These articles are among the most useful I have seen this week. Excerpts are below the fold.
1. Professionals at work: See how Congress has modified the Paulson Plan. Originally 2 pages, now 451+ pages. This excerpt shows an important addition (perhaps omitted due to an oversight by Secretary Paulson), that illustrates an important aspect of our political regime.
2. “Senate bailout bill keeps growing“, Politico, 1 October 2008 — Amazing things added to the bill.
3. “High stakes in Canada’s vast oil-sands fields“, Christian Science Monitor, 30 September 2008 — “Trillions of dollars’ worth of oil are present, but the environmental costs are high, too – and growing.” The best general media article I have seen about Alberta’s oil sands.
4. E pluribus hokum or When the gamblers bail out the casino“, Spengler, Asia Times, 23 September 2008 — A typically insightful analysis by Spengler.
Excerpts
1. An ammendment to the Paulson Plan (hat tip to Calculated Risk).
Why did a congressperson or staffer insert this text? I leave it to your imagination, Doing this in such a vital and urgent piece of legislation reveals much about the true values of our representatives. (source)
SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.
(a) IN GENERAL.-Paragraph (2) of section 4161(b) is amended by redesignating subparagraph (B) as subparagraph (C) and by inserting after subparagraph (A) the following new subparagraph:
(B) EXEMPTION FOR CERTAIN WOODEN ARROW SHAFTS.-Subparagraph (A) shall not apply to any shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly:
(i) measures 5⁄16 of an inch or less in diameter and
(ii) is not suitable for use with a bow described in paragraph (1)(A).(b) EFFECTIVE DATE.-The amendments made by this section shall apply to shafts first sold after the date of enactment of this Act.
2. “Senate bailout bill keeps growing“, Politico, 1 October 2008 — Amazing things added to the bill. Excerpt:
The Senate hopes to revive Treasury’s $700 billion financial rescue plan Wednesday night by packaging it together with more than $100 billion in popular tax breaks as well as aid to rural schools important to House Republicans.
To calm voters fearful of bank failures, the $100,000 cap on federal insurance for deposits would also be raised to $250,000-a concession backed by both parties but also aimed at community banks who can be helpful in building small town support for the larger bill.
With each permutation, the bill has steadily grown in size. Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute now runs over 450 pages. And tucked away in the tax provisions is a landmark health care provision demanding that insurance companies provide coverage for mental health treatment-such as hospitalization-on parity with physical illnesses.
Really a bill onto itself, the mental health parity measure has been a bipartisan priority for top lawmakers in both chambers but has stalled because of disagreements again over how to pay for its estimated $3.8 billion five-year cost. In the current climate, that seems to be no longer a stumbling block, and if the Treasury plan becomes law, it will also.
3. “High stakes in Canada’s vast oil-sands fields“, Christian Science Monitor, 30 September 2008 — Excerpt:
The relentless search for oil has led explorers to the boreal forest of northeastern Alberta, among the jack pines and black spruce trees an hour’s drive from the boom town of Fort McMurray. Kelly Hansen, operations manager at ConocoPhillips’s $1 billion Surmont oil-sands plant, holds up the prize: a beaker of sticky black “synbit,” a 50-50 blend of bitumen (a viscous, tarlike petroleum) and synthetic oil.
“The Athabasca oil sands contain the equivalent of 1.7 trillion barrels of oil,” Mr. Hansen says. “About 20 percent of that total can be produced, using current technology” – namely, surface mining and steam extraction underground.
… At the same time, Syncrude – a joint venture that includes Canadian Oil Sands Ltd., Imperial Oil (an ExxonMobil subsidiary), Petro-Canada, Nexen, ConocoPhillips, and others – is Canada’s largest single emitter of greenhouse gas, since it must burn 750 cubic feet of natural gas to generate the steam needed to produce a barrel of bitumen. That’s the equivalent of burning one barrel of oil for every eight barrels produced.
