Sink That Slow Boat to China

November 6, 2009

I don’t like to predict things because I can’t really see into the future, but last year in one of my posts I predicted in passing:

My guess is that the first bill in Congress to make wind farms illegal will come from Democratic sponsors in the name of conservation.

Well looks like I was half right. The first opposition to a big ($1.5B) wind farm in Texas is by a Democrat, Chuck Schumer, who was ironically also the topic of that same post. Chuck didn’t, however, poo-poo the power plant because of conservation. He doesn’t like the fact that the turbines are going to be made in China. Believe it or not, I agree.

Buying toasters, toys, TVs, and telephones made in China is bad enough, but contracting major industrial projects to Chinese products and labor shows us only that we have lost leadership in almost all  things critical to a successful country. The useless “stimulus” spending the Feds are undertaking should at least help us build back our own industries, our own capabilities, our own future, not those of China.

This last week a piece of the Oakland-San Francisco Bay Bridge broke and fell onto traffic. The piece was a fix to a broken eye-span, critical to keeping the bridge from falling into the bay. This span of the old bridge is being replaced with a brand new bridge span that is supposed to look spiffy. I listened on the radio to a civil engineering professor from U.C. Berkeley who has been studying the bridge in detail since the earthquake of 1989 that shook lose a non-critical but still lethal section of the bridge deck. He said that the current fix to the bridge is not safe, it is just a C-clamp to keep the the eye-span from further deterioration. It is a race now, will they get the new bridge done before the old one collapses? Will Caltrans fix the old bridge properly? What does this have to do with China?

Turns out most of the steel in the new bridge is made in, you guessed it, China. I guess they were the low bidder. I hope this new bridge is going to hold up better than the current one.  According to the professor, chinese steel is known for being defective, subject to cracking, and he said that they have already found a couple of cracks in critical decking before it made it out of the factory, some 12,000 miles from California.

The professor mentioned another interesting characteristic of the new bridge design: the bridge deck is a critical element keeping the entire bridge structure together (unlike all the other bridges where the bridge deck is held up by the bridge structure). While the structure is built to withstand a really big earthquake (assuming the steel infrastructure doesn’t crack), it is not built to withstand a simple bomb. One bomb causing one big hole in the new bridge deck and the whole thing will collapse. The old bridge doesn’t suffer that problem. Caltrans answer to why this flaw exists? Terrorism was not an issue when the bridge was designed.

I hope Caltrans hires some good engineers from California to fix the old bridge properly so that it can be used just in case the new one gets hit.

Einstein: e=mc^2; EPA: e=2.5mc^2

September 25, 2009

I have been trying to reconcile the latest claims by GM and now Nissan that they have electric cars that get the equivalent of 230 mpg and more.  My previous post on energy facts was based on my understanding of the science of physics, but I was worried that maybe I was missing something. My calculations showed that a typical Prius-sized electric vehicle should get around 100mpg equivalent, assuming a conversion efficiency of 100%.  Typical conversion efficiencies of fossil fuels are closer to 40% or 50% in the best case so the real equivalency is more like 50 mpg.  So where did I go wrong?

A couple days ago I read a magazine, Design News, that had been sitting on my desk for a few weeks. There was an interesting article about the 230 mpg Volt. One line in the article confused me: the EPA uses an energy density for gasoline of 82 kwhr/gallon. Strange. I used 34.5. Maybe I was wrong….  I looked at many sources including the DOE and NIST and sure enough, the energy density of gasoline is around 34 kwhr/gallon depending on the exact formulation (in California it is lower, for example).

Next I looked up the EPA conversion factor of 82 (about 2.5 times the actual energy density) to see where they came up with that. I found it in the Electronic Code of Federal Regulation, Title 10, Section 474.3: “If the electric vehicle does not have any petroleum-powered accessories installed, the value of the petroleum equivalency factor is 82,049 Watt-hours per gallon.” So the EPA has decided that the laws of physics are not good enough for them, they need to favor electric vehicle hype by a factor of 2.5. What a fraud.

