Update: Today, October 23, Alan Greenspan testified before Congress about how shocked he was at the explosion of this financial crisis. He also laid blame at the feet of investors, insufficient vetting of borrowers, and faulty credit ratings issued to many sub-prime mortgage backed securities. Anyone who contests my previous article now has to argue against Alan Greenspan as well.
We are in the home stretch now, gringos! For Barack Obama, it looks quite promising. Any benefit he had last week is now magnified by the endorsement of Colin Powell -- all fence stradlers are now noticing severe gaols pushing them to the left. The right is scrambling desperately: claiming he's a socialist, he cavorts with terrorists, and we just don't know enough about his past (whatever the hell that means).
But all these claims have me wondering...where's Bin Laden? This time in 2004, the race was just barely tilting toward John Kerry when (to the delight of Bush loyalists) Bin Laden was on TV telling us that no matter who we elect, we're still on his shit-list. I couldn't help but feel our electorate was the object of mass reverse-psychology: telling us it didn't matter, in a way that made it matter very much.
Fear makes people irrational and this stunt was no exception. Bin Laden understood the dynamic of our political leanings and he exploited the perceived weakness of John Kerry to encourage people to vote for Bush by reminding us that he had gone nowhere. If anything this should have been the clearest sign of failure of Bush's first term, the man we spent so much time, effort, and cash to nab is still at large -- and he feels secure enough to flaunt it. While we can't say definitively what would have happened under a Kerry administration, it seems obvious that Bin Laden was far more comfortable with the devil he knew.
Think about the current perceived weaknesses of each candidate: Obama/National Security and McCain/Economy. To the degree that one weakness is more pronounced as an issue the electorate moves to who they perceive as being strongest in that arena. As long as we're talking about the economy, Obama wins. If we're talking about national security, McCain wins.
To me, it's obvious that McCain has been trying to change the subject for weeks -- nonsense about Bill Ayers, ACORN, and so on...But this all seems to fall into the same black hole gobbling up the Dow. McCain needs an external factor to change the conversation from the economy to security. McCain needs a terrorist attack equal in scope and impact to 9/11 between now and the election. What will be lacking in the public mind, should such an event occur, is the degree to which an Al-Qaida attack would be equal to an Al-Qaida endorsement of Senator McCain.
Let's look at the benefits to Al-Qaida of a McCain administration:
1) Continued Economic Strife (this will be the case no matter who's elected).
2) An Energy Platform built around Oil -- Al-Qaida funding does come from OPEC nations. Greater US consumption of oil means more money for Al-Qaida.
3) John McCain's apparent disliking for the UN, the EU, and real diplomacy will keep the West fractured in the face of this grave threat.
4) If McCain does win (assuming the numbers today are right), it will be by a VERY thin margin -- and because of the divisive nature of his campaign will leave our nation more fractured.
With Obama, we would be trimming our dependence on oil and would be reinvigorating the image of the US around the world (McCain simply cannot achieve this, see #3 above). And if Obama wins (assuming the numbers today are right) he will do so by a fairly substantial margin and a sizeable public mandate.
This is not to say we've seen the last of Al-Qaida. We will almost certainly face an attack within the next year -- this has been their MO for the past 15 years. From the first World Trade bombing in 1993 (one month after Clinton's first inauguration, when republicans argued against his preparedness), the embassy bombings in Kenya and Tanzania (3 months before mid-term elections when republicans accused Clinton of issuing military strikes to divert attention from the Lewinsky scandal), USS Cole (in the months leading up to the 2000 elections, when Clinton did not respond for fear that he would reap the same criticisms as in 1998), and 9/11/2001 (nine months after Bush's first inauguration).
Al-Qaida's strategic move during the next presidential term will be to make a President Obama look ill-prepared and a President McCain to look steadfast and resolute -- those strategies are what will further their objectives to destroy the west.