… Two tons of loose rock and soil and two tons of ore have to be moved to produce a single barrel of oil. Surface mining also uses from 2 to 4-1/2 barrels of water per barrel of oil. The water is pumped from the nearby Athabasca River to produce steam, which helps separate sand and bitumen. Much of the water is recycled, but some is left to settle in highly toxic tailings ponds.
… Some aboriginal communities downstream are worried that contaminated water will seep back into the river and affect the drinking water and fish they depend on. This fall, the Alberta government is due to release a long-awaited report on the impact of oil-sands wastes on public health in the communities.
… Compared with surface mining, {in situ, or subsurface, mining} uses far less water – 1/4 barrel of water per barrel of oil.
4. “E pluribus hokum or When the gamblers bail out the casino“, Spengler, Asia Times, 23 September 2008 — A typically insightful analysis by Spengler.
America will give between US$700-$800 billion to the Treasury to buy any bank assets it wants, on any terms, with no possible legal recourse. It is an invitation to abuse of power unparalleled in American history, in which ill-paid civil servants will set prices on the portfolios of the banking system with no oversight and no threat of legal penalty.
Why are the voices raised in protest so shrill and few? Why will Americans fall on their fountain-pens for their bankers? If America is to adopt socialism, why not have socialism for the poor, rather than for the rich? Why should American households that earn $50,000 a year subsidize Goldman Sachs partners who earn $5 million a year?
Believe it or not, there is a rational explanation, and quite in keeping with America’s national motto, E pluribus hokum. Part of the problem is that Wall Street, like the ethnic godfather in the old joke, has made America an offer it can’t understand. The collapsing the mortgage-backed securities market embodies a degree of complexity that mystifies the average policy wonk. But that is a lesser, superficial side of the story.
Paulson’s dreadful scheme will become law, because Americans love their bankers. The bankers enable their collective gambling habit. Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose; individually they nonetheless hope to win their way out of the hole.
Afterword
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Fab,
Spengler is insightful, as always.
Re: ill-paid civil servants. The annual salary range for a GS-15 in the D.C. area starts at about $115,000 and goes to about $150,000. A GS-15 is the top of the “general schedule,” that is, rank-and-file civil servants. Above that is the senior exec. service, which starts at $140,000 and goes to nearly $200,000. All GS and SES also have excellent medical programs and retirement benefits. Spengler must be doing quite well.
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Fabius Maximus replies: These are pittances compared to paychecks for traders, investment bankers, and hedge fund managers who run money on Wall Street — let alone the executives who manage them. How can America survive if Wall Street CEO’s make less than $10 million in a bad year?
Another footnote:
One of the drivers behind the War on Drugs is asset forfeiture. Basically, when a law enforcement agency raids a drug house, it not only gets to arrest the dealers, but it also gets to seize and sell the house, the proceeds from which sale to directly to the agency and not to the general fund. ( Other assets also can be seized: yachts, automobiles, and of course cash ).
The economics behind this are well described in this letter to the editor:
“Columnist Jack Spillane asked why law enforcement opposes Question 2 by asking what they are smoking (Sept. 20). As a retired police officer, I can tell you exactly why they oppose Question 2: Money.
“We receive millions of dollars to hire new officers to combat the crime generated by modern prohibition. We love the overtime to go to court for pot cases. Sheriffs also like the money from civil asset forfeiture, as do the district attorneys like Bristol County District Attorney C. Samuel Sutter. We love the job option of being a narcotics officer, which also generates generous overtime checks.
“Prison guards know that without modern prohibition (the war on drugs) half will be unemployed. The guards know that ending marijuana prohibition would be the “gateway” to waking up Massachusetts to ending all prohibition.
As with most questions in life, Mr. Spillane should follow the money.”
As credit dries up, it will become harder to sell these seized assets, which instead will become white elephants. Meanwhile, reports of hard pressed local government financing suggest the generous overtime and other items also are likely to dry up.
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Fabius Maximus replies: I agree, asset forfeiture is a good idea that has spun out of control — with horrible results.
