Enough: A court's ruling exposes the travesty of holding 'enemy combatants' on flimsy -- or nonexistent -- evidence.
Washington Post, Friday, November 21, 2008; Page A22
"SEVEN YEARS . . . is enough." With those words yesterday, U.S. District Judge Richard J. Leon ordered the release of five Algerians held at the U.S. Naval Base in Guantanamo Bay, Cuba, since January 2002. A conservative appointed by President George W. Bush, Judge Leon also delivered a forceful indictment of the administration's detention decisions and provided indisputable proof of the importance of allowing federal judges to evaluate the secret evidence the government used to justify detentions.
The case, known as Boumediene v. Bush, yielded the first ruling in a habeas corpus proceeding involving Guantanamo detainees. It first came before Judge Leon in 2004, and, at that time, he read the law as not allowing detainees federal court review. The Algerians appealed and ultimately prevailed this summer when the Supreme Court issued a landmark ruling empowering federal judges to review the government's basis for detaining people on the naval base.
In Boumediene, the government relied on a single classified document from an unnamed source. Justice Department lawyers were unable to convince Judge Leon of the validity of the detentions, even though they were held to a low standard of proof. Judge Leon concluded that the document did not prove that the men, captured in Bosnia in 2002, were planning to travel to Afghanistan to fight U.S. forces. The fact that there was no corroborating evidence and that there was little information to help the judge assess the reliability of that source doomed the government's case. "To allow enemy combatantcy to rest on so thin a reed would be inconsistent with this Court's obligation . . . to protect petitioners from the risk of erroneous detention," he wrote. He ordered the five Algerians freed "forthwith," but left the details to the government and did not specify where the men should be sent. He declined to order the release of a sixth man, concluding that the government had provided corroborating evidence that he was an al-Qaeda operative.
In another extraordinary move, Judge Leon urged the Justice Department not to appeal his order that the five be freed, saying: "Seven years of waiting for our legal system to give them an answer to their legal question is enough." The government needs the legal flexibility to hold those it believes are terrorism threats but against whom there is not enough evidence to bring traditional criminal charges. But what Judge Leon revealed in his ruling is the utter travesty that is holding people with virtually no evidence -- and certainly no evidence that can reasonably be considered reliable.
The Justice Department should heed the judge's call and refrain from an appeal. It should work with the departments of State and Defense to find a suitable third country for these detainees. And it should not wait for another judicial rebuke before releasing others who are being held on the basis of feeble or questionable evidence.
Saturday, November 22, 2008
Saturday, October 18, 2008
The Energy Paradox
October 19, 2008
What’s Really Wrong With the Price of Oil
By ROGER LOWENSTEIN www.nytimes.com
Back before the mortgage meltdown turned into the worst financial crisis since the Great Depression, the country’s big economic problem was energy. The presidential campaign was on fire over what to “do” about the price of oil. Gas cost more than $4 a gallon, it was slowing down the economy, people were driving fewer miles and they were flying less. Believe it or not, this was an economic crisis that affected people who didn’t happen to be pinstriped bankers, hedge-fund managers or cabinet officials. You didn’t have to read the stock-market columns to know it was happening. Ordinary people started walking to town or skipping errands — taking the compact and not the S.U.V. Actually, I did that. And then, the price of oil plummeted, first because of slowing demand and recently amid panic selling during the credit crisis. And as it plunged more than 40 percent from its record high of $147 a barrel, the issue has faded.
Well, gas still costs $3.50 a gallon, and the price of a barrel of oil, last week close to $80, still is four times what it was all of six years ago. If that doesn’t sound like a big deal, consider that in the half-dozen years of the housing boom, residential home prices rose only 125 percent, whereas oil prices, even now, are 300 percent higher than they were six years ago. So the energy issue is still here. Remember the winter after Katrina, when home-heating-fuel prices caused an uproar? This winter they are likely to be much higher.
When the new president takes office, high energy costs will be — as they are already — a drag on the economy, one that is becoming conflated with the credit crisis. Last month, the U.S. auto industry sold fewer than one million cars — its slowest sales rate in 15 years. Tight credit and high gas prices each contributed to that. There is no way to completely unravel the two, but here is one fact: In the early part of this decade, when oil was cheap, Americans spent only 2 percent of their income on gasoline. Recently they have been spending about 4.5 percent — more than twice as much. And you can bet that the percentage is higher among families with lower incomes.
What we should do about all this varies greatly according to your view of why gas prices went up. Various people who know the oil industry have been worrying for several years that global supplies were running low. Emerging (and populous) nations like China and India have been consuming more, and in many countries and for reasons varying from geology to politics, production was peaking or actually declining. So the supply-demand equation was getting squeezed on both ends. Last winter — when the price was in the neighborhood of $100 per barrel — John Hess, the chairman of Hess Corporation, told a conference of energy specialists, “An oil crisis is coming — in the next 10 years.” Just in case the age of oil is truly ending, Hess, a medium-size oil company, is investing in fuel-cell technology, an alternative to gasoline. Richard Rainwater, the Texas investor who made billions buying oil stocks, shares the view that oil is scarce, and so does Warren Buffett, the investor whom Wall Street has been dialing for rescue capital. “It’s supply and demand,” Buffett told me. “The ability to produce 10 percent or 12 percent more than the world needed was there, and we got lulled into thinking — we just kept assuming — it would always be there. But there isn’t any tap to turn on now.” (Disclosure: I own stock in Buffett’s company.)
Buffett said this during the summer, before high oil prices (and before the full force of the credit hurricane) slowed the world’s thirst for oil. Under current conditions, the oil “tap” is not so dry, though presumably, economic activity will pick up someday and oil will become scarce again. Of course, this is if you believe that scarcity had anything to do with why the price rose in the first place.
There is also another, highly publicized view of the oil market. According to skeptics like George Soros and Michael Masters, a hedge-fund operator, the only thing wrong with the oil market is the market itself. Speculators, they say, drove the price away from its “fundamental” value; worse, a new breed of institutional investor has been buying oil futures, hoarding the supply. Masters compares these investors to the Hunt brothers, the Texas billionaires who cornered the silver market in the late ’70s — until silver crashed and the Hunts landed in bankruptcy. Essentially, he says, the oil price is, or was, seriously “wrong” — a distortion caused by traders that has little to do with the amount of oil being produced and consumed.
According to this view, oil traders are the culprits, as are the futures market and the Commodity Futures Trading Commission, the federal agency that regulates it. (The agency has also begun its own probe of the oil market.) Masters has fired off scores of e-mail messages to journalists and Wall Streeters, urging limits on speculators. (One message found its way to Senator Joe Lieberman.) Masters is not a disinterested party; his hedge fund has bet heavily on companies, like Delta Airlines, that have been punished by soaring oil prices. But his argument struck a populist chord. “Speculators are driving up the price of food and energy for everyone else,” he told me. Shad Rowe, a Dallas money manager, says the situation raises the bigger question of “whether people in a complex society ought to be allowed to make bets that affect other people and that have nothing to do with them.”
Of course, capitalism demands that people, or at least investors, make bets. That is how resources are allocated and money is invested where it is needed; high prices communicate scarcity. You could even say the oil market has performed a vital service to the country by telegraphing the need to conserve and to develop alternative supplies. The number of miles driven by Americans has declined, in recent months, by close to 5 percent. Consumers have abandoned S.U.V.’s, forcing Ford to speed up its plans to close truck factories and emphasize small cars. For similar reasons, General Motors and Chrysler are rushing to introduce electric cars. All of this is healthy, and none of it would have occurred in an environment of $20 oil. “Should speculators go to jail,” notes Robert Barbera, chief economist with the Wall Street firm ITG, “or should they get the Congressional Medal of Honor?”
In a sense, the question is whether we want to return to an era of plentiful oil and low prices — assuming it is possible — or to accept that political, geological and possibly environmental limitations will force us to diversify. The candidates, while talking tough about cutting our dependence on foreign oil, have supported some policies that seem inconsistent with that aim. Barack Obama has called for investment in alternative energy sources like wind and solar, and for ramping up production of cars that don’t rely on gasoline. John McCain has supported offshore drilling and nuclear power. Such policies are responsive to the idea that energy, oil in particular, is a scarce resource. And a higher oil price is the most persuasive lobby for all of them. But on the stump, each candidate has inveighed against high gasoline prices — as if prices were the problem, rather than a useful, albeit painful, signal that conventional supplies are running low. Obama supports a windfall tax on oil-company profits, a nonsolution that would discourage drilling and potentially worsen future shortages. (An Obama campaign flier asserts, “While you’re running on empty, Exxon made $4 billion in one month.”) McCain advocated a temporary repeal of the gas tax — a measure that would do the most to revive Americans’ love affair with big cars.
Congress took a positive step toward energy conservation last year, raising mileage requirements to 35 miles per gallon, but the new standard will not take effect until 2020 and will not, even then, make cars in the U.S. as efficient as those now on the road in Europe, where the average is about 45 miles per gallon. Wind and solar credits were also extended as part of the financial-bailout bill. Congress also held hearings (with Michael Masters as a prime witness) probing the supposed harm done by oil speculators. Blaming speculators is good politics. In 1958, the government shut down the market for onion futures after a price spike, and recently the Securities and Exchange Commission has seemed to blame speculators for the havoc in bank stocks.
The S.E.C. may not be all wrong, but oil trading and stock trading differ in an important respect. The stock market is a secondary market, in which investors merely exchange shares with one another. Except for the relatively rare occasions on which companies raise capital by selling new stock, changes in stock prices have little effect on nontraders, which means that mispricings (or bubbles) can persist for a long time. But commodity markets affect not just investors but also people who use the actual goods — all of us, that is.
Crude oil and other energy products are quoted on the New York Mercantile Exchange, a vast commodities pit with giant, wall-to-wall screens that is also a market for metals like copper and gold. Traders at the Merc buy and sell oil for future delivery, and the price on the Merc serves as the reference price for oil shipments around the world. In other words, when a refinery contracts to buy crude oil from, say, Saudi Arabia, it generally agrees to pay the price on the Merc less a certain differential. (The discount depends on the quality of the oil being shipped.) Approximately 500,000 crude-oil futures contracts, representing 500 million barrels, trade on the Merc each day. By comparison, the world uses only 86 million barrels of oil daily. Though in theory the price on the Merc reflects the underlying supply-and-demand trends, on any given day the futures market often wags the physical market, not the other way around.
Last June 5, for example, when the decrease in Americans’ gasoline consumption was already apparent, crude oil inexplicably shot up $5.49 a barrel — a record move. As analysts searched for an explanation, the following day oil soared like one of those fabled East Texas gushers — up $10.75. According to Raymond Carbone, a floor trader on the Merc, two news items — neither having anything to do with supply and demand — were behind it. Jean-Claude Trichet, head of the European Central Bank, had made worrisome comments about inflation, which suggested that Trichet might raise interest rates, a step that could strengthen the euro and weaken the dollar. (When the dollar falls in currency markets, the price in dollars of international goods like vacations in France and barrels of crude oil generally goes up.) Also, an Israeli minister said it might be necessary to attack Iran. Israel did not attack — nor did the minister’s remark reflect any policy change — and the dollar was about to get stronger. Nonetheless, Carbone, who was betting on the rally to continue, figured the rumors were good for a ride and maintained his bets.
Looked at in isolation, trusting oil prices to Raymond Carbone and his peers on the Merc, and to their fellow speculators around the globe, does seem like madness. In two days, the price of a commodity that is a staple of everyday life rose 13 percent. According to a calculation by an energy economist at the Dallas Federal Reserve, that 48-hour market orgy weakened the future expected output of the U.S. economy by $90 billion, slicing more than half a percentage point off the gross domestic product.
But the link to the real economy means that commodity prices tend to correct relatively quickly. After all, when the price of a good is too high, people buy less of it. Also, a futures contract is not just a gambling chit (though many people use it that way). Futures are agreements to buy or sell actual oil (or corn or soybeans, etc.) at a future moment at a particular price. This makes them especially useful to hedgers, who use futures to offset risks in their business. Southwest Airlines correctly anticipated that oil would go up, and via futures bought its jet fuel in advance at prices lower than today’s.
Most of the trading on the Merc is probably done by speculators, not hedgers, and the vast majority settle in cash before their contracts expire. But the fact that traders have the right to settle in kind provides an important check. Say that traders went truly nuts and drove the price to $200 a barrel. Oil companies would take advantage and sell $200 oil by the boatload. Either the people who took delivery would be able to find customers for such expensive oil or — more likely — they would go broke, and the price would come crashing down.
The system sounds wacky, but those that preceded it were hardly better. Beginning in the 1870s, John D. Rockefeller tried to control oil’s price by monopolizing the distribution — until his company, Standard Oil, was dismantled in an antitrust case. In the 1930s, when oil sank to 10 cents a barrel, the state of Texas adopted a system that mimicked Rockefeller’s — or at least got the same result. For the next three decades, the Texas Railroad Commission controlled supplies by restricting well operators to a fixed number of production days per month. Then, in 1960, Venezuela and Saudi Arabia, which by then had supplanted Texas as the center of the oil world, founded the Organization of the Petroleum Exporting Countries with the same principle in mind. (In fact, the founders hired a former Railroad Commission engineer to show them the ropes.) Since 1983, when the Merc introduced the crude-oil contract, investors and traders have largely assumed the cartel’s former function of setting prices.
The reason that the history of oil is basically one of attempted price fixing is that, as technology has improved, drilling costs have fallen, meaning that prices have been under near-continuous downward pressure. Like most commodities, oil should sell for whatever the cost of producing one additional unit is — in this case, one more barrel. Economists call this the “marginal” cost. If someone charges much more than that, a competitor can offer to sell it more cheaply.
It’s only when oil is scarce that things become interesting. If there isn’t enough to go around, then the marginal cost no longer matters because, at the margin, there is no more oil to produce. Under such conditions, oil will rise to the price at which people stop using it — either because they drive less or because they find another energy source. This is called the price of demand destruction. Think of that as the upper bound on the price. With the twin shocks of the ’70s — the Arab embargo and the Iranian revolution — oil did reach an upper bound, jumping tenfold to $40 a barrel in 1981. Demand quickly collapsed, and the price eventually sank all the way back to the marginal cost, $12.
Low prices were good news for consumers but a mixed blessing for society. Since it takes time for oil companies, as well as consumers, to react to price changes, markets tend to respond with a perilous lag. In the ’80s, oil companies were spending billions looking for oil, and Detroit was retooling its plants to make smaller cars, even as the price of oil was collapsing.
In the mid-1980s the oil industry suffered a terrible slump. Thousands of petroleum engineers were fired or left the business. Congress lost interest in energy conservation, and projects to develop shale oil and other alternatives were dropped. In Europe, high fuel taxes meant that people still had an incentive to conserve. In America, families became unwilling to ride in anything but trucks.
Even as oil prices rose in this decade, big oil companies — still responding to the price signal of an earlier period — plowed most of their cash flow into dividends and stock repurchases rather than risk it on exploration. State oil companies overseas, like Saudi Arabia’s, which control four-fifths of the world’s reserves, refused to make the investment to develop their fields to full potential for fear of flooding the market (another reaction to low prices). For similar reasons, there was a lull in building critically needed refineries.
By the time oil companies woke up to the consequences of low prices, it was in some sense too late. There was “a missing generation of engineers,” according to Daniel Yergin, the chairman of Cambridge Energy Research Associates and the author of “The Prize,” a history of the oil industry. There was also a lack of drilling rigs and men to work them. Drilling costs soared, and equipment was often unavailable. Also, countries where oil is abundant, like Russia and Venezuela, were increasingly chauvinistic and hostile to foreign operators. Civil unrest set back production in Nigeria.
By the middle of this decade, various big oil regions — Mexico, Nigeria, the North Sea, Colombia, Venezuela — were experiencing production declines. Matthew Simmons, an energy banker in Houston, made a startling forecast: the entire world’s oil production, he said, was peaking and was headed for irreversible decline.
Simmons was dismissed as an alarmist, and much of what he said was extreme. He spoke of a looming, postglobal economy in which transportation grinds to a halt, almost a literal return to the Dark Ages. This isn’t going to happen. At least not right away. The world has 1.3 trillion barrels of proven reserves, enough for 40 years at current rates of consumption. “Peak oil is about geology,” notes Marianne Kah, chief economist at ConocoPhillips. “I don’t think we are running out of oil. We are running out of access to oil.”
Kah is right: there is plenty of oil. But it cannot be withdrawn at will like money from an A.T.M.; wells yield only so much liquid per day. And since the flow from aging wells declines by about 5 percent a year, producers that stand pat will shrink. To stay even requires investment — and usually, the incentive of a high price. It also takes time. Thus, in the short run, whether the constraints on supplies are geologic or human may not matter.
What frightened markets last spring was the awareness that capacity was flattening at the same time that a strong global economy was pushing demand rapidly higher. And emerging nations would seem to have a lot of oil-demand growth ahead of them. While the U.S. consumes 25 barrels of oil per capita annually and Europe 10 barrels, each Chinese consumes 2 barrels a year. Given their numbers, even a small amount of growth in Chinese consumption will offset a great deal of conservation in the U.S. Rising demand is especially ominous in light of Buffett’s point: there is less spare capacity than in the previous decade. Before, if a war or hurricane were to interrupt supplies, Saudi Arabia could always open the tap farther. Soon there might not be enough. “Imagine if you and I were trading jelly beans,” Ken Hersh, who runs an energy fund, offered in a telling metaphor. “We both love jelly beans, we know our kids are going to like ’em, and our kids’ kids, and five years from now we have to make a trade and we look in the jar and there is only one jelly bean left.” As traders wondered what would happen if there was a natural or man-made disaster, they were pricing each barrel as if it were the very last jelly bean.
Institutions also have been counting jelly beans. After the stock-market disasters of the dot-com collapse in 2000 and Enron in 2001, big investors began to look for alternatives to stocks. Wall Street promoted commodities as the answer, and institutions like Harvard University and the California Public Employees’ Retirement System have taken a flier on commodity indexes that are heavily weighted in oil. Masters is incensed because such investors tend to hold for the long haul and thus, he claims, to remove supplies from the market. Then again, commodities could be just the latest fad. Literature from A.I.G., the recently rescued insurer, described commodities as “an asset class which has returns that have historically been comparable to stock returns but with lower volatility.” This is a gross distortion. (It is true only if you calculate the returns in a highly stylized manner.) The fact is that from 1975 to 2005, the average commodity did not keep up with inflation, much less with the stock market. Whether it is wise to invest pensions and endowments in rocks is, of course, their business, but it is hard to see why they should be less free than others to express an opinion — even if it does feed into prices. This, in fact, is what speculators are supposed to do: translate (however imperfectly) expectations about the future into today’s price.
You can argue that last July’s $147 peak was irrational, but Aubrey McClendon, the chief executive of the Oklahoma-based Chesapeake Energy, says it was merely the answer to a real-world economics quiz: at what price would the world consume less oil? Americans began to cut back on their driving at $50 oil, and at something like $120 oil they garaged their S.U.V.’s en masse. People in many emerging nations were slower to react, because their governments subsidize local gasoline prices. But as the price rose, such a subsidy became costly, and beginning in May, China, India, Indonesia and others cut their subsidies. The upper bound had been reached.
It’s actually the lower bound that should concern Washington now. When you ask economists what the minimum oil price is to sustain the development of alternatives to gasoline — new battery systems or sugar ethanol or even wood chips — you get a range of something like $75 a barrel to maybe $150.
Marginal costs for oil are less than those for alternative technologies, though they are rising. The marginal barrels today are found in remote and costly terrain, like the Canadian tar sands or off the coast of Brazil under 7,000 feet of seawater and more than 10,000 feet of ocean floor.