Thursday, October 23, 2008
Sunday, October 12, 2008
Role of Fannie and Freddie in Subprime Crisis
It's Sunday morning and I've just finished watching "Sunday Morning" with Charles Osgood. This morning there was an Op-Ed piece by Ben Stein discussing the current financial meltdown resulting from Mortgage Backed Securities (MBS) particularly those weighted in the subprime category. An economist first, and a Republican second, Mr. Stein wove a tapestry of blame that implicated nearly everyone connected to the mortgage industry -- including deregulators (he even conceded that perhaps anti-regulators is more accurate) in Washington D.C. I thought it was fair...for the most part.
Not politically uncharacteristic, Mr. Stein launched the first rhetorical cruise missile at (paraphrasing) liberals who encouraged lending to those borrowers who could not make good. While I do not deny SOME causal relationship between this and the meltdown, I'm not convinced that it is a greater cause or, for that matter, even equivalent to the lack of regulation consistent with this administration (and Bill Clinton's) and the 12 of the last 14 years in which republicans have controlled Congress.
The first charge against liberals goes back to the Carter administration and the passage of the Community Reinvestment Act (CRA) of 1977. Conservatives (such as Larry Kudlow and George Will) like to say this is the "root" of the problem (I think irresponsible lending is the "root", but I digress). Perhaps the most startling aspect of this charge is that this crisis, allegedly caused by the CRA, was 30 years in the making -- not to mention that the U.S. enjoyed the lowest foreclosure rate in its history for nearly 25 of those 30 years of the CRA's existence. Conservatives conveniently and irrationally bestow this credit upon Ronald Regan.
According to Ellen Seidman, Executive Vice President for National Policy and Partnership Development at ShoreBank Corporation and Director of the Financial Services and Education Project at the New America Foundation, the record enforcement of the CRA led to responsible lending resulting in the relatively low foreclosure rate during its exitence but:
CRA enforcement became a lower priority for bank regulators after 2001. My successor at the Office of Thrift Supervision, in fact, led an effort-eventually thwarted-to unilaterally loosen CRA regulations for institutions with more than $1 billion in assets. See 70 Fed. Reg. 10023. Nevertheless, CRA regulations were eased more generally in 2005. See 70 Fed. Reg. 44256. (http://www.newamerica.net/blog/asset-building/2008/no-larry-cra-didn-t-cause-sub-prime-mess-3210).
It's quite obvious that the lack of enforcement of CRA lending provisions (which unarguably occurred during the Bush Administration) is clearly closer to the explosion of the mortgage crisis and therefore warrants far more blame than the CRA itself. It's tantamount to blaming the Social Security crisis on FDR simply because he founded the program -- when a program is in crisis, it's hardly convincing to lay blame at its existence more so than its management.
The follow-up allegation to this initial charge (one spouted by John McCain in the second debate) is that Fannie Mae and Freddie Mac caused this crisis. This very statement shows just how little Sen. McCain understands how the two lenders operate let alone their association with this particular crisis. Allow me to lay out as best I can the Fannie/Freddie role in this industry, then I will mark the areas for which they were at fault.
First, Fannie/Freddie are not primary mortgage lenders -- meaning that no borrower ever goes to Fannie/Freddie and says "I want a mortgage." If one believes, as I do and as conservatives rightly state, that the root of this problem is borrowers taking out loans they cannot afford -- then, it is totally inconsistent to say Fannie/Freddie are a "root" cause since they are NOT a primary lender. It, however, is perfectly consistent to say the lender or, perhaps even more so, the lender's loan processing company (as well as irresponsible borrowers) are root causes.
But just because Fannie/Freddie are not root causes doesn't mean they're entirely innocent either. Fannie/Freddie are what's known as "second-tier mortgage lenders" and it breaks down like this:
Not politically uncharacteristic, Mr. Stein launched the first rhetorical cruise missile at (paraphrasing) liberals who encouraged lending to those borrowers who could not make good. While I do not deny SOME causal relationship between this and the meltdown, I'm not convinced that it is a greater cause or, for that matter, even equivalent to the lack of regulation consistent with this administration (and Bill Clinton's) and the 12 of the last 14 years in which republicans have controlled Congress.
