THE WAY OUT (AND WHY IT IS NOT CHOSEN)


 

A PARTICULARLY CONCISE STATEMENT OF THE CRISIS, AND HOW TO REMEDY IT. FOLLOWED BY TECHNICAL ADDENDA AND WHY OBAMA IS CHOSING THE WRONG STRATEGY.

Overview: This is a companion essay to Paul Krugman’s “Who’ll stop the pain?” (NYT, Feb. 20, 2009). As Krugman puts it: “The Obama administration’s policy initiatives will help in this difficult period — but they are intended to mitigate the slump, not end it. No doubt this recession will pass — but how, and when?”

This is not simply a credit crisis, it’s entangled with efficiency and energy crises. They all have to be addressed simultaneously, leading to counterintuitive strategies (rising some taxes). As usual, I propose the usual solution. In the addenda, I make some extremely specific recommendations, down to which technologies to push or transfer. So far Obama has chosen instead to continue the general path of fixing the broken, and vicious system many of his closest advisers have profited from (this is explained in the final addendum). 

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This is indeed Great Depression III. The (inflation adjusted) median income has been going down since 1998 (when Summers and Geithner were already in charge).

Understanding how one got there leads to the way out.

First,  of course, between 1989 and mid-1995, the United States of America owned asset management company, the Resolution Trust Corporation nationalized 747 banks (so called “Savings and Loans”) with total assets of $394 billion. Mr. Bill Seidman was in charge  of this. The average bank was kept in US government hands from three to four months during which time it was cleaned of its bad assets, reorganized, and finally sold. This was so successful that Sweden imitated the method, and later Japan resolved its decade long crisis by putting Mr. Seidman in charge of saving its own banking sector, after a decade slump. Why Mr. Obama did not follow the same strategy on day one is, at first sight, baffling (the mystery is elucidated in the last section of the addendum).

Instead the US credit market have been left in deep freeze, causing enormous damage to the world economy. Comparable damage in the past has led to world war. In a few weeks the situation has degraded to a level that is worse, in some ways, than the Great Depression II in the 1930s, the one that brought Nazism and World War Two.

Second, it would be better if Mr. Obama, after he finishes laughing about Sweden, would take a crash course on the Scandinavian banking crisis, and learn two things:

1) The way the Swedes and other Scandinavians solved their very similar banking crisis was by being ruthlessly efficient: they wanted their economy restarted ASAP, and the best way was to bring back to life the dying banks. So they nationalized, separated the bad assets, and the banks were functioning again. Then the now profitable banks were sold. The Swedes acted way early and swiftly: the bad loans were only 13% of GDP and they acted as the banks went below their capital requirements of 8%. The present situation in the USA is way worse: the bad loans approach 40% of GDP. And the sick banks, thanks to the huge leverage they used recently, on weird derivatives that don’t really exist, are probably in way worse shape than the Swedish banks were.

2) Scandinavia has the population of Canada, and was easily pulled out of its dive by the world economic expansion. Whereas the USA is huge and in free fall, and the EU is just as enormous, and shrinking about as fast. So nothing big and strong is going to come to the rescue of those two. Moreover the USA has united political command, with Obama as Lord and Master, whereas the Europeans are divided. The whole world is waiting for Obama to make miracles, but that will not happens as long as he listens to those among his associates who are mesmerized by banks (and future rich paybacks they envision for themselves?). 

It is conventional among American bankers to have mild contempt for Sweden, but the real GDP per person is higher than in the USA. Nevertheless, careful studies have shown that, to this day, Sweden is poorer than it would have been without crisis. The same hold all countries with similar crises. Real damage is made to the economy while the bank holding companies (the plutocrats) keep most taxpayer money for themselves.

So much for the conventional part of the present problem, the excess of credit. The USA had turned from a capitalist country to a creditist country, making bankers rich, and everyone poorer (see the movie “The International” for elaboration).