One intriguing alternative is natural gas. Its price also soared, from $2 per thousand cubic feet to $13. And while U.S. oil production has been falling for four decades, the gas industry is experiencing a revival. Most recently, gas companies have embarked on a frantic quest to lease land in a vast, wooded region of the Northeast known as the Marcellus Shale that may contain more natural gas than anywhere else in America. The drilling uses a new technology to inject water deep below the surface to split apart the shale, then underground drilling continues horizontally for hundreds of feet.
Farmers in the Marcellus who once leased land for $2 an acre are reaping fortunes. One 73-year-old dairy farmer leased 1,100 acres for $2.5 million. There could be many more like him out there. The United States has a lot of untapped shale, and there is no engineering reason that America could not substitute gas, which is cleaner and produces only half as much carbon as oil, for much of its driving. Eight million cars in the world already run on natural gas, though very few in the U.S. do. To Barbera, the economist, whose family owns some land in the Marcellus, it proves that technology will frustrate Thomas Malthus, the classical economist who forecast catastrophic, population-induced food shortages. The only risk in the Marcellus is that falling prices will sabotage the entire enterprise. Last summer, when gas was at a peak, Barbera told me that the gas companies rushing to sign up farmers reminded him of the way venture capitalists once threw money at Web sites. They shouldn’t be asking how high gas can go, he said; they should be asking at what price does the drilling stop.
Bingo. Gas has fallen to $7. If it falls much more, the Marcellus looks a lot less interesting. And if oil falls to $70, so do other alternatives.
It would be a tragedy if falling prices were to extinguish such alternatives and — given the time lag inherent in energy development — leave the country vulnerable to a yet another round of shocks. There is no disputing, as Ben Bernanke said, that recently falling oil prices are giving the economy a shot in the arm. But new energy projects also create jobs, and though oil prices impose a cost, Europe has lived with high prices (because of the imposition of taxes) and adjusted to them.
What can Washington do now? McClendon, the Chesapeake chief executive, whose company is active in the Marcellus, is angling for federal subsidies to help service stations convert to natural gas. This is what every energy pioneer wants: subsidies for what it does. But Congress is probably not the optimal institution for anointing technological winners. Its mandate to use corn for ethanol, while it has done wonders for Iowa farmers, has led to sharply higher corn prices and has not added much (if anything) to the country’s energy supply. And even if politicians act with the purest of motives, there are simply too many possibilities for the car of tomorrow (fuel cells, nickel-hydride or lithium-ion batteries, natural gas, biofuel from wood chips and oil itself) to know which will prove the most feasible.
The government could help finance basic research, but there is no reason to rule out any source — oil included. By restricting offshore drilling, the United States is shunning an estimated 18 billion barrels of oil (equal to 80 percent of our proven reserves). As McClendon says, it’s hard to fault Mexico or Saudi Arabia for not developing their fields to the max when the U.S. declares its own territory off-limits.
What the country doesn’t want is to remain dependent only on oil — to lose the urgency to develop alternatives. It happened once before. After the gas lines of the ’70s, Jimmy Carter declared that solving our energy problems was the moral equivalent of war. Then, in the 1980s, Americans forgot.
The way to avoid a repeat is to dust off an idea that Gerald Ford once proposed: a tax on oil. Ideally, it would kick in only if the price fell back to, say, $70 a barrel. The beauty of this tax is that, very likely, no one would have to pay it. The tax would merely serve as a floor — a new lower bound. Auto companies would never have to worry that cheap gas would tempt consumers away from efficient cars; investors could finance development of batteries and fuel cells, because cheap oil could never undercut them. Oil itself would be used more sparingly and last longer. The oil market did its part when it sent the price to almost $150. The government should make sure there is no going back.
Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His most recent book is “While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC subways, Bankrupted San Diego and Loom as the Next Financial Crisis.”
What’s Really Wrong With the Price of Oil
By ROGER LOWENSTEIN www.nytimes.com
Back before the mortgage meltdown turned into the worst financial crisis since the Great Depression, the country’s big economic problem was energy. The presidential campaign was on fire over what to “do” about the price of oil. Gas cost more than $4 a gallon, it was slowing down the economy, people were driving fewer miles and they were flying less. Believe it or not, this was an economic crisis that affected people who didn’t happen to be pinstriped bankers, hedge-fund managers or cabinet officials. You didn’t have to read the stock-market columns to know it was happening. Ordinary people started walking to town or skipping errands — taking the compact and not the S.U.V. Actually, I did that. And then, the price of oil plummeted, first because of slowing demand and recently amid panic selling during the credit crisis. And as it plunged more than 40 percent from its record high of $147 a barrel, the issue has faded.
Well, gas still costs $3.50 a gallon, and the price of a barrel of oil, last week close to $80, still is four times what it was all of six years ago. If that doesn’t sound like a big deal, consider that in the half-dozen years of the housing boom, residential home prices rose only 125 percent, whereas oil prices, even now, are 300 percent higher than they were six years ago. So the energy issue is still here. Remember the winter after Katrina, when home-heating-fuel prices caused an uproar? This winter they are likely to be much higher.
When the new president takes office, high energy costs will be — as they are already — a drag on the economy, one that is becoming conflated with the credit crisis. Last month, the U.S. auto industry sold fewer than one million cars — its slowest sales rate in 15 years. Tight credit and high gas prices each contributed to that. There is no way to completely unravel the two, but here is one fact: In the early part of this decade, when oil was cheap, Americans spent only 2 percent of their income on gasoline. Recently they have been spending about 4.5 percent — more than twice as much. And you can bet that the percentage is higher among families with lower incomes.
What we should do about all this varies greatly according to your view of why gas prices went up. Various people who know the oil industry have been worrying for several years that global supplies were running low. Emerging (and populous) nations like China and India have been consuming more, and in many countries and for reasons varying from geology to politics, production was peaking or actually declining. So the supply-demand equation was getting squeezed on both ends. Last winter — when the price was in the neighborhood of $100 per barrel — John Hess, the chairman of Hess Corporation, told a conference of energy specialists, “An oil crisis is coming — in the next 10 years.” Just in case the age of oil is truly ending, Hess, a medium-size oil company, is investing in fuel-cell technology, an alternative to gasoline. Richard Rainwater, the Texas investor who made billions buying oil stocks, shares the view that oil is scarce, and so does Warren Buffett, the investor whom Wall Street has been dialing for rescue capital. “It’s supply and demand,” Buffett told me. “The ability to produce 10 percent or 12 percent more than the world needed was there, and we got lulled into thinking — we just kept assuming — it would always be there. But there isn’t any tap to turn on now.” (Disclosure: I own stock in Buffett’s company.)
Buffett said this during the summer, before high oil prices (and before the full force of the credit hurricane) slowed the world’s thirst for oil. Under current conditions, the oil “tap” is not so dry, though presumably, economic activity will pick up someday and oil will become scarce again. Of course, this is if you believe that scarcity had anything to do with why the price rose in the first place.
There is also another, highly publicized view of the oil market. According to skeptics like George Soros and Michael Masters, a hedge-fund operator, the only thing wrong with the oil market is the market itself. Speculators, they say, drove the price away from its “fundamental” value; worse, a new breed of institutional investor has been buying oil futures, hoarding the supply. Masters compares these investors to the Hunt brothers, the Texas billionaires who cornered the silver market in the late ’70s — until silver crashed and the Hunts landed in bankruptcy. Essentially, he says, the oil price is, or was, seriously “wrong” — a distortion caused by traders that has little to do with the amount of oil being produced and consumed.
According to this view, oil traders are the culprits, as are the futures market and the Commodity Futures Trading Commission, the federal agency that regulates it. (The agency has also begun its own probe of the oil market.) Masters has fired off scores of e-mail messages to journalists and Wall Streeters, urging limits on speculators. (One message found its way to Senator Joe Lieberman.) Masters is not a disinterested party; his hedge fund has bet heavily on companies, like Delta Airlines, that have been punished by soaring oil prices. But his argument struck a populist chord. “Speculators are driving up the price of food and energy for everyone else,” he told me. Shad Rowe, a Dallas money manager, says the situation raises the bigger question of “whether people in a complex society ought to be allowed to make bets that affect other people and that have nothing to do with them.”
Of course, capitalism demands that people, or at least investors, make bets. That is how resources are allocated and money is invested where it is needed; high prices communicate scarcity. You could even say the oil market has performed a vital service to the country by telegraphing the need to conserve and to develop alternative supplies. The number of miles driven by Americans has declined, in recent months, by close to 5 percent. Consumers have abandoned S.U.V.’s, forcing Ford to speed up its plans to close truck factories and emphasize small cars. For similar reasons, General Motors and Chrysler are rushing to introduce electric cars. All of this is healthy, and none of it would have occurred in an environment of $20 oil. “Should speculators go to jail,” notes Robert Barbera, chief economist with the Wall Street firm ITG, “or should they get the Congressional Medal of Honor?”
In a sense, the question is whether we want to return to an era of plentiful oil and low prices — assuming it is possible — or to accept that political, geological and possibly environmental limitations will force us to diversify. The candidates, while talking tough about cutting our dependence on foreign oil, have supported some policies that seem inconsistent with that aim. Barack Obama has called for investment in alternative energy sources like wind and solar, and for ramping up production of cars that don’t rely on gasoline. John McCain has supported offshore drilling and nuclear power. Such policies are responsive to the idea that energy, oil in particular, is a scarce resource. And a higher oil price is the most persuasive lobby for all of them. But on the stump, each candidate has inveighed against high gasoline prices — as if prices were the problem, rather than a useful, albeit painful, signal that conventional supplies are running low. Obama supports a windfall tax on oil-company profits, a nonsolution that would discourage drilling and potentially worsen future shortages. (An Obama campaign flier asserts, “While you’re running on empty, Exxon made $4 billion in one month.”) McCain advocated a temporary repeal of the gas tax — a measure that would do the most to revive Americans’ love affair with big cars.
Congress took a positive step toward energy conservation last year, raising mileage requirements to 35 miles per gallon, but the new standard will not take effect until 2020 and will not, even then, make cars in the U.S. as efficient as those now on the road in Europe, where the average is about 45 miles per gallon. Wind and solar credits were also extended as part of the financial-bailout bill. Congress also held hearings (with Michael Masters as a prime witness) probing the supposed harm done by oil speculators. Blaming speculators is good politics. In 1958, the government shut down the market for onion futures after a price spike, and recently the Securities and Exchange Commission has seemed to blame speculators for the havoc in bank stocks.
The S.E.C. may not be all wrong, but oil trading and stock trading differ in an important respect. The stock market is a secondary market, in which investors merely exchange shares with one another. Except for the relatively rare occasions on which companies raise capital by selling new stock, changes in stock prices have little effect on nontraders, which means that mispricings (or bubbles) can persist for a long time. But commodity markets affect not just investors but also people who use the actual goods — all of us, that is.
Crude oil and other energy products are quoted on the New York Mercantile Exchange, a vast commodities pit with giant, wall-to-wall screens that is also a market for metals like copper and gold. Traders at the Merc buy and sell oil for future delivery, and the price on the Merc serves as the reference price for oil shipments around the world. In other words, when a refinery contracts to buy crude oil from, say, Saudi Arabia, it generally agrees to pay the price on the Merc less a certain differential. (The discount depends on the quality of the oil being shipped.) Approximately 500,000 crude-oil futures contracts, representing 500 million barrels, trade on the Merc each day. By comparison, the world uses only 86 million barrels of oil daily. Though in theory the price on the Merc reflects the underlying supply-and-demand trends, on any given day the futures market often wags the physical market, not the other way around.
Last June 5, for example, when the decrease in Americans’ gasoline consumption was already apparent, crude oil inexplicably shot up $5.49 a barrel — a record move. As analysts searched for an explanation, the following day oil soared like one of those fabled East Texas gushers — up $10.75. According to Raymond Carbone, a floor trader on the Merc, two news items — neither having anything to do with supply and demand — were behind it. Jean-Claude Trichet, head of the European Central Bank, had made worrisome comments about inflation, which suggested that Trichet might raise interest rates, a step that could strengthen the euro and weaken the dollar. (When the dollar falls in currency markets, the price in dollars of international goods like vacations in France and barrels of crude oil generally goes up.) Also, an Israeli minister said it might be necessary to attack Iran. Israel did not attack — nor did the minister’s remark reflect any policy change — and the dollar was about to get stronger. Nonetheless, Carbone, who was betting on the rally to continue, figured the rumors were good for a ride and maintained his bets.
Looked at in isolation, trusting oil prices to Raymond Carbone and his peers on the Merc, and to their fellow speculators around the globe, does seem like madness. In two days, the price of a commodity that is a staple of everyday life rose 13 percent. According to a calculation by an energy economist at the Dallas Federal Reserve, that 48-hour market orgy weakened the future expected output of the U.S. economy by $90 billion, slicing more than half a percentage point off the gross domestic product.
But the link to the real economy means that commodity prices tend to correct relatively quickly. After all, when the price of a good is too high, people buy less of it. Also, a futures contract is not just a gambling chit (though many people use it that way). Futures are agreements to buy or sell actual oil (or corn or soybeans, etc.) at a future moment at a particular price. This makes them especially useful to hedgers, who use futures to offset risks in their business. Southwest Airlines correctly anticipated that oil would go up, and via futures bought its jet fuel in advance at prices lower than today’s.
Most of the trading on the Merc is probably done by speculators, not hedgers, and the vast majority settle in cash before their contracts expire. But the fact that traders have the right to settle in kind provides an important check. Say that traders went truly nuts and drove the price to $200 a barrel. Oil companies would take advantage and sell $200 oil by the boatload. Either the people who took delivery would be able to find customers for such expensive oil or — more likely — they would go broke, and the price would come crashing down.
The system sounds wacky, but those that preceded it were hardly better. Beginning in the 1870s, John D. Rockefeller tried to control oil’s price by monopolizing the distribution — until his company, Standard Oil, was dismantled in an antitrust case. In the 1930s, when oil sank to 10 cents a barrel, the state of Texas adopted a system that mimicked Rockefeller’s — or at least got the same result. For the next three decades, the Texas Railroad Commission controlled supplies by restricting well operators to a fixed number of production days per month. Then, in 1960, Venezuela and Saudi Arabia, which by then had supplanted Texas as the center of the oil world, founded the Organization of the Petroleum Exporting Countries with the same principle in mind. (In fact, the founders hired a former Railroad Commission engineer to show them the ropes.) Since 1983, when the Merc introduced the crude-oil contract, investors and traders have largely assumed the cartel’s former function of setting prices.
The reason that the history of oil is basically one of attempted price fixing is that, as technology has improved, drilling costs have fallen, meaning that prices have been under near-continuous downward pressure. Like most commodities, oil should sell for whatever the cost of producing one additional unit is — in this case, one more barrel. Economists call this the “marginal” cost. If someone charges much more than that, a competitor can offer to sell it more cheaply.
It’s only when oil is scarce that things become interesting. If there isn’t enough to go around, then the marginal cost no longer matters because, at the margin, there is no more oil to produce. Under such conditions, oil will rise to the price at which people stop using it — either because they drive less or because they find another energy source. This is called the price of demand destruction. Think of that as the upper bound on the price. With the twin shocks of the ’70s — the Arab embargo and the Iranian revolution — oil did reach an upper bound, jumping tenfold to $40 a barrel in 1981. Demand quickly collapsed, and the price eventually sank all the way back to the marginal cost, $12.
Low prices were good news for consumers but a mixed blessing for society. Since it takes time for oil companies, as well as consumers, to react to price changes, markets tend to respond with a perilous lag. In the ’80s, oil companies were spending billions looking for oil, and Detroit was retooling its plants to make smaller cars, even as the price of oil was collapsing.
In the mid-1980s the oil industry suffered a terrible slump. Thousands of petroleum engineers were fired or left the business. Congress lost interest in energy conservation, and projects to develop shale oil and other alternatives were dropped. In Europe, high fuel taxes meant that people still had an incentive to conserve. In America, families became unwilling to ride in anything but trucks.
Even as oil prices rose in this decade, big oil companies — still responding to the price signal of an earlier period — plowed most of their cash flow into dividends and stock repurchases rather than risk it on exploration. State oil companies overseas, like Saudi Arabia’s, which control four-fifths of the world’s reserves, refused to make the investment to develop their fields to full potential for fear of flooding the market (another reaction to low prices). For similar reasons, there was a lull in building critically needed refineries.
By the time oil companies woke up to the consequences of low prices, it was in some sense too late. There was “a missing generation of engineers,” according to Daniel Yergin, the chairman of Cambridge Energy Research Associates and the author of “The Prize,” a history of the oil industry. There was also a lack of drilling rigs and men to work them. Drilling costs soared, and equipment was often unavailable. Also, countries where oil is abundant, like Russia and Venezuela, were increasingly chauvinistic and hostile to foreign operators. Civil unrest set back production in Nigeria.
By the middle of this decade, various big oil regions — Mexico, Nigeria, the North Sea, Colombia, Venezuela — were experiencing production declines. Matthew Simmons, an energy banker in Houston, made a startling forecast: the entire world’s oil production, he said, was peaking and was headed for irreversible decline.
Simmons was dismissed as an alarmist, and much of what he said was extreme. He spoke of a looming, postglobal economy in which transportation grinds to a halt, almost a literal return to the Dark Ages. This isn’t going to happen. At least not right away. The world has 1.3 trillion barrels of proven reserves, enough for 40 years at current rates of consumption. “Peak oil is about geology,” notes Marianne Kah, chief economist at ConocoPhillips. “I don’t think we are running out of oil. We are running out of access to oil.”
Kah is right: there is plenty of oil. But it cannot be withdrawn at will like money from an A.T.M.; wells yield only so much liquid per day. And since the flow from aging wells declines by about 5 percent a year, producers that stand pat will shrink. To stay even requires investment — and usually, the incentive of a high price. It also takes time. Thus, in the short run, whether the constraints on supplies are geologic or human may not matter.
What frightened markets last spring was the awareness that capacity was flattening at the same time that a strong global economy was pushing demand rapidly higher. And emerging nations would seem to have a lot of oil-demand growth ahead of them. While the U.S. consumes 25 barrels of oil per capita annually and Europe 10 barrels, each Chinese consumes 2 barrels a year. Given their numbers, even a small amount of growth in Chinese consumption will offset a great deal of conservation in the U.S. Rising demand is especially ominous in light of Buffett’s point: there is less spare capacity than in the previous decade. Before, if a war or hurricane were to interrupt supplies, Saudi Arabia could always open the tap farther. Soon there might not be enough. “Imagine if you and I were trading jelly beans,” Ken Hersh, who runs an energy fund, offered in a telling metaphor. “We both love jelly beans, we know our kids are going to like ’em, and our kids’ kids, and five years from now we have to make a trade and we look in the jar and there is only one jelly bean left.” As traders wondered what would happen if there was a natural or man-made disaster, they were pricing each barrel as if it were the very last jelly bean.
Institutions also have been counting jelly beans. After the stock-market disasters of the dot-com collapse in 2000 and Enron in 2001, big investors began to look for alternatives to stocks. Wall Street promoted commodities as the answer, and institutions like Harvard University and the California Public Employees’ Retirement System have taken a flier on commodity indexes that are heavily weighted in oil. Masters is incensed because such investors tend to hold for the long haul and thus, he claims, to remove supplies from the market. Then again, commodities could be just the latest fad. Literature from A.I.G., the recently rescued insurer, described commodities as “an asset class which has returns that have historically been comparable to stock returns but with lower volatility.” This is a gross distortion. (It is true only if you calculate the returns in a highly stylized manner.) The fact is that from 1975 to 2005, the average commodity did not keep up with inflation, much less with the stock market. Whether it is wise to invest pensions and endowments in rocks is, of course, their business, but it is hard to see why they should be less free than others to express an opinion — even if it does feed into prices. This, in fact, is what speculators are supposed to do: translate (however imperfectly) expectations about the future into today’s price.
