Exelon and Constellation Energy have won approval for their merger, but now they must live with the terms of the deals cut to win that approval and also deliver on the smart grid performance metrics imposed in a recent legislative contest of wills.
The political brawl that played out in Illinois from the legislative battle over smart grid is typical of the Land of Lincoln where everything is political and everything has its price. But while the outcome is not what was planned or predicted it may end up being an interesting lab experiment on whether smart grid can earn its keep.
In full disclosure I spent five years working for the Illinois Commerce Commission as Manager of its Public Utilities Division and then my last year as General Manager of the agency. I learned to navigate the Illinois political calculus including “freeze exceptions” for hiring state employees which served as a pretext to send me a list of patronage candidates to consider. If I agreed to hire one from the list I got my freeze exception. If not I had to wait. I was never forced to hire anyone but there clearly was a cost for not doing so.
I also learned that just because utilities were regulated by the Illinois Commerce Commission did not mean they were helpless subjects to be trifled with. There was always a political way to fix a problem. That is the situation with Exelon’s need to move forward with smart meter deployment and smart grid implementation. It was not a matter of whether this was a good idea only how much it would cost to implement—and to win the approval needed to do so. Ameren thought it could piggyback on a good deal and ended up being caught in the crossfire.
The problem was smart meter deployment got caught up in other issues including anger over power outages from storms that made customers mad and put politicians on the defensive. Then Governor Pat Quinn, an unabashed ratepayer advocate and frequent opponent of utilities for more than 30 years, played his role true to type. Then there was the utilities fear that the ICC might not approve their smart meter costs as “prudent” after the fact so they wanted approval in advance. No dice said the Commission. Add to that the political sparing between the Governor and Legislature and you have the classic makings of a Chicago-style food fight.
When the utilities went to the Legislature over the heads of the ICC to get legislative approval—the fight was on! Everyone who wanted or needed to score points found reasons and ways to do so. Governor Quinn scored by vetoing the bill. Take that!
But that enraged the Legislative leaders who cobbled together another political deal with a veto-proof majority and sent it back to the Governor. To get that veto proof majority the trailer bill, as these things are called, was loaded with favors for those who delivered the votes to rub the Governor’s nose in the mess.
But a funny thing happened–the bill finally passed sets performance standards for smart grid implementation! In street language this might be called “stink control” in the halls of the Illinois General Assembly this is getting the people’s business done.
So the utilities (Commonwealth Edison and Ameren) will get their smart grid deployment but the amount was reduced from $3.2 billion to $2.6 billion and they must spend one-half on upgrading the transmission grid to reduce power outages.
Yes customers will pay more—that was never in doubt. But while the performance metrics have more to do with predefining the terms of regulatory approval to reduce the discretion the ICC may exercise, they do make Illinois one of the few states with such bold, legislatively approved performance metrics. Stay tuned to see how this works out before judging whether Illinois is setting a model for anyone else to follow.
The price the utilities are paying for this new ‘model of smart grid accountability’ is that they must use the smart grid approved revenue to fix the outage problems that give politicians headaches AND THEN still perform to make smart grid work.
- EIA: Smart Grid Legislative and Regulatory Policies and Case Studies (bespacific.com)
- Top 5 Smart Grid Trends of 2011 (greentechmedia.com)
- Smart grid winners, losers (and fence-sitters) 2011 [Earth2Tech] (gigaom.com)
- 3 smart grid trends to watch in 2012 (zdnet.com)
President Obama will quietly sign a $1 trillion omnibus spending bill passed by Congress to avert a government shutdown. No one wanted to Scrooge Christmas with a conflict over a mere trillion dollars spending. But getting the spending bill passed did allow the Republicans to attach a few riders that put coal in the President’s Christmas stocking including:
- Blocking enforcement of federal light bulb efficiency standards
- Prohibiting the White House from hiring additional climate change staff
- Blocking US EPA livestock operations and manure management systems emissions regulations
- Transferring EPA’s air quality permitting authority to the Department of the Interior.
