Friday, November 28, 2008
An economic analysis of the external value of CO2 shows an unambiguously high positive value: we should be encouraging, not deterring, CO2 emissions
Emailed this afternoon to: a-and-r-Docket@epa.gov
INRE: Docket ID Number EPA-HQ-OAR-2008-0318
Comment period ends today.
An economic analysis of the external value of CO2 shows an unambiguously high positive value: we should be encouraging, not deterring, production of CO2
Missing from the debate on CO2 is a proper economic analysis of the external value of CO2: the costs and benefits of CO2 that are not captured in market prices. Virtually every economic analysis that has been done starts with the IPCC’s projections of CO2 induced global warming, then looks at the economic costs of that predicted warming. But this is not the correct form for an expected value calculation. A proper analysis of the expected external value of CO2 would look at the external value of CO2 under all the different possible climate outcomes and weight these different external values by the likelihoods of the different climate outcomes. For instance, if natural climate variation is headed in the cooling direction, then the slight warming effect of a slightly thicker blanket of greenhouse gases would be a benefit, which needs to be weighted by our best assessment of the probability that natural climate variation is headed in the cooling direction.
Even in the absence of natural cooling, a modicum of extra warming will in almost every circumstance be desirable. The historical record is clear. During the medieval warm period, when Greenland was green, civilization flourished throughout the world. Growing seasons were longer, there was more water vapor in the atmosphere, and winters, the great killer of people and animals, were milder. The only way that the IPCC is able to cast human induced warming as a threat is through its extraordinary proposition that the miniscule changes to the atmosphere effected by human activity dominate the natural sources of temperature variation. The fact that global temperature stopped rising 10 years ago, and turned sharply downward last year, proves conclusively that human changes to the atmosphere do NOT dominate the natural sources of climate variation, and if the natural sources of temperature variation still predominate, then a little bit of human caused warming will always be beneficial. Planet Earth is naturally a bit on the cold side as far as life is concerned, alternating between hundred thousand year-long ice ages and 10 to 12,000 year-long interglacial's (our current interglacial having begun 11 ½ thousand years ago). If our environment alternates between way too cold and only a little too cold, then the slight warming effect from human produced CO2 will always have a positive external value, whether it is mitigating natural cooling or adding a slight boost to the always insufficient natural warming.
Climate science and economics: the omitted variable problem
The fact of recent global cooling is not the only grounds for dismissing the IPCC’s radical claim that natural temperature variation is now dominated by the human production of CO2. When the source of this claim is examined, it is easily recognized as an old nemesis of the economics profession. Economists have been conducting statistical analyses of complex and uncontrolled environments for far longer than modern climate science has been in existence. We have had to sort through the variety of analytical mistakes and statistical legerdemain that such a science is vulnerable to. Thus it is easy for an economist to recognize that the IPCC is committing one of the classic statistical frauds: the omitted variable.
In any statistical analysis, the omission of any explanatory variable will cause the explanatory power of that variable to be misattributed to any correlated variables that are included. Economists have spent decades weeding out “advocacy statistics” that intentionally leave out explanatory variables so that effects can be misattributed to correlated variables that the “advocacy statisticians” have a vested interest in. A classic example from the field of economics is the statistical analysis of women's pay. It turns out that men on average work quite a few more hours per week than women (who on average spend more hours taking care of the home). In other words, gender is correlated to hours of work (and to other variables that legitimately influence pay). When these explanatory variables are left out, it appears that for men and women of equal qualifications, the men are getting paid more, and such studies have been used politically, with great success, to demand affirmative action for women. Yet when the omitted variables are included, it turns out that equally qualified women who work the same hours as men actually earn substantially more, exactly as we would expect in a society that maintains powerful legal inducements to female advancement in the workplace.
The IPCC is using the same trick as the feminist advocacy statisticians, but on an unprecedented scale, perpetrating the most ambitious fraud in the history of science. There are two competing theories of the small amount of late 20th century warming. The IPCC attributes this warming to the post World War II increase in human production of CO2, which as a greenhouse gas is known to have some heat trapping effect. The competing theory is based on the well documented correlation between solar activity (sunspots) and global temperature. Shaviv and Veiser studied cosmic ray and temperature signatures in the geological record going back 550 million years and found that the level of cosmic rays explains statistically about 75% of temperature variation. Similarly impressive correlations have been found on every time scale, all the way down to the decadal, starting with Christensen an Lassen’s seminal 1991 paper, “Length of the Solar Cycle: An Indicator of Solar Activity Closely Associated with Climate.” The subsequent decade and a half of studies consistently point to solar activity as the primary driver of climate. See for instance “Persistent Solar Influence on North Atlantic Climate During the Holocene,” by Bond et al, 2001 and “Strong coherence between solar variability and the monsoon in Oman between 9 and 6 kyr ago,” by Neff et al, 2001. There are hundreds of such confirmations, according to climatologist Fred singer, who amasses the evidence in his book Unstoppable Global Warming: Every 1500 Years.
Sunspot activity has little effect on the sun’s total irradiative output, but it shifts the Sun's energy spectrum strongly towards the UV and it drives the solar magnetic flux (the solar wind). Because the change in total irradiative output is so small, it has to be the UV shift or the solar wind that is driving global temperature. The precise mechanism is not yet nailed down, but the leading theory comes from Henrik Svensmark. It has long been known that a stronger solar wind shields the Earth from some of the Galactic Cosmic Radiation (GCR) that would otherwise strike our atmosphere. Svensmark theorizes that GCR ionizes the atmosphere, seeding cloud formation. Thus when the solar wind is up, it in effect blows the clouds away, letting more sun through and warming the earth.
