Barney Frank's Fantasy World

This item spells out clearly how we got were we are with the US housing market.  Without question the Clinton administration embraced and promoted the use of Freddie and Fannie as a mechanism to support marginal lending with the implicit support of government as lender of last resort.  He also unleashed the deregulated securities industry. 

 

Bush embraced the policies in place and over time tweaked them higher.  There is no reason to think either Clinton or Bush truly understood the danger created by these new policies.  Those wanting to blame Bush cannot have it both ways.  The policies were created by a democrat regime and sustained as a sop to secure support for other initiatives.

 

We are in the process of getting affordable housing by destroying the mortgage market.  This was done once before during the great depression.  The problem is that there will be less takers because the middle class market is been shrunken

 

The take home lesson for all my readers is that once a credit bubble is underway, no one can stop it except the Federal Reserve through increasing bank reserves.  This was never done in a timely manner.  Instead we went the other direction in an idiotic attempt to keep the party going.

 

Credit bubbles in an isolated stock floatation is great fun and surprisingly common and harmful only to the players.  The housing market is the mainstay of the economy and needs to have a functioning credit system.  It continues to go unrepaired.

 

 

Barney Frank’s Fantasy World

by RUSS ROBERTS on JANUARY 29, 2010

http://cafehayek.com/2010/01/barney-franks-fantasy-world.html

in GOVERNMENT INTERVENTION IN HOUSING

At Big Think, they used one of my questions in their interview with Barney

Frank:

Question: How can Fannie and Freddie be structured to avoid the moral hazard problem and a too-cozy relationship with regulators? (Russ Roberts, Café Hayek)

Barney Frank: Yes, in 2004 the Bush Administration significantly increased those housing goals and particularly ordered Freddie and Fannie to start buying up a lot of low income individual mortgages, and I opposed it at the time.

Interesting answer. Here is the relevant data on the housing goals from my soon (really) to be finished essay:

Starting in 1993, Fannie and Freddie have affordable housing goals—30% of Fannie and Freddie’s purchases of loans have to be loans made to borrowers whose income was below the median income in their area. These are interim goals. In 1996, the interim goal becomes firm at 40%. In 1997, the number rose to 42%. In 2001 it rose to 50%. The Bush Administration increased this number to 52% in 2005, 53% in 2006, and 55% in 2007.

So it turns out there was no increase in 2004 and a minimal increase in 2005. The big increase was in 2001, the legacy of Clinton and Andrew Cuomo his HUD chief. Of course Bush embraced the housing goals and did increase them. But “Bush in 2004″ is a red herring.

I’d love to see the evidence that Frank “opposed it at the time.”

And none of Frank’s answer addresses the moral hazard problem–that people kept lending to F and F as the quality of their portfolio deteriorated because they knew the government stood behind them.

Obama Drifting?

We are now a half year into the Obama presidency. The high emotion brought on by the global credit collapse has somewhat abated and perhaps the banking system is getting a decent handle on present business conditions and their own portfolio. In the meantime, they have used government funds to slowly bring their capital requirements back into line. Several of the largest have also given hack bailout funds making them independent.

We have posted on the scariest parts of the ongoing credit restructuring and just how big it could become.

Assume that the worst case scenario can be avoided and that a chastened banking system will limp back into business.

The long term problem is that their customers have been severely hurt. A real percentage of the customers has been actually put to the wall. Everyone who financed a house using excessive leverage has likely lost all their capital if not their job. Assets like stocks and cars are always sold to support the house before one throws in the towel. Once lost, a citizen is starting over completely with incremental savings and a really bad attitude to banks and other financial institutions who encourage such imprudent behavior in the first place.

Since we are doing this the hard way, it is certain that a number of years must pass before these customers are back and strong.

My problem is that so far Obama produced reassurance and little else that convinces anyone that positive steps are underway, unless you think that the defacto nationalization of GM is actually going to work at all. He has been also less than insightful in terms of preserving the integrity of bilateral agreements, but that is because his supporters are not above pushing through a fast one or two. The point is that he and his staff can be had, which is not unusual for a rookie president.