I then read the “Purpose and Scope” of this distorted computation: “The petroleum-equivalent fuel economy value is intended to be used by the Environmental Protection Agency in calculating corporate average fuel economy values pursuant to regulations at 40 CFR Part 600—Fuel Economy of Motor Vehicles.” Translation: if you sell one electric car then you can sell 20 20mpg cars and claim an average of 30 mpg for your fleet. No wonder GM wants to sell electric cars.

But why would the EPA want electric cars?  They pollute more than hybrid cars because they essentially burn coal, which is known to be the dirtiest source of electric power. I will check and see if I can find the answer to this question on the Internet.


I found the original DOE memo detailing how the electric vehicle equivalency was computed, Petroleum-Equivalent Fuel Economy Calculation dated June 12, 2000. The analysis, by the DOE, starts off in a very reasonable way. The relative efficiency of burning fuel in an engine versus burning it in a power plant is computed yielding a net efficiency for electric power production of 35%, which is exactly what I used in my analysis in an earlier blog Energy Facts. So far so good. Next they multiply this number by 6.67. What? They call it they “Fuel Content” (the quotes are theirs). Here is the reason from the document:

The fuel content factor has a value of 1/0.15 and is included in
the PEF for the reasons described in the notice of proposed rulemaking
and the responses to comments section of this notice. Briefly, these
reasons are:
    (i) Consistency with existing regulatory and statutory procedures;
    (ii) Provision of similar treatment to manufacturers of all types
of alternative fuel vehicles; and
    (iii) Simplicity and ease of use.
The fuel content factor value of 1/0.15 is equivalent to a multiple
of 6.67.

Translation: we lie about electric cars to be consistent with the lies we tell about other politically correct vehicles. One interesting note about this lie: in the comment sections some of the electric power companies want to be a bit more honest about the factor of 6.67, but the California Air Resources Board wants be lie even more:

Comment 6: Assigning one fuel content factor (1/0.15) to all
alternative fuel vehicles is inappropriate since ``the fuel efficiency
benefits of electric vehicles far exceed those of other alternative
fuel vehicles.'' DOE should use a fuel content factor that more
accurately represents electric vehicle benefits in comparison to other
alternative fuels. (CARB)

Joe Wilson, Deja Vu.

September 11, 2009

I didn’t watch or listen to our President’s big healthcare speech before Congress yesterday.  i figured if he actually said something important I could read about it the next day. When I read the headlines this morning I saw “Joe Wilson tells President: You Lied!”. Deja vu. Was there some new yellow cake memo? Was his hot wife, Valerie Plame, looking for more headlines to sell her book? Oops. Wrong Joe Wilson, wrong President. Apparently there is a new Joe Wilson calling a President a liar, this one a Congressman.

Everyone (well everyone who hates Republicans) is in a huff that someone had the gall to speak up during a speech in Congress. They should watch the Prime Minister of England talk every week before his Parliament. Anyways I was interested to listen to what the so called FACT CHECK article had so say. “Fact Check” is what modern journalists call it when they actually do research on an issue and don’t just print propaganda. Unfortunately the term has been twisted into just the newest form of propaganda. What I was left with is listening to a clip of the actual speech.

Obama: “The reforms I’m proposing will not apply to those who are here illegally.”

Wilson: “You lie”

So I guess the question is, do the reforms that Obama is proposing apply to those who are here illegally? Well first, what reforms is Obama proposing? Obama hasn’t proposed any specific reforms so in that sense Wilson is wrong. Case closed.

Well, let’s assume, as the “FACT CHECK” guys do, that Obama is talking about the bills propose by his fellow Democrats in the House and the Senate. The fact check guys say the house bill says: “Nothing in this subtitle shall allow federal payments for affordability credits on behalf of individuals who are not lawfully in the United States.” They conclude that Joe Wilson is wrong. Unfortunately for them Obama didn’t say: “The reforms I’m proposing will not provide any federal insurance health subsidies for those who are here illegally.” Then Wilson would be wrong.