You can argue that last July’s $147 peak was irrational, but Aubrey McClendon, the chief executive of the Oklahoma-based Chesapeake Energy, says it was merely the answer to a real-world economics quiz: at what price would the world consume less oil? Americans began to cut back on their driving at $50 oil, and at something like $120 oil they garaged their S.U.V.’s en masse. People in many emerging nations were slower to react, because their governments subsidize local gasoline prices. But as the price rose, such a subsidy became costly, and beginning in May, China, India, Indonesia and others cut their subsidies. The upper bound had been reached.
It’s actually the lower bound that should concern Washington now. When you ask economists what the minimum oil price is to sustain the development of alternatives to gasoline — new battery systems or sugar ethanol or even wood chips — you get a range of something like $75 a barrel to maybe $150.
Marginal costs for oil are less than those for alternative technologies, though they are rising. The marginal barrels today are found in remote and costly terrain, like the Canadian tar sands or off the coast of Brazil under 7,000 feet of seawater and more than 10,000 feet of ocean floor.
One intriguing alternative is natural gas. Its price also soared, from $2 per thousand cubic feet to $13. And while U.S. oil production has been falling for four decades, the gas industry is experiencing a revival. Most recently, gas companies have embarked on a frantic quest to lease land in a vast, wooded region of the Northeast known as the Marcellus Shale that may contain more natural gas than anywhere else in America. The drilling uses a new technology to inject water deep below the surface to split apart the shale, then underground drilling continues horizontally for hundreds of feet.
Farmers in the Marcellus who once leased land for $2 an acre are reaping fortunes. One 73-year-old dairy farmer leased 1,100 acres for $2.5 million. There could be many more like him out there. The United States has a lot of untapped shale, and there is no engineering reason that America could not substitute gas, which is cleaner and produces only half as much carbon as oil, for much of its driving. Eight million cars in the world already run on natural gas, though very few in the U.S. do. To Barbera, the economist, whose family owns some land in the Marcellus, it proves that technology will frustrate Thomas Malthus, the classical economist who forecast catastrophic, population-induced food shortages. The only risk in the Marcellus is that falling prices will sabotage the entire enterprise. Last summer, when gas was at a peak, Barbera told me that the gas companies rushing to sign up farmers reminded him of the way venture capitalists once threw money at Web sites. They shouldn’t be asking how high gas can go, he said; they should be asking at what price does the drilling stop.
Bingo. Gas has fallen to $7. If it falls much more, the Marcellus looks a lot less interesting. And if oil falls to $70, so do other alternatives.
It would be a tragedy if falling prices were to extinguish such alternatives and — given the time lag inherent in energy development — leave the country vulnerable to a yet another round of shocks. There is no disputing, as Ben Bernanke said, that recently falling oil prices are giving the economy a shot in the arm. But new energy projects also create jobs, and though oil prices impose a cost, Europe has lived with high prices (because of the imposition of taxes) and adjusted to them.
What can Washington do now? McClendon, the Chesapeake chief executive, whose company is active in the Marcellus, is angling for federal subsidies to help service stations convert to natural gas. This is what every energy pioneer wants: subsidies for what it does. But Congress is probably not the optimal institution for anointing technological winners. Its mandate to use corn for ethanol, while it has done wonders for Iowa farmers, has led to sharply higher corn prices and has not added much (if anything) to the country’s energy supply. And even if politicians act with the purest of motives, there are simply too many possibilities for the car of tomorrow (fuel cells, nickel-hydride or lithium-ion batteries, natural gas, biofuel from wood chips and oil itself) to know which will prove the most feasible.
The government could help finance basic research, but there is no reason to rule out any source — oil included. By restricting offshore drilling, the United States is shunning an estimated 18 billion barrels of oil (equal to 80 percent of our proven reserves). As McClendon says, it’s hard to fault Mexico or Saudi Arabia for not developing their fields to the max when the U.S. declares its own territory off-limits.
What the country doesn’t want is to remain dependent only on oil — to lose the urgency to develop alternatives. It happened once before. After the gas lines of the ’70s, Jimmy Carter declared that solving our energy problems was the moral equivalent of war. Then, in the 1980s, Americans forgot.
The way to avoid a repeat is to dust off an idea that Gerald Ford once proposed: a tax on oil. Ideally, it would kick in only if the price fell back to, say, $70 a barrel. The beauty of this tax is that, very likely, no one would have to pay it. The tax would merely serve as a floor — a new lower bound. Auto companies would never have to worry that cheap gas would tempt consumers away from efficient cars; investors could finance development of batteries and fuel cells, because cheap oil could never undercut them. Oil itself would be used more sparingly and last longer. The oil market did its part when it sent the price to almost $150. The government should make sure there is no going back.
Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His most recent book is “While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC subways, Bankrupted San Diego and Loom as the Next Financial Crisis.”
Tuesday, October 07, 2008
Yes Bob, it is 1929 again-- or worse.
A story from the Washington Post. My comment, published there, follows.
"Is it 1929 again"
By Robert J. Samuelson
Monday, October 6, 2008; Page A15 Washington Post
Watching the slipping economy and Congress's epic debate over the unprecedented $700 billion financial bailout, it is impossible not to wonder whether this is 1929 all over again. Even sophisticated observers invoke the comparison. Martin Wolf, the chief economics commentator for the Financial Times, began a recent column: "It is just over three score years and ten since the [end of the] Great Depression." What's frightening is not any one event but the prospect that things are slipping out of control. Panic -- political as well as economic -- is the enemy.
There are parallels between then and now, but there are also big differences. Now as then, Americans borrowed heavily before the crisis -- in the 1920s for cars, radios and appliances; in the past decade, for homes or against inflated home values. Now as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is a huge part of the economy (20 percent vs. 3 percent in 1929), and its spending -- for Social Security, defense, roads -- provides greater stabilization. Unlike then, government officials have moved quickly, if clumsily, to contain the crisis.
We need to remind ourselves that economic slumps -- though wrenching and disillusioning for millions -- rarely become national tragedies. Since the late 1940s, the United States has suffered 10 recessions. On average, they've lasted 10 months and involved peak monthly unemployment of 7.6 percent; the worst (those of 1973-75 and 1981-82) both lasted 16 months and had peak unemployment of 9 percent and 10.8 percent, respectively. We are almost certainly in a recession now, but joblessness, 6.1 percent in September, would have to rise spectacularly to match post-World War II highs.
The stock market tells a similar story. There have been 10 previous postwar bear markets, defined as declines of at least 20 percent in the Standard & Poor's 500-stock index. The average decline was 31.5 percent; those of 1973-74 and 2000-02 were nearly 50 percent. By contrast, the S&P's low point so far (Friday) was 30 percent below the peak reached in October 2007.
The Great Depression that followed the stock market's collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90 percent from their peak. The accompanying devastation -- bankruptcies, foreclosures, bread lines -- lasted a decade. Even in 1940, unemployment was almost 15 percent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why?
Capitalism's inherent instabilities were blamed -- fairly, up to a point. Over-borrowing, over-investment and speculation chronically govern business cycles. But the real culprit in causing the Depression's depth and duration was the Federal Reserve. It unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.
From 1929 to 1933, two-fifths of the nation's banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled. Economic retrenchment fed on itself and overwhelmed the normal mechanisms of recovery. These channels included: surplus inventories being sold, so companies could reorder; strong firms expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending.
What's occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It's said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already -- through various actions -- lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks' deposits.
The cause of the Fed's timidity in the 1930s remains a matter of dispute. Some scholars suggest a futile defense of the gold standard; others blame the flawed "real bills" doctrine that limited Fed lending to besieged banks. Either way, Fed Chairman Ben Bernanke, a scholar of the Depression, understands the error. The Fed's lending and the bailout aim to avoid a ruinous credit contraction.
The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.
MY COMMENT:
My guess is that the editor changed Robert's initial conclusion of "this is 1929 again- or worse." How else could such a seemingly intelligent commentator rely on distinctions so dubious?
First, he finds import in the federal government being a larger part of the economy. Pray tell Robert, but what was the government deficit in 1929? Certainly not the equivalent of the $10+ trillion hole of today.
Second, Robert relies on a lower unemployment rate than in previous recessions. The unemployment rate in 1929 and the years following exceeded 25%. The current quote of the unemployment rate at 6.1% is a sham, as it only extrapolates from a small sample, and even that sample is biased as it counts only those as unemployed and "looking for work," and not the actual number of unemployed or (gasp) the army of those underemployed. I'm certain that if the unemployment rate were calculated as it was in 1929, then the number of 6.1% might double or even triple.
Third, I nearly fell over after reading the line "The Great Depression resulted from the mix of a weak economy and perverse government policies." For today, check and check (unless one does not consider an unnecessary and unjustified $2T war as perverse). Robert, let's hope your editor does not destroy your next story.
The fact is, and you seem to imply this, that the problem is not credit, but a historical overabundance of it. The consumer that drives US economic activity is in large part tapped out, having long-suffered stagnating wages while zealously leaping forward into the abyss of overconsumption. This model is unsustainable and, regardless of the amount of taxpayer money the Fed/Treasury (are these still separate institutions?) injects into the system for the banks to loan back to taxpayers at interest, the consumer will not be able to recover until its debt is repaid, its greatest asset (home) stops plummeting in value and its wages are raised. Until then, Ben the "scholar" can tack up all the inflationary window dressing he likes, but the end result will be even greater calamity.
"Is it 1929 again"
By Robert J. Samuelson
Monday, October 6, 2008; Page A15 Washington Post
Watching the slipping economy and Congress's epic debate over the unprecedented $700 billion financial bailout, it is impossible not to wonder whether this is 1929 all over again. Even sophisticated observers invoke the comparison. Martin Wolf, the chief economics commentator for the Financial Times, began a recent column: "It is just over three score years and ten since the [end of the] Great Depression." What's frightening is not any one event but the prospect that things are slipping out of control. Panic -- political as well as economic -- is the enemy.
There are parallels between then and now, but there are also big differences. Now as then, Americans borrowed heavily before the crisis -- in the 1920s for cars, radios and appliances; in the past decade, for homes or against inflated home values. Now as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is a huge part of the economy (20 percent vs. 3 percent in 1929), and its spending -- for Social Security, defense, roads -- provides greater stabilization. Unlike then, government officials have moved quickly, if clumsily, to contain the crisis.
We need to remind ourselves that economic slumps -- though wrenching and disillusioning for millions -- rarely become national tragedies. Since the late 1940s, the United States has suffered 10 recessions. On average, they've lasted 10 months and involved peak monthly unemployment of 7.6 percent; the worst (those of 1973-75 and 1981-82) both lasted 16 months and had peak unemployment of 9 percent and 10.8 percent, respectively. We are almost certainly in a recession now, but joblessness, 6.1 percent in September, would have to rise spectacularly to match post-World War II highs.
The stock market tells a similar story. There have been 10 previous postwar bear markets, defined as declines of at least 20 percent in the Standard & Poor's 500-stock index. The average decline was 31.5 percent; those of 1973-74 and 2000-02 were nearly 50 percent. By contrast, the S&P's low point so far (Friday) was 30 percent below the peak reached in October 2007.
The Great Depression that followed the stock market's collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90 percent from their peak. The accompanying devastation -- bankruptcies, foreclosures, bread lines -- lasted a decade. Even in 1940, unemployment was almost 15 percent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why?
Capitalism's inherent instabilities were blamed -- fairly, up to a point. Over-borrowing, over-investment and speculation chronically govern business cycles. But the real culprit in causing the Depression's depth and duration was the Federal Reserve. It unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.
From 1929 to 1933, two-fifths of the nation's banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled. Economic retrenchment fed on itself and overwhelmed the normal mechanisms of recovery. These channels included: surplus inventories being sold, so companies could reorder; strong firms expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending.
What's occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It's said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already -- through various actions -- lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks' deposits.
The cause of the Fed's timidity in the 1930s remains a matter of dispute. Some scholars suggest a futile defense of the gold standard; others blame the flawed "real bills" doctrine that limited Fed lending to besieged banks. Either way, Fed Chairman Ben Bernanke, a scholar of the Depression, understands the error. The Fed's lending and the bailout aim to avoid a ruinous credit contraction.
The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.
MY COMMENT:
My guess is that the editor changed Robert's initial conclusion of "this is 1929 again- or worse." How else could such a seemingly intelligent commentator rely on distinctions so dubious?
First, he finds import in the federal government being a larger part of the economy. Pray tell Robert, but what was the government deficit in 1929? Certainly not the equivalent of the $10+ trillion hole of today.
Second, Robert relies on a lower unemployment rate than in previous recessions. The unemployment rate in 1929 and the years following exceeded 25%. The current quote of the unemployment rate at 6.1% is a sham, as it only extrapolates from a small sample, and even that sample is biased as it counts only those as unemployed and "looking for work," and not the actual number of unemployed or (gasp) the army of those underemployed. I'm certain that if the unemployment rate were calculated as it was in 1929, then the number of 6.1% might double or even triple.
Third, I nearly fell over after reading the line "The Great Depression resulted from the mix of a weak economy and perverse government policies." For today, check and check (unless one does not consider an unnecessary and unjustified $2T war as perverse). Robert, let's hope your editor does not destroy your next story.
The fact is, and you seem to imply this, that the problem is not credit, but a historical overabundance of it. The consumer that drives US economic activity is in large part tapped out, having long-suffered stagnating wages while zealously leaping forward into the abyss of overconsumption. This model is unsustainable and, regardless of the amount of taxpayer money the Fed/Treasury (are these still separate institutions?) injects into the system for the banks to loan back to taxpayers at interest, the consumer will not be able to recover until its debt is repaid, its greatest asset (home) stops plummeting in value and its wages are raised. Until then, Ben the "scholar" can tack up all the inflationary window dressing he likes, but the end result will be even greater calamity.
Tuesday, September 23, 2008
Lamentation of Nostradamus
"Prophecy is a poor career choice."
R.W. Twain, paraphrasing Jesus.
R.W. Twain, paraphrasing Jesus.
Many of the essays I publish are forward-looking but, despite the thought and labor expended in formulation, I rarely get credit and esteem for having been correct. When others express reservation or indignation at my claims of prophetic genius, I generally discount such discourtesy to the unconscious proclivity of the American mind to reject the notion of another individual being quicker of mind with regard to a well-known backdrop of accepted truths. Oddly, I turn to a John Travolta role to address this curious set of affairs: remembering Phenomenon. where Travolta's character, infected with foresight, is demanded to explain many of life's unknown unknowns (scene and another). Having Hollywood provide the premise for my own conclusion is evidence enough that I am correct-- prophets dominate the Writer's Guild.
Saturday, August 02, 2008
Would you really want to know?
In response to Glenn Greenwald's "Vital unresolved anthrax questions and ABC News"
(http://www.salon.com/opinion/greenwald/2008/08/01/anthrax/index.html) on Friday Aug. 1, 2008, I wrote:
"I've long been convinced that neoconservative elements were involved with the planning and execution of the 9/11 attacks, the anthrax scare, the Patriot Act, warrantless wiretapping (see http://www.nytimes.com/2007/10/14/business/14qwest.html) and a thousand other nefarious plots to aid them in dominating the American government and its resources. Given that position, your article served to deepen that belief with regard to the oft-forgotten anthrax scare. As you note, the scare occurred just as the public psyche was attempting to come to terms with the 9/11 attacks. The scare operated to elongate the public's panic and invigorate its need to feel secure. Much like 9/11, the scare was never solved (unless you consider the coerced confession of KSM that served as the backbone for the 9/11 report's conclusions) and the scare's perpetrator, like bin Laden, was never ferreted out.
Despite all of this, in my many years of sharing these thoughts with others, the seminal question I always return to is: would you really want to know if neoconservative elements in this country were responsible for effectuating the 9/11 attacks and the subsequent global war on terror? This sentiment was well presented in the movie "V" in the scene where the policeman, who has discovered that the British government was behind an attack on its own people, asks his unwitting partner, "would you really want to know if you own government had betrayed you?"
It's an interesting exercise to ask yourself the same question with regard to the anthrax scare. If Locy, Stewart, Kristof or Ross were forced to reveal their sources and those sources (if they didn't commit "suicide" themselves) confirmed that the scare was an internal operation, then what? Would putting the responsible elements on trial for treason repair the wounds of the last eight years? Lower gas prices? Lead to a withdrawal from Iraq? What if every notion this country has been operating on for the last eight years turned out to be a scheme concocted by neoconservative elements to dominate the very populace they pretend to protect? Would you want to know?"
(http://www.salon.com/opinion/greenwald/2008/08/01/anthrax/index.html) on Friday Aug. 1, 2008, I wrote:
"I've long been convinced that neoconservative elements were involved with the planning and execution of the 9/11 attacks, the anthrax scare, the Patriot Act, warrantless wiretapping (see http://www.nytimes.com/2007/10/14/business/14qwest.html) and a thousand other nefarious plots to aid them in dominating the American government and its resources. Given that position, your article served to deepen that belief with regard to the oft-forgotten anthrax scare. As you note, the scare occurred just as the public psyche was attempting to come to terms with the 9/11 attacks. The scare operated to elongate the public's panic and invigorate its need to feel secure. Much like 9/11, the scare was never solved (unless you consider the coerced confession of KSM that served as the backbone for the 9/11 report's conclusions) and the scare's perpetrator, like bin Laden, was never ferreted out.
Despite all of this, in my many years of sharing these thoughts with others, the seminal question I always return to is: would you really want to know if neoconservative elements in this country were responsible for effectuating the 9/11 attacks and the subsequent global war on terror? This sentiment was well presented in the movie "V" in the scene where the policeman, who has discovered that the British government was behind an attack on its own people, asks his unwitting partner, "would you really want to know if you own government had betrayed you?"
It's an interesting exercise to ask yourself the same question with regard to the anthrax scare. If Locy, Stewart, Kristof or Ross were forced to reveal their sources and those sources (if they didn't commit "suicide" themselves) confirmed that the scare was an internal operation, then what? Would putting the responsible elements on trial for treason repair the wounds of the last eight years? Lower gas prices? Lead to a withdrawal from Iraq? What if every notion this country has been operating on for the last eight years turned out to be a scheme concocted by neoconservative elements to dominate the very populace they pretend to protect? Would you want to know?"
Friday, May 16, 2008
Beating Up on Krauthammer
In response to this, I posted:
Kraut: Saw you on Fox the other day, thought it was a scene from 28 Days Later.
Do me a favor and drop into your next pro-Israel column a breif discussion of the history of the formation of the modern state of Israel. The history begins with Skyes-Picot and the covenants of the Anglo-French Declaration of 1918. The Arabs of Palestine (and their 3,00 years of history) have a right to exist as well. They carved out Ottomans in World War I and provided support throughout WWII. The Arabs who fought those battles, having controlled Palestine, since the end of the Last Crusade, were "dispossessed" by a body in which they had no representation. Their land, their property, taken away not at the end of a sword, but with the stroke of a pen. Throughout the Middle East, a sense of "dispossession" persists-- maybe it was the betrayal of Sharif Hussein for Saud, or the installation of the Shah; hell, they might even be a bit peeved about the occupation of Iraq.