What we know for certain is that there is SOME mechanism (beyond the variation in total irradiance) by which solar activity is driving global climate. A high degree of correlation over decades, centuries, millennia, ages, epochs and eras implies a causal relation, and that causality can only go one way. It is not global temperature that is causing solar activity.
Sami Solanki coined the term “grand maximum” to describe the level of solar activity between 1940 to 2000. Given the historical relation between solar activity and temperature, those grand maximum levels of solar activity could easily explain much or all of the small amount of late 20th century warming. What does the IPCC do with this possible explanation for 20th century warming? The only component of solar activity that is modeled by the IPCC is the tiny variation in total solar irradiance, which is pegged at its known tiny level. The UV shift and the solar wind, known to somehow between them explain 75% of all temperature variation on all time scales, are simply and completely omitted. Since CO2 was rising rapidly during the 1940-2000 period of grand maximum solar activity, omission of solar effects from the IPCC model causes the well documented warming effect of solar activity to be misattributed to CO2. The IPCC then magnifies this misattributed warming exponentially by projecting it decades into the future.
In the Spring of 2007 I submitted a comment on the 4th IPCC Draft Report that traces the omitted variable phenomenon through the fourth report. This is the greatest scientific fraud in history, and it is easily, EASILY, recognizable as fraud to anyone who is familiar with the omitted variable problem. Take away the misattributed and then multiplied warming effects, and the expected effect of CO2 on temperature becomes very modest, implying beneficial effects regardless of whether natural variation at a particular point in time is headed in the warming of the cooling direction. That beneficial effect is greater in a time like the present when natural variation is headed in the cooling direction, but because the effect is beneficial regardless of the direction of natural temperature change, the expected external value of CO2 is unambiguously positive regardless of our state of uncertainty about the direction of natural temperature change. The only possible exception is the case where the warming effects of CO2 have somehow come to dominate natural temperature variation, causing warming to feed on itself in some way never seen in the natural history of the planet. But all the prognostications about runaway CO2-caused global warming are blatant statistical fraud. Economists have been throwing this kind of trash in the garbage for many years. The adolescent field of climatology needs to learn from economics and start doing the same.
Palo Alto, CA
A more complete economic analysis
I wanted to keep my remarks to the EPA simple, but there's a lot more to be said about the value of CO2. Interestingly, a full evaluation of CO2 exhibits a repeating theme, where risk profiles are consistently lopsided, showing danger only in the cooling direction. I went over these risk factors in some detail in an earlier post:
1. From our current warm-earth conditions, additional greenhouse gases have little capacity to cause additional warming, but could have substantial capacity to mitigate cooling.
Briefly, pretty much all the heat trapping work that CO2 can do is already being done by the CO2 already in the atmosphere, and by the much more abundant water vapor, which traps most of the wavelengths of infrared that CO2 does. The warmer the Earth is, the more water vapor there is an atmosphere, and the more irrelevant additional CO2 becomes.
The situation changes dramatically as the Earth cools. A colder atmosphere does not hold as much water vapor, leaving more heat trapping work for CO2 to do. The colder the climate becomes, the more we rely on CO2 to provide the greenhouse warming that keeps the earth from becoming an ice ball. A doubling of the tiny CO2 component the atmosphere has only a tiny warming effect when the Earth is already warm, but has a magnified warming effect when the Earth turns cold. Good stuff. Sitting on what may be the brink of the next Little Ice Age, we should be trying to raise the floor on the likely cooling by pumping out CO2.
In sum, CO2 presents little downside risk (only a tiny warming effect in the event that natural variation continues in the warming direction), but a relatively large upside risk (possibly significant raising of the floor on global cooling, in the event that natural variation heads in the cooling direction).
2. Warming appears to be self-limiting. Cooling is not (at least not until we are buried under mountains of ice).
A couple different physical processes are at work here. Roy Spencer theorizes that the increasing efficiency of the rain cycle as temperatures warm constitutes a natural thermostat. The more efficient rain cycle means that precipitation more completely removes moisture from the air. These efficient cloudbursts open up a column of dry air in the sky through which the heat produced by precipitation (opposite of the cold produced by evaporation) escapes into space. The warmer the earth gets, the more efficient the rain cycle, the more heat gets vented through cloudbursts, making warming self-limiting.
In contrast , the geological record proves that cooling is not self-limiting, as the Earth regularly descends into hundred thousand year-long ice ages. One of the lopsided mechanisms at work is the albedo effect. Cooling causes increased snow cover, which reflects away more sunlight than bare ground or open ocean does. This causes more cooling, causing snow and ice to grow still further, etcetera.
What makes the albedo effect lopsided in its operation is the fact that as snow and ice descend to lower latitudes, the change in territory covered grows rapidly. Also, the lower latitudes recieve sunlight more directly than the higher latitudes do, so when sun gets reflected away from the lower latitudes, more energy is lost per square mile of snow and ice than at higher latitudes. Cooling causes snow and ice to descend towards the temperate regions, where most of the earth's landmass resides. Thus relatively direct sunlight gets bounced away from progressively larger swaths of the earth's surface, causing the marginal albedo effect to grow rapidly.
