The Corpus Callosum

I’m sure I am not the only one who was underwhelmed by the series of
Presidential debates.  Here is what the candidates and the
moderators forgot…


1) Regarding energy problems:  Government should act more
swiftly to promote solar and wind installations.
 Specifically,
they need to do more to promote small, distributed installations.
 Because of economy of scale, coal, natural gas, and nuclear
power
generation does not scale down very well.  Wind and especially
solar power can be scaled down reasonably .  This is
not merely
a question of where the power will come from; it is a question of who
controls the power, and how it is distributed.

One of the problems we will face, is the poor state of the electrical
grid.  Having more small, distributed power generation could
reduce the need for large, expensive, and vulnerable transmission
lines.  I know someone will comment, “but that won’t solve the
problem.”  True, it will not.  But there is no
one
thing that will solve the problem.  If there
were, we’d be doing it.  

Decentralizing the generation of power will improve supply and
reliability, and buy us a little time to work on more definitive
solutions.  Distributed systems are not popular, because no
single
entity can control them.  Too bad.  

Also, nobody mentioned peak oil.   It is one of the href="http://www.theoildrum.com/node/4643">defining
challenges of our time.
 It sure would be nice to see that at least one candidate
understands the issue, or at least knows how fragile our energy
delivery system is.  For example, did you know that if
everyone in
the country simultaneously topped off their gas tanks, it would href="http://www.youtube.com/watch?v=0Hrpv21Ubf8">completely
exhaust our supply of stored gasoline?  Do either of
the candidates know that?

The entire discussion of offshore drilling showed that both candidates
are at least three weeks
behind the times in their understanding of the issue.  Neither
seems to appreciate the fact that the credit crunch is going to
href="http://money.cnn.com/2008/10/14/news/cost_of_drilling/index.htm">severely
limit the ability of energy companies to engage in the large
capital expenditures necessary for development of href="http://www.scandoil.com/moxie-bm2/news/spot_news/oilex-weighs-credit-crunch-sevan-delays.shtml">oil
and href="http://www.platts.com/Natural%20Gas/News/6959653.xml?src=Natural%20Gasrssheadlines1">gas
fields.   href="http://www.nationalpost.com/news/canada/story.html?id=863968">Development
of oil sands may become economically unfeasible.

One of the candidates has mentioned the role of conservation, but
neither mentioned the need to improve our railroad system.
 That
is going to be important, and it would be much better to do it now, and
get the savings and the employment benefits now.

2) How will we balance the need for national security with the
expectation of civil rights?  No one asked that, but we need
an
answer.  The answer is this: first, we need to understand that
the
function of national security is to protect people, their property, and
their money.  Anything that threatens those things is a threat
to
national security.  So quit worrying about the unlikely things
that cost a lot to address.  Funny thing: if you do that,
there is
no need to fret about civil liberties.  

3) To the extent that deregulation of the financial system is a
problem, what specific regulations would you propose for financial
institutions? href="http://market-ticker.denninger.net/archives/2008/09/26.html">That’s
easy.
 Limit leverage to no more that 12:1. Require public reporting
of
all level III assets, along with the methodology used to compute their
value, and disallow “off balance-sheet” assets.  Require
credit
default swaps to be regulated like insurance.  Disallow
“over-the-counter” (really under-the counter)
securities transactions.  All such transactions should take
place in an open marketplace.  

In other words, get rid of the shadow financial system, and get back to
prudent banking.

Oh, and while you are at it, require that institutions that originate
loans maintain some degree of risk if the loans are not paid back.
 As pointed out by href="http://delong.typepad.com/sdj/2008/09/how-did-we-get.html"
rel="tag">Brad DeLong, attempting to come up with
a succinct explanation:

Well, because the investors and creditors did not do
their
due diligence and check that the banks that were the ultimate holders
of derivative securities had done their due diligence and checked that
the financiers who had created the derivatives had done their due
diligence and checked that the purchasers of the securities had done
their due diligence and checked that securitizers had done their due
diligence and checked that the lenders had done their due diligence and
checked that the home buyers had done their due diligence and checked
that they could afford their mortgages if house prices stopped going up.

Catastrophic failures of risk management at seven
different points along the chain–any one of which
would have kept us out of this current mess. [emphasis added]

Neither candidate articulated a clear understanding of href="http://www.theoildrum.com/node/4629">the origin of the
financial crisis.  The problem was not caused by
falling home prices.  It was caused by the fact that house
prices continued to rise, while incomes did not keep up
.
 Excessive and href="http://www.marketwatch.com/news/story/us-charges-over-400-defendants/story.aspx?guid=%7B0820E291-C17B-428E-BDA3-7EC83BD7FD96%7D">fraudulent
mortgage origination contributed.  Government efforts to
increase
home ownership backfired.  Rather than increasing the number
of
persons who own homes sustainably, those efforts
acted as
artificial price supports.  This distorted the market, leading
to
prices higher than what the market could bear.  

A modest amount of that would have been OK.  But it got way
out of hand.

