Over at the New York Times, Leonhart shows this chart from NASA.  And he has an accompanying article about government options regarding climate change policies that’s worth reading.

Getting Warmer

One has to be very, very obstinate (economists call this problem ‘tunneling’) to not see that regulatory failures played major roles in two recent disasters, one financial, the other environmental.

In the financial meltdown, regulators failed to even enforce the laws on the books.  From the Securities and Exchange Commission (SEC) to the Office of Thrift Supervision and the Federal Reserve, which ignored it’s responsibilities to protect consumers, an apparent philosophy that markets would control themselves helped fuel risky investments and raw leverage that exploded economies.

Then a British Petroleum deep water oil rig in the Gulf catches fire and collapses into one mile of ocean, leaving a blownout drill hole on the seafloor spewing out hundreds of thousands of gallons of oil into the Gulf.   And no one had a plan in place to manage such a disaster.  Here the regulator caught sleeping on the job is the Minerals Management Service (MMS), which simply left everything up to British Petroleum. 

James Surowiecki, staff writer for the New Yorker Magazine, wondered about this problem in a recent article entitled “The Regulation Crisis:”

“M.M.S.’s bad behavior was unusually egregious, but it’s hard to think of a recent disaster in the business world that wasn’t abetted by inept regulation. Mining regulators allowed operators like Massey Energy to flout safety rules. Financial regulators let A.I.G. write more than half a trillion dollars of credit-default protection without making a noise. The S.E.C. failed to spot the frauds at Enron and WorldCom, gave Bernie Madoff a clean bill of health, and decided to let Wall Street investment banks take on obscene amounts of leverage, while other regulators ignored myriad signs of fraud and recklessness in the subprime-mortgage market.

CNBC this morning featured former IMF Banker Simon Johnson (co-author of the book “13 Bankers” ) and US Senator Ted Kaufman, both proponents of breaking up TBTF bank holding companies and forcing derivative trading onto public exchanges.

You have to understand that CNBC represents a point of view opposite to Johnson and Kaufman.  In our equity and bond markets today, making money depends on large volume trading and volatility.  Boring, stable markets reduce trader and exchange profits.  And boring, stable markets make CNBC boring as well–or at least the CNBC management believes so.  The cable station is a child of the markets and the symbiotic feedback loop between the markets and CNBC is fairly straightforward.

Nevertheless the CNBC staff took Johnson’s and Kaufman’s opinions fairy well.  Show co-host Joe Kernen did make a stab at placing Fannie and Freddie (government sponsored enterprises that are legally private) as the main culprit for building a housing bubble and, thus, causing the financial meltdown.  This is a Wall Street meme aimed at diverting responsibility from risky, leveraged Wall Street bets to government as the main culprit in the meltdown.

They then went to US Senator Bob Corker, who is opposed to reforming derivative trading and to downizing the TBTF banks.  Corker complained that the derivative reforms will, somehow, limit credit to companies and leave them bereft of any way to hedge currency risk, or product input pricing.  He didn’t explain how this would happen.  He just took it as faith, as did the CNBC staff listening to him.  Those are the official Wall Street memes, of course, which is why Corker quickly followed Simon and Kaufman.

The CNBC crew didn’t ask Corker what he thought about the current situation where more than 90% of derivative trading is done over the counter (OTC)–that is outside of public and regulatory view–by five of the world’s largest banks, four of  them TBTF Wall Street holding companies: (1. JPMorgan Chase, 2. Goldman Sachs, 3. Bank of America, 4. Citibank, 5. HSBC.).

One wonders how our large corporations managed to survive and prosper before the rise of derivatives, and their inherent trading volatility.   Of course they did survive and were quite easily able to hedge currency and material prices without the innovation of opaque, off the board derivative trading and traders.  But those kind of observations challenge the meme’s validity so they weren’t brought up when Corker was on.

Kernen brought up Fannie and Freddie with Kaufman on the air, but made no contrary observations when Corker was on the air.  To be fair, that’s not his job anyway.  He’s there to push the daily Wall Street meme and he does.  That’s what he’s paid to do. 

CNBC needs to re-balance it’s point of view and hire some co-hosts who know finance, markets and trading and offer a different point of view over the day’s events.  This unrelenting, one sided point of view means no one is seriously covering the issues of the day.   Instead of having the occasional, brief appearance, of knowledgeable players who don’t always follow the meme, such people should have a regular chair at the table.  All day long.

Dream on.

One facet of understanding markets, and economies, is to understand how much cash is sloshing around “out there.”

During the low interest rate Greenspan era after the 2000 recession, corporation profits and cash holdings built up to historic levels.  So did the cash holdings of the wealthiest cohort of Americans.

Cash has to go somewhere, particularly if interest rates are low.  As we know now, a good portion of the cash went into housing and into financial innovation securities like credit default swaps.  And into the stock market.