But there will still be fireworks over the price the President must pay for an extension of the payroll tax cut. A deal in the Senate between Leaders McConnell and Reid is in trouble in the House at this writing because House Republican freshman again told their leaders to forget it.
“Two months, really? Come on!”
So the House is expected to pass a year-long extension of both the payroll tax cut and emergency federal unemployment benefits to solve the matter rather than just pushing the fight into the new year. This is what the President said he wanted but the question is what he will be forced to pay for the extension. House Republicans are also want a two-year “doc fix,” or delays in pay cuts to Medicare physicians. All three measures are currently set to expire December 31.
And then there is still the matter of the Keystone XL pipeline approval. The Senate bill required the President to decide the matter within 60 days instead of deferring it past the election, but House Republicans now fear the President will just reject the deal to spite them calculating that even if it irritates his labor supporters they have nowhere else to go and won’t likely work against him. But approving the pipeline now would enrage the President’s environmental constituency. While they too have nowhere else to go they will make the President’s life miserable between now and the election.
I bet the President wishes now he would have told Hilary to sign off on the Keystone Pipeline deal and let her take the heat for the decision while he took credit for the 20,000 new jobs.
- Keystone Pipeline Doomed? Why the GOP’s Insistance on Including it in the Payroll Tax Cut Bill May Be a Good Thing (alternet.org)
- President Obama and the Keystone Pipeline | breezespeaks (mbcalyn.com)
- House Passes Keystone XL Pipeline Provision (indiancountrytodaymedianetwork.com)
- Senate Democrats Supporting GOP Keystone XL Pipeline Strategy, Obama’s Hand Forced (indiancountrytodaymedianetwork.com)
- Expedited decision could kill Keystone XL project (vancouversun.com)
- Expedited decision could kill Keystone XL project (calgaryherald.com)
- U.S. Senate approves short-term extension of payroll tax holiday, mandates Keystone Pipeline decision (newsok.com)
- Boehner Blasts Obama On Keystone XL (huffingtonpost.com)
As expected not much progress is being made in Durban on solving the world’s carbon emissions challenges. Kyoto Protocol became effective in 2005, requiring greenhouse-gas reductions in nearly every developed nation. The US recognized the unsustainability of a treaty that excludes the fastest growing polluters China, India, Russia and Brazil because they were emerging markets while requiring the established markets to effectively write them big checks so they could keep growing and pollute more.
Reducing greenhouse gas emissions is a worthy goal, but one nation or block of nations alone cannot solve that problem. Signing up for a giant wealthy transfer from developed countries to emerging and undeveloped countries was a tough guilt-tripped sell in the booms times of the global economy. It is a non-starter now that the global economies except for those emerging markets are in the ditch.
So the Kyoto Protocol’s first commitment period will end in 2012 and there is nothing to replace it laments the assembled delegates in Durban. GOOD! We can now all quit pretending it was a good idea in the first instance. Canada, Japan and Russia all signed onto Kyoto the first time but now realize they scored few green points for such a commitment and don’t plan on continuing the charade by re-upping for another five years of greenmailing. The EU said it was willing to sing-up for a second five year commitment—-IF and ONLY IF everyone else did so. Fat chance of that!
The best that can be said of the Durban conference is that thousands of delegates will have improved the economy of Durban by their whining and wining. The release of another round of leaked emails about climate scientists behaving badly when the science did not fit their politically correct views soured the event further with reminders of the first Climategate scandal. They now face a second round of red-faced bluster knowing that there are still more than 220,000 documents to be leaked.
If the world is serious about reducing greenhouse gas emissions then everyone must take action on their own to do so. We don’t need a treaty for that—we need resolve. Gaining consensus about that resolve also means that the cure cannot be worse than the disease. Kyoto was worse than no treaty at all. It tried to guilt the 1% nations into paying reparations to the 99% as penance for their economic growth and success. The US made the right decision to just say no to such a dumb idea. The EU played politics for domestic consumption but now cannot continue to hide the stupidity of its decision.