By the same token, the marginal albedo effect shrinks as the earth warms. Starting from a warm period like the present, warming causes our relatively mild ice and snow coverage to retreat towards higher latitudes. The amount of territory involved keeps getting smaller, and it only recieves sunlight at a shallow angle anyway, so that the marginal decrease in albedo keeps getting smaller.
3. Specific to this point in time, the likely direction of natural temperature variation is very lopsided in the cooling direction.
Solar activity was at “grand maximum” levels from 1940 to 2000, and ALL the geological evidence points to solar activity is the primary driver of global climate. (There is literally NO evidence that global climate change has EVER been driven by CO2, unless you go way back to before there was plant life to suck the CO2 out of the atmosphere. We know in theory that marginal changes in CO2 should have SOME warming effect, but they are apparently too small to detect.)
From this “grand maximum” level of solar activity, there was nowhere to go but down, and if the past is any guide, that meant it was going to get cold, which is just what is happening. Since 2000 solar activity has dropped off dramatically, with the transition from solar cycle 23 to solar cycle 24 now dawdling along in an extended solar minimum. Concomitantly, global temperatures stopped rising in 1998, and fell dramatically last year.
Solar cycle 24 still could fire up strong, in which case the expected global cooling could be put off, but in all likelihood it is coming. Solar activity has nowhere to go but down from its recent high levels, and all the evidence says that the result is going to be a period of global cooling.
In an expected value calculation, that boost to the likelihood of cooling gets applied as a weighting factor to the extra high value of CO2 in the event of a cooling episode. Warming is more important the cooler gets, and the amount of warming work that CO2 does increase is the cooler it gets (and the less water vapor there is in the atmosphere).
In short, all of these different lopsided risk profiles are getting multiplied together to create a super lopsided risk profile, where down side risks are tiny while upside risks are relatively huge. They still aren’t big, because CO2 effects in general are small. But in relative terms they are gigantic, implying that the positive net external value of CO2 is unambiguously positive.
Actually there aren't ANY effects that have a negative value, given that a modicum of warming is a benefit, even if natural temperature variation is already headed in the warming direction. Unless warming has somehow gotten out of control, warming is good. The more the better. We have NEVER had too much warming. Since the claim that warming HAS somehow gotten out of control are based on the most blatant statistical fraud, is no reason to get any weight to that radical idea.
Not that CO2 has to be all benefits and no costs in order for it to have been unambiguously positive value. That only requires that the benefits unambiguously outweigh the costs. The actual result is turns out to go even further. There are no costs. CO2 is nothing but benefits. And we can throw in a few more too, like the fact that CO2 is plant food. A doubling of CO2 has substantial effect positive affect on agricultural productivity. That the EPA, and governments all over the world, are looking at CO2 as a pollutant that needs to be dramatically suppressed is truly a form of madness.
Disregard for truth creates divorce from reality
That's the theme of this blog. Error theory examines the consequences of failure to think straight, which usually is driven, not by an inability to think straight, but from attempts to gain advantage by avoiding or suppressing inconvenient truths. The global warming alarmists are an extreme example. All of these trained climatologists (those who got their funding from Al Gore) have managed to convince themselves that human economic activity is such a threat to the environment that anything they can do to stop it, no matter how dishonest, is justified. Their conviction that shutting off the oil economy is necessary for saving the natural world natural world has nothing to do with global temperature, which was just a convenient pretext.
The consequence is that by not caring about the truth, they have become divorced from reality. They are committing the greatest scientific fraud in history, and pursuing a course that is utterly destructive to both mankind and the environment.
Global cooling is not just destructive to humanity, but if it proceeds very far, will dramatically shrink the planet’s living space for all of us: plants, animals and humanity. We should be doing everything we can to counter that eventuality, and one of the things we can do, which will do no harm in the event that natural variation turns in the other direction, is to keep on pumping out the CO2.
We don't need to actually subsidize CO2, but the correct tax, we are going to apply one at all, is clearly negative. We should be paying people to produce CO2, In accordance with its unambiguously positive external value.
How the IPCC’s statistical fraud raises the specter of runaway warming
Another point that I left out of my EPA comment just to keep things simple was an explication of how the IPCC's scare-mongering about runaway warming is completely a product of its statistical fraud. To be exact, when the IPCC misattributes the warming effects of solar activity to CO2, it does so by creating a large multiplier effect for temperature “forcings.”
The direct warming effects of CO2 are known from physical principles to be tiny. To translate this tiny warming effect into something that could account for late 20th century warming, the IPCC has to assume that it kicks off a feedback loop. The initial increment of warming causes additional evaporation from the oceans, building up the water vapor content of the atmosphere. Since water vapor is a greenhouse gas, the result is an additional increment of warming, which produces additional water vapor, etc. Estimated statistically, this multiplier effect is whatever it has to be to misattribute solar warming effects to CO2.
This is where the prospect of a runaway comes from. To get any significant CO2 warming effect at all, the IPCC has to concoct this fantasy of a vicious cycle of warming. But it's all nonsense. The best estimate, as Roy Spencer points to out, is that the actual water vapor feedback effect is negative. Warming produces additional water vapor, yes, but this additional water vapor increases the efficiency of the rain cycle, so that every cloudburst more efficiently pumps heat into the stratosphere, the opposite of the heat trapping effect that the IPCC envisions.