Perhaps Wilson was referring to the other 1,000 pages of the bill. How about the part that says that insurance companies cannot discriminate based on preexisting conditions, or the part about employers getting fined for employees that do not have health insurance or the part that allows people to join the “public option.” How about all of the other provisions that are in these bills or may be in these bills in the future? Californians passed a constitutional amendment prohibiting state funds to be used to give state run health care (i.e. publicly funded hospitals) or education to illegals and it was determined to be unconstitutional. So who was more right this time, the President or Mr. Wilson?

BTW, just as an informal poll.  Since I didn’t listen to his speech, did President Obama say his plan includes the “public option” or not?

Put me on the Death Panel

August 28, 2009

When it comes to a big, long term, government run health programs, the ultimate question is: would you trust YOUR health to President Obama? He would be the ultimate guy in charge, at least according our Constitution. Lots of people say yes.  Then I ask: would you trust your health to George Bush or Sarah Palin?  I just get laughs… “That will never happen. Why would I?” Well, I explain, you don’t know who is coming after Obama, it might even be Sarah Palin herself.

The problem with the current health bill is that everyone who is pushing it really wants a single payer system. Single payer won’t sell now, so they came up with a 1200 page bill that nobody understands and claim it is nothing like a single payer system. Would you believe them? These proponents are being disingenuous, and most people understand that Obama will implement the bill as though it is a single payer system, eventually. In a single payer system all of your health decisions are controlled by a single payer, and guess what, YOU are not that payer.

Whether Congress passes a health bill with death panels or rationed care or free care for illegals or value based decision making really makes no difference. Whatever bill is passed now is just a another step down the path of thinking that the our government knows better than we do. The national health insurance system currently assumes that our employer makes better decisions than we do. Our employer decides our benefits, our deductibles, our drug plans, our co-pay our medical groups, and in many cases our employer even has to approve specific medical procedures. For most people it is not a stretch to change employer to government, in both cases someone else is making our most basic decisions for us.

To say that there is no choice in medical insurance plans is just wrong. There are lots of choices, it is just you aren’t allowed to make them. When my company wanted to offer medical insurance we asked a broker to come up with a list of possible plans. I expected a handful of plans and got literally hundreds, more than we wanted to read or understand. I’m an engineer, not a insurance specialist. We ended up offering our 5 employees a choice of just two plans, one HMO one PPO. Four years later we have more than 40 employess and have added a third choice: Kaiser. This is the way medical insurance is decided for 80% or more of Americans. By the way, employers make the same decisions for 401K retirement plans. I had to pick one of those too.

The health bill I would propose would be very short and contain just two key and simple elements: employers or other groups are not allowed to offer insurance, only individuals and families can purchase insurance; insurance rates or availability may not depend on individual or family genetics or health history but may depend on the number of years they are uninsured (this would have to be phased in) and other general characteristics. This would provided a basis for universal coverage in that all people could be covered if they could pay an average rate. If someone decided not to have insurance, that is OK, but if they get sick they would have to pay up, maybe 2 times, maybe 100 times the going rate before they get coverage. The value of having insurance would be amplified, and the cost would be controlled by the individual. People wanting only catastrophic insurance to reduce their health insurance costs could. If you want complete coverage it is your choice, not your employer’s and not your President’s.

If Congress wants to pass a law to pay for the insurance of people who do not want to, or cannot pay for insurance Congress can, but that would be a different bill with its own issues. Any such law would have to define a minimum acceptable insurance plan (MAP) which would be a source of great debate. It is the same question that each of us would have to answer ourselves, which plan is best, only this time it would have to be a plan that would fit everyone. Let’s face it, there is no such plan. I’m sure they can write another 1000 page bill that describes a minimum plan. 1000 pages may be too few though, I mean the tax code is a lot bigger and that.