The world public is skeptical that this enterprise is worth the cost and aggravation because of the overreach of political pandering and the Climategate scandal revelations that the ‘incontrovertible scientific evidence’ isn’t so incontrovertible after all. That should not be interpreted as lack of public resolve, but rather public realistic public resolve. Our politicians have nearly bankrupted us with their mismanagement of the economy—let’s not give them control over the earth!
The piling on by the politicians and media over Solyndra’s bankruptcy after the Obama Administration guaranteed $535 million in loans to the company is as disgusting as the political correctness that got us in this mess. This is the current day equivalent of the madam professing shock that transactions were being made in the rooms upstairs.
In political terms, Washington is looking for someone to hang for this embarrassment. That Solyndra executives are now taking the 5th to avoid the perp walk before Congress does not mean they are guilty of anything illegal, but rather that they have the good political sense to hire lawyers who know the ways of Washington.
Solyndra failed because its tubular solar product was more costly to produce than alternative flat PV panels made in China. This is a recurring story around the world as feed-in-tariffs in Europe and US renewable portfolio standards, tax credits and loan guarantees were used by China to grow global market share for its exports of cheaper PV panels. China played the game, just like Solyndra did. It used the rules to devise a strategy to gain competitive advantage.
For China the game was simple, low prices, always lower prices to underbid the domestic solar panel producers and take their market share and the tax subsidies that went with each sale. For Solyndra the game was more challenging, it sought new capital to scale its production of more innovative technology faster to drive down the cost in hopes of competing with China. That strategy might have worked except by early 2011 the price of polysilicon had dropped from $300/kg to less than $60/kg making China’s PV panels so cheap to make thus flooding the market with excess supply and cratering higher priced producers worldwide. Falling prices took out not only Solyndra, but Evergreen Solar, SpectraWatt and PV panel producers in Spain, Germany and elsewhere in Europe.
Who’s to blame?
- Governments used tax subsidies, loan guarantees, and mandated purchase rules to promote renewable energy at home. Instead those policies were used by China to suction up cash from all the subsidies to scale market share for their PV exports.
- Politicians pandered by using social engineering and burdensome regulations to substitute industrial policies that favor renewable energy and punish fossil fuels for competitive market forces to achieve policy goals to reduce emissions and promote a transition to a clean energy economy.
- Renewable Energy Companies used tax subsidies to cover the above market cost of renewable energy. The quest for ever more tax subsidies became their core competency thus taking their eye off technology innovation that was their greatest advantage over commoditized Chinese first generation PV panels. Falling prices caused by the very tax subsidies they sought swamped them.
- China is an easy target to blame for this mess because the world tolerates a trading scheme that allows China access to world markets on level playing field competitive terms, but does not demand the same terms for doing business in China. Why? Trade with China has become too important in the uncertain, unstable global economy. The world depends upon China to keep producing cheap goods for export which it is glad to do. But the true cost of those cheap goods is growing Chinese hegemony in the global economy.
This political theater over Solyndra will play itself out in due course. The question is whether this will be a true turning point for the clean energy business model or for our foolish policy of industrial policy ‘earmarks’. We want a clean environment. We want a robust competitive global economy. But we are learning that there are unintended consequences for social engineering. Subsidies may be useful to jump start new technologies, but they are not sustainable and neither are the technologies that depend upon them.
There are inconvenient truths in the Solyndra example.
- Global market competition is ruthlessly Darwinian in weeding out inefficiency—-celebrate it!
- Industrial policy to pick winners and losers rarely succeeds, and is costly and counterproductive because it stifles the very innovation essential to sustainable success—stop doing it!
- Don’t blame competitors (China) for taking competitive advantage of your stupidity (Washington) when you fail to fix the strategic problems you face—–grow or die!
That Solyndra was a risky investment was known by the markets and the company itself detailed those risks in painful detail in its public S-1 filing at the S.E.C. in September 2009. If you are an investor, if one of your companies is going to fail you’d rather they fail fast and cut your losses. In this case, the political calculus was that despite the probability of Solyndra failure, the good press opportunity was worth the risk—-but, of course, politicians were risking YOUR money not their own.