But the crisis detonated in 2008 after a run-up of energy prices, which forced the subprime tribe to choose between mortgage and forage. Meanwhile, and revealingly, housing prices were still going up in France. Why? Because the French economy is much more efficient than the US economy. The CO2 emissions of France are less than a third that of the USA, per person. The impact of high energy prices in France was not as hard.

This brings in both a complicating factor in the present crisis, and a solution. The crisis is compounded by LACK OF ENERGY EFFICIENCY. If the US economy rose suddenly from its ashes on its own, energy prices would immediately flare up again, and the economy would be placated again, as it was last summer. The solution, the only way to break the cycle, is to make the US economy much more efficient, ASAP.

So all efficient technologies have to be pushed, and will provide a lot of new work. This means solar, wind, grid, trains (light rail and transcontinental very high speed), biofuels (maybe cellulosic, better from sun and algae), nuclear (safe and closed cycle), and the most efficient car and plane technologies. All this will work only if energy is made expensive when it is not. So energy taxes have to be brought up (that is counterintuitive in a recession, but it is not exactly a recession as ever seen before).

This is a very heavy industry solution, a massive reindustrialization, the ultimate war against greenhouse heating. Even relaunching the nuclear industry safely will play an important role, because it will allow to coordinate a worldwide effort to make nuclear into something strictly civil (that means extremely strict worldwide inspections and drastic cut backs in nukes). If the greenhouse heating is not fought back soon, there will be world war. So, conceptually, fighting heating, recession, and war fits together.

The USA has domineering positions in some industries: planes, nanotechnology, biotech, and should push its advantage to the maximum in these sectors, to reestablish the balance of trade. Where it is weak (trains, cars), it should purchase European technology transfers (as Russia is doing with trains, China with planes, and Chrysler with Fiat). That would be quick and efficient, the technological equivalent of nationalization of zombie banks. General motors could be making high speed trains in months.

There are ways, but there is no time, It’s all about real infrastructure, and real efficiency, not the poverty of the illusion of money.

Patrice Ayme
http://patriceayme.com/

 

Addenda: TECHNICAL DETAILS: 1) The Swedish solution was similar to the US Resolution Trust Corporation (a “bad bank” that got rid of the bad assets). Not all big banks were nationalized in Sweden: one declined the government offer, and rose private capital. All banks did great, very quickly, and the crisis was over in two years.

2) Not only does Sweden have a higher GDP per person, but the effective GDP is much higher, a lot of services Americans have to pay for, coming for free in Sweden. GDP is a blunt and distorting instrument: it goes up in traffic jams. So a lot of the high US GDP per person is just high waste per person with lipstick.

3) Some giant French banks made profits in 2008. BNP saw its profits halved, but they were still three billion Euros. Societe Generale doubled its profits to two billion Euros. Giant insurer AXA (who owns Equitable in the USA) is still profitable. And so on. One large French bank () is sick, from having gorged itself on to many US derivatives. Another French bank wants to gobble that “Caisses d’Epargne”, but the later’s management, little interested by firing itself, has been dragging its feet, and the French government gave a deadline.

4) Coal is not an acceptable technology. Carbon capture and storage, as presently proposed, would make coal prohibitively expensive, and way too complicated to use. It consists in somehow capturing and liquefying the CO2, and then carrying it far away in trains. Then it would be injected, by very deep drilling, far from any city. A lot of the explosive power of volcanoes comes from CO2, that is why care has to be taken.

There maybe a solution for coal plants in the desert, by combining enormous emissions of CO2 that coal creates, with algae. Algae not only make excellent biofuel, but they absorb CO2 like crazy.  But that avenue has not been explored.

5) Coal is subsidized, because it does not have to pay for the gigantic damage it causes (let alone the thousands dying, from breathing and mining). The USA has 600 coal plants, and gets more than half of its electricity from coal (the world average is  40%). A lot of US production has been transferred to China, which has been building like one coal plant a week, to serve that demand. The Chinese are aware of the problem, because they find difficult to breathe and see. But of course, it’s a world problem: the greenhouse heating has been accelerating, with now methane eruption from melting permafrost. 