While we are at it, we should eliminate the 401K retirement program and replace it with personal retirement accounts too. I like giving people their own choices in life, but I guess that is a perverted idea in Democracy today. I learned in high school that Democracy was about letting people vote for the things that make a difference in their lives. I didn’t realize that meant that my neighbors could vote if I qualify to live. Seventy years ago my father left a country that voted on whether he would live or die. They picked die. Each of us deserves to make our own health insurance decisions, to be the one and only member of our own personal death panel.

U.S. Health Plan: Stay Healthy

August 14, 2009

I would like to write a post about the truth of the Obama/Reid/Pelosi/Democratic health bill but that is really difficult because I don’t want to read the thousand page bill, and apparently nobody else does either. Even Congressman John Conyers, who heads the committee in charge of the bill, points out that he can’t be expected to read the bill because even if he were to read it aided by two lawyers he wouldn’t understand it. We are supposed to be a country of laws, but this is ridiculous. Perhaps we should be a country of laws that the average person can read and understand. I think that was in the Napoleonic code.

So instead of discussing the facts, let me discuss the claims.

First, Obama says that the bill will allow one to keep their own doctor. What does that mean? Right now my insurance, as is almost everybody’s, is decided by my employer, not by me. My employer today might decide to get insurance that has one set of doctors, but tomorrow (actually they can only change annually), they might decide to choose a different plan that only supports other doctors. Is Obama saying that they cannot make this decision? He has said that employer’s are still going to provide insurance so I am confused. I think he means that your employer will continue to decide your health insurance, not the government. Obama is trying to personalize healthcare today without understanding the basic reality, heath insurance is decided by employers, not by individuals.

The second statement from Obama is that private insurance will be more competitive if there is a “public” insurance plan. Who is going to fund this “public” insurance? The public or the government? All insurance companies are “public” today, they trade on public exchanges, they provide insurance to the public, the raise money from the public, their profits are distributed to the public. I think he means a government insurance plan, not a public plan. So who would put up the capital for a government plan? who would get the profits? who would run the plan? who would be on the board of directors? who would manage the company?

When I first heard him promote a public plan equal to private plans my  thought was “will private insurance companies be allowed to raise my taxes?” I know it is a strange question, but I assume that the government plan would have such a right, so if the government can do it and they are equal to the private companies then the private companies must have the right to do it. You probably are thinking that I am crazy, or as someone said to me recently, that I engage in hyperbole. Well it turns out that I was right. Regular  insurance companies will, under the Obama plan, be able to raise my taxes, at least indirectly, by skewing the cost curve. The government, i.e. my taxes, will under the laws of economics have to match the private plans, so basically my taxes will be paying for other people’s premiums which means that my taxes will be controlled by insurance companies while my employer will pay for my insurance.

The result will be a system whereby the only insurance that I will NOT be deciding or paying is my own!!

I think this is the ultimate goal of the Democratic plan: create a system so confusing, so open to abuse, so out of control that in a few years we will all be screaming for someone to step in and fix it. Then, enter single payer health, where it will be illegal to get health insurance, and illegal to pay for ones own health care and ultimately illegal to get any health care unless you can convince that “single payer” that you are worthy to be treated. I think this is called a slippery slope. Let’s hope we don’t slip, that might not be covered.

Iran and Lost

June 24, 2009

Listening to pundits talk about the turmoil in Iran one would think that the people there support a great reformer to bring Iran back into the world community. Pundits also talked about how the election of Obama would bring the U.S. back in line with world community. Neither is true. Obama’s policies are no different than Bush’s, and I suspect that Mousavi’s are no different than Amanutjob’s. So why all the protesting?