Than then there is this—–the spectacular growth of unconventional natural gas E&P in the competitive US energy market has done more to undermine coal and reduce emissions, shift the US toward a ‘cleaner’ energy economy, and enhance America’s competitive advantage and energy security than the sum of all renewable energy installed and all energy regulations promulgated in a shorter time period all while driving down natural gas prices.
- Solyndra as Icarus (insightadvisor.wordpress.com)
- Solyndra and the China Factor (forbes.com)
- Solyndra’s burnout burdens other solar upstarts (news.cnet.com)
- Tom Zeller Jr.: The Solyndra Scandal: Full Of Sound And Fury, Signifying Nothing (huffingtonpost.com)
- Solar Companies Face Headwinds (fool.com)
- Solyndra executives won’t testify before Congress (money.cnn.com)
- Parties Spar Over Loan Guarantees After Solyndra Fall (blogs.wsj.com)
- Lessons on Solyndra and clean energy development (sfgate.com)
And I do not mean growth in the Federal spending.
But Bloomberg reports that President Obama’s address to Congress will call for about $300 billion in additional spending for extending the payroll tax cuts, aid to local government to reduce layoffs of teachers and first responders, and some more of those shovel ready infrastructure projects. The President’s plan will pay for this $300 billion in short term stimulus with “revenue increases” long term. Translation: higher taxes. The White House signaled that the President will make longer term recommendations to the super committee next week probably in another speech.
The problem the President faces is the $300 billion supplemental stimulus proposed is mostly a continuation of current policies and thus is unlikely to create many jobs, encourage much growth or raise confidence enough to unleash hoarded cash. With the combination of the high unemployment, the horrible zero net jobs report for August, and the political sparing, we are losing sight of the real problem and instead are focused on symptoms and gimmicks. The result is we risk a long stay at in the ditch before the tow truck arrives to pull us out.
The President must give one ‘hellava’ speech September 8th to persuade a skeptical public he ‘gets it’. But his words will be compared with substantive proposals by other candidates. Jon Huntsman released his last week. This week Mitt Romney laid out a 59-point plan to get growing again. The President is late to the jobs plan party so his plan must measure up to some of the good ideas of his competitors’.
So here is my check list to compare President Obama’s speech with Jon and Mitt’s plan. √=me too.
|Revenue-neutral personal income tax simplification with 8%, 14%, 23% rates.No deductions/creditsNo Alt Min Tax
No Cap Gains Tax
Cut Corp Tax from 35% to 25%
No Tax on Cap Gain, Div., Interest < $200k income
No Estate Tax
|Extend:payroll tax holiday
unemployment ins.both expiring Dec. 31.
|Repeal ObamaCareRepeal Dodd-FrankRein-in EPA
Curb NLRB labor regs
Reform FDA permits
Privatize Fan & Fred
Postpone ozone and other EPA rules to 2013
|Grow USOil & Gas Production.End energy subsidies||
|OK trade deals: South Korea, Panama, ColumbiaNew Free trade deals: India, Taiwan, Japan||
China trade sanctions as currency manipulator
|Will send trade deals to Congress when they agree with labor conditions|
|5% spend cut =$20 BlnCap spend @20% of GDPRestructure Fed Gov’t Balc’d Budget Amend.||
Workers & Immigration
|Retrain workersRetain H1b foreign skills
Green card with diploma
|Let unemployed retrain as unpaid interns and still draw unemployment.
Job creation is important, but the unemployment rate is a lagging indicator. It is our report card on our performance addressing the real problems with our economy—lack of GDP growth and uncertainty. Unemployment is still high because US GDP growth is weak and uncertainty is paralyzing us. Fix those two things and unemployment rates will drop as business spends its hoarded cash to create jobs to produce products and services to satisfy growing demand.
There are many good ideas on these lists from the candidates for President Obama to applaud and adopt, but most of them will take time and bipartisan cooperation to achieve. That’s the problem. The next President is not going to be chosen for fourteen months, then add three more until January 20, 2013, then time to get the new administration officials confirmed and on the job.