The IPCC’s counterfactual picture of feedback effects gets jettisoned if solar activity is properly included in the model. Then the warming effects of solar activity get attributed to solar activity, leaving little or no warming for the IPCC to misattribute to CO2 in the form of exaggerated feedback effects.
Wednesday, November 26, 2008
No, the Mecca-orientation of the Crescent of Embrace is NOT a product of the landform
Defenders of the Flight 93 memorial repeatedly insist that the Mecca orientation of the giant crescent HAS to be a coincidence. It is completely determined, they insist, by the landform, the path of Flight 93, and the impact point, leaving no room for intent to enter.
Of course it is crazy to think that, so long as it is just an unfortunate coincidence, there is nothing wrong with planting a giant Mecca-oriented crescent (the central feature of a mosque) on the graves of our murdered heroes. About as crazy, actually, as thinking that the Mecca-orientation of the giant crescent could really be a coincidence. First architect Paul Murdoch just innocently comes up with a half mile wide Islamic-shaped crescent to honor the victims of Islamic terrorism, then he innocently places the Sacred Ground Plaza between the tips of the giant crescent, in the position of the star on an Islamic crescent and star flag, then he innocently just happens to point this entire crescent-and-star-flag configuration at Mecca (and on and on and on).
When the nation saw the second airliner hit the Trade Towers, everyone immediately knew that the first impact was no accident. The more airplanes that Paul Murdoch flies into the Flight 93 memorial, the more the Memorial Project thinks it HAS to be an accident. Its just TOO OUTLANDISH to think that an Islamic enemy could attack us out of the blue and unawares in such a heinous way. What precedent is there for thinking that such a thing could even be possible? (Knock, knock, knock.) And so the more evidence they are confronted with, the more impossible it seems, and the more they insist that Murdoch HAS to be innocent.
Okay, so they are WILLFULLY blind. Even so, they still need an excuse to hang their willful blindness on, and part of Murdoch's evil genius is to supply these excuses. That is where this trope about the crescent design being dictated by the landscape comes from. It comes from Murdoch, and is actually one of his most brilliant deceptions.
Murdoch' PRELIMINARY DESIGN actually can be seen as dictated by the landform, the flight-path, and the point of impact
Before any designs were submitted, the Memorial Project gave all the design contestants a site organization map that labeled the "the ridgeline," "the bowl," "the crash site," and "the flight path." Architect Paul Murdoch claims that all he did was combine these elements by having the flight path symbolically "break" the circular bowl shape, creating the giant Crescent of Embrace design. If you start a crescent at the point where the flight path crosses the ridgeline, and follow the rim of "the bowl" around the ridgeline to create a crescent that "embraces" the Sacred Ground where Flight 93 crashed, then you get the Crescent of Embrace design. Since this procedure uniquely determines the orientation of the crescent, there is no room for the orientation to be determined by anyone's intent. If it faces Mecca, it HAS to be a coincidence.
This argument actually works, but only when applied to Paul Murdoch's ORIGINAL Crescent of Embrace design, which did NOT point to Mecca. Take a look:
The Site Organization Map (left), shows "the bowl," bordered by "the ridge," along with the flight path and the crash site. Murdoch's preliminary Crescent of Embrace design (right), uses the point where the flight path crosses the ridge/bowl as the end point for a crescent that has the Sacred Ground centered between its crescent tips. Resulting orientation: 11.1°. clockwise from north, which is 44.1° north of Mecca.
The explanatory notes in the preliminary design are perfectly accurate when they describe the crescent as focused on the Sacred Ground:
A curving arc of maple trees along a walkway unites the ridge and forms an edge to the bowl, with a focus on the Sacred Ground.It is also correct to say that this crescent and its orientation are uniquely determined (to within 5° or so) by the landform, the flight path and the crash site. If the crescent arc were extended much further then the bisector of the crescent would no longer point to the Sacred Ground. (The amount of curve between the end points of the crescent does not affect the crescent's orientation. Murdoch established the curve of his original crescent by smoothing the curved shape of the ridge line.)
Murdoch's final crescent design ignores the landform and the crash site
If Murdoch's preliminary crescent design is uniquely determined by the combination of landform, flight path and crash site, then his final Crescent of Embrace design, rotated 42.3° further to the east, obviously CANNOT be determined by these factors. By extending the crescent in his final design to match the full Islamic crescent shape (covering about 2/3rds of a circle of arc), Murdoch created a crescent that no longer points to the Sacred Ground:
The bisector of the crescent in Murdoch's final Crescent of Embrace design points approximately 1.8 ° north of Mecca (marked "qibla"). Notice that the bisector of this Mecca-oriented crescent does not even touch the Sacred Ground, but crosses through the upper portion of the Sacred Ground Plaza that sits up the flight path from the Sacred Ground.
While the crescent no longer points to the Sacred Ground, Murdoch still PRETENDS that it does. Asked last summer about the orientation of the crescent, Project Superintendent Joanne Hanley and architect Paul Murdoch both claimed that it points to the Sacred Ground:
Further, [Hanley] added, it is still unclear exactly where on the landscape the memorial will even be situated. It could move as much as 200 yards, she said, discounting the idea that it faces Mecca.Hanley may be honestly duped, but Murdoch knows full well that the crescent does not point to the Sacred Ground. Such an orientation would ruin his mosque design, not just because a Sacred Ground oriented crescent would no longer point to Mecca, but also because it would place the graves of the infidels in the location of the star on an Islamic flag, leaving them inside the symbolic Islamic heavens. Blasphemy!