So while he is riding along, he is also trying to ignore the big domestic government finance disaster rushing down the rail toward him. California is screaming for help and others can not be far behind. The cities must be facing huge contractions in their budgets. In the end it will become visible and congress will be forced to react again in a panic. All this is foreseeable and plans can be made.

And while the financial punditry inventories the credit balloon and takes fearful conclusions from it, I do want to make one observation. The mere fact that the larger banks chose to pay back their bailout funds is very encouraging. They felt no need to hang on to the government lifeline. This suggests that the subprime collapse was actually isolated in terms of making losses and that the remaining portfolios are intact and operating normally. If true, this is good news because it means that everything else will slowly get back to work from the present base.

We still have not resolved the housing problem, but without doing as I posted, the market will continue to grind out a solution while brutally slashing household wealth. Everyone with a good job gets to pay of their credit cards for a couple of years.

It would be wonderful if in fact the only problem Obama faced in the financial realm is the subprime portfolio.

Global Wind Power Rising

The wind industry is clearly in full flight. It is way ahead of all other alternative energy methods simply because it was more or less economic even in the beginning, or at least a little bit of subsidy made it so.

Now the manufacturers are going full out and are not exposed to a single buyer. In fact, the economic model is a banker’s dream all the way around. And after the global crash in real estate, bankers need better product then the homeowner’s paycheck. Selling power for decades satisfies that need.

Thus for the next five years, the wind industry has the Market largely to itself. Solar has only now perhaps broken the cost barrier and has a lot of product development to get out of the way over the next five years, so it is still not in the banker’s comfort zone but it is certainly coming with the present work underway.

The other big alternative prospect is thermal which is about to go toward the mega project route with the essential demonstration plants now happening. That also requires a few years of development to bring up to been able to match demand.

So for now, wind is the winner of this horserace by a lap or two.

Global Wind Power Could Generate 318 Gigawatts By 2013

http://www.winddaily.com/reports/Global_Wind_Power_Could_Generate_318_Gigawatts_By_2013_999.html


by Staff Writers
Oyster Bay NY (SPX) Jun 16, 2009


The emission-neutral energy provided by wind power represents a unique opportunity to help the world end its reliance on expensive, polluting fossil fuels, and to spur the economy by creating millions of "green collar" jobs.

Wind power has followed an evolutionary path over thousands of years that has transformed it from an efficient method for grinding grain into the world's fastest-growing, most cost-competitive, sustainable energy source.

A new market study by NextGen Research, "Global Wind Power Market: The Outlook for Renewable Energy Generation by Wind Turbines, Wind Farms", forecasts that global wind-based electrical generation capacity, which totaled just under 121 gigawatts (GW) in 2008 (a record year for new installations), will reach 318.5 GW by 2013.

Spurring this growth will be a boom in China's renewable energy industry; government support in the form of subsidies, feed-in tariffs and Renewable Portfolio Standards, and international goals for renewable energy usage established under accords like the Kyoto Protocol and the EU's Renewables Directive.

The study's author, Keith Reinhardt, says that despite the troubled economic climate, the global business environment has never been so favorable for the widespread proliferation of wind power equipment.

"The wind power industry worldwide has surged over the past decade, as demand has been driven by aggressive government mandates and subsidies designed to promote energy independence and reduce toxic emissions. Moreover, the growing prevalence of policy implemented to ensure a long-term market for wind power and to promote investor certainty continues to facilitate growth in emerging markets with massive potential."

Mr. Reinhardt says that the global recession dealt a glancing blow to the wind power industry in 2009 by forcing many developers to cancel or delay projects. However, he says, the industry will rebound sharply during 2010 as credit markets thaw and the flow of capital resumes.

"The world has embarked on a green revolution, with a growing number of aggressive government policies mandating increased reliance on renewable energy. In addition, the cost of generating electricity from wind is approaching parity with traditional energy sources, and could become cheaper than fossil fuel-based electrical generation regardless of government subsidies as fuel prices rise and a standardized global value is placed on carbon emissions.

Dead Cat Bounce

It is good to see a breath of optimism return to the markets with rising prices and a restoration of consumer demand. It is fair to say that the panic induced cash flow gap is now been unwound as normalcy of a sort comes back to the economy.