Against this backdrop of this oft-unmentioned history, Krauthammer wields a sense of condescension towards what he seems to assert are backwards-thinking "victims."
Look, Chuck, I refuse to subscribe to anti-Semitism, yet often ignore pleas of an "isolated Israel." I believe Israel to be a state imposed on the Palestinians with unwielding support from the United States; which support includes indifference towards, and likely a continuous supply of, military hardware and nuclear technology to Israel. That's not fair to anyone in the neighborhood, yet you rattle your pen at Iran for exercising its rights within the NNPT.
Ask yourself, if Mezicals were granted an independent state in Southern California, or the Cherokee nation in Missouri, would you support their right to soverignty? Each of those races has a claim to the land, and history as aged and rich as the Jews. Why not return them to their homeland? What if the Chinese armed them wth nuclear weapons? Think you might get upset? Maybe fight against the existence of a Mezical state? Oh, that's right, you do fight against that...
Two more things:
This comment above was insightful. If it's true, then I wish it were broadcast more often.
"But the number of Arab members of Israeli Parliament exceeds the number of Jews in the parliaments of all the Arab countries combined."
Second, and returning to China, Kraut bloviated that Israel is:
"the only nation in the world that is governing itself in the same territory, under the same name, and with the same religion and same language as it did 3,000 years ago."
The Chinese, as well as the Arabs, have a proven history of civilization dating back much longer than 3,000 years. Absent invasion, those Arabs did a noble job in advancing mathematics and science, enough so to bring Eurpoe out of the Dark Ages.
Kraut: Saw you on Fox the other day, thought it was a scene from 28 Days Later.
Do me a favor and drop into your next pro-Israel column a breif discussion of the history of the formation of the modern state of Israel. The history begins with Skyes-Picot and the covenants of the Anglo-French Declaration of 1918. The Arabs of Palestine (and their 3,00 years of history) have a right to exist as well. They carved out Ottomans in World War I and provided support throughout WWII. The Arabs who fought those battles, having controlled Palestine, since the end of the Last Crusade, were "dispossessed" by a body in which they had no representation. Their land, their property, taken away not at the end of a sword, but with the stroke of a pen. Throughout the Middle East, a sense of "dispossession" persists-- maybe it was the betrayal of Sharif Hussein for Saud, or the installation of the Shah; hell, they might even be a bit peeved about the occupation of Iraq.
Against this backdrop of this oft-unmentioned history, Krauthammer wields a sense of condescension towards what he seems to assert are backwards-thinking "victims."
Look, Chuck, I refuse to subscribe to anti-Semitism, yet often ignore pleas of an "isolated Israel." I believe Israel to be a state imposed on the Palestinians with unwielding support from the United States; which support includes indifference towards, and likely a continuous supply of, military hardware and nuclear technology to Israel. That's not fair to anyone in the neighborhood, yet you rattle your pen at Iran for exercising its rights within the NNPT.
Ask yourself, if Mezicals were granted an independent state in Southern California, or the Cherokee nation in Missouri, would you support their right to soverignty? Each of those races has a claim to the land, and history as aged and rich as the Jews. Why not return them to their homeland? What if the Chinese armed them wth nuclear weapons? Think you might get upset? Maybe fight against the existence of a Mezical state? Oh, that's right, you do fight against that...
Two more things:
This comment above was insightful. If it's true, then I wish it were broadcast more often.
"But the number of Arab members of Israeli Parliament exceeds the number of Jews in the parliaments of all the Arab countries combined."
Second, and returning to China, Kraut bloviated that Israel is:
"the only nation in the world that is governing itself in the same territory, under the same name, and with the same religion and same language as it did 3,000 years ago."
The Chinese, as well as the Arabs, have a proven history of civilization dating back much longer than 3,000 years. Absent invasion, those Arabs did a noble job in advancing mathematics and science, enough so to bring Eurpoe out of the Dark Ages.
Friday, May 02, 2008
Brilliant
My own published comment from :
http://blog.washingtonpost.com/capitol-briefing/2007/05/clinton_deauthorize_iraq_war.html
While deauthorization (no quotes b/c I'm officially declaring it a real word) does seem to be one of the most intelligent options for a first step, the Dems must still overcome the presumption that they are "micromanaging" the war. Thus, they should be extremely careful about how they approach a deauthorization, and need to understand that America would be better served by a limited reauhtorization. Whatever you want to call it, two absolutely necessary components to re/deauthorization would be an immediate follow-up authorization for limited purposes in both Iraq and Afghanistan, and, second, the support of active and retired military leaders and rank-and-file for these newly formed, limited purposes. If either of these elements are mssing, then popular support, currently Congress' most powerful weapon, will not follow.
Also, dc law student's comment needs to be deleted as balderdash. The President doesn't sign and certainly cannot veto a congressional resolution either authorizing or deauthorizing the war-- that's a power ordained exclusively upon Congress and one of the fundamental tenets of separation of powers. Dc law student should either start paying more attention in Con Law or ask for a refund from the bursar's office.
DC law student did, however, highlight the most important principle for all of us to remeber here. DC stated "the President can and will put troops wherever he or she feels." It's been almost 2000 years since Ceaser and many less since Napolean and Hitler, but I don't believe Americans (however fat, stupid and lazy) have forgotten that one person should never have exclusive control over the levers of the military machine. If push comes to shove on that issue, Bush will lose.
Posted by: R.W. Twain May 7, 2007 01:42 PM
http://blog.washingtonpost.com/capitol-briefing/2007/05/clinton_deauthorize_iraq_war.html
While deauthorization (no quotes b/c I'm officially declaring it a real word) does seem to be one of the most intelligent options for a first step, the Dems must still overcome the presumption that they are "micromanaging" the war. Thus, they should be extremely careful about how they approach a deauthorization, and need to understand that America would be better served by a limited reauhtorization. Whatever you want to call it, two absolutely necessary components to re/deauthorization would be an immediate follow-up authorization for limited purposes in both Iraq and Afghanistan, and, second, the support of active and retired military leaders and rank-and-file for these newly formed, limited purposes. If either of these elements are mssing, then popular support, currently Congress' most powerful weapon, will not follow.
Also, dc law student's comment needs to be deleted as balderdash. The President doesn't sign and certainly cannot veto a congressional resolution either authorizing or deauthorizing the war-- that's a power ordained exclusively upon Congress and one of the fundamental tenets of separation of powers. Dc law student should either start paying more attention in Con Law or ask for a refund from the bursar's office.
DC law student did, however, highlight the most important principle for all of us to remeber here. DC stated "the President can and will put troops wherever he or she feels." It's been almost 2000 years since Ceaser and many less since Napolean and Hitler, but I don't believe Americans (however fat, stupid and lazy) have forgotten that one person should never have exclusive control over the levers of the military machine. If push comes to shove on that issue, Bush will lose.
Posted by: R.W. Twain May 7, 2007 01:42 PM
Thursday, May 01, 2008
John Yoo: You make my heart scream
Ocasionally I run across a story that helps me define my values. Here, my subject is John Yoo, the former Justice Department employee and young, legal sage who in 2003 formulated the argument that "drugs could be used [on detainees] as long as they did not inflict permanent or 'profound' psychological damage." I initially give Yoo the benefit of the doubt, as I assume very of us are truly wicked or malicious, with even fewer being truly incompetent. Yet Woo faced no calamitous challenge in producing his opinion, simply buckling to peer pressure as a low-level employee; one apparently "experienced" enough to set forth a policy choice that ignores the Geneva Conventions. In contrast, and in the same context, I can't imagine any degree of pressure that could force me to pen the words of theYoo memo. The conclusions of that memo violate my understanding of the most basic of of human rights-- terrorist or not. If the waterboarded (and, as you'll learn below, potentially drugged) KSM is executed for "confessing" to planning 9/11, then there had better be extremely good evidence of his involvement. A coerced confession is inadmissible in every court in the United States. If we can't extend the same right to alleged terrorists, then we, the people of the United States, are equally immoral.
From: http://www.washingtonpost.com/wp-dyn/content/blog/2008/04/22/BL2008042201309_2.html?wpisrc=newsletter&wpisrc=newsletter
Joby Warrick writes in The Washington Post about Adel al-Nusairi, a former Saudi policeman captured in Afghanistan in 2002, who says he was drugged before his interrogations in U.S. custody.
"At least two dozen other former and current detainees at Guantanamo Bay and elsewhere say they were given drugs against their will or witnessed other inmates being drugged, based on interviews and court documents.
"The Defense Department and the CIA, the two agencies responsible for detaining terrorism suspects, both deny using drugs as an enhancement for interrogations, and suggest that the stories from Nusairi and others like him are either fabrications or mistaken interpretations of routine medical treatment.
"Yet the allegations have resurfaced because of the release this month of a 2003 Justice Department memo that explicitly condoned the use of drugs on detainees.
"Written to provide legal justification for interrogation practices, the memo by then-Justice Department lawyer John C. Yoo rejected a decades-old U.S. ban on the use of 'mind-altering substances' on prisoners. Instead, he argued that drugs could be used as long as they did not inflict permanent or 'profound' psychological damage. U.S. law 'does not preclude any and all use of drugs,' Yoo wrote in the memo. He declined to comment for this article.
"The memo has prompted new calls for the Bush administration to give a full accounting of its treatment of detainees, and to make public detailed prison medical records. Legal experts and human rights groups say that forced drugging of detainees for any nontherapeutic reasons would be a particularly grave breach of international treaties banning torture."
------
A bit more reading on the same subject from:
http://www.slate.com/blogs/blogs/convictions/archive/2008/05/01/surprise-agreement-at-senate-hearing-on-secret-law.aspx
Surprise Agreement at Senate Hearing on "Secret Law"
By
authLink();
Dawn Johnsen
I testified yesterday on "Secret Law and the Threat to Democratic and Accountable Government" before the Senate judiciary committee's subcommittee on the Constitution. The hearing, chaired by Sen. Feingold, covered the range of the Bush administration's "secret law." I talked primarily about the terrible harm of secret (and profoundly flawed) opinions of the Office of Legal Counsel.
Briefly, I told the committee that the central question is: "May OLC issue binding legal opinions that in essence tell the president and the executive branch that they need not comply with existing laws—and then not share those opinions and that legal reasoning with Congress or the American people? I would submit that clearly ... the answer to that question must be no." "This combination—the claimed authority not to comply with the law and to do so secretly—is a terrible abuse of power, without limits and without checks. It clearly is antithetical to our constitutional democracy." (My written testimony is here.)
OLC's Deputy Assistant Attorney General John Elwood denied there was any problem (at least, not since he joined the government in late 2005—he pointedly avoided talking about the John Yoo and other memos that came before). He said that he agrees with, and OLC now follows, the 10 "Principles to Guide the Office of Legal Counsel" co-authored by me and 18 other former OLC lawyers in response to the initially leaked OLC torture opinion. I said no, from what we can tell from what's public, they don't follow them all, and they certainly didn't in the Yoo years. Elwood also sparred with Sens. Feingold and Whitehouse, who were incredulous at his claims that the Bush administration, in fact, is keeping Congress briefed and informed about OLC's legal conclusions and reasoning (even if it won't always release its opinions).
Republican ranking member Sam Brownback, Elwood, and Republican-invited witness Brad Berenson (former associate counsel to President Bush) took issue even with the term "secret law," claiming that OLC simply interprets laws for the government, and doesn't make law that governs the lives of private persons. You can well imagine the responses to that claim—government torture and spying don't affect the lives of people!—from me and the other witnesses invited by the Ds (Steven Aftergood of the Federation of American Scientists, Heidi Kitrosser of University of Minnesota Law School, and J. William Leonard, former director of the Information Security Oversight Office). (Also invited by the R's was David Rivkin.)
So far, all very predictable. Here is the most surprising and promising thing about the hearing: Berenson said he agreed with my central point that we have a problem with the Bush administration violating laws in secret (though he argued, and I disagreed, that on many national security matters only Congress and not the American people need to be notified). Even more notable, Berenson also agreed with my suggestion (building on a proposal from Professor Trevor Morrison) that perhaps Congress should enact legislation to require additional reporting, so that the executive branch has to tell Congress not only when it refuses to comply with a statute, but also when it (mis)interprets a statute by relying on the constitutional-avoidance doctrine. (A standard ploy, of course, by the Bush administration is to deny that it in fact is violating statutes, but instead claim it is interpreting them in order to avoid a conflict with Bush's sweeping and plainly incorrect views of his own constitutional powers.)
Berenson's agreement with my proposal led Sen. Brownback to turn to Sen. Feingold and say he would be interested in working with him to pursue the possibility of such legislation. Stay tuned ...
UPDATE 9/22/08: Apparently John Yoo did possess a shred of moral fiber: from Barton Gellman's new book on Dick Cheney, we learn on page 177 that Yoo did reject one proposed investigation technique on legal grounds, declaring that "the CIA could not bury a subject alive, even if it planned to dig him back up in time." And I thought he was all bad...
From: http://www.washingtonpost.com/wp-dyn/content/blog/2008/04/22/BL2008042201309_2.html?wpisrc=newsletter&wpisrc=newsletter
Joby Warrick writes in The Washington Post about Adel al-Nusairi, a former Saudi policeman captured in Afghanistan in 2002, who says he was drugged before his interrogations in U.S. custody.
"At least two dozen other former and current detainees at Guantanamo Bay and elsewhere say they were given drugs against their will or witnessed other inmates being drugged, based on interviews and court documents.
"The Defense Department and the CIA, the two agencies responsible for detaining terrorism suspects, both deny using drugs as an enhancement for interrogations, and suggest that the stories from Nusairi and others like him are either fabrications or mistaken interpretations of routine medical treatment.
"Yet the allegations have resurfaced because of the release this month of a 2003 Justice Department memo that explicitly condoned the use of drugs on detainees.
"Written to provide legal justification for interrogation practices, the memo by then-Justice Department lawyer John C. Yoo rejected a decades-old U.S. ban on the use of 'mind-altering substances' on prisoners. Instead, he argued that drugs could be used as long as they did not inflict permanent or 'profound' psychological damage. U.S. law 'does not preclude any and all use of drugs,' Yoo wrote in the memo. He declined to comment for this article.
"The memo has prompted new calls for the Bush administration to give a full accounting of its treatment of detainees, and to make public detailed prison medical records. Legal experts and human rights groups say that forced drugging of detainees for any nontherapeutic reasons would be a particularly grave breach of international treaties banning torture."
------
A bit more reading on the same subject from:
http://www.slate.com/blogs/blogs/convictions/archive/2008/05/01/surprise-agreement-at-senate-hearing-on-secret-law.aspx
Surprise Agreement at Senate Hearing on "Secret Law"
By
authLink();
Dawn Johnsen
I testified yesterday on "Secret Law and the Threat to Democratic and Accountable Government" before the Senate judiciary committee's subcommittee on the Constitution. The hearing, chaired by Sen. Feingold, covered the range of the Bush administration's "secret law." I talked primarily about the terrible harm of secret (and profoundly flawed) opinions of the Office of Legal Counsel.
Briefly, I told the committee that the central question is: "May OLC issue binding legal opinions that in essence tell the president and the executive branch that they need not comply with existing laws—and then not share those opinions and that legal reasoning with Congress or the American people? I would submit that clearly ... the answer to that question must be no." "This combination—the claimed authority not to comply with the law and to do so secretly—is a terrible abuse of power, without limits and without checks. It clearly is antithetical to our constitutional democracy." (My written testimony is here.)
OLC's Deputy Assistant Attorney General John Elwood denied there was any problem (at least, not since he joined the government in late 2005—he pointedly avoided talking about the John Yoo and other memos that came before). He said that he agrees with, and OLC now follows, the 10 "Principles to Guide the Office of Legal Counsel" co-authored by me and 18 other former OLC lawyers in response to the initially leaked OLC torture opinion. I said no, from what we can tell from what's public, they don't follow them all, and they certainly didn't in the Yoo years. Elwood also sparred with Sens. Feingold and Whitehouse, who were incredulous at his claims that the Bush administration, in fact, is keeping Congress briefed and informed about OLC's legal conclusions and reasoning (even if it won't always release its opinions).
Republican ranking member Sam Brownback, Elwood, and Republican-invited witness Brad Berenson (former associate counsel to President Bush) took issue even with the term "secret law," claiming that OLC simply interprets laws for the government, and doesn't make law that governs the lives of private persons. You can well imagine the responses to that claim—government torture and spying don't affect the lives of people!—from me and the other witnesses invited by the Ds (Steven Aftergood of the Federation of American Scientists, Heidi Kitrosser of University of Minnesota Law School, and J. William Leonard, former director of the Information Security Oversight Office). (Also invited by the R's was David Rivkin.)
So far, all very predictable. Here is the most surprising and promising thing about the hearing: Berenson said he agreed with my central point that we have a problem with the Bush administration violating laws in secret (though he argued, and I disagreed, that on many national security matters only Congress and not the American people need to be notified). Even more notable, Berenson also agreed with my suggestion (building on a proposal from Professor Trevor Morrison) that perhaps Congress should enact legislation to require additional reporting, so that the executive branch has to tell Congress not only when it refuses to comply with a statute, but also when it (mis)interprets a statute by relying on the constitutional-avoidance doctrine. (A standard ploy, of course, by the Bush administration is to deny that it in fact is violating statutes, but instead claim it is interpreting them in order to avoid a conflict with Bush's sweeping and plainly incorrect views of his own constitutional powers.)
Berenson's agreement with my proposal led Sen. Brownback to turn to Sen. Feingold and say he would be interested in working with him to pursue the possibility of such legislation. Stay tuned ...
UPDATE 9/22/08: Apparently John Yoo did possess a shred of moral fiber: from Barton Gellman's new book on Dick Cheney, we learn on page 177 that Yoo did reject one proposed investigation technique on legal grounds, declaring that "the CIA could not bury a subject alive, even if it planned to dig him back up in time." And I thought he was all bad...
Wednesday, April 30, 2008
Kentucky Derby: One man's vision
Top 10 Kentucky Derby horses for 2008
http://www.xpressbet.com/columns.aspx?author=JohnnyD
1. Smooth Air
2. Z Fortune
3. Colonel John
4. Pyro
5. Big Brown
6. Adriano
7. Eight Belles
8. Visionaire
9. Cool Coal Man
10. Tale of Ekati
Similarly, I can see Smooth Air being first or second with a furlong to go in the Derby. If that does happen, it will put him in a prime position to possibly win because 43 of the last 45 Derby winners have been first or second with a furlong to run, the two exceptions being Grindstone and Giacomo.
Z Fortune earned a career-best 102 Beyer Speed Figure in the Arkansas Derby. There is a concern that he might regress off such a strong effort, especially with just three weeks between races.
Maybe Z Fortune really doesn’t want to go 1 1/4 miles. He had the lead with a furlong to go in the Risen Star only to be overtaken by Pyro. Z Fortune could not get by Gayego in the final furlong of the Arkansas Derby.
Colonel John just looks like a rock solid contender. I certainly can’t argue with anybody who thinks he’s going to win. He has the 2-year-old foundation and a pair of 1 1/8-mile victories under his belt at 3. He’s finished first or second in each of his six lifetime starts. It looks like Colonel John will relish 1 1/4 miles. He’s certainly bred for such a trip. Colonel John is by Tiznow out of a Turkoman mare. Tiznow is the only two-time winner of the Breeders’ Cup Classic, a 1 1/4-mile race. Point Given was out of a Turkoman mare. Turkoman won a pair of Grade I races at 1 1/4 miles. Point Given won the Grade I Travers Stakes at 1 1/4 miles and the Grade I Belmont Stakes at 1 1/2 miles by 12 1/4 lengths.