Because it is obvious that Amanutjob didn’t win the election, that he didn’t even count the votes, that he just claims that he won and that is good enough for Iran. The Soviet Union (now Russia), Cuba and now Venezuela have a much better approach to insuring election results, they only allow one candidate. The other possible candidates are put in jail or kicked out of the country or forced to publicly endorse the “real” candidate. One party systems are like single payer health care systems – you get what the the one party wants, whether you like it or not.

Iran’s mistake was in allowing people to believe that they had actually voted on election day. The rioting today is voter feedback – if you ask us to vote, then at least count the votes and before you pick the winner.

There is hope that out of this turmoil someone will stand up and demand not a new vote, but a new system that respects the vote, that elects the people who get the most votes, and that offers the people some choice in who governs them. Boris Yeltzin did that in Russia, standing on a tank pointed at the Kremlin until the Iron Curtain fell. We can all hope that Iran will find their guy, but I doubt it. It is more likely that the people will be beaten into submission and life will return to normal, only this time the ballots will contain only one name.

Energy Facts

May 3, 2009

I’ve been looking on the Internet for facts on energy usage including alternative energies and alternative fuels for cars. Most of what I’ve found is propaganda, and I don’t believe it. The solar people try to sell you that your electric meter will run backwards and you’ll make money. The electric car people call their cars “zero emission” and claim it will cost you pennies a mile to drive them. I analyzed some real data provided by the DOE, DOT, and other sources and computed some answers using simple math.

Total U.S. yearly electric power generation/consumption 5,000,000,000,000 kWh
Total U.S. Households 120,000,000
Total electrical power per household 4,756 W
Yearly electrical consumption  by households 1,300,000,000,000 kWh
Consumption per household by households 1,237 W
% of total electrical consumption by households 26.0%
U.S. Gallons of gasoline consumed per year 142,000,000,000 gallons
Energy in a gallon of gasoline 34.50 kWh/gal
Vehicle miles travelled/year 3,000,000,000,000 miles
cars/light trucks 2,775,000,000,000 miles
big rigs 225,000,000,000 miles
Average miles/gallon for cars/light trucks 19.54 mpg
Total energy in gasoline consumed per year 4,899,000,000,000 kWh
Hybrid (i.e. Toyota Prius)
efficiency of hybrid gasoline engine 35.0%
hybrid miles/kWh 4 miles/kWh
mpg of a hybrid 48 mpg
efficiency of average car 20.0%
efficiency of gasoline generator (8kw) 35.0%
efficiency of a coal burning power plant 40.0%
efficiency of a coal burning power plant after distribution network 37.1%
Registered Vehicles in U.S. (2007) 247,264,605 vehicles
Registered Cars in U.S. (2007) 135,932,930 vehicles
Registered Trucks in U.S. (2007) 110,497,239 vehicles
Electric car – typical miles/kWh 3.00 miles/KWh
Equivalent mpg for typical electric car @ 100% efficient engine 103.50 miles/gallon
Equivalent mpg for typical electric car @ coal efficiency power production 38.42 miles/gallon
Losses in Power grid 7.2%
Additional electrical power generation required for all electric cars 996,767,241,379 kWh
% increase in total electrical generation needed for electric cars 19.9%
% increase in household electricity usage for electric cars 76.7%

That’s a lot of numbers.

The first interesting number is that 26% of electrical energy use is in households, the rest is for commercial and industrial purposes. I started this simple analysis when I read a story on Wikipedia about solar energy plants in the Mojave desert. In the same article it said that one solar power plant that delivers 350MW could power 500K households while another 550MW plant could only power 400K households. They obviously assumed a different value for household usage, so I asked myself: which is correct?  I looked up on the DOE web site and found that on average a U.S. household consumes about 1200W (10,500kWh/year).  But 1200W is only 1/4 of the overall power consumed on a per household basis.  So a 550MW plant, which would be the biggest solar plant ever built at a huge cost, would supply power for a community of about 90K households and businesses, much fewer than either the 400K or 500K quoted in Wikipedia.  In fact that 550MW plant couldn’t even power the smallest of cities because it provides no power when the sun doesn’t shine, for example at night or on cloudy days. So in fact saying that the solar plant can provide power for even a single household is misleading. Except for remote cabins with huge batteries, solar does not provide primary power. Solar can only be used to reduce peak power consumption during the daytime, which is certainly a need, but not a primary need.