The bottom line is we can’t wait that long for real action focused on getting growth going again. So the supercommittee has an opportunity to bring us together around a bold plan to jump start GDP growth, restore confidence, reduce uncertainty and create jobs.
- An Interview with Mitt Romney (kudlowsmoneypolitics.blogspot.com)
- Romney’s Job Promise: 11.5M Jobs in 1st Term (abcnews.go.com)
In the “You Just Can’t Make this Stuff Up, Department” comes this:
Editor’s Note: The following article comes from Worldcrunch, an innovative, new global news site that translates stories of note in foreign languages into English. This article was originally published in Suddeutsche Zeitung.
BONN – Before going on shift in the limited public space reserved for street prostitution in Bonn, the city‘s prostitutes must now purchase a “sex tax” ticket from an automatic dispenser. The six-euro ticket is valid for one night’s work, no matter the number of clients.
To get the system up and running, fiscal authorities had a machine normally used to dispense tickets for parking places converted so that the words “Steuerticket-Automat” (tax ticket automat) are now painted on it, and the display now reads: “Die Nacht 6,00 Euro” (6 euros a night). The display also states that tickets are required from Monday to Sunday, from 8:15 p.m. to 6 a.m.
In Germany, Bonn is a pioneer of this automatic up-front taxation system. Dortmund has tickets that sex workers buy in gas stations, but no automatic dispenser.
The system is meant to make taxing of prostitution more equitable, since those working inside “Eros centers“ and sauna clubs were paying taxes. The sex tax itself was introduced at the beginning of 2011, and is expected to generate some 300,000 euros. City tax controllers are responsible for monitoring the ticket system; anyone caught without a ticket will first receive a warning followed by more severe measures if caught a second time.
Street prostitution in Bonn is limited to a space opposite an “Eros Center.” After a sex worker agrees to go with a drive-by customer, the client drives his car into one of the six “sex boxes” – parking spaces separated by wood partitions – which are equipped with an emergency button to alert the night watchman in case of trouble. The new “meters” are located nearby.”
In the interest of good taste, no editorial commentary will follow!
I really start to worry when I find myself agreeing with Paul Krugman. I know he has a Nobel Prize but mostly I find his views on spending and the role of government in our society too intrusive. But he said recently that the markets don’t think the US is Greece (yet!). Nor do they think the US will default on its debt. But they do worry that there are too many downward pressures on growth to get much of it and that is our biggest problem.
Krugman is not recommending that we roll back ObamaCare, or some of the EPA regulations that spew daily from its printing presses. But both those things would be a good start. But even that will not be enough.
As Dan Drechsel said in Accurate Reality the debt deal did not do nearly enough to signal the markets that we are serious about reducing our deficit and debt. He’s right, of course. Washington speak for “cut” really means they are reducing the rate of growth not actually cutting anything. So the debt deal peddled as a cut in spending actually adds $7 trillion more to the national debt net over the next ten years.
The S&P downgrade of US credit ratings to AA+ from AAA is another wake-up call. Will we roll over and hit the snooze button one more time or actually wake up and do something constructive?
When the markets are persuaded that the government is serious about growth we will see business start to spend its hoard of cash and create jobs. Private sector spending (not government spending) and its ripple effect across the economy will turn the tide. But the 2012 election is a long time away and our politicians seem unable, unwilling and unresponsive to our real need for growth.
We need action now—the ship of state is going back into recession. The panic that caused this week’s 513 point meltdown in stocks is driven by the fear that our government is feckless—just like Italy in facing up to our realities. The bright spot is that the global search for safety brought many to US Treasuries in a fervent prayer that America will wake up, get up and find a way to grow again—as we have always done before in times of crisis.