“Media reports estimated Pyro’s final quarter-mile in Saturday’s Risen Star Stake at 22.6 seconds. The natural pessimist in me found it difficult to believe a 3-year-old could finish that strongly -- even during a last-to-first rally -- so I used a digital timer to get the real story of his stretch clocking.
“Here it is:
“Pyro actually ran his final quarter in about 22.3 seconds.”
In the Grade II Louisiana Derby, Pyro had to await room turning into the stretch and early in the stretch run. When a hole materialized with a little less than a furlong to go, he charged to the front and quickly pulled away to prevail by three lengths.
Pyro’s had more than two preps this year, unlike the Florida Derby winner (Big Brown), the Santa Anita Derby winner (Colonel John), the Wood Memorial winner (Tale of Ekati), the Blue Grass Stakes winner (Monba) and the Illinois Derby winner (Recapturetheglory). Obviously, Pyro’s biggest negative is his Blue Grass debacle. He finished 10th on the Blue Grass. Perhaps a line can be drawn through that race because it was on Polytrack. Still, such a poor performance in Pyro’s final race before the Derby is cause for concern. The last Derby winner to finish worse than fourth in his or her final prep was Iron Liege in 1957.
Going into the Derby, Big Brown appears to be the most talented horse. He’s undefeated in three starts, winning by margins of 11 1/4, 12 3/4 and five lengths. Big Brown obviously is an extremely talented colt. But I wrote those exact same words about Curlin prior to last year’s Kentucky Derby. Curlin, like Big Brown, went into the Kentucky Derby undefeated and untested in three lifetime starts. But having only three lifetime starts is a high hurdle. The last time a horse won the Derby with only three career starts was the great filly Regret in 1915 while Woodrow Wilson was in the White House. There also is some concern about Big Brown being able to win a 1 1/4-mile race as a son of Boundary, who was a sprinter.
In his only start on the dirt, Adriano ran by far his worst race, finishing ninth in the Grade II Fountain of Youth Stakes at Gulfstream Park on Feb. 24. Was that clunker because of running on the dirt? Was it because he became fractious before the race? And will he be able to keep from becoming unruly before the huge Churchill Downs crowd?
Based on her 2008 Beyer Speed Figures (100, 99, 96, 91), Eight Belles not only belongs in the Derby, she is a bona fide contender. In all four of her races this year, she’s looked as if she will do just fine going 1 1/4 miles. Her paternal grandsire, Unbridled, did just fine going 1 1/4 miles when he won the Derby in 1990. As mentioned earlier for Smooth Air, if Big Brown loses due to his lack or experience or some other reason, the door then is open for someone else to win. The Beyer Speed Figures indicate that someone could be Eight Belles. There also is the concern of Eight Belles lugging in during the stretch run of the Grade II Fantasy Sakes at Oaklawn Park. She lugged in again while coming home in her five-furlong workout in :58 1/5 at Churchill Downs last Sunday. This will be Eight Belles’ first start against colts. No filly has ever won the Derby without having previously raced against colts.
Another positive for Visionaire is his trainer, Michael Matz, who sent out Barbaro to win the Derby in 2006. Based on Visionaire’s breeding (a son of Grand Slam out of a French Deputy mare), I’m not sold that he can win a 1 1/4-mile race. This concern is accentuated by the fact that Visionaire has not finished at least third in a 1 1/8-mile race. Since 1955, only four horses have won the Derby without doing that.
--------------------------------------------------------------------
KEY KENTUCKY DERBY FACTORS
In 1999, I came up with various key factors to determine how a Kentucky Derby candidate looks from a historical standpoint in terms of class, stamina, style and precedence. When a horse doesn’t qualify in one of the 10 categories, he or she gets a strike.
Here are how many strikes each Kentucky Derby winner has had since 1999:
1999 Charismatic (1 strike)
2000 Fusaichi Pegasus (1 strike)
2001 Monarchos (0 strikes)
2002 War Emblem (0 strikes)
2003 Funny Cide (2 strikes)
2004 Smarty Jones (0 strikes)
2005 Giacomo (2 strikes)
2006 Barbaro (1 strike)
2007 Smart Sense (1 strike)
Based on what has happened in the last nine years, I’d say there is roughly a 78 percent chance the 2008 Kentucky Derby winner will have zero strikes or one strike. The following 2008 Kentucky Derby entrants are in that boat:
ZERO STRIKES
Adriano
Smooth Air
Z Fortune
ONE STRIKE
Big Truck
Colonel John
Cool Coal Man
Cowboy Cal
Eight Belles
Pyro
Tale of Ekati
Visionaire
Z Humor
Based on the last nine years, I’d say there is about a 22 percent chance the 2008 Kentucky Derby winner will have two strikes. These 2008 Kentucky Derby candidates are on that list:
TWO STRIKES
Big Brown
Gayego
Monba
I toss out any 2008 Kentucky Derby candidate with three or more strikes. They are:
THREE STRIKES
Anak Nakal
Bob Black Jack
Court Vision
Denis of Cork
Recapturetheglory
Here are my 10 key Kentucky Derby factors:
1. THE GRADED STAKES FACTOR. (The horse ran in a graded stakes race as a 3-year-old before March 31.) This points out horses who have competed against tough competition early in the year at 3 and not just at the last minute in April, enabling the horse to be properly battle-tested. (Exceptions: Since the introduction of graded stakes races in the U.S. in 1973, only Genuine Risk and Sunny’s Halo have won the Derby without running in a graded stakes race at 3 before March 31.)
Recapturetheglory gets a strike.
2. THE WIN IN A GRADED STAKES FACTOR. (The horse has won a graded stakes race.) This points out horses who have shown they have the class to win a graded stakes race. (Exceptions: Alysheba in 1987, Funny Cide in 2003 and Giacomo in 2005 are the only exceptions since the introduction of U.S. graded stakes races in 1973; Alysheba did finish first in the Blue Grass only to be disqualified and placed third.)
Bob Black Jack gets a strike.
3. THE EIGHTH POLE FACTOR. (In either of his or her last two starts before the Derby, the horse was either first or second with a furlong to go.) This points out horses who were running strongly at the eighth pole, usually in races at 1 1/16 or 1 1/8 miles. By running strongly at the same point in the Derby, a horse would be in a prime position to win the roses. Keep in mind that 43 of the last 45 Derby winners have been first or second at the eighth pole. Giacomo was sixth at the eighth pole in 2005; Grindstone was fourth at the eighth pole in 1996; Decidedly was third at the eighth pole in 1962. (Exceptions: Since 1955, the Derby winners who weren’t either first or second at the eighth pole in his or her last two starts have been Tim Tam, Carry Back, Cannonade, Gato Del Sol, Unbridled and Sea Hero, with Canonero II unknown.)
Anak Nakal, Court Vision, Denis of Cork, and Z Humor each get a strike.
4. THE GAMENESS FACTOR. (The horse did not get passed in the final furlong in either of his or her last two races.) This points out horses who don’t like to get passed in the final furlong. (Exceptions: Since 1955, the exceptions have been Venetian Way, Cannonade, Foolish Pleasure, Ferdinand and Silver Charm, with Canonero II unknown.)
Bob Black Jack, Cool Coal Man, Cowboy Cal, Gayego and Recapturetheglory each get a strike.
5. THE DISTANCE FOUNDATION FACTOR. (The horse has finished at least third in a 1 1/8-mile race before the Derby.) This points out horses who have the proper foundation and/or stamina for the Derby distance. (Exceptions: Since 1955, the only exceptions have been Kauai King, Sea Hero, Charismatic and Giacomo.)
Big Truck, Eight Belles, Pyro and Visionaire each get a strike. For all four, it is their only strike. Anak Nakal and Denis of Cork also each get a strike.
6. THE SUFFICIENT RACING EXPERIENCE FACTOR. (The horse has had at least six lifetime starts before the Derby.) This points out horses who have the needed experience. (Exceptions: Since 1955, Grindstone in 1996, Fusaichi Pegasus in 2000 and Barbaro in 2006 have been the only exceptions. They each had made five starts before the Derby.)
Big Brown, Denis of Cork, Monba and Gayego each get a strike.
7. THE NO ADDING BLINKERS AS A 3-YEAR-OLD FACTOR. (The horse has not added blinkers in any of his or her races at 3 before the Derby.) This seems to point out that, if a horse is good enough to win the Derby, the trainer is not searching for answers so late in the game. (Exceptions: Since Daily Racing Form began including blinkers in its past performances in 1987, no horse has added blinkers at 3 before winning the Derby. Strike the Gold did have blinkers removed in his second start at 3. Sea Hero had blinkers removed for the Derby after racing with blinkers in the Blue Grass.)
Anak Nakal, Bob Black Jack and Court Vision each get a strike. (Bob Black Jack and Court Vision are expected to add blinkers for the Derby. Not adding blinkers for the Derby would bring either Bob Black Jack or Court Vision down to two strikes.)
8. THE RACED AS A 2-YEAR-OLD FACTOR. (The horse made at least one start as a 2-year-old.) (Exception: Apollo in 1882 is the only Derby winner who didn’t race as a 2-year-old.)
All 20 entrants qualify.
9. THE NOT A GELDING FACTOR. (The horse is not a gelding.) (Exception: Funny Cide is the only gelding to win the Derby since Clyde Van Dusen in 1929.)
All 20 entrants qualify.
10. THE SUFFICIENT EXPERIENCE AS A 3-YEAR-OLD FACTOR. (The horse has made at least three starts at 3 before the Derby.) (Exceptions: Of the last 55 horses to run in the Derby with fewer than three preps, 53 have failed. The only exceptions since Jet Pilot in 1947 were Sunny’s Halo in 1983 and Street Sense in 2007.)
Big Brown, Colonel John, Court Vision, Monba, Recapturetheglory and Tale of Ekati each get a strike.
http://www.xpressbet.com/columns.aspx?author=JohnnyD
1. Smooth Air
2. Z Fortune
3. Colonel John
4. Pyro
5. Big Brown
6. Adriano
7. Eight Belles
8. Visionaire
9. Cool Coal Man
10. Tale of Ekati
Similarly, I can see Smooth Air being first or second with a furlong to go in the Derby. If that does happen, it will put him in a prime position to possibly win because 43 of the last 45 Derby winners have been first or second with a furlong to run, the two exceptions being Grindstone and Giacomo.
Z Fortune earned a career-best 102 Beyer Speed Figure in the Arkansas Derby. There is a concern that he might regress off such a strong effort, especially with just three weeks between races.
Maybe Z Fortune really doesn’t want to go 1 1/4 miles. He had the lead with a furlong to go in the Risen Star only to be overtaken by Pyro. Z Fortune could not get by Gayego in the final furlong of the Arkansas Derby.
Colonel John just looks like a rock solid contender. I certainly can’t argue with anybody who thinks he’s going to win. He has the 2-year-old foundation and a pair of 1 1/8-mile victories under his belt at 3. He’s finished first or second in each of his six lifetime starts. It looks like Colonel John will relish 1 1/4 miles. He’s certainly bred for such a trip. Colonel John is by Tiznow out of a Turkoman mare. Tiznow is the only two-time winner of the Breeders’ Cup Classic, a 1 1/4-mile race. Point Given was out of a Turkoman mare. Turkoman won a pair of Grade I races at 1 1/4 miles. Point Given won the Grade I Travers Stakes at 1 1/4 miles and the Grade I Belmont Stakes at 1 1/2 miles by 12 1/4 lengths.
“Media reports estimated Pyro’s final quarter-mile in Saturday’s Risen Star Stake at 22.6 seconds. The natural pessimist in me found it difficult to believe a 3-year-old could finish that strongly -- even during a last-to-first rally -- so I used a digital timer to get the real story of his stretch clocking.
“Here it is:
“Pyro actually ran his final quarter in about 22.3 seconds.”
In the Grade II Louisiana Derby, Pyro had to await room turning into the stretch and early in the stretch run. When a hole materialized with a little less than a furlong to go, he charged to the front and quickly pulled away to prevail by three lengths.
Pyro’s had more than two preps this year, unlike the Florida Derby winner (Big Brown), the Santa Anita Derby winner (Colonel John), the Wood Memorial winner (Tale of Ekati), the Blue Grass Stakes winner (Monba) and the Illinois Derby winner (Recapturetheglory). Obviously, Pyro’s biggest negative is his Blue Grass debacle. He finished 10th on the Blue Grass. Perhaps a line can be drawn through that race because it was on Polytrack. Still, such a poor performance in Pyro’s final race before the Derby is cause for concern. The last Derby winner to finish worse than fourth in his or her final prep was Iron Liege in 1957.
Going into the Derby, Big Brown appears to be the most talented horse. He’s undefeated in three starts, winning by margins of 11 1/4, 12 3/4 and five lengths. Big Brown obviously is an extremely talented colt. But I wrote those exact same words about Curlin prior to last year’s Kentucky Derby. Curlin, like Big Brown, went into the Kentucky Derby undefeated and untested in three lifetime starts. But having only three lifetime starts is a high hurdle. The last time a horse won the Derby with only three career starts was the great filly Regret in 1915 while Woodrow Wilson was in the White House. There also is some concern about Big Brown being able to win a 1 1/4-mile race as a son of Boundary, who was a sprinter.
In his only start on the dirt, Adriano ran by far his worst race, finishing ninth in the Grade II Fountain of Youth Stakes at Gulfstream Park on Feb. 24. Was that clunker because of running on the dirt? Was it because he became fractious before the race? And will he be able to keep from becoming unruly before the huge Churchill Downs crowd?
Based on her 2008 Beyer Speed Figures (100, 99, 96, 91), Eight Belles not only belongs in the Derby, she is a bona fide contender. In all four of her races this year, she’s looked as if she will do just fine going 1 1/4 miles. Her paternal grandsire, Unbridled, did just fine going 1 1/4 miles when he won the Derby in 1990. As mentioned earlier for Smooth Air, if Big Brown loses due to his lack or experience or some other reason, the door then is open for someone else to win. The Beyer Speed Figures indicate that someone could be Eight Belles. There also is the concern of Eight Belles lugging in during the stretch run of the Grade II Fantasy Sakes at Oaklawn Park. She lugged in again while coming home in her five-furlong workout in :58 1/5 at Churchill Downs last Sunday. This will be Eight Belles’ first start against colts. No filly has ever won the Derby without having previously raced against colts.
Another positive for Visionaire is his trainer, Michael Matz, who sent out Barbaro to win the Derby in 2006. Based on Visionaire’s breeding (a son of Grand Slam out of a French Deputy mare), I’m not sold that he can win a 1 1/4-mile race. This concern is accentuated by the fact that Visionaire has not finished at least third in a 1 1/8-mile race. Since 1955, only four horses have won the Derby without doing that.
--------------------------------------------------------------------
KEY KENTUCKY DERBY FACTORS
In 1999, I came up with various key factors to determine how a Kentucky Derby candidate looks from a historical standpoint in terms of class, stamina, style and precedence. When a horse doesn’t qualify in one of the 10 categories, he or she gets a strike.
Here are how many strikes each Kentucky Derby winner has had since 1999:
1999 Charismatic (1 strike)
2000 Fusaichi Pegasus (1 strike)
2001 Monarchos (0 strikes)
2002 War Emblem (0 strikes)
2003 Funny Cide (2 strikes)
2004 Smarty Jones (0 strikes)
2005 Giacomo (2 strikes)
2006 Barbaro (1 strike)
2007 Smart Sense (1 strike)
Based on what has happened in the last nine years, I’d say there is roughly a 78 percent chance the 2008 Kentucky Derby winner will have zero strikes or one strike. The following 2008 Kentucky Derby entrants are in that boat:
ZERO STRIKES
Adriano
Smooth Air
Z Fortune
ONE STRIKE
Big Truck
Colonel John
Cool Coal Man
Cowboy Cal
Eight Belles
Pyro
Tale of Ekati
Visionaire
Z Humor
Based on the last nine years, I’d say there is about a 22 percent chance the 2008 Kentucky Derby winner will have two strikes. These 2008 Kentucky Derby candidates are on that list:
TWO STRIKES
Big Brown
Gayego
Monba
I toss out any 2008 Kentucky Derby candidate with three or more strikes. They are:
THREE STRIKES
Anak Nakal
Bob Black Jack
Court Vision
Denis of Cork
Recapturetheglory
Here are my 10 key Kentucky Derby factors:
1. THE GRADED STAKES FACTOR. (The horse ran in a graded stakes race as a 3-year-old before March 31.) This points out horses who have competed against tough competition early in the year at 3 and not just at the last minute in April, enabling the horse to be properly battle-tested. (Exceptions: Since the introduction of graded stakes races in the U.S. in 1973, only Genuine Risk and Sunny’s Halo have won the Derby without running in a graded stakes race at 3 before March 31.)
Recapturetheglory gets a strike.
2. THE WIN IN A GRADED STAKES FACTOR. (The horse has won a graded stakes race.) This points out horses who have shown they have the class to win a graded stakes race. (Exceptions: Alysheba in 1987, Funny Cide in 2003 and Giacomo in 2005 are the only exceptions since the introduction of U.S. graded stakes races in 1973; Alysheba did finish first in the Blue Grass only to be disqualified and placed third.)
Bob Black Jack gets a strike.
3. THE EIGHTH POLE FACTOR. (In either of his or her last two starts before the Derby, the horse was either first or second with a furlong to go.) This points out horses who were running strongly at the eighth pole, usually in races at 1 1/16 or 1 1/8 miles. By running strongly at the same point in the Derby, a horse would be in a prime position to win the roses. Keep in mind that 43 of the last 45 Derby winners have been first or second at the eighth pole. Giacomo was sixth at the eighth pole in 2005; Grindstone was fourth at the eighth pole in 1996; Decidedly was third at the eighth pole in 1962. (Exceptions: Since 1955, the Derby winners who weren’t either first or second at the eighth pole in his or her last two starts have been Tim Tam, Carry Back, Cannonade, Gato Del Sol, Unbridled and Sea Hero, with Canonero II unknown.)
Anak Nakal, Court Vision, Denis of Cork, and Z Humor each get a strike.
4. THE GAMENESS FACTOR. (The horse did not get passed in the final furlong in either of his or her last two races.) This points out horses who don’t like to get passed in the final furlong. (Exceptions: Since 1955, the exceptions have been Venetian Way, Cannonade, Foolish Pleasure, Ferdinand and Silver Charm, with Canonero II unknown.)
Bob Black Jack, Cool Coal Man, Cowboy Cal, Gayego and Recapturetheglory each get a strike.
5. THE DISTANCE FOUNDATION FACTOR. (The horse has finished at least third in a 1 1/8-mile race before the Derby.) This points out horses who have the proper foundation and/or stamina for the Derby distance. (Exceptions: Since 1955, the only exceptions have been Kauai King, Sea Hero, Charismatic and Giacomo.)
Big Truck, Eight Belles, Pyro and Visionaire each get a strike. For all four, it is their only strike. Anak Nakal and Denis of Cork also each get a strike.
6. THE SUFFICIENT RACING EXPERIENCE FACTOR. (The horse has had at least six lifetime starts before the Derby.) This points out horses who have the needed experience. (Exceptions: Since 1955, Grindstone in 1996, Fusaichi Pegasus in 2000 and Barbaro in 2006 have been the only exceptions. They each had made five starts before the Derby.)
Big Brown, Denis of Cork, Monba and Gayego each get a strike.
7. THE NO ADDING BLINKERS AS A 3-YEAR-OLD FACTOR. (The horse has not added blinkers in any of his or her races at 3 before the Derby.) This seems to point out that, if a horse is good enough to win the Derby, the trainer is not searching for answers so late in the game. (Exceptions: Since Daily Racing Form began including blinkers in its past performances in 1987, no horse has added blinkers at 3 before winning the Derby. Strike the Gold did have blinkers removed in his second start at 3. Sea Hero had blinkers removed for the Derby after racing with blinkers in the Blue Grass.)