"The only thing that orients the memorial is the crash site," she said.
Mr. Murdoch reinforced that idea.
"It's oriented toward the Sacred Ground," he said. "It just couldn't be clearer."
Murdoch has a very different symbolism in mind for the star on his giant crescent and star flag. In the top third of the Sacred Ground Plaza, centered on the bisector of the giant crescent, in the exact position of the star on an Islamic flag, sits a separate upper section of Memorial Wall, inscribed with the 9/11 date. The date goes to the star on the Islamic flag. The date goes to the terrorists.
The duping of David Beamer
At this August's public meeting of the Memorial Project, David Beamer (father of Flight 93 hero Todd Beamer) came out to counter Tom Burnett Sr.'s protests against the crescent design.
Mr. Beamer declared that he had performed several months of due diligence investigating the warnings about the crescent design, by which he presumably meant that he had checked at least a few of our factual claims, like the Mecca orientation of the giant crescent (now called a broken circle). But instead of reporting the results of his fact-checking, Beamer changed the subject. He did not say a single word about the accuracy of any of our claims, but only reported how he had met with architect Paul Murdoch and was satisfied that Murdoch's design properly honors his son and the other murdered heroes of Flight 93.
If he actually did any fact checking, then he is fully aware that the giant crescent DOES point within 2° of Mecca, in which case there is only one plausible explanation for Beamer declaring the design innocent. Murdoch must have convinced him that the crescent orientation is determined by the landform, the flight path and the crash site, so that its orientation on Mecca HAS to be coincidence.
If Mr. Beamer had bothered to talk to the person who has been warning of an enemy plot then Alec Rawls would have explained to him that no, these physical facts about the crash site do NOT yield a Mecca-oriented crescent. They yield a crescent that points 44° north of Mecca. It is a very strange concept of due diligence to trust the assurances of the person one is being warned is an enemy operative while refusing to talk to the person who is issuing warnings
Very strange too, to think that just because one is convinced that the Mecca orientation of the crescent is a coincidence, that somehow makes it okay to deny the Mecca orientation when speaking to the press and the public, as several Project spokesmen have now done. The fact that Beamer and Hanley and other Project Partners have been duped by Murdoch's explanations would be of little consequence if they just let the public know what they know, so the American people can decide for themselves whether the fact that it might be a coincidence makes it okay to plant the world's largest Mecca-direction indicator on the Flight 93 crash site.
Obviously the answer would be "NO!" and this nightmare would be over. It is the lying that is the problem. Hanley et. al. can be a bunch of dupes if they want, but they have no right to deceive the public about what they know.
Monday, November 17, 2008
Leverage limits should be determined by the need to moderate deflationary cycles, not by the riskiness of the leveraged assets
Yup. Instead of trying to keep leverage ratios in a rule-of-thumb safe zone, they tried to derive a theoretically "proper" leverage ratio for assets that they never even understood. Apparently they ended up allowing twice the leverage ratio of traditional banks (up to 20 to 1, versus 10 to 1 for commercial banks). Banks are actually subject to multiple requirements--reserve requirements and capital requirements and other oversight--that make them fundamentally safer than investment banks and other non-bank brokers to begin with. Thus the regulators allowed inherently less safe institutions to run half the margin requirements of safer institutions. Pure insanity.
Even if the regulators did understand the assets, they were looking at leverage ratios the wrong way. The reason to limit leverage ratios is to limit the vicious cycle of deflationary feedback in the event of a market downturn. We have learned through painful history that if markets get too leveraged they become unstable, prone to speculative bubbles and deflationary collapse (where leveraged holders are forced to sell to consolidate their positions, further driving prices down). As a rule of thumb, reserve requirements and margin requirements in the range of 20% have been found to be cautious and safe; reserve requirements of 10% are reasonable; while leverage ratios much beyond 10% are dangerous, regardless of the riskiness of the assets themselves.
The riskiness of the leveraged assets only determines the likelihood of a negative shock, but the likelihood isn't what matters. We want to be able to survive an event, whether the probability of its occurring is 1 in 10 or 1 in 100. The purpose of limited leverage is to make sure that when market downturns do occur, they don't create a propagation of bankruptcy that extends beyond the real shock to the economy. Economies are always going to suffer large and small shocks. We just want the shocks to be contained to the necessary damage, without creating a general propagation of collapse.
The subprime regulators took their eye off that ball. They thought (wrongly) that these assets had very little chance of turning belly up and deduced (wrongly) that that made it okay for investment banks to hold these assets with very little margin. But the margin requirement should be set, not by the likelihood of the assets turning belly up, but by the need to limit the propagation of collapse in the event that the assets DO turn belly up.
It makes sense to allow SOME adjustment for the safety of the assets. We impose substantially greater reserve requirements for stock speculation (25%) than for normal bank loans (10%), but there's no excuse for allowing leverage ratios to get outside of the normal rule-of-thumb bounds, especially when regulators didn't even understand the assets that they were dealing with. Faced with that fundamental uncertainty, they should have turned to traditional leverage ratios as a guide, and it's hard to understand why they didn't.
