Obama's Windfall

Yglesias writes about his fear that the federal debt will get so bloated because of the bailout that Obama will have no resources with which to fuel his agenda. I disagree strongly. In fact, Obama is going to have a multi-trillion dollar windfall once things return to a semblance of normality. The United States government already owns 70% of the mortgages (thanks to the Fannie/Freddie natonalization) and is about to purchase almost all the rest, along with a huge bundle of other assets.

The pundits like to refer to these securities as "toxic debt", which leaves the impression that they are worthless. That's missing an important point: the toxicity is already priced in. Even Lehman Brothers had knocked their mortgage-backed CDO's to 65% of their book value. Other banks that acted more aggressively now claim only 35% of the book value on their balance sheet. In other words, these things are dirt cheap.

A more likely circumstance is that, as the government winds down its holdings and sells the securities back to the private markets, it will pay off all the debt that is about to be incurred over the next few weeks and then have a handsome profit. A handsome profit on a multi-trillion dollar sale means several hundred billion dollars of "free money".

While this might seem like pollyanna-ism, there's plenty of precedent to believe that it's a likely scenario. Most times in the past when governments intervened to stanch a financial bloodletting, it resulted in a net surplus within five years: Mexico in 1992, Thailand in 1996 and most notably, South Korea in 1997. I'm writing a book for Amacom about the Korean economy and I've been studying the after-effects of the 1997 crisis. While many people were saying that the events of November 1997 were the death knell for the Korean miracle, the country's economy grew at a faster rate for the five-year period following the crisis than at any other five-year period in it's history.

For those that believe that the current bailout bailout money is simply disappearing into a black hole, wake up. The only way for that to happen is for a massive disruption to the U.S. economy. Think the Great Depression, only worse. If that is our fate, then the government borrowing a few trillion now is of little consequence--the economy as a whole will be declining in value by tens of trillions of dollars. And if that were to happen, then inflation would skyrocket, making the trillions in debt much easier to pay off in the future.

Both candidates have been rightfully criticized by their deer-in-the-tractor-trailer-lights response to the crisis, with Barack Obama's only saving grace being that he has said fewer stupid things than John McCain has. But there is one thing that Obama can do now that would noticeably improve the global economic outlook: Promise that he will end deficit spending by the end of his first term in office. He hasn't done it in the past because he didn't want to enter office with a financial handicap. Now that he will probably get a windfall of several hundred billion dollars from the profits of this bailout, he can afford to make the promise.

Why is such a promise so important? Because borrowing is what got us into this mess and ending the practice is the only thing that will get us out. The masters of the financial markets have proven without a doubt that they are dumber than rocks. But the stock market itself is still the most intelligent social brain that we have. If it senses that both candidates will end the insane practice of deficit spending, it will respond accordingly. And Obama will be given credit for showing economic leadership that resulted in a new tide of optimism. And if things get so bad that the bailout assets don't appreciate in value, no amount of federal deficit spending will help us, not to mention the fact that our government might collapse and we'll all be shooting at each other from our caves. All-in-all, it's pretty much a can't-lose proposition, huh?

P.S.--For those that might interpret this post to mean that I've gone all Keynesian on you, please remember: I'm firmly against this bailout. I say we should let AIG, Fannie, Freddie and even Goldman go under and prepare for financial market meltdown. If we have to use government money to be buying private companies, let's save it for the GM's, GE's and Boeing's of our country, not the banks. Or better yet, keep the government out of all this and let the markets correct things. Instead, we've got a government that is acting like a hedge fund--using borrowed money to buy stocks.

Who Needs Warren Buffet?

Has it occurred to anyone else that if Lehman, Goldman, Morgan Stanley etc. were to disappear in a poof of white smoke, maybe it really won't matter to anyone besides their shareholders and employees? It's been a long time since I've noticed any investment banker who actually added value to any deal in which he was involved (yes, they're all he's). These guys are so wrapped up in their castles-made-of-sand derivatives that the only books being wiped clean are their own. There is of course the issue of the massive sudden disruption to the markets, but that will get sorted out in the end.

In other news, the United States of America is about to invest several trillion dollars in buying up assets for pennies on the dollar that will inevitably be worth more than they are today. I'm in the let-them-burn camp myself, but let's hear an exclamation of awe for the greatest value investor in history: the federal government.