Anak Nakal, Bob Black Jack and Court Vision each get a strike. (Bob Black Jack and Court Vision are expected to add blinkers for the Derby. Not adding blinkers for the Derby would bring either Bob Black Jack or Court Vision down to two strikes.)
8. THE RACED AS A 2-YEAR-OLD FACTOR. (The horse made at least one start as a 2-year-old.) (Exception: Apollo in 1882 is the only Derby winner who didn’t race as a 2-year-old.)
All 20 entrants qualify.
9. THE NOT A GELDING FACTOR. (The horse is not a gelding.) (Exception: Funny Cide is the only gelding to win the Derby since Clyde Van Dusen in 1929.)
All 20 entrants qualify.
10. THE SUFFICIENT EXPERIENCE AS A 3-YEAR-OLD FACTOR. (The horse has made at least three starts at 3 before the Derby.) (Exceptions: Of the last 55 horses to run in the Derby with fewer than three preps, 53 have failed. The only exceptions since Jet Pilot in 1947 were Sunny’s Halo in 1983 and Street Sense in 2007.)
Big Brown, Colonel John, Court Vision, Monba, Recapturetheglory and Tale of Ekati each get a strike.
Tuesday, April 29, 2008
Idiot's guide to Idiots
I've read some tripe in the past, but to see this "everyone's out to get us" BS seven and a half years out from "9/11" is astonishing. AEI, the author's benefactor, is often described as a "conservative think tank." In a sense, Frum illuminates those qualities-- he's conceivably been traped in a deprivation tank for the last few years, and is conservative in the sense of adhering to tradition, albebit then one of repeating falsehoods and provocations until such statements ring "truth" in the establishment. Read on and be your own judge. as you go through, ask yourself, are some of these sentences simply upsupported conclusions that beat that serve indirectly as argument for further war?
David Frum, AEI douchebag, wrote:
"Mystery solved. On Sept. 6 of last year, Israeli warplanes struck a facility in the deserts of eastern Syria. The Israelis refused to explain what they had hit or why. The Syrians immediately bulldozed the site to block all further investigation. The U.S. government acknowledged the attack but declined otherwise to comment. And the world was left to speculate.
On Thursday, the Bush administration at last confirmed what had long been rumored: The Syrian facility was indeed a nuclear plant. The plant followed the same design as the Yongbyon plant in North Korea, and North Korean engineers and workers had helped to build it. North Korea and Syria had initiated discussions on the plant in 1997. Construction had commenced in 2005. When the Israelis struck, the plant was only weeks from completion.
All that would have been needed then would have been enough plutonium to start a weapons production cycle. Had the Syrians been allowed to proceed, they might well have been a nuclear weapons state by now.
This terrible story carries some significant lessons.
Military action against nuclear facilities can be effective--especially if those facilities are located far from population centres, as Syria's was.
1) For years we have heard that it was impossible, inconceivable, that states such as Syria, North Korea, Iran or Saddam Hussein's Iraq could ever co-operate with each other. We were told that Shiite Iran could never possibly ally with Sunni terrorist groups such as Hamas or al-Qaeda. Yet again and again, over the past half dozen years, we have witnessed just that. North Korea did help Syria. Iran and North Korea did exchange technology. Iran did subsidize Hamas. Al-Qaeda leaders did find refuge in Iran.
You know, it's almost like they form an axis or something.
2) Many have urged the Bush administration to "reach out" to Syria. The Iraq Study Group, co-chaired by Lee Hamilton and James Baker, suggested that Syria could help broker a solution inside Iraq. Before that, Clinton secretary of state Warren Christopher elaborately courted Syria, visiting Damascus more often than any other government on Earth. Yet the bad faith, aggression and recklessness of the Syrian regime continue unabated.
Happily, this latest deadly threat was intercepted in time. But can we at last recognize that Syria's Assad regime is part of the problem in the Middle East--not part of the solution?
3) Democrats and liberals have fiercely criticized the Bush administration for focusing on state sponsors of terrorism such as Syria and Iran, instead of focusing exclusively on non-state terror groups such as al-Qaeda. We've even heard it said that focusing on state sponsors of terror is a "distraction." But terrorists with nuclear weapons are a lot more dangerous than terrorists who lack them. Al-Qaeda's attempts to acquire nuclear weaponry have fizzled. It is from states such as Syria and Iran and North Korea that the threat of nuclear terrorism chiefly comes.
4) Military action against nuclear facilities can be effective--especially if those facilities are located far from population centres, as Syria's was. And despite Syria's command of terrorist organizations, there has been no Syrian terrorist retaliation. Something to think about in connection with the much more ominous Iranian nuclear program.
5) The revelations underscore the lethal naivete of the advisers around Barack Obama. As Gabriel Schoenfeld has pointed out on the Commentary magazine blog, Joseph Cirincione, the man most widely identified as Obama's top nuclear-affairs adviser, last September pooh-poohed as "far-right" "nonsense" the early rumors that the Syrian nuclear facility was indeed a nuclear facility.
Cirincione wrote on the Foreign Policy blog: "This [early news of the Syrian facility] appears to be the work of a small group of officials leaking cherry-picked, unvetted 'intelligence' to key reporters in order to promote a pre-existing political agenda. If this sounds like the run-up to the war in Iraq, it should. This time it appears aimed at derailing the U.S.-North Korean agreement that administration hardliners think is appeasement. Some Israelis want to thwart any dialogue between the U.S. and Syria."
Cirincione seems to have been so determined to avert what he regarded as the threat of U.S. over-reaction--so eager to promote dialogue with Syria--that he blinded himself to the reality of a nuclear threat.
And this way of thinking is not, unfortunately, unique to him. It pervades the Democratic foreign policy establishment--and especially that portion of the establishment that has gravitated to Obama.
So here's the final lesson from this week's: For the safety of the world, these people have to be kept far, far away from political power.
David Frum is a resident fellow at AEI."
Reprinted from http://aei.org/axis_of_evil_idiots_guide_david_frum.htm
David Frum, AEI douchebag, wrote:
"Mystery solved. On Sept. 6 of last year, Israeli warplanes struck a facility in the deserts of eastern Syria. The Israelis refused to explain what they had hit or why. The Syrians immediately bulldozed the site to block all further investigation. The U.S. government acknowledged the attack but declined otherwise to comment. And the world was left to speculate.
On Thursday, the Bush administration at last confirmed what had long been rumored: The Syrian facility was indeed a nuclear plant. The plant followed the same design as the Yongbyon plant in North Korea, and North Korean engineers and workers had helped to build it. North Korea and Syria had initiated discussions on the plant in 1997. Construction had commenced in 2005. When the Israelis struck, the plant was only weeks from completion.
All that would have been needed then would have been enough plutonium to start a weapons production cycle. Had the Syrians been allowed to proceed, they might well have been a nuclear weapons state by now.
This terrible story carries some significant lessons.
Military action against nuclear facilities can be effective--especially if those facilities are located far from population centres, as Syria's was.
1) For years we have heard that it was impossible, inconceivable, that states such as Syria, North Korea, Iran or Saddam Hussein's Iraq could ever co-operate with each other. We were told that Shiite Iran could never possibly ally with Sunni terrorist groups such as Hamas or al-Qaeda. Yet again and again, over the past half dozen years, we have witnessed just that. North Korea did help Syria. Iran and North Korea did exchange technology. Iran did subsidize Hamas. Al-Qaeda leaders did find refuge in Iran.
You know, it's almost like they form an axis or something.
2) Many have urged the Bush administration to "reach out" to Syria. The Iraq Study Group, co-chaired by Lee Hamilton and James Baker, suggested that Syria could help broker a solution inside Iraq. Before that, Clinton secretary of state Warren Christopher elaborately courted Syria, visiting Damascus more often than any other government on Earth. Yet the bad faith, aggression and recklessness of the Syrian regime continue unabated.
Happily, this latest deadly threat was intercepted in time. But can we at last recognize that Syria's Assad regime is part of the problem in the Middle East--not part of the solution?
3) Democrats and liberals have fiercely criticized the Bush administration for focusing on state sponsors of terrorism such as Syria and Iran, instead of focusing exclusively on non-state terror groups such as al-Qaeda. We've even heard it said that focusing on state sponsors of terror is a "distraction." But terrorists with nuclear weapons are a lot more dangerous than terrorists who lack them. Al-Qaeda's attempts to acquire nuclear weaponry have fizzled. It is from states such as Syria and Iran and North Korea that the threat of nuclear terrorism chiefly comes.
4) Military action against nuclear facilities can be effective--especially if those facilities are located far from population centres, as Syria's was. And despite Syria's command of terrorist organizations, there has been no Syrian terrorist retaliation. Something to think about in connection with the much more ominous Iranian nuclear program.
5) The revelations underscore the lethal naivete of the advisers around Barack Obama. As Gabriel Schoenfeld has pointed out on the Commentary magazine blog, Joseph Cirincione, the man most widely identified as Obama's top nuclear-affairs adviser, last September pooh-poohed as "far-right" "nonsense" the early rumors that the Syrian nuclear facility was indeed a nuclear facility.
Cirincione wrote on the Foreign Policy blog: "This [early news of the Syrian facility] appears to be the work of a small group of officials leaking cherry-picked, unvetted 'intelligence' to key reporters in order to promote a pre-existing political agenda. If this sounds like the run-up to the war in Iraq, it should. This time it appears aimed at derailing the U.S.-North Korean agreement that administration hardliners think is appeasement. Some Israelis want to thwart any dialogue between the U.S. and Syria."
Cirincione seems to have been so determined to avert what he regarded as the threat of U.S. over-reaction--so eager to promote dialogue with Syria--that he blinded himself to the reality of a nuclear threat.
And this way of thinking is not, unfortunately, unique to him. It pervades the Democratic foreign policy establishment--and especially that portion of the establishment that has gravitated to Obama.
So here's the final lesson from this week's: For the safety of the world, these people have to be kept far, far away from political power.
David Frum is a resident fellow at AEI."
Reprinted from http://aei.org/axis_of_evil_idiots_guide_david_frum.htm
Sunday, April 13, 2008
Iraqi Oil Deals without a National Law for Ownership or Distribution of Profits?
Chevron, Total Seek Oil Deal in Iraq
By SINAN SALAHEDDIN
The Associated Press
Saturday, April 12, 2008; 8:38 AM
BAGHDAD -- Oil giants Chevron Corp. and Total have confirmed that they are in discussions with the Iraqi Oil Ministry to increase production in an important oil field in southern Iraq.
The discussions are aimed at finalizing a two-year deal, or technical support agreement, to boost production at the West Qurna Stage 1 oil field near Iraq's second-largest city of Basra.
Chevron and Total confirmed their involvement in the discussions in e-mails received Saturday by The Associated Press.
"Chevron is interested in helping the Iraq government's objectives to develop its oil and gas industry," Chevron spokesman Kurt Glaubitz said in an e-mail. Total spokeswoman Lisa Wyler confirmed the French company's involvement.
Basra, about 340 miles southeast of Baghdad, has been the scene of sporadic attacks and clashes since the U.S.-led invasion in 2003. The latest fighting broke out March 25 when the government launched an operation against Shiite militants, who remain in control of several neighborhoods.
West Qurna field, located about 40 miles west of Basra, is among Iraq's 10 "super giant" fields with its reserves estimated between 15 to 21 billion barrels, according to Iraqi Oil Ministry and Energy Information Administration.
The Ministry intends to add 100,000 barrels per day to the field's current capacity of 180,000 bpd. Its estimated pre-2003 production capacity stood at 250,000 bpd, the ministry's figures show.
In 1997, the Russian Lukoil oil giant struck a $3.7 billion deal with former Iraqi leader Saddam Hussein to drill at the West Qurna field. However, Saddam canceled the contract in 2002. The Russians hoped they would be able to revive it when Moscow wrote off most of Iraq's $12.9 billion debt.
The Iraqi Oil Ministry has said it is also negotiating with Royal Dutch Shell PLC, BP PLC, ExxonMobil Corp. to increase crude production in four other fields and under the same agreement.
Iraq has the world's third-largest oil reserves, totaling more than 115 billion barrels. Iraq's average production for February was 2.4 million barrels per day and exports averaged 1.93 million barrels per day.
By SINAN SALAHEDDIN
The Associated Press
Saturday, April 12, 2008; 8:38 AM
BAGHDAD -- Oil giants Chevron Corp. and Total have confirmed that they are in discussions with the Iraqi Oil Ministry to increase production in an important oil field in southern Iraq.
The discussions are aimed at finalizing a two-year deal, or technical support agreement, to boost production at the West Qurna Stage 1 oil field near Iraq's second-largest city of Basra.
Chevron and Total confirmed their involvement in the discussions in e-mails received Saturday by The Associated Press.
"Chevron is interested in helping the Iraq government's objectives to develop its oil and gas industry," Chevron spokesman Kurt Glaubitz said in an e-mail. Total spokeswoman Lisa Wyler confirmed the French company's involvement.
Basra, about 340 miles southeast of Baghdad, has been the scene of sporadic attacks and clashes since the U.S.-led invasion in 2003. The latest fighting broke out March 25 when the government launched an operation against Shiite militants, who remain in control of several neighborhoods.
West Qurna field, located about 40 miles west of Basra, is among Iraq's 10 "super giant" fields with its reserves estimated between 15 to 21 billion barrels, according to Iraqi Oil Ministry and Energy Information Administration.
The Ministry intends to add 100,000 barrels per day to the field's current capacity of 180,000 bpd. Its estimated pre-2003 production capacity stood at 250,000 bpd, the ministry's figures show.
In 1997, the Russian Lukoil oil giant struck a $3.7 billion deal with former Iraqi leader Saddam Hussein to drill at the West Qurna field. However, Saddam canceled the contract in 2002. The Russians hoped they would be able to revive it when Moscow wrote off most of Iraq's $12.9 billion debt.
The Iraqi Oil Ministry has said it is also negotiating with Royal Dutch Shell PLC, BP PLC, ExxonMobil Corp. to increase crude production in four other fields and under the same agreement.
Iraq has the world's third-largest oil reserves, totaling more than 115 billion barrels. Iraq's average production for February was 2.4 million barrels per day and exports averaged 1.93 million barrels per day.
Destroying the Straw Man
This is trash, but a good example of crushing th straw man. Who says we have to "re-invade?" what about the Kirkuk Solution?
--------------------------------------------------------
Andreas Martinez
The Democrats' Iraq Fantasies
http://blog.washingtonpost.com/stumped/2008/04/the_democrats_iraq_dilemma.html#comments
Dear Stumped:
Although invading Iraq was a mistake, pulling out hastily may only compound it. How, exactly, do Barack Obama and Hillary Clinton propose to withdraw American troops from Iraq while preventing a civil war and the ensuing instability in the region? If, in the final analysis, the conclusion is that things were better before the invasion, then the pullout will definitely mark the beginning of the end for America's leadership role in the world.
-- Carl from Caracas
Dear Carl,
This week's testimony on Capitol Hill by Gen. David Petraeus and Ambassador Ryan Crocker once again made clear that it is easier to criticize the status quo, and the Bush administration's past decision-making on Iraq, than it is to offer a wise exit strategy for the future.
While John McCain is stuck supporting the surge ad infinitum, assuring Americans that we will prevail in Iraq in this century if not the next (and don't ask him to define success, you'll know it when you see it), the two Democratic presidential candidates have now embraced campaign-driven (i.e., fantasyland-based) tidy exit timetables.
Hillary Clinton, who is supposed to be the world-weary prospective commander-in-chief, ready to take over the Situation Room on Day One (unlike Barack Obama, who'd presumably have to spend Day One learning how to order room service from the White House mess), has now embraced a faith-based withdrawal timetable. She long resisted doing so, but is now committed to getting most troops out in 2009 -- regardless of the facts on the ground, her campaign says.
It's an understatement to call such rigidity reckless, and it's doubly reckless coming from someone who voted to authorize this mess. But at least there is an upside to her inflexibility: If the Clinton national security policy is reduced to a campaign pledge that cannot be tinkered with regardless of developments, she'll never have a need to answer those pesky 3 a.m. phone calls.
Obama's exit strategy is also muddled, as McCain has noted. Obama would essentially take most troops out soon, but keep them on hold nearby, just in case sectarian genocide breaks out or al-Qaeda takes over the country -- because then, he concedes, the United States may have to reinvade.This "the sooner we leave, the sooner we can reinvade" concept reminds me of one of my favorite college mantras: "The sooner you fall behind in a class, the more time you have to catch up!"
And I would offer a word of caution about this notion that the era of American leadership in the world is coming to a close because of the Iraq debacle. Remember Vietnam, and all the subsequent talk of American impotence? Remember all the angst two decades ago, and into the early 1990s, about the overextended U.S. empire and the irreversible Japanese economic takeover? Remember Paul Kennedy's book? It was great history, but too many pundits seized on it, and our trade deficit with Japan, to write a lot of nonsense about how the United States would soon be overtaken by Guatemala as a regional power (okay, I exaggerate).
Within a few years, too many pundits had gone to the other extreme, extolling the "indispensable superpower" when it became clear that American technological ingenuity and military might still reign supreme in the world.
The current wave of obituaries being published for the U.S. empire are as silly as those published two decades ago, regardless of what happens in Iraq. That may or may not be good news for you in Caracas, depending on whether or not you back "El Comandante" and his Bolivarian revolution.
--------------------------------------------------------
Andreas Martinez
The Democrats' Iraq Fantasies
http://blog.washingtonpost.com/stumped/2008/04/the_democrats_iraq_dilemma.html#comments
Dear Stumped:
Although invading Iraq was a mistake, pulling out hastily may only compound it. How, exactly, do Barack Obama and Hillary Clinton propose to withdraw American troops from Iraq while preventing a civil war and the ensuing instability in the region? If, in the final analysis, the conclusion is that things were better before the invasion, then the pullout will definitely mark the beginning of the end for America's leadership role in the world.
-- Carl from Caracas
Dear Carl,
This week's testimony on Capitol Hill by Gen. David Petraeus and Ambassador Ryan Crocker once again made clear that it is easier to criticize the status quo, and the Bush administration's past decision-making on Iraq, than it is to offer a wise exit strategy for the future.
While John McCain is stuck supporting the surge ad infinitum, assuring Americans that we will prevail in Iraq in this century if not the next (and don't ask him to define success, you'll know it when you see it), the two Democratic presidential candidates have now embraced campaign-driven (i.e., fantasyland-based) tidy exit timetables.
Hillary Clinton, who is supposed to be the world-weary prospective commander-in-chief, ready to take over the Situation Room on Day One (unlike Barack Obama, who'd presumably have to spend Day One learning how to order room service from the White House mess), has now embraced a faith-based withdrawal timetable. She long resisted doing so, but is now committed to getting most troops out in 2009 -- regardless of the facts on the ground, her campaign says.
It's an understatement to call such rigidity reckless, and it's doubly reckless coming from someone who voted to authorize this mess. But at least there is an upside to her inflexibility: If the Clinton national security policy is reduced to a campaign pledge that cannot be tinkered with regardless of developments, she'll never have a need to answer those pesky 3 a.m. phone calls.
Obama's exit strategy is also muddled, as McCain has noted. Obama would essentially take most troops out soon, but keep them on hold nearby, just in case sectarian genocide breaks out or al-Qaeda takes over the country -- because then, he concedes, the United States may have to reinvade.This "the sooner we leave, the sooner we can reinvade" concept reminds me of one of my favorite college mantras: "The sooner you fall behind in a class, the more time you have to catch up!"