Maybe there was corruption involved. We know that the Republicans tried for years to curtail irresponsible behavior by Fannie Mae and Freddie Mac, while Democrats like Barack Obama and Barney blocked reform efforts so that their friends could keep feeding at the public trough. On the other hand, the people who allowed the tiny subprime margin requirements are either executive branch (the SEC) or independent (the Fed).
I'm guessing that in this case the regulatory failure was a classic case of the regulators being captured by the industry. They all become buddies, and it's hard for the regulators, who understand less than the industry people, to tell the industry people that they're wrong, especially when the industry is making money hand over fist. It's only when it all goes wrong that they all start remembering why they're supposed to be cautious.
Treasury Secretary Paulson himself is tremendously vulnerable to that dynamic. Not only is he pals with the honchos at Goldman Sachs (a primary beneficiary of the bailout), but he probably still has a good chunk of his $500 million there, giving him a tremendous conflict of interest. Given his evident lack of expertise (claiming earlier this year that: "our banks and investment banks, are strong"), that conflict is hard to justify.
Changing the bailout plan from TARP (Troubled Asset Relief Program) to re-capitalization
This could be a move in the right direction, if it is done right. The original bailout plan was probably a dead letter. How was the government going to do a better job of pricing and managing all of these complicated assets than the bankers whose job it is to price and manage complicated assets? At best this was going to take time, but it seems that time has already made the TARP approach passé.
According to my friend in the business, the bad debt from the ill-advised sub-prime lending has already “worked its way through the system,” via the traditional tools that the Fed has at its disposal for combating financial instability. First is the Fed's discount window (making loans to banks, with the banks’ long-term assets as collateral). The discount window addresses the fundamental instability of the banking system: that a banks liabilities are short-term while its assets are long-term, raising the prospect of “runs on the bank” in the event of a financial panic. It looks like the Fed has already made a couple trillion dollars worth of discount window loans, but that only solves half the problem.
The banks long-term assets have taken a major hit thanks to the sub-prime meltdown. If the sub-prime meltdown has already “worked its way through the system,” that means the loss of asset value has been incorporated into everybody's balance sheets and stock values, leaving us with a bunch of undercapitalized banks. In normal times, the Fed handles the periodic bank failure by facilitating a reorganization, where the distressed bank is taken over by a healthy bank, with something close to a complete loss of equity value for the owners of the distressed bank.
The current crisis is too deep to be managed by reorganization alone. The healthy banks are not healthy enough to absorb the failing institutions and still have the resources to do the lending that they need to do if the economy is to function. Unfortunately, says my insider friend, simply infusing the reorganization efforts with bailout money is already proving not to work. The treasury has pushed huge amounts of money on some of our biggest banks in hopes that they will lend it, but instead they've actually tightened credit.
It isn't that they are afraid they're not going to be paid back. The problem is that they have better things to do with the money then lend it. With banks collapsing all over, any institution that has money can pick up valuable assets at fire-sale prices, so instead of doing their jobs (making the loans that allow the economy to function) they go on shopping sprees to improve their balance sheets. It makes perfect economic sense for them. It just doesn't solve the banking crisis.
This was the impetus for Ed Koch’s letter to Treasury Secretary Paulson and Federal Reserve Chairman Bernanke, asking them to require banks to make loans to “creditworthy” customers. But can the government really bully banks into doing what is not in their interest? Such an approach is doomed to fail.
If we have gotten ourselves to such an impasse, a better alternative--one that might actually work--is for the government to buy the failing banks itself. Then it can run them how it wants, infusing them with loanable funds and having them perform the traditional banking role of making loans, so that the economy can continue to function. Once these banks are back on their feet, the government can sell them, and it ought to be able to make a profit in the bargain. There is a reason why the healthy banks want to buy up the distressed banks. They are getting a good deal, which means the government can too. Today's failing banks are loaded with valuable assets that should pay off over time. Get them through the present crisis (and run them so that they help all of us through the crisis by doing their money-lending job), and the asset value should prove out in the long-term, so long as the government's bank managers don't use recapitalization funds to go making more bad loans to un-creditworthy borrowers.
The government already took an equity position in the AIG bailout and essentially took over management. Whether this kind of takeover is part of the current bailout plan I don't know. It seems that Paulson and Bernanke are figuring things out as they go along. But if they are going to try temporary nationalization, I will think they might be on the right track.
The banking crisis HAS to be solved
Those of you who have followed my career know that I'm a free market person -- until you're told that if you don't take decisive measures then it's conceivable that our country could go into a depression greater than the Great Depression’s. So my administration has taken significant measures to deal with a credit crisis.What he said. Just remember that this mess was not caused by market institutions, but by government pressure to ignore market driven limits on lending. Congressional Democrats forced the sub-prime markets open. Sarkozy has it ass backwards when he says that the current crisis disproves the idea that “everything could be solved by deregulation, free competition and the market.” The banking system does need to be regulated, but as usual, the problem has been too much government, not too little.
Still, now that we are in this mess, we had better do whatever it takes to fix it, including such drastic steps as temporary nationalization, if that will work. The change in the bailout plan might lead some people to think that the urgency of the original plan was trumped up (especially given Paulson's private interests in bailing out his cronies), but it wasn't. The word I got from inside the business was that Armageddon was days away. The bailout money was needed. It just got shifted from TARP to recapitalization because the ground shifted. The troubled assets got incorporated into everyone's balance sheets and the emergency became the lack of capital.