The damage inflicted on the financial system was massive and almost unbelievable. Governments have acted to isolate the cancer while the real economy gets a chance to kick in and start cleaning up some of the damage. The real economy can limp along for quite some time without infusions of fresh credit for capital spending.

What makes me most nervous is that the general behavior of the markets are eerily similar to the 29’ crash and the same time functions are in place. It is only nine months since the actual break took place. In roughly the same time period, in 1930, the markets recovered somewhat and trade also. It really was a dead cat bounce that merely punctuated the ongoing economic decline that rolled on for a full two more years until late in 1932.

As I have said a number of times. The problem is the destruction of the US mortgage market and the ongoing inability of the government to repair the market. The US consumer is not able to restore his household economy until this problem is made well, however long we wish to dawdle. The Japanese took ten years to make the necessary moves, after trying everything else first. We are well on the way to been that stupid.

More positively, the rest of the world is fairing much better than happened in the 1929 crash. China and India both have huge reserves of consumer buying that merely needs to be capitalized and both will emerge the stronger for it. Both economies will be doubling over the next five years just taking care of their own.

Europe’s disaster came from buying US paper and has been back stopped by government printing presses. This will now increase the demand for more prudent investments and strong capital driven investment out of Europe. They are well on the way to sorting themselves out. They may even become large buyers of US hard assets in exchange for the suitcases of worthless paper they have been gifted with. Revenge is sweet.

Latin America is nicely following in the footprints of India and China and looks almost untouched so far. Mexico keeps doing its own thing making it an excellent place to leave.

Canada has gone through the salutary experience of been shot at and missed. We now love our tightly regulated banking system. My only concern is that a lot of excellent work done between the two governments that were unquestionably mutually beneficial are now been subjected to attack by newly empowered incompetents reading from some ideological prayer book. No matter, Canada will end up supplying a third of the globe’s reduced oil demand for centuries, and the big capital build out is about to begin.

That means a positive balance of payments until hell freezes over. We could even afford a socialist system, although we have had great success with the best application of the Laffer curve methodology of anyone.

Personal Energy Sufficiency in Kenya

I dragged this item out of the Oil Drum and it is well worth sharing. We are sold on excessive consumption for the sake of consumption. And we get almost nothing back for it that at the end of the year but the demand to work harder.

There are certain truths that need to be listed.

1 It is possible to design and build a living space that is approaching energy neutral with the environment. I did not say it was easy, but passive design and excellent insulation catches most of it in bitter cold country and dose the same in arid hot country. Linked to a geothermal system and you are home free.

2 It is possible to properly link urban style and quality housing with modern agriculture to establish a fully symbiotic community environment that can become self sustaining. Yes we will have to modify a number of things, but the likely social reward is huge and reinforces the social contract imposed by a larger polity.


3 It is easy to dream that larger social structures are unnecessary, but that is simply not true. It takes a national polity to demand universal education and social discipline. That has to be supported and protected by the beneficiaries, who are granted freedom from personal exploitation by armed strangers. And no one in Africa should have any such illusions. The problem is more that we are still a long way from getting it right.

4 Our own society is struggling with the need to lower inherent costs of our own society. Very cheap energy has allowed wasteful methods to proliferate simply because they were convenient. It was convenient to buy cheap oil to operate tractors to produce corn by the ton. Now we need to convert corn stover into cellulose ethanol on the farm to fuel those same tractors in order to achieve the same productivity.


5 The best signal for all this is price, but price has been distorted in many places and his has retarded the transition to a broad cheap energy base. A energy floor of say $60.00 per barrel for oil equivalent and a rationing of imported energy would supercharge the North American energy conversion. Ending farm subsidies would translate some of that energy offshore to maximum effect. Anyway, I have said all this before.

This is a welcome reminder that it is in our power to live on this earth with a very modest footprint. The drive is on to do so and we are behooved to support it.

http://www.theoildrum.com/node/5282
I want to share an e-mail I received from a reader I know as Derek. His Oil Drum name is "Ndege" (Kiswahili for... Bird, Airplane, Helicopter, Airport, Butterfly, flying--one word covers quite a lot of related concepts). We had been corresponding about another matter, and I had sent him a link to this presentation I have given several times recently.