In the UK, which faces a situation analogous to that in the US, it is
estimated that href="http://www.money.co.uk/article/1001691-house-prices-will-not-recover-until-2023.htm">house
prices will not recover until 2023.
 Some politicians suggest that we support housing prices now.
 That is an awful long time to prop those prices up; it’s
doubtful
that we could afford to do that.  

Sure, the financial crisis is href="http://calculatedrisk.blogspot.com/2008/10/cnn-culprits-of-collapse.html">more
complicated
than that.  Perhaps it is pointless to try to narrow it down
to a
single root cause.  But to the extent that you can talk about
a
single cause, it was the divergence between income and housing prices
that did it.  The reason that is important, is that it
highlights
the role of the systematic
gutting of the middle class
.
 People did not adjust their expectations of what is realistic
for
a middle-class family to have, in the face of changing economic
realities.  While the middle class has gotten poorer,
expectations
have risen, not fallen.

4) Food security.  No one wants to acknowledge that this is a
problem in the USA.  Note that the UK is setting up a national
href="http://www.telegraph.co.uk/earth/main.jhtml?view=DETAILS&grid=&xml=/earth/2008/10/06/eafood106.xml">Council
of Food Policy Advisors, to start working on food security.
 

The new council, to be made up of experts from every
stage
of the food system from farmers through to retailers, will advise on
improving food production at home, ensuring low income food choices
have adequate levels of nutrition and maintaining cheap foods through
trade.

We need that in the USA, too.  Sounds like a heavy government
hand, but hey, it’s homeland security, right?

5) Speaking of security, what about health care?  

The whole homeland security rubric is nothing more than an excuse for
the government to do what it wants to do.  The thing is, it
works
equally well as an rationale to compel them to do the things they
currently do not want to do.  Specifically, make sure that
there
is enough food, that people have access to health care, and that basic
infrastructure is adequate.

Comments

  1. #1 Andrew
    October 16, 2008

    The worst thing is that attempting to point out that “security” can cover things like basic survival requirements (food, energy, healthcare etc) tends to just make certain groups start frothing at the mouth and ranting about those evil socialist conspirators.

    It would be funny if it wasn’t so tragic.

  2. #2 Daniel Newby
    October 16, 2008

    One of the problems we will face, is the poor state of the electrical grid. Having more small, distributed power generation could reduce the need for large, expensive, and vulnerable transmission lines.

    The distribution and generation infrastructure still needs to be sized for peak loads when the sun is not shining and the wind is not blowing.

    Distributed systems are not popular, because no single entity can control them.

    For good reason. It takes precision control of the overall system to maintain grid voltage and phase, and to keep any one link from being overloaded. We have not yet developed the theory to do it with millions of distributed generators, let alone deployed the considerable hardware.

    The entire discussion of offshore drilling showed that both candidates are at least three weeks behind the times in their understanding of the issue. Neither seems to appreciate the fact that the credit crunch is going to severely limit the ability of energy companies to engage in the large capital expenditures necessary for development of oil and gas fields.

    The relevant time scale for ramping up offshore production is 5-15 years. The credit crunch will not last that long.

    Require credit default swaps to be regulated like insurance.

    No. CDS as insurance is impossible, since the underlying risks are not amenable to actuarial analysis. The proper solution is to trade them on a public exchange and enforce collateral posting requirements, just like the Options Clearing Corporation does for U.S. stock and index options. All the rumors I’ve read suggest that a CDS exchange is being rapidly created.

    Disallow ‘over-the-counter’ (really under-the counter) securities transactions.

    Speculative trades for derivatives of publicly traded instruments, yes. Investment derivatives transactions, no. Derivatives of private instruments, no. (For example, employee stock option transactions at a startup company are OTC derivative transactions, but not amenable to trading on an exchange.)

  3. #3 Joseph j7uy5
    October 16, 2008

    Daniel, those are thoughtful points. But I am going to dispute them. For one, solar is particularly good for generating power during peak times. If you can shave off the tip of the peaks that the utilities have to deal with, it could reduce the need to expansion to meet those peak needs. As for the problems of keeping voltage and phase properly regulated, those are manageable problems. Sure, it requires smart infrastructure. To that I saw, let’s get going with the program. The problem of keeping things in phase is not fundamentally different from the problem of using genlock to sync video cameras in a multi-camera setup. It’s easier when you are handling millivolts but the idea is the same, and it can be done. Voltage regulation is not any more difficult.

    As for the time scale of offshore drilling: Consider that any decrement in capital expenditures this year, will inevitably reduce production over the next 10-15 years. It may be possible to catch up some, but I am not convinced that this credit crunch is going to be solved in the next 5 years.

    CDS exchanges are in the works, in Chicago at least. But think about what you said. If it is true that CDSs are not amenable to actuarial analysis, then tell me, how are they different from a game of dice. People talk about “innovative” financial instruments. That. excuse me, is baloney. Dice games have been around for at least 7000 years. The only innovation is that it is now possible for people to put the entire financial system at risk, with their own gambling. They should just go to the casino, where the only money they put at risk is their own.

    The point of getting rid of under-the-counter transactions is to get everything out in the open, not to invite everyone to participate.

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