Hopefully these guys can get ahead of the game and figure out how to head off the next crisis instead of just responding to it, but if they can't, it's still better to respond than not.
Nationalization in the age of Obama
What makes a strategy of temporary nationalization particularly risky today is that we just elected a president whose mentor advocated violent overthrow of American capitalism, while Obama himself shows every sign of being a ruthless aggrandizer of whatever power he can get his hands on. He is already deeply implicated in systematic vote fraud and systematic campaign finance fraud. We just elected Hugo Chavez as our president. Such a man is likely to turn temporary government ownership into permanent nationalization of the banking system.
Maybe we could put a mandatory sale date on any equity stake the government takes in any bank reorganization. Not that that would be much protection. The fact is, Obama's gonna do what Obama's gonna do. We elected this radical leftist president. It's a little too late to think about containing leftist tendencies. The barn door is already open. All we can do at this point is try to pursue the best policy.
I am far from certain that the best policy is temporary nationalization, but even in the best of times, the mismatch between short-term liabilities and long-term assets makes the banking industry inherently unstable and in need of government intermediation. It is a quasi-government industry to begin with, so a bigger government role is to be expected in a period of crisis.
In general, a lighter touch is preferred, where it can get the job done, but it seems fruitless to try to manipulate banks to do what they don't want to do. If in today's extreme circumstances it doesn't make sense for banks to act like banks, then having the government take temporary control of failed banks is an obvious solution.
A little temporary nationalization could also put a much-needed damper on the rising tide of cries for bailout money. When getting a bailout means losing ownership, expect the movers and shakers to withdraw their hands as if from a cobra.
The problem with a bailout is that it rewards irresponsible behavior. A buyout does not. That might satisfy conservatives like Michelle Malkin who are concerned about equity: “I pay my debts you pay yours!” If you don't pay your own debts, you no longer own the store.
Wednesday, November 12, 2008
Tom Burnett Senior: “We have an Islamist design here that can't go forward, please.”
Powerful video of Tom Burnett Senior and Alec Rawls at the August 2nd Memorial project meeting. The clip below is Part 1 of Alec’s new video exposé, starting with Mr. Burnett 's appeal to the American people to please help him stop the Park Service from planting a giant Islamic shaped crescent atop his son's grave.
Part one: it points to Mecca. Clip covers the Mecca orientation of the giant crescent, the phony redesign, and the crescent-topped minaret. Lots of unaired news video and animated graphics, bookended with the coolest spaghetti western music ever.
A terror war battle that we can still win, despite a president-elect who does not want to fight
Rational people still want to defeat the Islamofascist enemy, but half of the electorate will now get its way in pretending that there is no enemy. Exposing and stopping the terrorist Memorial to flight 93 is a chance for the rest of us to still achieve victory, and on multiple fronts at once. Not only can we foil an enemy plot, but we can at the same time expose the willful blindness of those peace-at-any-cost countrymen who are engaged in blatant cover-up of the most damning facts about the crescent design.
These are the two battles we need to win. We have to expose and stop the deceptive agents of Islamic conquest, and we have to expose and stop the peacenik cover-up of every enemy threat.
We also need to stop the re-hijacking of Flight 93 for its own sake. Just listen to Mr. Burnett's insistence on a proper memorial for his son Tom and the other heroes. Yes, the battle over the memorial is only symbolic, but as our Democrat-controlled media just proved by delivering Obama to the presidency, it is the information war that ultimately determines everything.
To those conservatives who have been staying away from the memorial controversy, please reconsider. All of our claims about the Memorial are easy to verify. This is a real attack on our country, and in the age of Obama, it is a rare battle that we are still in a position to win. The father of one of America's greatest heroes is pleading for your help, but he is also
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One of our blogburst participants, Curt at Flopping Aces, e-mails a reminder about the great work done by the VALOUR-IT program at Soldiers' Angels, delivering computer-based help to wounded soldiers.
Monday, November 03, 2008
Lesson for the Obamamedia: threats you try to cover up will be inevitably be realized
The lesson of the flight 93 memorial is simple. Whatever dangers people try to wish away they are going to get smashed over the head with, for the simple reason that they have closed their eyes to the threat. They are ALLOWING it to proceed and smash them over the head. It is the negative version of the lesson of Flight 93. Heeding information from the ground that their plane was being used as a missile, the heroes of Flight 93 were able to stop the hijackers from reaching the nation's capitol. At the opposite extreme, efforts to hide the truth have turned the Memorial Project and the Obamamedia into enablers of evil.
The election fraud example
While the blogosphere is afire with the discovery that Obama accepts false-name and false address credit card donations, allowing foreigners to donate and allowing everyone to evade campaign finance limits, the Obamamedia makes a front page "scandal" over the Republican National Committee buying a campaign wardrobe for Sarah Palin. When the Washington Post can no longer justify ignoring the donation fraud story, they run a blatant white wash, pretending that the McCain website has the same issues. Then they run a second whitewash, pretending that Obama is only accepting false-name and address donations from pre-paid credit cards, which everyone following the story online knows to be false.
Similarly for the massive and systematic ACORN vote fraud, and Obama's years of close association with ACORN. The press desperately tries to cover up extensive evidence that Obama will aggressively try to steal elections so that this information won't keep him from reaching the presidency, where he will have the POWER to steal elections. If this reality would only smash THEM over the heads, it wouldn't be so bad, but it is ALL of us who are going to end up under the thumb of a Hugo Chavez style election stealer if the media keeps suppressing the evidence that Obama IS a Hugo Chavez style election stealer.