The second question that I have always wondered about is much energy is used in the form of electricity versus how much is used for cars. After doing some simple math I found that the amount of energy used by cars over one year is roughly the same as the amount of electrical energy produced over one year. That was unexpected. Unfortunately, the useful energy that we derive from gasoline is only 20% of the total energy because of the efficiency of the average car. If we move to hybrid cars this efficiency goes up to about 35% which would reduce the energy needed by cars, that is the amount of gasoline consumed, to 57% (a little more than half) of the current level. Some newer non-hybrid engines can also achieve this higher efficiency. A 50% reduction in gasoline usage would be a huge help both for global warming and for energy security, but what if we want to go further. Enter the electric car.

There is no free lunch with the electric car, it still requires electricity to run and where do we get that electricity?  From coal and gas burning power plants for the most part. So how to we compare the performance of electric cars with gasoline powered cars?  That is a very difficult question because while there are 250 million registered gasoline power cars in the U.S. today, there are less than 100 thousand electric vehicle and those are all basically golf carts of one sort or another (the term of art is “neighborhood electric vehicles”). The equivalent to mpg for electric vehilces is miles/kWh. While small vehicles can have miles/kWh of 5 or even higher, the unanswered question is what would the equivalent miles/kWh be for the entire fleet of 250 million gasoline power cars if they all converted to electric cars. For my analysis I chose a very generous 3 miles/kWh, which I’m sure the electric car advocates would say is low. But if you consider that a Prius is a 4, chosing a 3 means that the average car would be a little bit bigger than a Prius, which is obviously not the case today.

So that what is the bottom line about how much fossil fuel can be saved moving to electric vehicles? The answer can be seen by looking at the efficiency of those coal and gas burning plants. Turns out coal and gas plants have about the same efficiency (35% or maybe up to 40% for the newest designs) as a well designed hybrid gasoline power engine. So that means that electric powered vehicles are really coal power vehicles generating pretty much the same amount of greenhouse gasses as hybrid vehicles. But the amount of other crap, like radioactive isotopes, that come from burning coal is much worse than burning gasoline. The bottom line is that it looks like electric cars pollute much more than hybrids. On the outside, electric cars are promoted as the ultimate in clean, but on the inside they are very dirty things. The only hope for electric cars is nuclear power, which would truely provide a “zero-emission” vehicle, but would also pollute the ideology of the electric car.

A final note on the electric car. My analysis shows that you can expect your electricty usage to almost double if you use one, so make sure you get the cheapest electricity rate you can.

Saving California

February 19, 2009

The State of California has been struggling for a new budget for about 100 days now. Here are some suggestions that would help with the budget and also help all Californians:

1. Eliminate California reformulated gasoline (or California Reformulated Automobile Petrol). We pay more for gas in California because we use our own type of gas. In Nevada, for example, the price of gas is about 25 cents cheaper than anywhere just over the border. Reno is not the hub of the refining industry. Why is it cheaper? Because they use federal reformulated gas, and so do almost all other states. That extra 25 cents goes to the oil refiners because they have a smaller market for the their goods, that is, less competition. If California were to switch to the federal standard we could increase our gas tax by 25 cents and consumers wouldn’t pay the extra, the oil refiners would. How much money is that, at 16B gallons of gas consumed each year in this state, that’s $4B per year.

2. Start drilling for oil and gas off-shore. You can drill now by standing on-shore and drilling diagonally. Alaska makes so much money on the oil drilled in their state that each resident gets thousands of dollars a year. The potential income here for the state, I don’t know, but $5B to $10B would be a minimum.