Prolate Spheroid

The three worst playcalls and the single best one from last week's NFL action:

The Worst:
*Mike Nolan, 49ers vs. Seahawks: Your opponent is starting one wide receiver who didn't play football last year and another one who is an undrafted rookie. And you play the whole game in nickel formation? It didn't even work: Hasselbeck got the ball to his receivers, who were open. They just kept dropping the ball. Yeah, you won the game, but only because your opponent had more injuries than Saint Sebastian.
*Scott Linehan, Rams vs. Giants: There wasn't any single move you made that was awful. But your decision to not quit during the offseason is the call that you blew. Your team is as bad as any in the history of the game. It doesn't matter how well you call plays when the team you lead is down by twenty points throughout the game.
*Mike Smith, Falcons vs. Buccaneers: The tradition of arguing with the officials is one of the worst aspects of this sport. The biggest nagger, we seem to be telling our children, is the one who wins. So kudos to rookie coach Mike Smith. You kept your mouth shut all day until it mattered. The officials mistakenly announced that two penalties by the Buccaneers offset each other, giving Tampa Bay posession of the ball after a fumble. You started to blow your top, but then went out fifteen yards into the field and stood there, hands behind your back and mouth closed, contrite-schoolboy style. You risked a personal foul penalty for the team, but by not screaming and remaining on the field, you forced the official to meet with you. Ten seconds of calm explanation caused the official to correct his error and changed the posession--rightfully--back to the Falcons. A good coach chooses his battles with officials and, when he decides to engage, acts like a dishonored professional, not like Tonya Harding.
The Best:
*Bill Belichick, Patriots vs. Jets: One probably assumes that Mike Shanahan should get this commendation for his famous two-point play. That was courageous and all, but it wasn't good play-calling. It was a roll of the dice. You, on the other hand, pulled a little trick that resulted in your team garnering a few extra yards during a fourth quarter punt. The Jets were out of timeouts when the New England offense came on for a surprise fourth down attempt. Suddenly the Pats fled the field and the punt team came on and quickly kicked the ball. That might seem simple, but in reality it's a feat of choreography that rivals the Beijing Olympics' opening ceremony. The Jets were left with their defense on the field and couldn't properly return the punt. It was just a few yards. But it's a miracle for a coach to earn a few yards in the ebbing minutes of a close game. It's no wonder that your team is 2-0 even though you've been forced to play Sarah Palin at quarterback.

Bankruptcy, Baby, Bankruptcy

Lost in the midst of the stunning series of events on Wall Street is the fact that the federal government seems to be wising up. Rather than bail out Lehman or Merrill Lynch, it sat stonefaced all weekend and refused to come to the rescue. Forget oil drilling. The new motto of the Feds should be "Bankruptcy, Baby, Bankruptcy". It's all a necessary part of starting to heal a very ill patient. Fear might cause some to lose a lot of their money (I should know--Bank of America is my largest holding). But investors and financial execs have to understand that it's up to them to break out of this siege. The cavalry is not coming.

A Request to Infectious Greed Readers

Paul Kedrosky publishes one of the best blogs I've ever read. Instead of logorrhia, readers are presented with a few short posts a day. Each one raises an interesting nugget of data that often challenges my assumptions and sometimes leads to new ways of looking at things. He even sometimes does real research just for a blog entry (something which I avoid at all costs).

That's why I asked Paul to send out an old-fashioned call for help to his readership for me. My book, Jewish Wisdom for Business Success , co-written by Rabbi Levi Brackman, is coming out next week. The Rabbi and I are on a mission: to open up the debate about Jews and money. We feel that it's been locked in a box out of fears of political incorrectness. That only leaves the conversation to the anti-semites and the ill-informed.

I'm scheduled to do some public debating regarding the subject. I'm trying to find some solid statistical evidence of economic success rates of various ethnicities, including Jews. I want to be armed with solid data when I make the case for our hypothesis that the religion itself is part of the reason for the business success of Jews.

I've combed through lots of census data, most of it unhelpful because there's no entry for "Jewish" on the long form. I've read all the social sciences literature and the economics literature on the subject that I could find. But sociologists tend not to write about economics and economists tend to stay very far away from ethnicity.

So here's my request: Do you know of any datasets, studies or raw data sources with regards to the Jewish community (and other ethnic groups in the U.S.) that shows economic or income performance compared to the population at large? If so, please let me know about it by emailing me at samjaffe (a) gmail.com (whether it supports my hypothesis or not).

Two points:
*I'm looking for data that is more bulletproof than "I know a lot of Jews who are lawyers...".
*This is not an exercise in anti-semitism. If your data is comprised of secret minutes for last week's meeting of the Elders of Zion, send it to mahmoud.ahmadinejad@deathtoisrael.com, not to me.

DARPA=Pork

DARPA's new coal-to-liquids solicitation, which was brought to my attention by the excellent Wired blog about defense technology called Danger Room, might be a good idea. But from a global warming perspective, it is disastrous.

The $4.5 million solicitation calls for a research project that would devise a method to turn coal into jet fuel. As Danger Room points out, it would help the United States lose some of its addiction to petroleum. But then the solicitation mentions "environmentally friendly". They talk about utilizing the hydrogen from coal. WRONG.

Coal isn't a hydrocarbon. It is almost completely carbon. In fact, it's one of nature's most effective methods of fixing carbon from the atmosphere and burying it deep underground, thereby keeping it from playing havoc with our climate. The only way to get hydrogen from coal is to turn the rock into methane (a process which pulls four hydrogen atoms from the atmosphere and attaches them to each carbon atom), and then turn that methane into a liquid fuel. In the end, you release the same amount of carbon into the atmosphere as you would if you were burning the coal in a campfire pit. To attach all those hydrogen atoms, however, you need to add a lot of energy, water and equipment capital cost. Altogether, you end up releasing at least twice as much carbon into the atmosphere as you would by drilling and burning the equivalent amount of crude oil.