They don't MEAN to usher in a usurper. They just want a Democrat to win, and because they refused to report Obama's negatives during the primaries, Hillary Clinton lost and they are now stuck with a Democrat that only Bill Ayers and Jeremiah Wright would vote for if the facts were known. By the same token, the Memorial Project does not mean to build a terrorist memorial mosque, but because they have decided to avoid and suppress the evidence, that is what they are actually doing.
Pretending to have investigated warnings
Memorial Project Chairman John Reynolds dismisses the claim that the Tower of Voices is a year-round accurate Islamic prayer-time sundial by claiming that ANY tower with a wall around it can be used as an Islamic sundial. When time for Islamic prayers comes, just mark the spot where the tower's shadow crosses the wall and there you go.
Wrong. Islamic prayer times are determined by shadow length, not shadow angle. Prayer time markers must be placed a particular distance from the sundial's gnomon, and must follow a particular arc. Chairman Reynolds’ misconception that Islamic prayer times can be marked by shadow angle proves that he never even looked at the sundial analysis (the subject of our last blogburst), yet here he is assuring the public that he has investigated this evidence of an al Qaeda sympathizing plot and found it to be a false alarm.
Same for the Obamamedia. They are pretending that they have vetted Obama when they have actually been protecting him from scrutiny.
How can it not be front page news that one of Obama's closest political allies, his fellow Luo tribesman Raila Odinga, who rioted his way to the Prime Ministership of Kenya, is known to be lying about being a Christian? It turns out that this man who Obama traveled to Kenya to campaign for in 2006 is actually a secret Islamofascist, signing a secret document with Muslim leaders in which he first declares Islam to be the only true religion, then promises to impose Sharia law.
None of this is in question. The secret agreement became public when the Muslim leaders decided to brag about it. You can read Odinga's admission of the secret agreement on his own website, yet it has never been mentioned in our mainstream media, just as Obama's own lies about his Muslim background do not get reported. Testimony from childhood friends and from his own sister belie his claim to have been raised Christian rather than Muslim.
Deception is a virtue in Islam
It's Obama's deceit about his Muslim background that is damning. The Koran allows Muslims to lie about their religion in order to advance Islamic conquest, and Obama knows the Koran. He studied it in Arabic as a child (which is how he was able to sing the Shahada--the Muslim declaration of faith--for Nicholas Kristof in Arabic "with a first rate accent": he was drilled on it). It is the fact that he lies about his past and his associations that gives the clearest indication that Obama actually is a secret Islamofascist.
Just the other day he claimed not to know about his illegal alien aunt, when it turns out his campaign has actually been tracking her.
Obama actually seems to exult in deception. Note the surreptitious fingers he gave to both Hillary and McCain. The obvious explanation is that deception is a virtue in Islam, so long as it is in the service of Islamic conquest. There is nothing wrong with tricking people in Obama’s mind because there is nothing wrong with tricking people in his religion.
Obama also has Nation of Islam people on his staff. NOI is our domestic Islamofascist group, specializing in anti-semitism and anti-white racism (al la Obama mentor Jeremiah Wright, who champions NOI leader Louis Farrakhan). One of Obama's best dinner buddies is Palestinian terror supporter Rashid Khalidi. Obama's cousin/buddy Odinga gets most of his funding from Moammar Ghaddafi. The terror ties go on and on, with all of it covered up by the Obamamedia. When Obama slips up and admits “my Muslim faith,” they even jump in to correct him.
If McCain possessed a single liability one tenth the magnitude of any of Obama's, he would be gone in a week, yet a recent study shows that the media coverage of McCain has been twice as negative as the Obama coverage, even in the absence of any obvious negatives (beyond being much too far left for any real conservative, which is actually a positive vis a vis the radically leftist Obama).
Truth suppression can give us a hijacked presidency as easily as a hijacked memorial
Suppress evidence of Obama's long and close relationship with domestic terrorist William Ayers and you get hit over the head with a president who has the same idea of "change" that Ayers does. Hide the Obama-ACORN-Fannie-Mae policies that caused the financial meltdown and you'll get whacked with MORE meltdown. Bury Obama’s declared intent to use the phony religion of global warming alarmism to cut off our energy supply and destroy the U.S. economy, and we will get a destroyed economy.
Just look at the Memorial Project. In September 2005, when national controversy over the Crescent of Embrace first erupted, the Pittsburgh Post Gazette held a special meeting to discuss the discovery that the giant crescent (now called a broken circle) points almost exactly at Mecca. (That makes it a mihrab, the Mecca-direction indicator around which every mosque is built.) Faced with this explosive information, the Post-Gazette made a top editorial decision not to tell the public about the Mecca orientation of the crescent. (Crescent of Betrayal, Part II, Chapter 6, p 108.) As a result, we are still on track, three years later, to have a terrorist memorial mosque planted on the graves of our murdered heroes.
We are supposed to be vigilant now. We learned on 9-11 the nature of our Islamofascist enemies, that they hide amongst us, pretending to be trustworthy friends while perpetrating acts of war. Armed with this knowledge, as the passengers and crew of Flight 93 were, we think we will never sit still for a hijacking again. Yet our media still hopes to gain advantage from truth suppression, and so we find ourselves today on the brink of having a hijacker take over the Oval Office.