Gail,

Based on some experience, I have a 'feeling' that the doom we see coming will actually not result in real doom on the ground – after a period of severe adjusting, that is. At least, it mustn't really 'feel' like doom. Things could go 'bad' - and we still (many, many, many of us) could have not such a bad life after-all - including an economy with things (some) and food (less exotic).

There is this thought/observation/concept (of mine), and it might interest you. That's why I feel it's okay to take some of your time.

When I read the scenarios on The Oil Drum, I believe them. They make sense. Yet I feel there is something missing. Or, rather, some factor factoring in too much: the way we measure events and changes that we see coming, and how we consider them to be 'bad' or 'good'.

We merely measure them (as one always does, I guess) against the known constants of our own lives, our own known parameters for survival and happiness. But I have a feeling that by generalizing this, yes, by assuming that this is a necessary standard in the first place, we might be wrong. And, therefore, many (not all) of our fears may actually be much less justified. Not because that sort of envisioned change isn't coming - but because the change really won't 'feel' as bad as we now believe that it must.

I may have that feeling, because I also know a different set-up, one where, for a very large part, the standard of what to expect is not based on an oil-fueled society with all its trimmings.

You see, during the past 28 years, I have spent a lot of time in Kenya, where our family has a home.

What I experience there is a society that does pretty well with VERY little energy, all things considering. Mind you, not 'pretty well' by any standard of the Western world. But survival - and happiness! - are pretty much possible. Oddly, a first-time visitor would think, but, yes, even (I would say, especially) the Masai, who really live lives quite, well, horrible (in the eyes of Westerners) are very happy people (and wouldn't want to change a thing, basically. A solar cell to get some TV and the mobile charger, that's all).
It's the mindset that makes most Kenyans experience a happiness most Westerners would never consider to be possible given realities - as they see and experience them.

In Kenya, we do use electricity (hydro / diesel), if we can. We have constant power cuts. But that's not the only limit. In fact, the vast majority of us, even the so-called middle-class, build our lives around limits. Limits are the basis for every decision we make, business or otherwise. It is, you could say, a way of life that is happy when it is not done in - not unhappy if things go wrong (I am not sure that this makes sense).

People there - including me - celebrate every day that was a good day. And a good day is one where we got by. I would say, for 95% of Kenyans, life there is very much focused on the hour - and hardly ever on the future.

We are used to being very mindful of how to not waste water. Or anything, really! Things get mended and re-used and re-used. Still, even our - middle class - standard of living FEELS like it is much higher than even here in cozy Europe, where I spend about two-thirds of the year.

We - and our guests - do really feel much better 'down there' - despite lacking certain consumer- and other creature comfort. When we get a nice block of (imported) chocolate, it is something special (as, I guess, it should be). It tastes great. It's fun to share something like this with guests (and, please, we have a big house - 500 sq. meters - so we are not 'poor' nor are our guests. We just don't define happiness by the amount of shopping for consumer goods - and use of energy. There is a big limit of both: things to buy (shops are far away, Western-lifestyle-items are very expensive); and energy.

When you go to the towns and villages, except for the ever-present mobile phones, everything else is pretty much powered by people doing their work by hand (one way or another). The approach employs a great number of people (although, mainly 'outside the legal employment system'). Everyone I know (or see) is constantly busy doing something. Not very efficient by 'our' standards, everything takes a long time to get accomplished, but, well, people do stuff, which creates opportunities to survive.

The outcome is different in the respect that little energy is put into things that may be fun, but are not important in the end. We go for income that generates food. Not tons of toys or consumer-stuff. Buildings are build by hand - even our house was. Not with machines. I guess there was only a special saw used once when certain stones had to be cut perfectly (but we would have well survived without them stones cut like we wanted them to be cut). Everything else was done by hand, using ZERO energy.

Our house was built according to local tradition (for such Mzungu - white - houses). We don't need AC. Not even with 32 Celsius.