The bubble built and burst far beyond the housing market itself because the housing bubble was mirrored on Wall Street by the swap market bubble.  The second bubble was the one that cratered the financial industry throughout Europe and the US primarily.

The underlying problem is that investors can’t find enough productive investments.  In an ideal world there would be industries and innovations sufficient to handle the money created from corporate profits.  In an ideal world these types of investment opportunities would create new jobs and income growth.  But the private markets haven’t been able to create, net, any new jobs for the past 10 years. 

And so the cash horde is building up again.  Right now the cash sitting on corporate balance sheets is about 12% of total assets.  That’s more than double the historic average.  Outside of corporations, the amount of cash sitting in money market funds is also at historic highs.

Yet this is happening while unemployment rises to 10% (16% in the US if you count the people who quit looking for jobs or are otherwise underemployed), more than 5$ trillion in US private wealth disappears and sovereign nations build up deficits as their revenues shrink.

So why is there a lack of productive investment opportunities–the kind of opportunities where money goes into new jobs, new machines and life enhancing innovations?

Because right now all the real opportunities, the really big ones, need government help.  And in the Democratic, developed countries governments haven’t done a very good job of identifying the right policies and the right government funding to get things kick started.

So what might these really big opportunities be?

• Energy.  Everyone knows that, inevitably, fossil fuel energy is going to become more and more expensive.  It won’t go straight up, of course.  Nothing does that.  But the fundamentals, and the trends in pricing, are as clear as the nose on your face.  Governments should adopt a multi-faceted set of policies that together would spur innovation and development in alternative energy.  Natural gas and nuclear might be good energy sources to “bridge”  into the era of truly clean and sustainable energy.  They would buy private markets time and security for risk taking–particularly if the government put subsidy floors under the new industries allowing them to attract private investment.  The so-called “green revolution” would take off with the right policies and subsidies.  And the promise of job and income growth would take off at the same time.
• Transportation.  You now hear that the automobile industry is going to eventually disappear.  Possibly.  But more likely it will evolve into an industry where more and more efficient cars are designed and built.  In 10 years I wouldn’t be surprised if there are very few gas stations.  There may be stations where you can “charge” your car.  But the days of selling gas may be the real industry that won’t survive.  On the flip side are trains.  That industry is likely to grow because it will have to–particularly in the area of commodity transportation.  Governments who adopt policies encouraging expansion of rail infrastructure will not only create private jobs and income growth, but will make other industries more competitive by controlling transportation costs.
• Agriculture.  This is another broad area where growth may come because it has to.  And it’s an excellent example of displaying the power of government subsidies.  Unfortunately, the subsidies were to the wrong companies.  The US subsidizes corn to the tune of $4 billion annually.  It’s been a stunning success in some regards.  We’ve basically become a corn dependent nation.  The corn is artificially cheap which means our beef and chicken, even farm raised fish, are cheaper than they would otherwise be.  Unfortunately, the food that’s cheaply produced isn’t very healthy.  And non corn food prices have gone up sharply.  So we’ve lost our food diversity too.  What if we changed our policy and started subsidizing the production of healthy foods?  What if we subsidized an increase in food diversity instead of one that concentrates fewer and fewer jobs into fewer and fewer corporations that make money on corn and corn derivative production?  Such policies would not only make us more healthy (thus reducing obesity and diabetes for starters) but would save the nation billions of dollars in medical costs.   Plus, there would be more farms and thus more farm employees and farm equipment.

These are just three major areas where productive investment opportunities will arise with the right government policies and subsidies.  They are huge areas offering the potential to create millions of jobs and billions in profit and income.

Repairing poor policies comes along with this package.  For every new subsidy aimed at the right target, there are other subsidies that should be stopped.  The corn subsidy is one striking example of what should be eliminated.

Financial regulation reform is another example.  Under the current regulatory regime, the policy is that we will always bail out “too big to fail” bank holding companies.  This is a huge subsidy, without question.  And it cost the nation dearly.  In the trillions of dollars.  If these banks can’t compete without this subsidy, then we need a new banking system from the ground up.  Done properly, financial reform will greatly improve the stability of our financial system, and that, all by itself, will give the overall economy a boost.

Health care reform is much like financial reform.  The policy has been to subsidize health insurance companies, to support medical professional wages overall, and to protect drug and medical device innovation.  The health reform package just passed is a step in the right direction.  But it has deep flaws that won’t do much to withdraw the subsidies of the previous policies.  To the degree that it is improved and thus reins in out-of-control price hikes all along the health care chain, the new policies will ”save” tax dollars that could be re-directed towards more growth oriented industries.

Better international trade policies are needed, as well.  Our laissez faire approach to international trade, similar to our laissez faire approach to financial regulation, has kept a lid on domestic job and income growth.  If our policies are able to protect domestic industry and labor’s income,  they will also support domestic demand for product.  And robust demand is a good force for job and income growth. 