- Paul Krugman: The Wrong Worries (economistsview.typepad.com)
- Newt Gingrich Accuses Obama Of Being A Follower Of Paul Krugman, Which Would Be News To Paul Krugman (huffingtonpost.com)
- WATCH: Krugman Slams Obama, George Will Slams Krugman (huffingtonpost.com)
- The Debt-Ceiling Debate is Dead! Long Live the Debt! Or, Will ObamaCare Cover What Krugman’s Smoking? (reason.com)
- Paul Krugman And Ron Paul Agree, Debit Ceiling Offers Nothing But “False Promises” (inquisitr.com)
The Europeans wake up and realize that Italy and Spain REALLY are PIIGS and while the Italian Prime Minister says things are fine, the bankers know otherwise. European stocks tank as confidence falls on this ugly epiphany. There are not enough Euros to bail our Italy or Spain.
On our side of the pond, the TEA party’s loud lament that the debt deal was not a good deal sinks in and confidence on Wall Street falls 513 points convinced that the day of reckoning is near for the US economy stalling out and facing the feared double dip recession. Moody’s and Fitch Ratings breathe a sigh of relief that they had reaffirmed the AAA US credit ratings the day before fearing they would have been blamed for the cratering stock markets.
To say that we are again in an economic funk is an understatement. But, never fear, our President is there to reassure us aren’t you Barak. Barack? Where is Barak when we need him? He is out fund raising for his re-election, of course. This seems frighteningly like Nero planning his next saturnalia while the fires creep up on Rome.
Our revelation draws near and we all see it plainly. The politicians of the world have run out of other people’s money to spend, and thus do not know what to do next.
The historians tell us panics are caused by lack of confidence driven by fear. But while yesterday’s stock market plunge may be scary it is useful to remember a few other facts from the experience:
- Flight to Safety to America. As the world worried about PIIGS and about whether America would ever get its economic act together and grow again, they did not run into the arms of Chinese bankers searching for safety. The nexus of choice yesterday was US Treasuries. Beaten up as the American dollar is today it remains the world’s reserve currency for a reason, because the world believes in the fundamental strengths of the American economy, the rule of law, and the ability of Americans to adapt and change. Millions took it to the bank yesterday and confidence in America won!
- America is Not Europe. Watching the PIIGS try to fly was only the latest reason Americans are realizing that our government is disserving us by trying to create a European style welfare state on our side of the pond. We don’t want that. We can’t afford that—and even the Europeans are realizing they cannot sustain it. The rest of the world lacks confidence that the fragmented and fractious Europeans will ever get their Euro house in order.
- YES WE CAN Take Back Our Government and our Future. Like Adam and Eve recognizing they were naked after eating the apple, Americans recognize that we have been stripped naked by wasteful spending, political correctness and unreasonable growth and overreach by our Federal Government. The TEA party movement started our reawakening and grew to change the balance of power in the people’s house in the 2010 elections. Americans realize that the TEA party are not ‘terrorists’ as Vice President Biden and some others called them this week because the resisted the debt deal and pushed the government to the brink of shutdown. Our revelation is that the TEA party members were correct—this is a bad debt deal. That we have been mislead and taken for granted once again by our politicians.
The conflict and yesterday’s panic also makes us realize that we have power in our voice and we have strength in our numbers and thus we no longer fear the uncertain future. The people see the way out!
Yes we can, turn around our stumbling economy by getting the government off of our backs and out of our pocket.
Yes we can, rebuild jobs and our strategic industries by changes in tax laws and regulation to get America growing, producing and working again.
Yes we can, resolve our health, education and retirement problems with market solutions; competition between vendors and choice for American consumers’ not big government mandates and rules telling us how to live.
Yes we can restore our confidence by rolling up our sleeves and taking back control over our lives and our government. Is it 2012 yet?
Now you know why President Obama is out fundraising. He will need every dollar he can raise to try to keep his job.
- The “PIIGS plus” club on Twitter (economicsintelligence.com)
- Daily Stock Theme: Nowhere to hide in European banking (tradingfloor.com)
- The Devil is in the Details of Obama’s Budget Deal (fellowshipofminds.wordpress.com)
- Coming Week Part 1: Eu Piigs Plan Backfiring, Contagion Nears (businessinsider.com)
- Will Greece, the IMF and the ECB figure things out in time? (beta.tradingfloor.com)
- Dow Bloodbath Could Herald “Great Depression” (destructionist.wordpress.com)
- Is The World Ready For What Happens Next In The Global Financial Crisis? (businessinsider.com)
- Stocks Stealth Bull Market? (thepressnet.com)
The economic reports are grim, growth has stalled and the US is again at the edge of recession. The debt deal that wasn’t has proven to be ‘business as usual’ from our elected leaders now more fearful about their own reelection prospects than ours.