Credit is not really something that propels that part of the Kenyan economy that the vast majority depends on for its survival. It is people, social structures, give and take, barter on a certain level (I assist you with providing you with a certain contact/job; you return the favor - or else...). And it is - mostly - cash... wads of cash. All the time. It is a society that is extremely people-orientated, extremely network-reliant. And, when it comes to financial transactions, they are cash-based, even for big projects. Builders for the houses are paid in cash in most cases. When people buy cars, they pay in cash, mainly. And cars are expensive - they cost at least US$ 20.000 - even for a Toyota Corolla (that's why I don't have one; I use a taxi or public transport if I have to get someplace - as do most Kenyans).

I am not saying there aren't any problems there. In fact, there are many and they are huge. But they are related to a very basic human - and modern - (mis-)behavior. One: political leadership squandering resources, getting into debt for silly things (things 99% of Kenyans have no use for), constant in-fighting to sit at the source of power. The other: people making too many babies, which is a tradition, because there is not much else to do in the villages (I am serious) and because, up until recently, many of them died within the first year or so. (Some Kenyan cultures don't give names to their babies within the first year still to this day.) Except, since the onset of modernity (farming/medicine) many of these babies do make it, which, please don't get me wrong, is fine with me - I love children, but which puts obvious strains on resources. But, on the other hand, I have also been witness to a great many situations where people lost their children, cried for a week, and moved on, had new babies, weren't depressed - nor impressed (strangely; I am still not getting over this - but that's the way it is; again: different view on things in Kenya).

It is safe to say that Kenyans would use even less energy and yield much higher economic results where it matters for most of them if there were NO politicians, no political structures, at all (and no credit facilities). Most Kenyans get along not because of modern financial and social structures, but despite them. In Kenya, most of what we assume to be a modern society actually is a hindrance (because it is so corrupt and because it doesn't fuse well the traditional culture, which is group- and NOT AT ALL individual based). I am pretty sure you won't find a Kenyan believing otherwise.

I am writing this because I believe (well, know, actually) that what we consider to be a 'flourishing' economy mustn't be the standard to go by when judging whether we, as people, can live without fear of constant social meltdown - and without perceiving our lives to be happy ones.

I think the coming changes will hit different societies differently. Maybe European and American people will have to let go of much more (stuff) than we in Kenya. We really have very little to lose as it is. There is very little credit - internally - to unwind, and people aren't too attached to it in the first place, knowing how difficult it is to hold on to stuff - or people, really.

I wouldn't be surprised if what you called the 'bad option' for the future (new currency etc.) may actually, after only a surprising limited amount of time of re-adjusting, be the better option. Because, it seems to me, things have to shrink a LOT. And they will.

Because, at the end of the day, it is our lifestyle that is doing us in. Our desires, not our needs. Nor the amount of oil available or not (which was just a propellant that was used to build a certain kind of society, which is by no means the only kind possible).

Maybe, one day, someone will come up with something that is available indefinitely to provide an indefinite lifestyle for an indefinite number of people (I doubt it). But as long as that is not the case (or as soon as oil gets uneconomical), I guess different ways to survive and to make a living are going to take place - and are, as such - not at all bad, once we arrive at that point.

To go from here to there, the way it will happen, and the decrease in population so far sustained by a lot of cheap energy, that will be horrible. The loss of lives, that is the price that will have to be paid. Credit? Consumer goods? Nice to have, perhaps. But not that important, really, to have a nice day.

I am pretty sure that this unwinding of the market - and of populations - will take place rather quickly. And afterwards, maybe not on a personal level, but for societies, life can and will continue. And it won't necessarily be a bad life. It may be one that feels, at first, like waking up from a dream, where everyone went shopping for tons and tons of things with a credit card - and finding one-self in a reality where there is less stuff, less choice in supermarkets, less of everything, but where one still does all kinds of things (including surviving), also 'modern' things, using a lot less resources - and still having a laugh, friends, fun, joy.

I guess what I am trying to say is this: even if all you wrote comes true (and, I am damn sure it will; option 'B' that is), life mustn't necessarily be bad for those who can survive - which, I guess, will be all those countries with a food-surplus, or, roughly, enough food to hang on. Kenya can be one of those places (after a decrease of population, which, knowing Africa, would take place rather quickly). Especially since we produce food with a lot less oil-input than the so-called First World.