6) The USA has an “open” nuclear cycle: fuel is “burned” once, with extremely low efficiency, creating huge amounts of nuclear waste. The “closed” nuclear cycle recovers the partially “burned” fuel, and remixes it , to create new nuclear fuel (“MOX”: Mixed OXide). That MOX is then burned again and again. France pioneered  that advanced technology and uses it on all its reactors. France even dismantled American nuclear warheads, and made fuel out of it. France also made nuclear fuel that way for Japan and Germany. France has been building a plant in the USA to transform nukes into fuel. For some obscure reason,  pertaining to the US Congress, MOX is not allowed in US reactors.

7) The French company Areva makes the EPR, an advanced nuclear reactor. A young French communist mayor is very happy that his charming town by the sea will see the construction of the newest EPR. Sarkozy wants to build more, to “export electricity”, something France already does massively (through below the sea cables going to Britain). Siemens, which has part of the consortium making the EPR, wants to pull out, obviously to make its own, and sell them worldwide. Siemens already has profited greatly by competing with the French Alsthom in constructing very high speed trains. In other words, although they cooperate, France and Germany, compete ferociously in high technology. This is even more true with cars, where the German card is the highest quality, whereas the French have chosen extremely low CO2 emission. The French go to European authorities, push for ever lower CO2 emissions, the German, and mostly Daimler-Benz, scream, the CO2 emissions go down, and so on. This is good, because very low CO2 is what the world needs.

8] Sweden had decided, for various philosophical and technological reasons to abandon nuclear technology thirty years ago. No new reactors were supposed to be built, all the old ones, closed. Due to a completely changed situation and technology, following Italy, Sweden has now reverted itself, and will follow Finland (which is building a nuclear reactor, an EPR), and build new nuclear reactors. In the end, France’s long held argument that nuclear technology is clean, and a good weapon against greenhouse heating, has been followed.

9) France builds 40% of the vehicles of the planet with CO2 emissions of less than 125 grams of CO2 per kilometer, the soon coming newest European standards. The present requirements are 160 grams per km. The present US fleet average is 330 grams per kilometer.

10) Alsthom makes the very high speed trains TGV and the new AGV (they go faster than their Japanese competition). The AGV is supposed to operate more efficiently, at the higher speed of 225 miles per hour (360 kms per hour). Siemens has operated his own trains in regular operations in Spain at up to 400 kmh (250 mph). Alsthom, having bought an Italian company that made them, makes trains that lean in turns, allowing to go at high speeds without changing the tracks. Russia is buying a lot of these (and the technology will be transferred, according to a precise schedule, so the Russians will industrialize, as they will increasingly put Russian content in the trains; a similar agreement has been made with Siemens). 

11) WHY IS THE OBAMA ADMINISTRATION SO FRIENDLY TO HEDGE FUNDS, BANK HOLDING COMPANIES, AND PRIVATE EQUITY?

As the New York Times revealed (Feb. 20), the Obama administration hopes to encourage new lending by effectively subsidizing the profits of firms that serve as bankers to the banks, such as hedge funds. Guaranteed profits would be astronomical: 20%!

Is that change one can believe in?

The day after he was elected president, Obama went to work at a hedge fund in Chicago. Unbelievable, but true, according to press reports. Many of Obama closest advisors were made rich by the financial system as it is (Emanuel being an example). Some (Summers, Geithner) were causal agents that set up the financial system as it is, more than ten years ago. It is no wonder that they have decided to spend all their energy repairing the failed system. So there they are among the debris of the crash, hoping the debris will fly again, bringing gasoline to the smoldering ruins…

Basic fairness would require that many of these gentlemen observe that they are part of, and party to the problem, and to excuse themselves from counsel. But, immense profits for the few have created a firestorm of greed that has burned all and any normal human emotion, including basic decency. All they know is that they deserve their place at the trough.

As Barack Obama put it: “we have different traditions and cultures in this country”.

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PA

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