If you want to keep coal as a part of our energy pie while avoiding global warming, there is only one way to do it: carbon sequestration. That means turn the coal into methane or syngas, burn the methane and then capture the carbon part of the exhaust and bury that underground. I am a VERY firm supporter of research and project finance in that arena. But anyone who talks about a simple coal-to-liquids process without the extremely expensive step of burying the carbon is proposing a greenhouse gas nightmare.

This isn't just bad science. According to the Washington Post's Intel Dump column, it goes counter to last year's energy bill, which prohibits the federal government from purchasing fuel which has a higher greenhouse gas weighting than plain-old petroleum. In other words, if DARPA's project works economically, the Department of Defense will still be prohibited by law from buying the stuff. Huh?

I used to view DARPA with the same geeky reverence I had for the Apollo program and Star Trek. Now that I've had professional contact with the organization, I know that it has become simply another government pork program. The main reason anybody gets a grant from DARPA is either because there was political pressure from the system placed on the institution or because the grantee played a lot of golf with the grant administrator. I'm sure a few of the granted programs are worthwhile and will someday bear fruit. But for the most part, it's my opinion that a cancer has attached itself to DARPA. And it's terminal.

The Five Myths of Jews and Money

I've been collecting data regarding Jews and money for the purposes of marketing our book, Jewish Wisdom for Business Success. When talking in the press about Jewish success in business, I want to make sure I stand on firm empirical ground in regards to whether there's statistical evidence that the Jewish community is more successful than the population at large when it comes to making money.

In the course of my reading, I've identified some surprising themes, which I'll summarize here as the five myths of Jews and money. It's a teaser: I'll provide more depth and breadth to the assertions in the weeks ahead. But here are my big five:

*Jews developed the banking industry because they dominated the money-lending industry in the middle ages, thanks to a Church proscription against usury (something which didn't apply to Jews).

*Jews are more successful in business than any other immigrant community in the United States in the last 100 years.

*The Jewish religious tradition views poverty as an emblem of piety.

*Karl Marx' theories were based on traditional Jewish concepts of communal partnership and the sympathy for the victimhood of the lower class.

*The patriarchs of the Torah were penniless wanderers who lived from day to day on the kindness of others.

Anybody who has any thoughts, advice or suggestions for data sources on any of the above assertions, please drop me a note at samjaffe (at) gmail.com. Likewise, if you think of a more obvious candidate for a myth--something that is commonly accepted in popular culture but is in fact baseless in fact--please make a suggestion.

An Energy Policy That Makes Sense

This post began as an email to a friend who is about to take up an energy policy position at a major NGO. It was an attempt at giving my thoughts on energy policy from the perspective of a small entrepreneur who has dove into the deep end of the energy pool. This is coming from someone who understands all of the major renewable energy technologies and is trying to make a living by predicting how things will play out in the next five years. Two other things you should know about me is that I have a revulsion for government participation in markets (based on my years as a journalist on Wall St. and seeing how corrosive they can be to functional systems) and yet I have a strong appreciation for how powerful they can be when applied intelligently (based on my expertise on Korea--I'm writing a book now for the American Management Association about the Korean economy).

With that in mind, here's what I would do if I had the next President's ear:

*Scrap the ITC and PTC--they've done their appointed jobs and are now hurting the industry as much as helping it.

*Heavily subsidize the $300 billion T&D buildout that will be necessary to bring all that bulk solar and wind to the markets. If need be, nationalize this process.

*Target the far ends of the downstream and uspstream portions of the energy chain with government incentives (loan guarantees, subsidies, tax credits, whatever...). 

*Avoid subsidizing the consumer (i.e. Obama's idea of a $7000 tax credit for buyers of new PHEV's). 

*Avoid Feed-In Tariffs at all costs (the ultimate sledgehammer approach to fixing the system). 

*Avoid a cap-and-trade system at all costs (it will end up being needlessly expensive for the economies involved and will become a massive bureaucracy that will become a political patronage system).

The fundamental thing that I understand that most people don't understand (yet), is that we've already reached the promised land of grid parity. In preparation for launching Panea, I spent a year doing very fundamental research and modelling regarding the state of all the various energy technologies. The fundamental truth that I learned from all that data sifting is that wind and solar are now competitive with coal. There are severe capacity bottlenecks for both, but in terms of fundamental science and economics, renewables have finally fulfilled their promise. They don't need subsidies anymore.

If we want to hasten the advent of a renewable-based economy, our energy policy should be based on addressing the physical limitations that are now the only barriers standing in the way: manufacturing capacity, commodity shortages, transmission & distribution, energy storage and smart grid applications. I'll keep posting on this theme in the coming days. In the meantime, good luck with the new gig Samir.