3. Eliminate the California Air Resources Board and the California Environmental Protection Agency and the California Water Resources Board and the ….  you get the picture. These bureaucracies are autoimmune diseases to the body of California. They were all started with reasonable goals in mind, but after these goal were achieved the bureaucracies stayed and started to attack things that make our beautiful state healthy. They forced all the gas stations to dig up their tanks even though only a handful of leaks had been detected. This act single-handedly killed most Ma and Pa gas stations. They forced the use of MTBE in gasoline, a toxic poison that replaced lead in gasoline. Which is worse? MTBE is thousands of times worse – lead is a natural element that is found naturally in all dirt. MTBE is a synthesized chemical that doesn’t do anything for anyone. Now we are required to use ethanol to clean up the air. Ethanol has to be imported into the state in massive amounts, mostly by trucking. The same trucks that the California Air Resources Board wants to eliminate. What sense is that?

A month ago I got a call from a pollster commissioned by the California Air Resources Board asking what I knew about their “Winter Spare the Air” program. Their questions were almost insulting at times, suggesting that I was delinquent because I didn’t know the details of some program that a room full of idle clowns came up with. The program consists of a bunch of fireplace Nazis driving around the neighborhood fining people for try to keep warm in the currently politically incorrect fashion. I’m sure they cause more pollution trying to enforce this insane program than they could ever hope to eliminate. When the polling part was over I asked if I could provide some free form feedback. The pollster said yes so I let them have it. He was giggling as I suggested what they should do with their program and their entire occupation.

California has vast resources but the people that live in this state have been force fed the idea that those resources are not for them to use. Our forests are allowed to burn because that is “natural,” but we can’t log them, to thin them out so that maybe they wouldn’t burn because that would be admitting that business can improve the environment. Drilling for oil is now bad because it is too easy, we have to install expensive and useless solar panels instead. From the perspective of these bureaucrats WE THE PEOPLE are evil and victimizers and they are the defenders of the environment. I see it the other way around.

Getting rid of an autoimmune disease is difficult, but in this case we are much better off with a massive dose of chemotherapy and starting anew than we are letting this disease consume us all.

Fix It First

January 29, 2009

I know that it is easy to criticize what Obama and Congress are doing to try to recover jobs and value in the economy, so today I am here to make a suggestion: before you throw another $1T into the economy. fix the problems that got us here!

As I recall, things started to head south as real estate prices fell. Lots of people, including most of Congress, regulators, banks, insurance companies, etc. thought that housing prices would never go down. Massive financial instruments were developed based on this one assumption. They were all wrong. We can’t fix the fact that real estate prices fell, but we can fix the institutions that collapsed because of it. Before we go try to fix the entire economy, let’s fix the government and its regulatory institutions. More regulations? No, Just fix what we have. If you don’t fix it, it is still broken.

Let’s start with the institution designed specifically to let the government interfere/regulate home mortgages, Fannie Mae and her cousin Freddy Mac. I haven’t heard one word about the “New Fannie Mae” because there is no new Fannie Mae. Is Fannie Mae operating the same way it did 4 years ago? I don’t know but I would guess yes, since I haven’t heard anything to the contrary. Will Fannie Mae still underwrite loans to people that everyone knows will never be able to pay them back. Probably. Banks aren’t loaning the money now, but if they did, I’m sure Fannie Mae would rubber stamp the transaction.

Then we have $70T in default credit swaps, a secret system of alliances designed to spread the risk. These financial instruments remind me of pre World War I Europe, where the risk of one country gaining military domination over all others was spread with a complex and often secret set of alliances and mutual support treaties. One Serbian kills one Austrian and before you know it everyone is fighting everyone. Four years later half of Europe is in such a deep depression that a wheelbarrow full of cash isn’t enough to buy a loaf of bread. Default credit swaps should be illegal.

