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Tuesday, June 24, 2008

Two Proposals, One Solution

Mcain and GrammSometimes, you see two headlines and they sum up an issue nicely. Especially when the subjects of both headlines are two presidential candidates' solutions to roughly the same problem. I had this experience looking through Reuter's headlines yesterday. The two headlines are "McCain calls for $300 million prize for car battery" and "Obama vows to crack down on oil speculation."

The McCain headline deals with McCain's approach to oil prices and energy problems. Like his offshore drilling idea, McCain's non-existent battery might possible pay off within ten years. With gas prices rising as quickly as they are, in ten years it might be cheaper to buy a car that runs on diamonds. Unless an immediate problem can be addressed by sending in more troops, John McCain doesn't seem to have any idea what to do about it.

Republican John McCain said on Monday if elected he would propose awarding a $300 million prize to the auto company that develops a next-generation car battery that weans America off oil.

McCain sought to portray himself as a forward-looking leader on solving the U.S. energy crisis a week after taking heat from Democrats for reversing position and supporting offshore oil drilling.

"Whether it takes a meeting with automakers during my first month in office, or my signature on an act of Congress, we will meet the goal of a swift conversion of American vehicles away from oil," McCain told a town hall meeting in Fresno, in rural central California.

And this addresses oil prices how? McCain is basically saying, "I've got no idea what to do. Here's a buttload of money, can I buy an idea?"

Of course, it's not all bad. He also would offer $5,000 dollar tax credit for zero emissions vehicles and other tax credits based on the carbon emissions of still emitting vehicles. From an environmental standpoint, that's not a bad idea, but how often do you buy a car? We've got to wait until this gets through Congress and then until we need a new car. Of course, the trade-in value of our older polluting vehicle will be pretty much jack, since there won't be any tax credit to knock down the price. This means you'll probably drive it until it dies. But still, it'd get the auto industry off their butts and on the stick.

It's Barack Obama's idea that will have a more immediate impact.

Obama would require U.S. energy futures to trade on regulated exchanges. The campaign also said he backed legislation that would direct the Commodity Futures Trading Commission, the top U.S. futures market regulator, to investigate proposals such as increasing margin requirements in the market.

In addition, the Illinois senator wants to see more transparency and oversight of institutional investors in commodities markets.

John McCain seems to forget he's a Senator -- he's not a powerless man. Let me throw in another headline, this time from MarketWatch -- "Gas could fall to $2 if Congress acts, analysts say."

For the record, John McCain is a member of Congress. It's that speculation that Obama would deal with that's the problem here.

The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday.

Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.

"[Edward Krapels of Energy Security Analysis] said that it wouldn't even take 30 days to drive prices lower, as fund managers quickly liquidated their positions in futures markets," we're told. What's happening right now is that speculators are foolishly gaming the market.

"From professional fund managers to regular people trying to make a buck, investors with no interest in actually owning oil are pouring billions of dollars into oil markets," Dallas Morning News reported last month. "Those investors are banking on fears that it will become much more difficult and expensive to produce oil, and, eventually, the world might not have enough."

As a result, oil is tremendously over-valued -- in other words, there's a market bubble. Gas prices will fall again, but only after the market collapses and a lot of people buying into funds lose their shirts. Following the collapse of the mortgage and housing markets, this could be disastrous. That's the genius of the unregulated free market -- after a bunch of people on Wall Street jump out of windows, after the economy is hit hard, after that collapse is absorbed by other markets, the price will go down again. Free market capitalism is often a thing of beauty, like a volcano blowing up in your backyard.

I've called advocates of completely unregulated markets "free market moonies" in the past, because their devotion to the concept doesn't have much to do with history or reality -- it's a matter of faith. The reasoning is circular; unregulated markets are good because they're free markets and free markets are good because they're unregulated. Markets don't have genius -- they're mindless. They react to the people in the market and, the more irrational those people are, the more irrational the market becomes. On a rationality scale, the current oil market is somewhere between Britney Spears and the Manson Family.

For his part, McCain is not embracing the solution to oil prices, but is bearhugging part of the problem. I've brought up McCain financial adviser Phil Gramm before and it pays to revisit him. Gramm was an architect of deregulating the energy market, which later resulted in the collapse of Enron. Gramm created the "Enron loophole" -- which basically exempted energy traders from regulatory oversight -- effectively deregulating the market. There were still regulations, but no one making sure the regulations were followed. The energy market became a city with laws, but no police. It turns out that gazillionaires are gazillionaires because they're ruthless -- putting them on the honor system was later proven to be the real bad idea that anyone with half a functioning brain should've known it was. You don't hand pirates a near-anarchy and expect them to play nice.

In summing this all up, let's throw in one more headline -- a Baltimore Chronicle headline from May; "McCain Defends 'Enron Loophole'."

Of course, that was May. Things are different now. "The truth is Barack Obama is following John McCain's lead to close a Wall Street loophole that was signed into law by President Bill Clinton," says McCain spokesman Tucker Bounds. But the Chronicle piece tells us that "[An] aide, who spoke on condition of anonymity," told the paper that McCain opposed a farm bill (later passed) because "Gramm advised McCain that he should resist its regulatory language on the energy futures market." Gramm hasn't learned a damned thing from Enron and McCain's still listening to him.

I know I wrote a post yesterday on politicians changing their mind. For the record, I'm all for it; given that they were wrong on the issue and later realized it. But if McCain's changed his mind on deregulation, why's he still paying Gramm?

Of the two original headlines I brought up, the first was (mostly) a gimmick and the second's a solution. McCain really needs to come up with more solutions. He also needs to dump the bad idea factory that's former Senator Phil Gramm.


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