IRS data from the annual Statistics of Income tables that were released this week tells us U.S. incomes fell again in 2009, with total income down 15.2% in real terms since 2007. The data showed a drop in the number of taxpayers reporting any earnings from a job — down 4.2 million from 2007. Think about that for a moment, every 33rd household that had work in 2007 had no work in 2009.
Average income fell in 2009 to $54,283, down $3,516, or 6.1% in real terms compared with 2008. Since 2007, average income is down $8,588 or 13.7%. Average income in 2009 fell to 1997 levels when it was $54,265 in 2009 dollars, just $18 less than in 2009.
We know the reality we face.
The US debt has driven us to the brink. The debt levels are made worse by reckless spending and entitlements we can no longer afford. The high unemployment levels mean fewer workers paying taxes, spending and investing. Business is hoarding cash due to the uncertainty about the economy, uncertainty about taxes, uncertainty about regulation and uncertainty about whether making a business bet at home is better or worse than making one abroad. Even a casual look at earnings reports tells us the answer. Much of business earnings growth is coming from overseas markets better positioned today than the US to deal with the current problems, but equally or more exposed to volatility and bad outcomes if the situation in the US gets worse.
Things are likely to get worse before they get better.
Since our fundamental problem is high debt levels we can’t use deficit spending to “stimulate” the economy to create jobs, make investments and restore confidence. Our politicians tried that option in a spending binge that rewarded politically correct causes and did little for the economy. The value of the dollar has fallen significantly thus raising the price of oil and other global commodities and creating an inflationary spike around the world. The tools left for the Federal Reserve are limited. They don’t want to raise interest rates because that would only make matters worse. They could ‘buy back’ US debt but that would be inflationary. They could retire the US Treasury bonds the Fed has purchased but doing so risks pushing the economy into recession by slowing growth.
What are our Options?
- Inflation. Our greatest fear is actually the most likely reality. The Fed has kept interest rates low but they can’t go any lower and the size of our debt means we sooner than later will have to pay higher interest rates to keep the system going until we find a solution. Remember we faced this same situation in the 1970’s when rabid inflation savaged the economy. Interest rates were the tool of choice Fed Chairman Paul Volker used to break the back of inflation and restore balance. But raising rates today will only explode the size of the US debt and could make matters worse. But when politicians are unwilling to act, inflation is the cruelest tax of all. So pay off your credit cards, you are going to need cash to pay for food.
- Freeze Federal Spending! I know this sounds simple and is what each of us has been required to do, but our government seems unable to quit spending, quit adding regulations that drive up our cost or discourage investment and job growth, quit promising new entitlements. The debt deal that wasn’t proves the charade. We need a break because the government is sucking the oxygen out of the economy. The most dramatic break would be a true and genuine freeze in Federal spending to current year actual levels. No more fuzzy math! If such a spending freeze would be enacted it might stimulate confidence. But we’re going to have to hold down REAL spending and then do more by weeding out the ineffective programs in order to redeploy the savings to higher priority programs and services. This is triage! It will be painful but it is essential. One plan discussed would freeze spending at current year levels and then each year cut 1% more until the budget is balanced. It would take 6-8 years but we would be a leaner, smarter, more self sufficient country. A plan like this would do wonders or confidence and quit digging the hole deeper.
- Domestic Energy Production. We spend billions importing oil and other energy products when we have domestic energy resources that our environmental regulations and political correctness prevents us from using. This must stop. Reducing oil imports would help moderate inflation, reduce our balance of payments, increase domestic jobs growth and investment and recycle the money in the US instead of OPEC. If ever there was a time to change this dynamic of foreign dependence it is now. If you think this will not work look at north Dakota and more recently Pennsylvania.