And I would offer a word of caution about this notion that the era of American leadership in the world is coming to a close because of the Iraq debacle. Remember Vietnam, and all the subsequent talk of American impotence? Remember all the angst two decades ago, and into the early 1990s, about the overextended U.S. empire and the irreversible Japanese economic takeover? Remember Paul Kennedy's book? It was great history, but too many pundits seized on it, and our trade deficit with Japan, to write a lot of nonsense about how the United States would soon be overtaken by Guatemala as a regional power (okay, I exaggerate).
Within a few years, too many pundits had gone to the other extreme, extolling the "indispensable superpower" when it became clear that American technological ingenuity and military might still reign supreme in the world.
The current wave of obituaries being published for the U.S. empire are as silly as those published two decades ago, regardless of what happens in Iraq. That may or may not be good news for you in Caracas, depending on whether or not you back "El Comandante" and his Bolivarian revolution.
Monday, March 24, 2008
The Next Bubble: Alternative Energy?
The next bubble: Priming the markets for tomorrow's big crash
BY
Eric Janszen
PUBLISHED
February 2008
I will use the familiar term “bubble” as a shorthand, but note that it confuses cause with effect. A better, if ungainly, descriptor would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away. is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.
Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.
That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.
* * *
Such transformations do not take place overnight. After World War I, Wall Street wrote checks to finance new companies that were trying to turn wartime inventions, such as refrigeration and radio, into consumer products. The consumers of the rising middle class were ready to buy but lacked funds, so the banking system accommodated them with new forms of credit, notably the installment plan. Following a brief recession in 1921, federal policy accommodated progress by keeping interest rates below the rate of inflation. Pundits hailed a “new era” of prosperity until Black Tuesday, October 29, 1929.
The crash, the Great Depression, and World War II were a brutal education for government, academia, corporate America, Wall Street, and the press. For the next sixty years, that chastened generation managed to keep the fog of false hopes and bad credit at bay. Economist John Maynard Keynes emerged as the pied piper of a new school of economics that promised continuous economic growth without end. Keynes’s doctrine: When a business cycle peaks and starts its downward slide, one must increase federal spending, cut taxes, and lower short-term interest rates to increase the money supply and expand credit. The demand stimulated by deficit spending and cheap money will thereby prevent a recession. In 1932 this set of economic gambits was dubbed “reflation.”
The first Keynesian reflation was botched. To be fair, it was perhaps impractical under the gold standard, for by the time the Federal Reserve made its attempt to ameliorate matters, debt was already out of control. Historians argue whether the Federal Reserve and Congress did enough soon enough to slow the rate of debt liquidation at the time. Most agree that once the inflation rate turned negative, monetary stimulus via short-term interest-rate management was ineffective, since the Fed could not lower short-term rates below zero percent. The Bank of Japan found itself in a similar predicament sixty years later. Banks failed, credit contracted, and GDP shrank. The economy was running in reverse and refused to respond to Keynesian inducements. In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not.
A few weeks after D-Day, the allies met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to determine the future of the international monetary system. It wasn’t much of a negotiation. Western economies were in ruins, and the international monetary system had been in disarray since the start of the Great Depression. The United States, now the dominant economic and military power, successfully pushed to peg the currencies of member nations to the dollar and to make dollars redeemable in American gold.
Americans could now spend as wisely or foolishly as our government policy decreed and, regardless of the needs of other nations holding dollars as reserves, print as many dollars as desired. But by the second quarter of 1971, the U.S. balance of merchandise trade had run up a deficit of $3.8 billion (adjusted for inflation)—an admittedly tiny sum compared with the deficit of $204 billion in the second quarter of 2007, but until that time the United States had run only surpluses. Members of the Bretton Woods system, most famously French President General Charles de Gaulle, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars. Opposed to the exercise of such “exorbitant privilege,” de Gaulle demanded payment in gold. With the balance of payments so greatly out of balance, newly elected President Richard Nixon faced a run on the U.S. gold supply, and his solution was novel: unilaterally end the U.S. legal obligation to redeem dollars with gold; in other words, default.
More than a decade of economic and financial-market chaos followed, as the dollar remained the international currency but traded without an absolute measure of value. Inflation rose not just in the United States but around the world, grinding down the worth of many securities and brokerage firms. The Federal Reserve pushed interest rates into double digits, setting off two global recessions, and new international standards and methods for measuring inflation and floating exchange rates were established to replace the gold standard. After 1975, the United States would never again post an annual merchandise trade surplus. Such high-value, finished-goods-producing industries as steel and automobiles were no longer dominant. The new economy belonged to finance, insurance, and real estate—FIRE.
* * *
FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals. With FIRE leading the way, the United States, free of the international gold standard’s limitations, now had great flexibility to finance its deficits with its own currency. This was “exorbitant privilege” on steroids. Massive external debts built up as trade partners to the United States, especially the oil-producing nations and Japan, balanced their trade surpluses with the purchase of U.S. financial assets. The motivation was in part political: the Saudis, Japanese, and Taiwanese hold a great portion of U.S. debt; not coincidentally, these nations receive military protection from the United States. The process of financing our deficit with private and public foreign funds became self-reinforcing, for if any of the largest holders of our debt reduced their holdings, the trade value of the dollar would fall—and with that, the value of their remaining holdings would be decreased. Worse, if not enough U.S. financial assets were purchased, the United States would be less able to finance its imports. It’s the old rule about bank debt, applied to international deficit finance: if you owe the banks $3 billion, the bank owns you. But if you owe the banks $10 trillion, you own the banks.
The FIRE sector’s power grew unchecked as the old manufacturing economy declined. The root of the 1920s bubble, it was believed, had been the conflicts of interest among banks and securities firms, but in the 1990s, under the leadership of Alan Greenspan at the Federal Reserve, banking and securities markets were deregulated. In 1999, the Glass-Steagall Act of 1933, which regulated banks and markets, was repealed, while a servile federal interest-rate policy helped move things along. As FIRE rose in power, so did a new generation of politicians, bankers, economists, and journalists willing to invent creative justifications for the system, as well as for the projects— ranging from the housing bubble to the Iraq war— that it financed. The high-water mark of such truckling might be the publication of the Cato Institute report “America’s Record Trade Deficit: A Symbol of Strength.” Freedom had become slavery; persistent deficits had become economic power.
* * *
The bubble machine often starts with a new invention or discovery. The Mosaic graphical Web browser, released in 1993, began to transform the Internet into a set of linked pages. Suddenly websites were easy to create and even easier to consume. Industry lobbyists stepped in, pushing for deregulation and special tax incentives. By 1995, the Internet had been thrown open to the profiteers; four years later a sales-tax moratorium was issued, opening the floodgates for e-commerce. Such legislation does not cause a bubble, but no bubble has ever occurred in its absence.
Total market value: NASDAQ. 11% annual growth derived from pre-bubble valuation (peak occurred March 10, 2000, when the NASDAQ traded as high as 5132.52 and closed the day at 5048.62)
I had a front-row seat to the Internet-stock mania of the late 1990s as managing director of Osborn Capital, a “seed stage” venture-capital firm founded by Jeffrey Osborn. Venture-capital firms are defined by when, not where, they place their investments; a “seed stage” firm usually puts the first money into very young firms and takes an active role in that investment. Jeffrey Osborn was a senior executive at commercial Internet provider UUNet before and after the legislation passed. Prior to the legislation, bookings were less than $4 million a year; a few years later they were greater than $2 billion. with positions on the boards of more than half a dozen technology companies. I observed otherwise rational men and women fall under the influence of a fast-flowing and, it was widely believed, risk-free flood of money. Logic and historical precedent were pushed aside. I remember a managing partner of one firm telling me with certainty that if the company in which we’d invested failed, at least it had “hard assets,” meaning the notoriously depreciation-prone computer equipment the company had received in exchange for stock. A year after the bubble collapsed, of course, the market was flooded with such hard assets.
Deregulation had built the church, and seed money was needed to grow the flock. The mechanics of financing vary with each bubble, but what matters is that the system be able to support astronomical flows of funds and generate trillions of dollars’ worth of new securities. For the Internet, the seed money came from venture capital. At first, Internet startups were merely one part of a spectrum of enterprise-software and other technology industries into which venture capitalists put their money. Then a few startups like Netscape went public, netting massive returns. Such liquidity events came faster and faster. A loop was formed: profits from IPO investments poured back into new venture funds, then into new start-ups, then back out again as IPOs, with the original investment multiplied many times over, then finally back into new venture-capital funds.
The media stood by cheering, carrying breathless profiles of wunderkinder in their early twenties who had just made their first hundred million dollars; business publications grew thick with advertisements. The media barely questioned the fine points of the new theology. Skeptics were occasionally interviewed by journalists, but in general the public was exposed to constant reiterations of the one true faith. Government stood back—after all, there was little incentive for lawmakers to intervene. Members of Congress, who influence the agencies that oversee market-regulation functions, have never been unfriendly to windfall tax revenues, and the FIRE sector has very deep pockets. According to the donation-tracking website opensecrets.org, FIRE gave $146 million in political donations for the 2008 election cycle alone, and since 1990 more than $1.9 billion—nearly double what lawyers and lobbyists have donated, and more than triple the donations from organized labor.
Part of my job was to watch for the end-time, to maximize gains and guard the firm against sudden losses when the bubble finally popped. In March 2000, the signal arrived. One of our companies was investigating the timing of an IPO; the management team was hoping for April 2000. The representatives of one of the investment banks we talked to gave us a surprisingly specific recommendation that ran counter to advice offered by banks during the IPO-driven cycle of the preceding five years: they warned the company not to go public in April. We took the advice in the context of other indicators as a clear sign of a top, and over the next few months we liquidated stocks in public companies that we held as a result of earlier IPOs. Shortly thereafter, millions of investors with unrealized gains in mutual funds sold stock to raise enough cash to pay taxes on their capital gains. The mass selling set off a panic, and the bubble popped.
In a bubble, fictitious value. Fictitious value is the delta between historical-trend growth and growth brought on by asset hyperinflation. As an anonymous South Sea Bubble pamphleteer explained: “One added to one, by any rules of vulgar arithmetic, will never make three and a half; consequently, all the fictitious value must be a loss to some persons or other, first or last. The only way to prevent it to oneself must be to sell out betimes, and so let the Devil take the hindmost.” goes away when market participants lose faith in the religion—when their false beliefs are destroyed as quickly as they had been formed. Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.
The technology industry represents only a small fraction of the U.S. economy, but the effects of layoffs, cutbacks, and the collapsing stock market rippled through the economy and produced a brief national recession in the early part of 2001, despite a concerted effort by the Federal Reserve and Congress to avoid it. This left in its wake a crucial dilemma: how to counter the loss of that $7 trillion in fictitious value built up during the bubble.
* * *
The Internet boom had been a matter of abstract electrons and monetized eyeballs—castles in the sky translated into rising share prices. The new boom was in McMansions on the ground—wood and nails, granite countertops. The price-inflation process was traditional as well: there was way too much mortgage money chasing not enough housing. At the bubble’s peak, $12 trillion in fictitious value had been created, a sum greater even than the national debt.
Total market value: Real estate. Actual market value from “Federal Reserve Flow of Funds Accounts of the United States.” Historical trend from Robert J. Schiller, Irrational Exuberance.
We certainly should have known better. Historically, the price of American homes has risen at a rate similar to the annual rate of inflation. As the Yale economist Robert Shiller has pointed out, since 1890, discounting the housing boom after World War II, that rate has been about 3.3 percent. Why, then, did housing prices suddenly begin to hyperinflate? Changes in the reserve requirements of U.S. banks, and the creation in 1994 of special “sweep” accounts, which link commercial checking and investment accounts, allowed banks greater liquidity—which meant that they could offer more credit. This was the formative stage of the bubble. Then, from 2001 to 2002, in the wake of the dot-com crash, the Federal Reserve Funds Rate was reduced from 6 percent to 1.24 percent, leading to similar cuts in the London Interbank Offered Rate that banks use to set some adjustable-rate mortgage (ARM) rates. These drastically lowered ARM rates meant that in the United States the monthly cost of a mortgage on a $500,000 home fell to roughly the monthly cost of a mortgage on a $250,000 home purchased two years earlier. Demand skyrocketed, though home builders would need years to gear up their production.
With more credit available than there was housing stock, prices predictably, and rapidly, rose. All that was needed for hypergrowth was a supply of new capital. For the Internet boom this money had been provided by the IPO system and the venture capitalists; for the housing bubble, starting around 2003, it came from securitized debt.
To “securitize” is to make a new security out of a pool of existing bonds, bringing together similar financial instruments, like loans or mortgages, in order to create something more predictable, less risk-laden, than the sum of its parts. Many such “pass-thru” securities, backed by mortgages, were set up to allow banks to serve almost purely as middlemen, so that if a few homeowners defaulted but the rest continued to pay, the bank that sold the security would itself suffer little—or at least far less than if it held the mortgages directly. In theory, risks that used to concentrate on a bank’s balance sheet had been safely spread far and wide across the financial markets among well-financed and experienced institutional investors. As happens with most bubbles, a perfectly good idea is taken to an extreme. In the case of the housing bubble, the new securitized debt product that drove the final stage—which has come to be known as the “subprime meltdown”—was the collateralized debt obligation (CDO). A CDO is a class of instrument called a credit derivative; specifically, a derivative of a pool of asset-backed securities. Parts of pools of asset-backed securities that were, for example, rated at a moderately high risk of default—junk grade, such as BB—were modeled, packaged into CDOs, and rated at lower risk-investment grades, such as AAA. These were used to finance the more creative mortgages—stated-income or “liar loans”—which we now hear are not quite living up to the issuers’ hopes.
The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults. Even after the faith that supported a bubble recedes, false beliefs continue to obscure cause and effect as the crisis unfolds.
Consider the chemical industry of forty years ago, back when such pollutants as PCBs were dumped into the air and water with little or no regulation. For years, the mantra of the industry was “the solution to pollution is dilution.” Mixing toxins with vast quantities of air and water was supposed to neutralize them. Many decades later, with our plagues of hermaphrodite frogs, poisoned ground water, and mysterious cancers, the mistake in that logic is plain. Modern bankers, however, have carried this mistake into the world of finance. As more and more loans with a high risk of default were made from the late 1990s to the summer of 2007, the shared level of credit risk increased throughout the global financial system.
Think of that enormous risk as ecomonic poison. In theory, those risk pollutants have been diluted in the oceanic vastness of the world’s debt markets; thanks to the magic of securitization, they are made nontoxic and so pose no systemic risk. In reality, credit pollutants pose the same kind of threat to our economy as chemical toxins do to our environment. Like their chemical counterparts, they tend to concentrate in the weakest and most vulnerable parts of the financial system, and that’s where the toxic effects show up first: the subprime mortgage market collapse is essentially the Love Canal of our ongoing risk-pollution disaster.
* * *
Read the front page of any business publication today and you can see the mess bubbling up. In the United States, Merrill Lynch took a $7.9 billion hit from its mortgage investments and experienced its first quarterly loss since 2001; Morgan Stanley, Bear Stearns, Citigroup, along with many other U.S. banks, have all suffered major losses. The Royal Bank of Scotland Group was forced to write down $3 billion on credit-related securities and leveraged loans, and Japan’s Norinchukin Bank suffered $357 million in subprime-related losses in the six months prior to September 2007. Even more of this pollution will become manifest as home prices continue to fall.
The metaphor is not lost on those touched by debt pollution. In December 2007, Chip Mason of Legg Mason, one of the world’s largest money managers, said that the U.S. Treasury should put $20 billion into a “structured investment vehicles superfund” to boost investor confidence.
As more and more risk pollution rises to the surface, credit will continue to contract, and the FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s. Because all asset hyperinflations revert to the mean, we can expect housing prices to decline roughly 38 percent from their peak as they return to something closer to the historical rate of monetary inflation. If the rate of decline stabilizes at between 6 and 7 percent each year, the correction has about six years to go before things stabilize, leaving the FIRE economy in need of $12 trillion. Where will that money be found?
* * *
Bubbles are to the industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly—the NASDAQ, for example, at 5,048 in March 2000, had recovered only half of its peak value going into 2007. When those trillions of dollars first die and go to money heaven, the whole economy grieves.
The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.
Our economy is in serious trouble. Both the production-consumption sector and the FIRE sector know that a debt-deflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.
We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.
There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.
There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. Wired magazine, returning to its roots in boosterism, put ethanol on the cover of its October 2007 issue, advising its readers to forget oil; NBC had a “Green Week” in November 2007, with themed shows beating away at an ecological message and Al Gore making a guest appearance on the sitcom 30 Rock. Improbably, Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of Amazon.com and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob. Other ventures—Lazard Capital Markets, Generation Investment Management, Nth Power, EnerTech Capital, and Battery Ventures—are funding an array of startups working on improvements to solar cells, to biofuels production, to batteries, to “energy management” software, and so on.
Total market value: Alternative energy and infrastructure. Estimated fictitious value of next bubble compared with previous bubbles.
The candidates for the 2008 presidential election, notably Obama, Clinton, Romney, and McCain, now invoke “energy security” in their stump speeches and on their websites. Previously, “energy independence” was more common, and perhaps this change in terminology is a hint that a portion of the Homeland Security budget will be allocated for alternative energy, a potential boon for startups and for FIRE.
More valuable than campaign rhetoric, however, is legislation. The Energy Policy Act of 2005, a massive bill known to morning commuters for extending daylight savings time, contained provisions guaranteeing loans for alternative-energy businesses, including nuclear-power technology. The bill authorizes $200 million annually for clean-coal initiatives, repeals the current 160-acre cap on coal leases, offers subsidies for wind energy and other alternative-energy producers, and promises $50 million annually, over the life of the bill, for a biomass grant program.
Loan guarantees for “innovative technologies” such as advanced nuclear-reactor designs are also at hand; a kindler, gentler nuclear industry appears to be imminent. The Price-Anderson Nuclear Industries Indemnity Act has been extended through 2025; the secretary of energy was ordered to implement the 2001 nuclear power “roadmap,” and $1.25 billion was set aside by the Department of Energy to develop a nuclear reactor that will generate both electricity and hydrogen. The future of transportation may be neither solar- nor ethanol-powered but instead rely on numerous small nuclear power plants generating electricity and, for local transportation, hydrogen. At the state and local levels, related bills have been passed or are under consideration.
Supporting this alternative-energy bubble will be a boom in infrastructure—transportation and communications systems, water, and power. In its 2005 report card, the American Society of Civil Engineers called for $1.6 trillion to be spent over five years to bring the United States back up to code, giving America a grade of “D.” Decades of neglect have put us trillions of dollars away from an “A.” After last August’s bridge collapse in Minnesota, it took only a week for libertarian Robert Poole, director of transportation studies for the Reason Foundation, to renew the call for “highway public-private partnerships funded by tolls,” and for Hillary Clinton to put forth a multibillion-dollar “Rebuild America” plan.
Of course, alternative energy and the improvement of our infrastructure are both necessary for our national well-being; and therein lies the danger: hyperinflations, in the long run, are always destructive. Since the 1970s, U.S. dependence on foreign energy supplies has become a major economic and security liability, and our superannuated roadways are the nation’s circulatory system. Without the efficient transit of gasoline-powered trucks laden with goods across our highways there would be no Wal-Mart, no other big-box stores, no morning FedEx deliveries. Without “energy security” and repairs to our “crumbling infrastructure,” our very competitiveness is at stake. Luckily, Al Gore will be making principled venture capital investments on our behalf.