In other words... what we assume to be so bad (change of economy and lifestyle) will most likely prove to be quite okay once we get there - and live it.

Forgive my ramblings. Thought I should share. And thank you, thank you, thank you... for all the mind-expanding input you and your fellow contibutors made available to me on The Oil Drum!

Cheers,

Derek

Economy Turning

For the past several months, all eyes have been focused on the money printing machine put in motion to salvage the financial credit system. Lots of drama and a lively debate over solutions, but they will grind themselves out the hard way unless congress et al are able to accelerate the healing process. Right now all assets are repriced. The prices are at a level that an intelligent buyer will buy.

More importantly, the lenders are frozen in terms of their liquidation options. They have discovered that when there are no bidders, you are not going to sell at all. Just as the advent of oil at $150 brought the economy to a screeching halt this past summer, present real estate prices have made it impossible for the lenders to liquidate.

So perhaps doing nothing right now is an excellent option. We sure know that they will all be a lot more realistic next year at this time.

In the meantime, what else has happened? The real global economy slammed on the brakes and shook off excess use of credit and inventory. All commodity prices have collapsed back to painful levels, including that of oil. Surplus inventories and capacity has now built up so we have ample reserves to supply the global recovery.

Global trade has dropped over 15% since September and dropped another 5%, this month, but then reorders must begin to kick in about now and the numbers will be trending upward in the spring. Expect a broad recovery to be fully underway this fall and winter and a recovery to prior levels as early as late 2010.

Capital spending will be led by energy investment as the world now understands that $150 oil is not an option.

Also the American automotive industry needs a trip through chapter 11 to shake off contracts that have made it non competitive even in the USA.

Personally, I have no clue what the stimulus boys think that they are going to accomplish with their money. If they actually can fix the financial system, that will be wonderful. I have already said what needs to be done to bounce out of this rat hole. So far they are on the road to attempt to restore the original bubble. It simply cannot be done because no one is going to buy stupid paper from America anymore. You only get one bite at that particular apple.

The key point that we can make is that the global economy is getting over its funk and finding that they are still in business, and there is still so much real liquidity around that business at least will get financed. I expect all surplus inventories except housing to be cleaned up by the end of the year and everything to be functioning normally if a little less flambouyantly.

Current Markets

It has been said by others, but the massive contraction of credit and concomitant equity is generating one of those brief eras of wealth creation that come along every generation or so. The good news is that this period of assemblage will last a good five years as good assets are marked down enough to attract shrewd buyers.

It is even a good time to buy a house and if you like been a landlord to buy a second property. If you are sophisticated you can do much better than that, but if you have just arrived on the last pumpkin truck, you too will live to be a winner. The inventory is out there looking for a home, and the folks who need to sell are desperate or certainly no longer delusional as to value. The next three years will see the banks sort out their mortgage portfolios and their strong reentry into mortgage lending If you have a smell of equity they will need you.

The stock market is also sorting itself out and this credit contraction is smashing up balance sheets around the globe. It will take a full year for the damage to be recognized and fully reported. This opens the door for selective buys were value investing precepts hold up and the prices are depressed enough. You will not go far wrong in following Buffet if you lack ideas of your own.

Avoid mutual funds for now because redemptions are forcing the sale of the good and down grading the longer term potential of these portfolios. They lack the freedom of a closed fund that Buffet has. The hedge funds are typically in even worse position.

There will also be incipient winners out there that good research will flush out. There is always a place for a punt on an incipient ten bagger, and there will be a lot of good ones out there making money today.

National Energy Program

Summer is clearly here and in full swing. The press is full of economic angst. People are discovering that $140 per barrel oil matters and a great adjustment is now underway throughout the globe. The most visible effect so far is watching the airline industry downsize. Most of the other costs have yet to push their way through the economy. So far most economic participants are eating some of the losses in order to preserve markets. This obviously cannot last, yet this slow response is likely the best response since we are going to see a sharp retreat in oil prices as the decline in consumption bites into the economy. Who wants to shrink demand for your product that you will be struggling to replace next year?