The first charge against liberals goes back to the Carter administration and the passage of the Community Reinvestment Act (CRA) of 1977. Conservatives (such as Larry Kudlow and George Will) like to say this is the "root" of the problem (I think irresponsible lending is the "root", but I digress). Perhaps the most startling aspect of this charge is that this crisis, allegedly caused by the CRA, was 30 years in the making -- not to mention that the U.S. enjoyed the lowest foreclosure rate in its history for nearly 25 of those 30 years of the CRA's existence. Conservatives conveniently and irrationally bestow this credit upon Ronald Regan.
According to Ellen Seidman, Executive Vice President for National Policy and Partnership Development at ShoreBank Corporation and Director of the Financial Services and Education Project at the New America Foundation, the record enforcement of the CRA led to responsible lending resulting in the relatively low foreclosure rate during its exitence but:
CRA enforcement became a lower priority for bank regulators after 2001. My successor at the Office of Thrift Supervision, in fact, led an effort-eventually thwarted-to unilaterally loosen CRA regulations for institutions with more than $1 billion in assets. See 70 Fed. Reg. 10023. Nevertheless, CRA regulations were eased more generally in 2005. See 70 Fed. Reg. 44256. (http://www.newamerica.net/blog/asset-building/2008/no-larry-cra-didn-t-cause-sub-prime-mess-3210).
It's quite obvious that the lack of enforcement of CRA lending provisions (which unarguably occurred during the Bush Administration) is clearly closer to the explosion of the mortgage crisis and therefore warrants far more blame than the CRA itself. It's tantamount to blaming the Social Security crisis on FDR simply because he founded the program -- when a program is in crisis, it's hardly convincing to lay blame at its existence more so than its management.
The follow-up allegation to this initial charge (one spouted by John McCain in the second debate) is that Fannie Mae and Freddie Mac caused this crisis. This very statement shows just how little Sen. McCain understands how the two lenders operate let alone their association with this particular crisis. Allow me to lay out as best I can the Fannie/Freddie role in this industry, then I will mark the areas for which they were at fault.
First, Fannie/Freddie are not primary mortgage lenders -- meaning that no borrower ever goes to Fannie/Freddie and says "I want a mortgage." If one believes, as I do and as conservatives rightly state, that the root of this problem is borrowers taking out loans they cannot afford -- then, it is totally inconsistent to say Fannie/Freddie are a "root" cause since they are NOT a primary lender. It, however, is perfectly consistent to say the lender or, perhaps even more so, the lender's loan processing company (as well as irresponsible borrowers) are root causes.
But just because Fannie/Freddie are not root causes doesn't mean they're entirely innocent either. Fannie/Freddie are what's known as "second-tier mortgage lenders" and it breaks down like this:
- Borrower applies for a mortgage.
- Something comes up that prevents the lender from extending credit to that borrower.
- Yet borrower qualifies for assistance from Fannie/Freddie.
- Fannie/Freddie subsidize a portion of the financing extended to the borrower for the purpose of shielding that lender from risk (something that has been going on since 1968).
- Fannie/Freddie then, once all the papers are signed, buy the mortgage debt from the lending institution.
- The lender, or sometimes a third party, owns the payment management side and charges a fee to Fannie/Freddie for this service (this too has been the case since 1968).
So Fannie/Freddie do not vet any borrowers, yet they do have standards -- standards that admittedly were loosened under the Clinton administration. So if Fannie/Freddie don't vet any borrowers who does the vetting? Either the lender or the loan processing company does, and Fannie/Freddie take them at their word - to which the lenders swear under penalty of perjury. If a lender lies to Fannie/Freddie about the credit worthiness of a borrower, that constitutes fraud.
So Fannie/Freddie then are victims too? Well, yes and no. It's entirely possible that they were duped by lenders and this is under investigation by the FBI. However, the FBI is also investigating them for doing the same thing in turn to other investors buying their MBSs. This is where things get interesting: while Fannie/Freddie were getting clobbered from these bad debts, they decided to sell them off which, in and of itself, isn't necessarily wrong -- asset liquidation is a basic part of any financial strategy. What they may have done and what they're being investigated for is having bundled these bad mortgages together and sold them off to investors all around the world under the false pretense that these securities, like T-Bills, were guaranteed by the Federal Government. (For a better understanding check out Jim Jubak on MSN.)