The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations77. To create these valuations, I first examined the necessary market capitalization of existing companies; then, using the technology and housing bubbles as precedents, I estimated the number of companies needed to support the bubble. The model assumes the existence of nascent credit products that will eventually be deployed to fund the hyperinflation. While the range of error in this prediction is obviously huge, the antecedents—and more important, the necessity—for the bubble remain.: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.
* * *
Word.
BY
Eric Janszen
PUBLISHED
February 2008
I will use the familiar term “bubble” as a shorthand, but note that it confuses cause with effect. A better, if ungainly, descriptor would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away. is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.
Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.
That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.
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Such transformations do not take place overnight. After World War I, Wall Street wrote checks to finance new companies that were trying to turn wartime inventions, such as refrigeration and radio, into consumer products. The consumers of the rising middle class were ready to buy but lacked funds, so the banking system accommodated them with new forms of credit, notably the installment plan. Following a brief recession in 1921, federal policy accommodated progress by keeping interest rates below the rate of inflation. Pundits hailed a “new era” of prosperity until Black Tuesday, October 29, 1929.
The crash, the Great Depression, and World War II were a brutal education for government, academia, corporate America, Wall Street, and the press. For the next sixty years, that chastened generation managed to keep the fog of false hopes and bad credit at bay. Economist John Maynard Keynes emerged as the pied piper of a new school of economics that promised continuous economic growth without end. Keynes’s doctrine: When a business cycle peaks and starts its downward slide, one must increase federal spending, cut taxes, and lower short-term interest rates to increase the money supply and expand credit. The demand stimulated by deficit spending and cheap money will thereby prevent a recession. In 1932 this set of economic gambits was dubbed “reflation.”
The first Keynesian reflation was botched. To be fair, it was perhaps impractical under the gold standard, for by the time the Federal Reserve made its attempt to ameliorate matters, debt was already out of control. Historians argue whether the Federal Reserve and Congress did enough soon enough to slow the rate of debt liquidation at the time. Most agree that once the inflation rate turned negative, monetary stimulus via short-term interest-rate management was ineffective, since the Fed could not lower short-term rates below zero percent. The Bank of Japan found itself in a similar predicament sixty years later. Banks failed, credit contracted, and GDP shrank. The economy was running in reverse and refused to respond to Keynesian inducements. In 1933, President Franklin D. Roosevelt called in gold and repriced it, hoping to test Keynes’s theory that monetary inflation stimulates demand. The economy began to expand. But it was World War II that brought real recovery, as a highly effective, demand-generating, deficit-and-debt-financed public-works project for the United States. The war did what a flawed application of Keynes’s theories could not.
A few weeks after D-Day, the allies met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to determine the future of the international monetary system. It wasn’t much of a negotiation. Western economies were in ruins, and the international monetary system had been in disarray since the start of the Great Depression. The United States, now the dominant economic and military power, successfully pushed to peg the currencies of member nations to the dollar and to make dollars redeemable in American gold.
Americans could now spend as wisely or foolishly as our government policy decreed and, regardless of the needs of other nations holding dollars as reserves, print as many dollars as desired. But by the second quarter of 1971, the U.S. balance of merchandise trade had run up a deficit of $3.8 billion (adjusted for inflation)—an admittedly tiny sum compared with the deficit of $204 billion in the second quarter of 2007, but until that time the United States had run only surpluses. Members of the Bretton Woods system, most famously French President General Charles de Gaulle, worried that the United States intended to repay the money borrowed to cover its trade gap with depreciated dollars. Opposed to the exercise of such “exorbitant privilege,” de Gaulle demanded payment in gold. With the balance of payments so greatly out of balance, newly elected President Richard Nixon faced a run on the U.S. gold supply, and his solution was novel: unilaterally end the U.S. legal obligation to redeem dollars with gold; in other words, default.
More than a decade of economic and financial-market chaos followed, as the dollar remained the international currency but traded without an absolute measure of value. Inflation rose not just in the United States but around the world, grinding down the worth of many securities and brokerage firms. The Federal Reserve pushed interest rates into double digits, setting off two global recessions, and new international standards and methods for measuring inflation and floating exchange rates were established to replace the gold standard. After 1975, the United States would never again post an annual merchandise trade surplus. Such high-value, finished-goods-producing industries as steel and automobiles were no longer dominant. The new economy belonged to finance, insurance, and real estate—FIRE.
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FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals. With FIRE leading the way, the United States, free of the international gold standard’s limitations, now had great flexibility to finance its deficits with its own currency. This was “exorbitant privilege” on steroids. Massive external debts built up as trade partners to the United States, especially the oil-producing nations and Japan, balanced their trade surpluses with the purchase of U.S. financial assets. The motivation was in part political: the Saudis, Japanese, and Taiwanese hold a great portion of U.S. debt; not coincidentally, these nations receive military protection from the United States. The process of financing our deficit with private and public foreign funds became self-reinforcing, for if any of the largest holders of our debt reduced their holdings, the trade value of the dollar would fall—and with that, the value of their remaining holdings would be decreased. Worse, if not enough U.S. financial assets were purchased, the United States would be less able to finance its imports. It’s the old rule about bank debt, applied to international deficit finance: if you owe the banks $3 billion, the bank owns you. But if you owe the banks $10 trillion, you own the banks.
The FIRE sector’s power grew unchecked as the old manufacturing economy declined. The root of the 1920s bubble, it was believed, had been the conflicts of interest among banks and securities firms, but in the 1990s, under the leadership of Alan Greenspan at the Federal Reserve, banking and securities markets were deregulated. In 1999, the Glass-Steagall Act of 1933, which regulated banks and markets, was repealed, while a servile federal interest-rate policy helped move things along. As FIRE rose in power, so did a new generation of politicians, bankers, economists, and journalists willing to invent creative justifications for the system, as well as for the projects— ranging from the housing bubble to the Iraq war— that it financed. The high-water mark of such truckling might be the publication of the Cato Institute report “America’s Record Trade Deficit: A Symbol of Strength.” Freedom had become slavery; persistent deficits had become economic power.
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The bubble machine often starts with a new invention or discovery. The Mosaic graphical Web browser, released in 1993, began to transform the Internet into a set of linked pages. Suddenly websites were easy to create and even easier to consume. Industry lobbyists stepped in, pushing for deregulation and special tax incentives. By 1995, the Internet had been thrown open to the profiteers; four years later a sales-tax moratorium was issued, opening the floodgates for e-commerce. Such legislation does not cause a bubble, but no bubble has ever occurred in its absence.
Total market value: NASDAQ. 11% annual growth derived from pre-bubble valuation (peak occurred March 10, 2000, when the NASDAQ traded as high as 5132.52 and closed the day at 5048.62)
I had a front-row seat to the Internet-stock mania of the late 1990s as managing director of Osborn Capital, a “seed stage” venture-capital firm founded by Jeffrey Osborn. Venture-capital firms are defined by when, not where, they place their investments; a “seed stage” firm usually puts the first money into very young firms and takes an active role in that investment. Jeffrey Osborn was a senior executive at commercial Internet provider UUNet before and after the legislation passed. Prior to the legislation, bookings were less than $4 million a year; a few years later they were greater than $2 billion. with positions on the boards of more than half a dozen technology companies. I observed otherwise rational men and women fall under the influence of a fast-flowing and, it was widely believed, risk-free flood of money. Logic and historical precedent were pushed aside. I remember a managing partner of one firm telling me with certainty that if the company in which we’d invested failed, at least it had “hard assets,” meaning the notoriously depreciation-prone computer equipment the company had received in exchange for stock. A year after the bubble collapsed, of course, the market was flooded with such hard assets.
Deregulation had built the church, and seed money was needed to grow the flock. The mechanics of financing vary with each bubble, but what matters is that the system be able to support astronomical flows of funds and generate trillions of dollars’ worth of new securities. For the Internet, the seed money came from venture capital. At first, Internet startups were merely one part of a spectrum of enterprise-software and other technology industries into which venture capitalists put their money. Then a few startups like Netscape went public, netting massive returns. Such liquidity events came faster and faster. A loop was formed: profits from IPO investments poured back into new venture funds, then into new start-ups, then back out again as IPOs, with the original investment multiplied many times over, then finally back into new venture-capital funds.
The media stood by cheering, carrying breathless profiles of wunderkinder in their early twenties who had just made their first hundred million dollars; business publications grew thick with advertisements. The media barely questioned the fine points of the new theology. Skeptics were occasionally interviewed by journalists, but in general the public was exposed to constant reiterations of the one true faith. Government stood back—after all, there was little incentive for lawmakers to intervene. Members of Congress, who influence the agencies that oversee market-regulation functions, have never been unfriendly to windfall tax revenues, and the FIRE sector has very deep pockets. According to the donation-tracking website opensecrets.org, FIRE gave $146 million in political donations for the 2008 election cycle alone, and since 1990 more than $1.9 billion—nearly double what lawyers and lobbyists have donated, and more than triple the donations from organized labor.
Part of my job was to watch for the end-time, to maximize gains and guard the firm against sudden losses when the bubble finally popped. In March 2000, the signal arrived. One of our companies was investigating the timing of an IPO; the management team was hoping for April 2000. The representatives of one of the investment banks we talked to gave us a surprisingly specific recommendation that ran counter to advice offered by banks during the IPO-driven cycle of the preceding five years: they warned the company not to go public in April. We took the advice in the context of other indicators as a clear sign of a top, and over the next few months we liquidated stocks in public companies that we held as a result of earlier IPOs. Shortly thereafter, millions of investors with unrealized gains in mutual funds sold stock to raise enough cash to pay taxes on their capital gains. The mass selling set off a panic, and the bubble popped.
In a bubble, fictitious value. Fictitious value is the delta between historical-trend growth and growth brought on by asset hyperinflation. As an anonymous South Sea Bubble pamphleteer explained: “One added to one, by any rules of vulgar arithmetic, will never make three and a half; consequently, all the fictitious value must be a loss to some persons or other, first or last. The only way to prevent it to oneself must be to sell out betimes, and so let the Devil take the hindmost.” goes away when market participants lose faith in the religion—when their false beliefs are destroyed as quickly as they had been formed. Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.
The technology industry represents only a small fraction of the U.S. economy, but the effects of layoffs, cutbacks, and the collapsing stock market rippled through the economy and produced a brief national recession in the early part of 2001, despite a concerted effort by the Federal Reserve and Congress to avoid it. This left in its wake a crucial dilemma: how to counter the loss of that $7 trillion in fictitious value built up during the bubble.
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The Internet boom had been a matter of abstract electrons and monetized eyeballs—castles in the sky translated into rising share prices. The new boom was in McMansions on the ground—wood and nails, granite countertops. The price-inflation process was traditional as well: there was way too much mortgage money chasing not enough housing. At the bubble’s peak, $12 trillion in fictitious value had been created, a sum greater even than the national debt.
Total market value: Real estate. Actual market value from “Federal Reserve Flow of Funds Accounts of the United States.” Historical trend from Robert J. Schiller, Irrational Exuberance.
We certainly should have known better. Historically, the price of American homes has risen at a rate similar to the annual rate of inflation. As the Yale economist Robert Shiller has pointed out, since 1890, discounting the housing boom after World War II, that rate has been about 3.3 percent. Why, then, did housing prices suddenly begin to hyperinflate? Changes in the reserve requirements of U.S. banks, and the creation in 1994 of special “sweep” accounts, which link commercial checking and investment accounts, allowed banks greater liquidity—which meant that they could offer more credit. This was the formative stage of the bubble. Then, from 2001 to 2002, in the wake of the dot-com crash, the Federal Reserve Funds Rate was reduced from 6 percent to 1.24 percent, leading to similar cuts in the London Interbank Offered Rate that banks use to set some adjustable-rate mortgage (ARM) rates. These drastically lowered ARM rates meant that in the United States the monthly cost of a mortgage on a $500,000 home fell to roughly the monthly cost of a mortgage on a $250,000 home purchased two years earlier. Demand skyrocketed, though home builders would need years to gear up their production.
With more credit available than there was housing stock, prices predictably, and rapidly, rose. All that was needed for hypergrowth was a supply of new capital. For the Internet boom this money had been provided by the IPO system and the venture capitalists; for the housing bubble, starting around 2003, it came from securitized debt.
To “securitize” is to make a new security out of a pool of existing bonds, bringing together similar financial instruments, like loans or mortgages, in order to create something more predictable, less risk-laden, than the sum of its parts. Many such “pass-thru” securities, backed by mortgages, were set up to allow banks to serve almost purely as middlemen, so that if a few homeowners defaulted but the rest continued to pay, the bank that sold the security would itself suffer little—or at least far less than if it held the mortgages directly. In theory, risks that used to concentrate on a bank’s balance sheet had been safely spread far and wide across the financial markets among well-financed and experienced institutional investors. As happens with most bubbles, a perfectly good idea is taken to an extreme. In the case of the housing bubble, the new securitized debt product that drove the final stage—which has come to be known as the “subprime meltdown”—was the collateralized debt obligation (CDO). A CDO is a class of instrument called a credit derivative; specifically, a derivative of a pool of asset-backed securities. Parts of pools of asset-backed securities that were, for example, rated at a moderately high risk of default—junk grade, such as BB—were modeled, packaged into CDOs, and rated at lower risk-investment grades, such as AAA. These were used to finance the more creative mortgages—stated-income or “liar loans”—which we now hear are not quite living up to the issuers’ hopes.
The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults. Even after the faith that supported a bubble recedes, false beliefs continue to obscure cause and effect as the crisis unfolds.
Consider the chemical industry of forty years ago, back when such pollutants as PCBs were dumped into the air and water with little or no regulation. For years, the mantra of the industry was “the solution to pollution is dilution.” Mixing toxins with vast quantities of air and water was supposed to neutralize them. Many decades later, with our plagues of hermaphrodite frogs, poisoned ground water, and mysterious cancers, the mistake in that logic is plain. Modern bankers, however, have carried this mistake into the world of finance. As more and more loans with a high risk of default were made from the late 1990s to the summer of 2007, the shared level of credit risk increased throughout the global financial system.
Think of that enormous risk as ecomonic poison. In theory, those risk pollutants have been diluted in the oceanic vastness of the world’s debt markets; thanks to the magic of securitization, they are made nontoxic and so pose no systemic risk. In reality, credit pollutants pose the same kind of threat to our economy as chemical toxins do to our environment. Like their chemical counterparts, they tend to concentrate in the weakest and most vulnerable parts of the financial system, and that’s where the toxic effects show up first: the subprime mortgage market collapse is essentially the Love Canal of our ongoing risk-pollution disaster.
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Read the front page of any business publication today and you can see the mess bubbling up. In the United States, Merrill Lynch took a $7.9 billion hit from its mortgage investments and experienced its first quarterly loss since 2001; Morgan Stanley, Bear Stearns, Citigroup, along with many other U.S. banks, have all suffered major losses. The Royal Bank of Scotland Group was forced to write down $3 billion on credit-related securities and leveraged loans, and Japan’s Norinchukin Bank suffered $357 million in subprime-related losses in the six months prior to September 2007. Even more of this pollution will become manifest as home prices continue to fall.
The metaphor is not lost on those touched by debt pollution. In December 2007, Chip Mason of Legg Mason, one of the world’s largest money managers, said that the U.S. Treasury should put $20 billion into a “structured investment vehicles superfund” to boost investor confidence.
As more and more risk pollution rises to the surface, credit will continue to contract, and the FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s. Because all asset hyperinflations revert to the mean, we can expect housing prices to decline roughly 38 percent from their peak as they return to something closer to the historical rate of monetary inflation. If the rate of decline stabilizes at between 6 and 7 percent each year, the correction has about six years to go before things stabilize, leaving the FIRE economy in need of $12 trillion. Where will that money be found?
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Bubbles are to the industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly—the NASDAQ, for example, at 5,048 in March 2000, had recovered only half of its peak value going into 2007. When those trillions of dollars first die and go to money heaven, the whole economy grieves.
The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.
Our economy is in serious trouble. Both the production-consumption sector and the FIRE sector know that a debt-deflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.
We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.
There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.
There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. Wired magazine, returning to its roots in boosterism, put ethanol on the cover of its October 2007 issue, advising its readers to forget oil; NBC had a “Green Week” in November 2007, with themed shows beating away at an ecological message and Al Gore making a guest appearance on the sitcom 30 Rock. Improbably, Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of Amazon.com and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob. Other ventures—Lazard Capital Markets, Generation Investment Management, Nth Power, EnerTech Capital, and Battery Ventures—are funding an array of startups working on improvements to solar cells, to biofuels production, to batteries, to “energy management” software, and so on.
Total market value: Alternative energy and infrastructure. Estimated fictitious value of next bubble compared with previous bubbles.
The candidates for the 2008 presidential election, notably Obama, Clinton, Romney, and McCain, now invoke “energy security” in their stump speeches and on their websites. Previously, “energy independence” was more common, and perhaps this change in terminology is a hint that a portion of the Homeland Security budget will be allocated for alternative energy, a potential boon for startups and for FIRE.
More valuable than campaign rhetoric, however, is legislation. The Energy Policy Act of 2005, a massive bill known to morning commuters for extending daylight savings time, contained provisions guaranteeing loans for alternative-energy businesses, including nuclear-power technology. The bill authorizes $200 million annually for clean-coal initiatives, repeals the current 160-acre cap on coal leases, offers subsidies for wind energy and other alternative-energy producers, and promises $50 million annually, over the life of the bill, for a biomass grant program.
Loan guarantees for “innovative technologies” such as advanced nuclear-reactor designs are also at hand; a kindler, gentler nuclear industry appears to be imminent. The Price-Anderson Nuclear Industries Indemnity Act has been extended through 2025; the secretary of energy was ordered to implement the 2001 nuclear power “roadmap,” and $1.25 billion was set aside by the Department of Energy to develop a nuclear reactor that will generate both electricity and hydrogen. The future of transportation may be neither solar- nor ethanol-powered but instead rely on numerous small nuclear power plants generating electricity and, for local transportation, hydrogen. At the state and local levels, related bills have been passed or are under consideration.
Supporting this alternative-energy bubble will be a boom in infrastructure—transportation and communications systems, water, and power. In its 2005 report card, the American Society of Civil Engineers called for $1.6 trillion to be spent over five years to bring the United States back up to code, giving America a grade of “D.” Decades of neglect have put us trillions of dollars away from an “A.” After last August’s bridge collapse in Minnesota, it took only a week for libertarian Robert Poole, director of transportation studies for the Reason Foundation, to renew the call for “highway public-private partnerships funded by tolls,” and for Hillary Clinton to put forth a multibillion-dollar “Rebuild America” plan.
Of course, alternative energy and the improvement of our infrastructure are both necessary for our national well-being; and therein lies the danger: hyperinflations, in the long run, are always destructive. Since the 1970s, U.S. dependence on foreign energy supplies has become a major economic and security liability, and our superannuated roadways are the nation’s circulatory system. Without the efficient transit of gasoline-powered trucks laden with goods across our highways there would be no Wal-Mart, no other big-box stores, no morning FedEx deliveries. Without “energy security” and repairs to our “crumbling infrastructure,” our very competitiveness is at stake. Luckily, Al Gore will be making principled venture capital investments on our behalf.
The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations77. To create these valuations, I first examined the necessary market capitalization of existing companies; then, using the technology and housing bubbles as precedents, I estimated the number of companies needed to support the bubble. The model assumes the existence of nascent credit products that will eventually be deployed to fund the hyperinflation. While the range of error in this prediction is obviously huge, the antecedents—and more important, the necessity—for the bubble remain.: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.
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Word.
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