- Corporate Tax Rates, Repatriating Earnings and Capital Gains. The way to coax business into spending its hoard of cash is to make it more profitable to invest money at home in America than to go overseas. Getting to this outcome requires setting aside the class warfare political rhetoric by cutting corporate tax rates not just to competitive global levels but lower than that to suck money back into the country from overseas. The current tax on repatriated earnings should be ended as should capital gains taxes. These actions make it more expensive to hoard cash than to spend it productively especially if the risk of inflation rises.
- Regulatory Balancing of Interests. Our regulatory agencies are out of control. None of them have a duty to balance their regulatory policy zeal with their impacts on the economy. This must stop. Congress should pass a mandatory requirement for regulatory balance that says every regulation must be reasonable and equitably balance environmental and other interests against the public interest in economic growth, job creation and global competitiveness. Regulation that cost the public interest more than the benefits—as objectively scored by an independent third party—are not, by definition, reasonable. Congress should be required to vote up or down on every regulation within 90 days of its submittal before it can go into effect or it dies. Business would be able to challenge regulations in court based upon reasonableness just as environmental groups can challenge agencies to act.
- Stabilize Housing. The home mortgage mess was a big part of creating this economic problem and it is still holding us back. Today perhaps 50% of American mortgages are underwater as home prices have fallen. Banks and mortgage lenders including Fannie and Freddie made this mess and are not doing enough fast enough to fix it. Banks have been loath to make mortgage modifications and most of the Federal assistance programs actually required homeowners to go into default in order to get any help. State AGs (all politicians up to their eyeballs in the mess) are suing banks over Mortgage backed securities and loan practices. Everyone is going to take losses in cleaning up his mess. We need a better shared loss or modifications strategy to help clear the market, restore confidence and avoid further unintended consequences as we dig out of the mess:
- Offer fixed rate loan modifications for all adjustable rate notes now. If inflation is coming and adjustable rate notes that were the cause of so many problems rise our housing crisis compounds. Loan to value ratios make refinancing to fixed rates impossible in this market. Economic stability will be seriously undermined by rising inflation in mortgage rates. Offering a fixed rate for adjustable notes would mitigate that risk. If you don’t take the deal, you can take your chances on inflation.
- Facilitate short sales. It takes too long for short sale approval. Set specific rules that banks must follow to enable buyers and sellers to enter into presumptive approve of short sale requests within specific parameters and require banks to approve or reject other short sale requests within days—not months.
- Principal Reduction now for capital gain sharing upon sale. When a home is more than say 25% underwater banks should be required to offer a swap reducing principal now in exchange for a share of capital gains not exceeding 50% when the property is sold or refinanced. To be eligible homeowners must not default or the deal goes away. The goal is to keep homeowners in their homes and keep them paying and get the housing market stabilized.
- Fed Housing Resolution Trust. Why can’t the Fed use some of the assets of Fannie and Freddie or some of the US Treasuries it has been buying to insure this faster transition to a stabilized housing market while writing off some of the debt it has bought or insured anyway in the MBSs to help clear the market.
Actions such as these would help restore confidence, focus our efforts on real solutions to the problems we face in getting back to growth and demonstrate that we are resolved to doing so.
- A Few Things You Need to Know About the U.S. Economy (xkorpion.wordpress.com)
- Don’t Look Now but the National Debt Could be $23 Trillion by 2021 (xkorpion.wordpress.com)
- Making Sense of Mixed Economic Signals: Part 1 (insightadvisor.wordpress.com)
- Obama’s Mouthpiece: No Threat of Double-DipObama’s Former Obama Economic Adviser: Threat of Double Dip Is 1 in 3 (minx.cc)
- Macro Update: U.S. inflation still low? (tradingfloor.com)
- Focus Turns Back to Fed on Economy (nytimes.com)
- The Problem is Too Much Debt – Wall Street Pit (news.google.com)
- The Reserve considered pushing up rates aright (petermartin.com.au)