Next we have new accounting rules for valuing homes and real estate. The rules were updated a few years ago, an act to increase transparency, to force banks to value property at resale value instead of book value. Like most rules with good intentions, this rule turned a bad real-estate market into bankrupt banks and insurance companies. Maybe not the best regulation.

There are also those quasi-regulators who misrated the risk in commoditized mortgages. Business as usual there too. These so called independent evaluators of risk are not so independent since the company doing the assessment profits more or less by the assessment they give. I think this is called corruption.

Until all these problems are fixed, who would invest in this known broken system? Who would trust that a seamingly strong company might, the day after you put in your life saving, go belly up because a bank on the other side of the country made one too many bad loans?

The public is smarter than Obama or the Congress. We don’t want to throw our good money after bad. But the government knows better and is going to spend our money, whether we like it or not, on the same of things that got us here in the first place. More than half of the “stimulus” bill gives money to programs and people that “need” the money. Why do they need it? For the most part, because they didn’t manage their money well. This goes for bank CEOs, for state governments, and for the chronically unemployed. I would give a break to those people that are recently unemployed due to the failures of their management, but for others, sometimes it is better to fail and let someone else figure out how to succeed than to stay in power and repeat your failure.

We tried the money giveaway thing nine months ago and that predicably went nowhere. Most of that money went into our gas tanks. Now we are trying it again. What is it that Einstein said about insanity? it is doing the same thing over and over and expecting a different result.

Obama’s Billions

January 26, 2009

The stimulus package proposed by Congress reminds me of an old Richard Pryor movie, “Brewster’s Millions”. In that movie Pryor could inherit $300M if only he spent $30M in 30 days. Sound familiar. Hand it to Paulson. He managed to spend $350B in about that time. The catch for Pryor was the he had to get value for that money but end up with nothing at the end. We don’t know yet if Paulson would pass or fail that test because while we all own a bunch of stock in various banks, we won’t know what it’s worth for a while.

The stimulus package follows much of Pryor’s solution – hire overpriced employees to do meanial and useless tasks. That is what the lion’s share of the stimulus will do. For $825B spent we will get at best $100B in infrastructure improvements, the rest will just go straight to various people’s pockets. I support those Democrats who want to remove all the tax cuts from the stimulus bill. I would remove all of the block grants for education, unemployment, and health too. While we are at it, remove all spending for things more than 2 years out. Doing all that would leave maybe $100B, if that, of infrastructure stimulus. I bet they won’t be able to spend most of that either.

Last month the Conference of Mayors put out a list of “shovel ready” transportation projects that don’t have funding. They came up with $90B worth. I can tell you that they just made up those number. $825B on the line and all that the mayors of all the cities in this country could come up with is $90B? The stimulus bill is giving them $30B. So much for infrastructure.

Why can’t the govement spend more than $30B on transporation infrastructure over the next 18 months? Too much government interference. In order to spend money this fast the government will have to suspend most of the “protections” that it places on spending. Environmental impact reports? forgot it. Multiple bid contracts, only superficial ones. It is not like there are millions and millions of skilled freeway, bridge, or road workers out there. Contractor managment will get rich, but jobs for the masses? I doubt it.

One interesting protection that must be waived is the idea of state matching funds. Normally when the feds spend on a project they require state or local governments to put up 10% or 20% of the cost. Given the state of states, this protection is going out the window for sure. Since the states are broke, maybe the federal government can instead extend its matching funds policy to the public. I heard an interesting suggestion for helping car companies: let people deduct up to $10K from their taxes for any car purchase this year, especially for a domestic car purchase. That sort of stimulus would help car companies pay us back for the last $700B bailout.

Calling this stimulus package an investment in infrastructure is a lie. Blaming the Republicans for the “tax cut” portion of the package is a further lie, but that is another post. In “Brewster’s Millions” Pryor managed to spend the $30M ending up with nothing in return. His fans who adored him when he was giving away money abandoned him when the well ran dry. Obama seems locked in the same plot.