Now, that's pretty damn serious!! If you don't understand why, it's nothing to be ashamed of, but to help I'll refer to Peter Orszag, Director of the Congressional Budget Office, who stated on October 9 that the saving grace here is that people are still willing to lend to us. This salvation may have been catastrophically absent had the Federal Government not stepped in to comandere Fannie/Freddie. If Fannie/Freddie had been permitted to fail, the U.S. credit rating would have plummeted, and that would have been followed by a whole host of other financial catastrophes far worse than what we've seen thus far.
So Fannie/Freddie are hardly blameless for the exponential growth of this problem but they are quite far from ground zero. And what would that be? Well, nobody seems to be saying it yet but it's a combination between the way Credit Bureaus assess the credit worthiness of borrowers and the way lenders try to justify risky lending with high (and occasionally usurous) interest rates. This fundamental question has been begged: How does one quantifiably justify risk?
The next concentric circle falls to the lenders who bundled these mortgages, gave them bogus credit ratings, and sold them off to investors or second-tier lenders like Fannie/Freddie. Then come the insurance companies who over-issued credit default swaps against these MBSs without the assets to back them up. (Check out this link where Paul Solman of the Newshour explains the credit default swap http://www.pbs.org/newshour/video/module.html?mod=0&pkg=7102008&seg=3). And then, every investor who sold an MBS while fraudulently boosting its credit rating. Finally, lack of regulation (see http://seekingalpha.com/article/98651-don-t-blame-deregulation-for-this-crisis-it-s-all-about-lack-of-regulation?source=wl_sidebar).
For more info about the misdirected blame on Fannie/Freddie see: http://seekingalpha.com/article/98533-fannie-and-freddie-did-not-cause-this-crisis?source=wl_sidebar
Wednesday, October 8, 2008
The Interests -- Energy Policy
This will be my third and final installment for "The Interests" series. Some readers may ask why am I not going to discuss healthcare, and the reason is because I'm still early on in the learning process. I do not yet feel competent enough to write on how to fix a problem I barely understand and it will probably take nearly eight years before I do feel competent enough -- it took me eight years to feel confident about Economics, Foreign Policy, and Terrorism. And one thing I do know about healthcare is that, believe it or not, it is far more complicated than anyone seems willing to admit. It makes the subprime mortgage crisis look like a game of tic-tac-toe. So I will defer healthcare for a later date -- certainly post-election and post-inauguration. If anyone is kind enough to give me some fundamentals, I'd be grateful.
Energy
Well, I have saved the best for last...because this is the key to American prosperity and hegemony for the next decade and, quite likely, the remainder of this century. As with many complicated issues of public policy, history is the best consultant. I believe it was Mark Twain who said: "History doesn't repeat itself, but it does rhyme." And since we like to consult history in multiples of ten, let's start with the first decade of the 20th century. This is when the US and Great Britain enterred the modern world light years ahead of everybody else.
What allowed this to occur? Interestingly enough, it was the invention of the electric light bulb in 1879. Prior to the electric light bulb, people lit their homes with kerosene lamps. Kerosene was produced through the refinement of crude oil -- a, and in many ways still, mysterious substance discovered in Titusville, PA in 1859 (some say sooner but the Drake Well in Titusville was the first well discovered on purpose). Kerosene remained the primary commodity for the lighting of residential structures as we approached the 20th century. And as early adopters invested in infrastructure (something encouraged by governments), eventually the light bulb overtook kerosene as the primary commodity.
Knowing where the electric innovation was leading, John D. Rockefellar formed the Standard Oil Trust in 1882 and R&D began (though it may have already been in place) for the purpose of transforming crude oil from a means for residential lighting to a means for more efficient transportation. In 1907, the first gasoline station opens up in St. Louis (see Daniel Yergin's The Prize).
What's important to realize here is that these changes did not occur in the vaccuum of a "free" market. Sure, private innovation drove the change but public governance is what brought the idea to reality. Without adequate patent and trade laws, this innovation will likely have died in a market ruled by the oil monopoly's iron fist. The other big player in the way of policy was the Sherman Anti-Trust Act under which Standard Oil was dissolved in 1911. This is an example of government intervention freeing up the market place as opposed to the deregulation which freezes the market by sealing it in the hands of private interests.