“It will become harder to sell these seized assets, which instead will become white elephants.”
A white elephant is a “possession which its owner cannot dispose of and whose upkeep exceeds its usefulness.” I suspect that cars, planes, boats and such can always be sold. Since the government’s cost is zero, seizures will always be profitable.
They have been selling drug-seized vehicles, including luxury yachts for decades. Mainly in Miami. My father was the high bidder for a $1.5 million yacht that had sunk in the harbour due to simple bilge pump failure. His bid? $17,000.
And if times really get tough, it won’t just be government sales like this producing rock bottom bargains. Cash is king!
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Fabius Maximus replies: Although not an expert in these things, I believe the growing use of asset forfeiture as a tool of the Federal government goes back to the Racketeer Influenced and Corrupt Organizations Act of 1970.
If I may suggest two more good articles by Spengler: “Truth, lies and ticker tape”
And this one was posted 9/30/2008. It really illustrates how much leverage had gotten into the system: “US wealth in shrink mode”
This article really has me searching for data from 1963 to 1973 at which point we went off the gold standard and things really started to go haywire. The Fed reports stops at 1962-1963 and then starts again in 1983 and goes forward. You can find them here: “Survey of Consumer Finances”
I wonder how many of the average citizens understand this information? I’m afraid at the answer.
The gambling analogy is excellent, altho I think there is a better reason for the public to support the Paulson mess. a) there IS a ‘crisis’ that is daily getting worse, and b) there is no single, particular alternative.
My suggestion would be to offer to buy 1 million houses, at 50% of the last mortgage. To set a market value floor at the bottom of the MBS which ‘nobody knows what they are worth’. Others have other suggestions.
There’s no single alternative (b).
And Fabius, your own what is to be done are a bit inconsistent: (a) stabilize the financial market, by 1) recapitalizing (like Paulson), 2) allowing weak institutions to fail, new bankruptcy, and 3) outright nationalizations
I fear that (1) Paulson/recapitalization is to AVOID (2) allowing weak financial institutions to fail.
Now that I think of it, maybe allowing Lehman to fail was a clever Paulson move to get top bankers to ALL support his plan — anything is better than the Lehman example. But the economy needs more Lehmans…
Instead, I favor your item (3) nationalization — in the form of Federal (or Fed plus local) ownership of houses, like a million or so. To stabilize the prices and allow weak financial institutes to fail.
Also, because the Paulson bailout does NOT stabilize the house prices, and I believe (from only negative evidence) that the financial system can’t be stablized until AFTER house prices stabilize.
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Fabius Maximus replies: Why is this inconsistent?
In Spengler’s later Asia writing, he mentions house prices:
“If they return to the prices of 1998, they will fall by half, which is where homes offered in foreclosure are clearing the market today in California and Las Vegas.
I think this is exactly what the Fed/gov’t should be offering — support in the form of buying houses at half the prior peak price. And I strongly doubt that the gov’t would actually be able to buy 1 million homes, because as they start buying, the floor price firms all MBS asset stream minimum prices, so more private folk will think 51% or 55% is a better price to get the house.
“The relentless search for oil has led explorers to the boreal forest of northeastern Alberta”
There is also drilling underway off the coast of Newfoundland and Nova Scotia.
http://www.energycurrent.com/index.php?id=2&storyid=12566
Also exploration in the Gulf Of The St. lawerence, in Quebec, and backed among others, by Chinese interests.
http://rigzone.com/news/article.asp?a_id=7842
http://www.corridor.ca/oil-gas-exploration/gulf-of-saint-lawrence.html
Grand banks Off shore oil and just as with the British North Sea, and Scandinavia is a hazardous enviroment, risky, costlier, and a lot harder work, than dilling in say, Saudi Arabia.
http://en.wikipedia.org/wiki/Ocean_Ranger
Fab,
So true, but it’s a prince’s ransom compared to what a lot of those folks are going to be making next year.
The median annual US household income for 2007 was around $50,000/year, just for comparison.
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