn't make inventers invent – they'll do that anyway – but it does help convince the investors the inventers need to invest. Taxing capital out of the private market and having government "invest" it is pretty much the worst way to encourage innovation.

Tom Friedman Being Stupid

"America Being Stupid" is the headline on Thomas Friedman's latest column in the New York Times. It's a rant against the possibility of offshore drilling.

"Why would Republicans, the party of business, want to focus our country on breathing life into a 19th-century technology — fossil fuels — rather than giving birth to a 21st-century technology — renewable energy? …

"Of course, we're going to need oil for many years, but instead of exalting that — with "drill, baby, drill" — why not throw all our energy into innovating a whole new industry of clean power with the mantra 'invent, baby, invent?'"

Forget the politics; that's not what this post is about.  Almost the whole political crew is way behind the public in the logic of this situation. McCain was against offshore drilling before he was for it (although changing your mind isn't always bad); he's still against more drilling in Alaska. Obama was against offshore drilling until he said he'd think about it (thinking isn't always bad but he ought to learn to change his mind more decisively). Nancy Pelosi wouldn't even allow a vote on offshore drilling until she saw the polls and heard from anguished House members up for reelection. Now she's hoping to uh.. put lipstick on a pig with a compromise which probably would mean no or very little drilling. But forget the politics.

Thomas Friedman wrote The Flattening of Almost Everything which was brilliant explanation of globalization. Sad to see him forgetting everything he seemed to know about economics and resorting to the rhetorical device of the false dichotomy.

Friedman writes as if we have to make a choice between drilling for more oil and innovating in energy creation and use. That might be true if there were a proposal to spend public money on drilling instead of, say, upgrading the power grid or doing basic research. But no one is proposing that we spend public money on drilling! We get public money from drilling twice, once when oil companies pay for the initial leases and once more when they pay royalties on the oil and gas they extract. Having more public money gives us more choices, not less.

What's more, American will pay less for oil products – no one knows how much less and when – if we have more domestic supplies. We will certainly send much less of our money to bad places abroad. If more of our money stays home, more money is available to spend on alternative energy without the government even guiding the investment into boondoggles like corny ethanol or bailouts for auto companies.

We don't even know how much offshore oil we have since we have forbidden ourselves to explore. A conservative estimate is 16 billion recoverable barrels – not counting Alaska. At $100/barrel that's $1.6 trillion dollars. Now here are some real dichotomies: do we want to keep that money here or do we want to send it away? Do we want the extraction jobs to be mainly American or do we want them somewhere else? Do we want to get this oil from an area we can relatively easily secure or would we rather get it from Iraq and Iran? Do we want the oil companies to invest their profits here or in Russia, for example?

Opponents of offshore drilling say that oil prices will soar even if we drill. They're probably right despite the current interruption in commodity inflation. Let's suppose oil is $400/barrel by the time any offshore wells can come online. Then that oil is worth $6.4 trillion dollars – probably half of which goes to the government and much of which stays in the US. Do we want $6.4 trillion dollars less than we want $1.6 trillion. The more we think prices'll go up, the more we should want to drill.

What's frightened an intelligent man like Friedman into false dichotomies and economic illiteracy? We're forgetting politics so I'll assume it's not that. What Friedman and other anti-drillers are really afraid of us is that, if we drill offshore, the price of oil and gasoline will continue to fall and therefore we won't invest in getting independent from it. History does show that, if prices are low enough, we (including me) buy SUVs and, if prices rise fast enough, we do cut back; so they have a point there.

If the price of oil falls far enough (unlikely given new demand but possible), then we should tax it back up and rebate the tax in reduced social security payments for low-income wage earners. Raising prices by reducing domestic supply (as we do by restricting drilling), give a windfall to foreign producers – many of whom are not our friends. Raising prices through taxation arguably reduces the take of the suppliers AND reduces demand. BTW, this is not an argument politicians are likely to make during the election season.

Related posts:

If I Can't Have a Magic Bullet, I Won't Shoot

The Price of Gasoline SHOULD Go Up (written before it DID go up)

 

 

 

Spam Filter: Debt More Important Than Sex

 

Mary was actually the first to spot this trend. Used to be that my spam filter was full of offers to enlarge my body parts, even those I'd rather not enlarge. Second hottest category was offers of medicine to help me make the best of the body parts I have. Then some opportunities to meet girls.

Assuming that spammers have their finger on the pulse of America, we seem now to be much more worried about debt than sex.

 

Now on Kindle!

hackoff.com: An historic murder mystery set in the Internet bubble and rubble

CEO Tom Evslin's insider account of the Internet bubble and its aftermath. "This novel is a surveillance video of the seeds of the current economic collapse."

The Interpreter's Tale

Hacker Dom Montain is in Barcelona in Evslin's Kindle-edition long short story. Why? and why are the pickpockets stealing mobile phones?

Need A Kindle?

Kindle: Amazon's Wireless Reading Device

Not quite as good as a real book IMHO but a lot lighter than a trip worth of books. Also better than a cell phone for mobile web access - and that's free!

Recent Reads - Click title to order from Amazon


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