In the meantime and really in the background, the credit readjustment is also rolling through the US economy and is step by step reducing the supply of lending cash in the global economy. The bubble of excess cash has evaporated and hopefully does not slide below what the market requires. The comment has been made that this crisis is proportionally less than the savings and loan debacle brought on in the mid eighties. We survived that quite handsomely. The important thing to remember is that the sub prime disaster is rather localized and is quite open to smart intervention, even though, we are on the road to getting FEMA instead.

We have explored every energy option that we could get our hands on in this blog for a reason. The core to our global economy is a sufficient supply of usable energy. Nothing else even counts. All other commodities are quickly replaceable with only a modest price shift. In fact the commodity boom of the past three years is promoting a rapid expansion in global capacity that will soon place the entire globe into a permanent surplus position. Recall that today perhaps only a third of the global population is not yet fully participating in the Global economy and that third will finish their transition over the next generation.

In fact, we can expect a sharp expansion in food supplies over the next twelve months as farmers rush to take advantage of the current price regime. The same thing has already happened with the other commodities. The only thing that remains surprising is the apparent willingness of participants to maintain the high price structures so long. The sellers are still making so much money that they are not yet feeling the need to dump excess inventories. They may even believe that prices are going higher.

Right now everything is fully priced and suppliers are filling everyone’s boots while the credit contraction in the USA is shrinking surplus leverage out of the system. This whole situation is one headline away from price breakdown and a global retrenchment. We may have to wait for a strong decline in US demand before the shoe drops.

Returning to the energy market, my posts late last week should make it extremely clear that the first phase of the solar energy transition is now upon us. The initial price is set at $1.00 per manufactured watt. This is already cheap enough for a rapid rollout and a single machine will produce the power equivalent of a nuclear power plant each year.

Since manufacturing is now on internet time, the transition will be utterly swift and powerfully supported by frightened Americans, who never again want to be beaten up at the gas pump.

There may have been no political support two years ago for a national energy policy, but I am certain that the presidency will go to the candidate who enunciates a credible energy program, rather than a carbon tax or its like. Americans are scared and they want relief and reassurance now.

Alternative Energy Economy Begins

Here we are in early 2008 and at the same time as the credit disaster in the US is fully developed, slashing US purchasing power as reflected by a lousy christmas for retailers, the price of oil merrily goes along close to $100 per barrel.

US oil demand is surely in decline, yet in an off season the price is steady at its high. I suspect that when the history of this period is written, that we are experiencing a significant reallocation of resources in the face of declining options.

We have had the first substancial market break, heralding the commencement of a protracted down swing in securities. The banks are writting down their capital reserves which then makes them carefull lenders. There will be plenty of good credit looking for a home over the next few years. And the Fed is scrambling to find a way to lessen the impact to provide a soft landing.

And I think that for the first time since the depression, cities are getting into the housing business. Rather scary folks, isn't it?

As I have posted earlier, oil supply has lost its elasticity. We have had forty years of convenient oil out of the middle east and have forgotten that even this fabulous resource reaches a point in which its daily production must go into decline. And today all the available evidence is saying just that. It is telling that one of the great institutuional naysayers, Cambridge Energy Research Associates, are now stating global production declines of 4.5%.

In fact we have already felt the bite of that decline and we are watching our oil stocks shrink. That is why the price is so bouyant. Remember that the price is currently twice what it was a mere year or so ago. The open question now is how long can we drag this out before aggressive rationing by both price and regulation is imposed. Obviously, George bush is hoping to tip toe out of office before this load of bricks lands on his head. My sense is that we will be seeing major high prices for oil this summer in spite of everyone's best intention. It may even develop into a crisis atmosphere, particularly if the markets respond by going into a steady decline.

Anyway, this will continue the capital movement of resources into alternative fuel strategies upon which I comment heavily.

As I have previously said, we are entering a world of $100 to $300 oil. This will make the automobile inconvenient to operate except as an occasional luxury. And every alternative becomes viable to impliment. So although there will be pain, there will also be great capital intensive transitions to be involved in.