Another monumental event occurred in 1911 -- Winston Churchill became First Lord of Admiralty. What did he do? Foreseeing a major continental conflict, Churchill mandated an initiative to convert the Royal Navy from a coal-powered fleet to a diesel-powered fleet. This ensured naval prowess at a time when the British Empire was waning.
In keeping with the spirit of Mr. Twain's insight let us now review the differences and the similarities between the conditions now and those of a century ago:
Similarities
Innovation: We are now in a phase of innovation as we were when Thomas Edison invented the light bulb. It's important to realize that while Thomas Edison receives a great deal of credit for his discovery, he wasn't the only one looking for an electric solution to the demand for artificial lighting. He was part of an army of innovators. Today, we have a similar situation. Scientists all over the globe are looking for solutions to our energy crisis from carbon sequestration technology, to carbon neutral fuel synthetics, to windmills, to solar power -- there is a race for the answer and it is competitive.
State of the Market: Then, as now, there is a peculiar desire among those with an advantage to maintain the status quo. Some may think I'm talking about Big Oil...strangely I'm not. I'm referring to OPEC and Russia. Now, to some degree Big Oil is trying to stall things (i.e. lobbying in opposition to tax credits for companies trying to develop alternative fuels -- though, while this is bad, they are not doing so to keep us addicted to oil but for them to get in on the ground floor of the alternatives which they view as inevitable). If you have a minute, go to MSN.com and read an article by Jim Jubak where he posits the end of Exxon.
How does OPEC and Russia stall this innovation? Well, it's a complicated line of reasoning but it goes like this -- earn the cash, finance the debt, collect the interest, contain the supply. Both OPEC and Russia possess massive reserves of US currency. Rather than hold the cash, they buy up bonds to finance our national debt, they then cash in those bonds to (you guessed it) hold more cash...and the cycle goes on ad infinitum. What does this have to do with stifling the growth of alternative fuels? Nothing directly -- but, together, the two entities control 2/3 of the world's supply of crude. Now, they must do two (seemingly conflicting) things -- 1.) Make it scarce -- by containing the supply, they can undermine buyer power in commodity futures markets and thus control price. 2.) Preach abundance -- by suggesting there's more to be had and that larger profit margins mean greater cost-reduction investment down the line and buyers continue to have faith in the cyclical nature of commodities markets. This is the new supply/demand law -- when demand is high, gradually increase available supplies but never to the point where you undermine your price strategy. It is by tying up capital that these entities skew the cost benefit analysis of investment in alternatives.
Hegemony at Stake: When Churchill converted the Royal Navy to diesel, he understood that he would be at a major disadvantage if he did not. The more we are dependent on oil, at this moment, the more we are at the diplomatic mercy of Russia and OPEC (which includes Iran and Venezuela). If we can succeed in building the proper infrastructure for a transportation fuel other than oil, we can regain our global hegemony.
Differences
Innovation: The difference here is that the stakes are much higher. Russia is moving very quickly to contain our influence in the world, what's more in our own hemisphere with emerging relationships with Venezuela, Bolivia, and Nicaragua (again). Petrodollars also fund madrassahs churning out the next generation of jihadists. Climate change -- enough said. If you don't buy into climate change, consider a resurgent Soviet Union and terrorism -- they are convincing enough on their own.
State of the Market: Globalization today is far more fast-paced than the globalization in the first decade of the 20th century -- the IT revolution bears the blame/credit for that. Also, to a large extent, governments have been sitting out as private industry has built bridges without regard to sovereignty (though government now seems to be getting rushed back into the game to stunt the financial crisis).
If one good thing can come from this government reinsertion, it's that it can actually bring about the coordination necessary to establish an infrastructure that will make the next phase of our energy sector a reality -- the non-fossil fuel revolution. Government was far more involved in our growing energy sector in the early 1900s than now.