The health care reform effort and the financial regulation reform effort represent only one kind of policy change:  The one trying to repair damage caused by poor policies.

What we also need is the development of policies aimed at spurring private investment directly into specific areas such as those mentioned before.  Targeted, coordinated government efforts at creating sustainable improvement in our economy.  If we can manage to implement these types of aggressive, forward looking, policies the nation will prosper.

Possibly one of the most important activities of the Obama administration is the White House garden growing under the watchful eyes of First Lady Michelle Obama.

We’ve written several posts on Industrial Agriculture’s demolition of our once healthy diets.  With the help of government subsidies, Industrial Ag is quickly turning the United States into a nation of fat, sick citizens.  Even the President is not immune from Industrial Ag.  Although healthier than most Americans his age,  the President was found to have too much “bad” cholesterol in his system and needs to eat a more balanced diet.

But the President is neck deep trying to reform other industries, including health care, Wall Street and energy.  To say nothing of fighting the deepest recession since the Great Depression of the 1930s.  His plate is more than full of unhealthy things (pun intended).

Which leaves the other Obama adult in the White House. 

First Ladies can become terrific activists if they have the desire to do so.  Hillary Clinton, as First Lady, spearheaded the effort to reform health care in the early 1990s.  That effort failed, but now as Secretary of State she celebrated the passage of health care reform legislation alongside the President.

Like Hillary Clinton, Michelle Obama possesses the requisite skills for exerting powerful influence.  She’s a Princeton and Harvard law school graduate.  She met the President when, as an associate at the Chicago branch of law firm Sidney Austin, she was assigned to be his adviser when the President interned there.

No doubt the First Lady is still advising the man she first advised when he was a young intern in Chicago.  Today the President, and the nation as a whole, could use some advice when it comes to eating healthy food. 

In brief, Michelle Obama could publicize the nation’s need to reform it’s food industry.  She could have an enormously positive impact by doing so.

She could start by drawing attention to that garden.  Imagine a nice television piece on the garden where the First Lady happens to point out the healthy foods.  She could then note the differences between organically grown food versus conventional food produced by Industrial Ag.  Maybe then she could ask why America subsidizes Industrial Ag food as opposed to organic food.  A reasonable inquiry.

You know, just to get the conversation going.  And one can only guess at the viewership dynamics presented by such a news story.  My guess it would include a large number of women.  And a large number of women being brought up to snuff about the food being pumped onto their kitchen tables by Industrial Ag would be, let’s say, instructive.  Would it not?

It’s a very short distance, in truth, between America’s kitchen pantry and Industrial Ag.  By cleaning up the White House pantry and using the garden as symbol, First Lady Michelle Obama would be doing the nation a huge favor.

It’s curious but true:  Democrats are the fiscally responsible party in America today.

If you don’t believe this, then you disagree with Bruce Bartlett, an economist, a Republican and a fiscal conservative. 

In his most recent article in Forbes Bartlett writes:

“What we face is a game of chicken. Republicans think if they wait until the last possible second to support the smallest possible tax increase necessary to make a budget deal work, they can get the largest possible spending cuts. The problem is that there is not one iota of historical evidence that this strategy will work. The budget deals of the 1980s and 1990s were all roughly 50-50: half tax increases, half spending cuts.

At some point, taxes have to be back on the table as the price that must be paid for profligate spending. Only then will the American people realize that they can’t have their cake and eat it too, as Republicans have preached for the last decade. Only when the American people go back to believing that spending must be paid for will they stop demanding something for nothing and put the country back on the path to fiscal sanity.”

I’ve argued many times on this website that we must “pay our bills.”  The real argument between Democrats and Republicans should be about what’s important:  That we honestly discuss our priorities for spending and then honestly determine the tax consequences involved in getting what we really want (at least what the majority want, it is a Democracy after all). 

Instead we keep having this fantasy argument about the level of taxes independent of deciding what we really want.  This is an argument that mistakenly assumes we don’t have to really pay for what we want.

And I, like the conservative Republican Bartlett, blame the Republican party for this problem.  It’s the Republicans who’ve preached to America that there is a free lunch.

Consider health care reform.  President Obama has been roundly attacked by Republicans for his proposals to reform health care and by doing so reduce overall spending.  The only real Republican proposal is one that ends Medicare, once enacted, for anyone under the age of 55.  No Republican even mentions this proposal in public anymore because to do so would result in being thrown out of office.  So instead of being honest about their proposal, Republicans instead attack Obama’s ideas of controlling health care costs.

The point is you can’t have it both ways.  Democrats have put forward their proposal, and it is aimed at controlling costs, but the Republicans haven’t countered with theirs.  This kind of dishonesty, if it continues, will probably destroy the Republican party in its current form.

And that would not only be good for the country, but good for Republicans because the “new” Republican party would at least be honest about their priorities and intentions.