Hegemony: Energy innovation has always been a strategic move and has never offered an immediate benefit. It takes time. The future of our hegemony depends on alternatives to oil. That is an unavoidable fact. Further dependence on oil, as stated before, digs us into a diplomatic hole when it comes to dealing with oil supplying nations. This is why a "drill, baby, drill" energy policy is not just wrong, but disastrous. I define a decision as "wrong" when our desitination is straight ahead, and we turn right or left. I define a decision as "disastrous" when our destination is straight ahead, and we do an about face. "Drill, baby, drill" is an about face -- not only is it wrong, but it's obviously wrong.
Some say that if we drill off-shore and in ANWR, we can compete with Russia and OPEC. But with only 3% of the world's supply sitting their, we barely make a dent in our own consumption let alone that of China and India. What's more is that there are plenty of US oil companies that drill for oil all around the world and we are still small potatoes compared to Russia and OPEC -- so the allegation that a 3% increase in supply will make any meaningful difference is absurd.
Are there holes in Barrack Obama's plans, of course -- nobody's perfect. One thing is I'd like to see less of is a focus on food-based fuels like ethanol. It says something when a society is willing to burn necessities to sustain luxuries. It's tough for a politician to speak against ethanol, especially one that's trying to win Iowa. But I'll forgive him on this, if it means the alternative is having a president who thinks we can simply drill our way out of this problem. If there's one thing the W presidency has taught us, it's to be suspicious of simple solutions to complex problems.
Energy
Well, I have saved the best for last...because this is the key to American prosperity and hegemony for the next decade and, quite likely, the remainder of this century. As with many complicated issues of public policy, history is the best consultant. I believe it was Mark Twain who said: "History doesn't repeat itself, but it does rhyme." And since we like to consult history in multiples of ten, let's start with the first decade of the 20th century. This is when the US and Great Britain enterred the modern world light years ahead of everybody else.
What allowed this to occur? Interestingly enough, it was the invention of the electric light bulb in 1879. Prior to the electric light bulb, people lit their homes with kerosene lamps. Kerosene was produced through the refinement of crude oil -- a, and in many ways still, mysterious substance discovered in Titusville, PA in 1859 (some say sooner but the Drake Well in Titusville was the first well discovered on purpose). Kerosene remained the primary commodity for the lighting of residential structures as we approached the 20th century. And as early adopters invested in infrastructure (something encouraged by governments), eventually the light bulb overtook kerosene as the primary commodity.
Knowing where the electric innovation was leading, John D. Rockefellar formed the Standard Oil Trust in 1882 and R&D began (though it may have already been in place) for the purpose of transforming crude oil from a means for residential lighting to a means for more efficient transportation. In 1907, the first gasoline station opens up in St. Louis (see Daniel Yergin's The Prize).
What's important to realize here is that these changes did not occur in the vaccuum of a "free" market. Sure, private innovation drove the change but public governance is what brought the idea to reality. Without adequate patent and trade laws, this innovation will likely have died in a market ruled by the oil monopoly's iron fist. The other big player in the way of policy was the Sherman Anti-Trust Act under which Standard Oil was dissolved in 1911. This is an example of government intervention freeing up the market place as opposed to the deregulation which freezes the market by sealing it in the hands of private interests.
Another monumental event occurred in 1911 -- Winston Churchill became First Lord of Admiralty. What did he do? Foreseeing a major continental conflict, Churchill mandated an initiative to convert the Royal Navy from a coal-powered fleet to a diesel-powered fleet. This ensured naval prowess at a time when the British Empire was waning.
In keeping with the spirit of Mr. Twain's insight let us now review the differences and the similarities between the conditions now and those of a century ago:
Similarities
Innovation: We are now in a phase of innovation as we were when Thomas Edison invented the light bulb. It's important to realize that while Thomas Edison receives a great deal of credit for his discovery, he wasn't the only one looking for an electric solution to the demand for artificial lighting. He was part of an army of innovators. Today, we have a similar situation. Scientists all over the globe are looking for solutions to our energy crisis from carbon sequestration technology, to carbon neutral fuel synthetics, to windmills, to solar power -- there is a race for the answer and it is competitive.
State of the Market: Then, as now, there is a peculiar desire among those with an advantage to maintain the status quo. Some may think I'm talking about Big Oil...strangely I'm not. I'm referring to OPEC and Russia. Now, to some degree Big Oil is trying to stall things (i.e. lobbying in opposition to tax credits for companies trying to develop alternative fuels -- though, while this is bad, they are not doing so to keep us addicted to oil but for them to get in on the ground floor of the alternatives which they view as inevitable). If you have a minute, go to MSN.com and read an article by Jim Jubak where he posits the end of Exxon.
How does OPEC and Russia stall this innovation? Well, it's a complicated line of reasoning but it goes like this -- earn the cash, finance the debt, collect the interest, contain the supply. Both OPEC and Russia possess massive reserves of US currency. Rather than hold the cash, they buy up bonds to finance our national debt, they then cash in those bonds to (you guessed it) hold more cash...and the cycle goes on ad infinitum. What does this have to do with stifling the growth of alternative fuels? Nothing directly -- but, together, the two entities control 2/3 of the world's supply of crude. Now, they must do two (seemingly conflicting) things -- 1.) Make it scarce -- by containing the supply, they can undermine buyer power in commodity futures markets and thus control price. 2.) Preach abundance -- by suggesting there's more to be had and that larger profit margins mean greater cost-reduction investment down the line and buyers continue to have faith in the cyclical nature of commodities markets. This is the new supply/demand law -- when demand is high, gradually increase available supplies but never to the point where you undermine your price strategy. It is by tying up capital that these entities skew the cost benefit analysis of investment in alternatives.
Hegemony at Stake: When Churchill converted the Royal Navy to diesel, he understood that he would be at a major disadvantage if he did not. The more we are dependent on oil, at this moment, the more we are at the diplomatic mercy of Russia and OPEC (which includes Iran and Venezuela). If we can succeed in building the proper infrastructure for a transportation fuel other than oil, we can regain our global hegemony.
Differences
Innovation: The difference here is that the stakes are much higher. Russia is moving very quickly to contain our influence in the world, what's more in our own hemisphere with emerging relationships with Venezuela, Bolivia, and Nicaragua (again). Petrodollars also fund madrassahs churning out the next generation of jihadists. Climate change -- enough said. If you don't buy into climate change, consider a resurgent Soviet Union and terrorism -- they are convincing enough on their own.
State of the Market: Globalization today is far more fast-paced than the globalization in the first decade of the 20th century -- the IT revolution bears the blame/credit for that. Also, to a large extent, governments have been sitting out as private industry has built bridges without regard to sovereignty (though government now seems to be getting rushed back into the game to stunt the financial crisis).
If one good thing can come from this government reinsertion, it's that it can actually bring about the coordination necessary to establish an infrastructure that will make the next phase of our energy sector a reality -- the non-fossil fuel revolution. Government was far more involved in our growing energy sector in the early 1900s than now.
Hegemony: Energy innovation has always been a strategic move and has never offered an immediate benefit. It takes time. The future of our hegemony depends on alternatives to oil. That is an unavoidable fact. Further dependence on oil, as stated before, digs us into a diplomatic hole when it comes to dealing with oil supplying nations. This is why a "drill, baby, drill" energy policy is not just wrong, but disastrous. I define a decision as "wrong" when our desitination is straight ahead, and we turn right or left. I define a decision as "disastrous" when our destination is straight ahead, and we do an about face. "Drill, baby, drill" is an about face -- not only is it wrong, but it's obviously wrong.
Some say that if we drill off-shore and in ANWR, we can compete with Russia and OPEC. But with only 3% of the world's supply sitting their, we barely make a dent in our own consumption let alone that of China and India. What's more is that there are plenty of US oil companies that drill for oil all around the world and we are still small potatoes compared to Russia and OPEC -- so the allegation that a 3% increase in supply will make any meaningful difference is absurd.
Are there holes in Barrack Obama's plans, of course -- nobody's perfect. One thing is I'd like to see less of is a focus on food-based fuels like ethanol. It says something when a society is willing to burn necessities to sustain luxuries. It's tough for a politician to speak against ethanol, especially one that's trying to win Iowa. But I'll forgive him on this, if it means the alternative is having a president who thinks we can simply drill our way out of this problem. If there's one thing the W presidency has taught us, it's to be suspicious of simple solutions to complex problems.
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