How ironic that our government is considering cap-and-trade legislation at a time of economic difficulty. Yesterday, I wrote about the harm cap-and-trade could do to consumers through higher costs. Today, I want to talk about the harm it could do to our national economy by damaging our trade relationships with other countries.

Martin Feldstein was President Reagan’s Chairman of the Council of Economic Advisors. He also happens to believe that the scientific evidence suggests global warming is true. Yet he opposes cap-and-trade as the solution. Why? Because it will harm free trade. Here’s why. Different countries will issue different permits that cost different amounts. As a result, Feldstein warnes:

“A cap-and-trade system can cause serious risks to international trade. Even if every country has a cap-and-trade system and all aim at the same relative reduction in national CO2 emissions, the resulting permit prices will differ because of national differences in initial CO2 levels and in domestic production characteristics. Because the price of the CO2 permits in a country is reflected in the prices of its products, the cap-and-trade system affects its international competitiveness.”
http://www.business-standard.com/india/news/martin-feldstein-cap-and-trade-=-protectionism/362252/

So cap-and-trade is bad for consumers and bad for our national economy. Surely there is a better way to combat global warming and reduce our dependence on foreign oil. And there is: alternative energy.

Last Friday on a narrow vote, the US House of Representatives passed legislation to curb greenhouse-gas emissions. The bill, based on the cap-and-trade model, now goes to the Senate.

The bill is designed to reduce global warming; instead, it will likely increase your taxes:

http://online.wsj.com/article/SB123655590609066021.html

The idea is that the government would create a new commodity that is scarce: the right to emit carbon. Then, government would mandate that businesses buy this right. Businesses that need to emit carbon, like those in the energy sector, would likely purchase these permits…and then pass it off to you the customer in the form of higher energy bills.

As the Wall Street Journal article notes:

“The Congressional Budget Office…estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).

Translation: your electricity bill is about to go up. And there will also be an impact on renewable energy, too. Currently, electricity that is produced from wind and solar is sold and purchased on the wholesale market along with other electricity produced from fossil fuels like crude, coal, natural gas, hydro and nuclear. Today all of these sources are priced competitively and renewables cost the same as coal. Renewable energy companies must charge the same rate as fossil fuel producers or today the customer will buy whatever is the lowest cost. Once the cap-and-trade starts renewables will be a very special and nitch market that will be in high demand from big power users. Now energy producers will be able to charge a high premium for their kwh production from renewable sources. That will likely enable the other energy companies to increase their market prices too, which will in turn hammer the small businesses and consumers.

Let me say again that I agree with the President that we need to reduce our oil consumption. But this is not the way to do it. Instead of penalizing all of us with higher energy bills, why not do more to encourage alternative energy, like biomass, solar and wind?

For two weeks now, I’ve warned that the economy is bad and will likely get worse.  But it’s not just me saying it.  So is the Oracle of Omaha, Warren Buffett:

http://www.bloomberg.com/apps/news?pid=20601039&sid=aUgpE2pRx5eU

According to this Bloomberg article:

“There’s evidence, though, that Buffett is awake to America’s problems. He says there will be no quick rebound in consumer spending, the economy has ‘fallen off a cliff,’ and we are now ‘fighting a war.’ Berkshire Hathaway Inc.’s real- estate arm just estimated that the backlog of unsold houses is double the official figures.”

So my advice to everyone reading this blog is: fasten your seatbelts.  We are not out of this rough stretch of road yet.

But there is also some good news: cash is again king.  So hold onto your cash; pay down your debt; and keep your eyes open.  In the next year or so there will be great deals.  Maybe it’s a new house; maybe it’s some land.  If you have the cash on hand, get ready to experience a buyer’s market.

And that buyer’s market will eventually, as always, bring the economy back.  So let’s keep a positive outlook as we endure today’s challenges and get ready for tomorrow’s opportunities. As Warren Buffett once said, “‘Buy American: I am.”

Today, our series on America’s economic crisis continues by focusing on the next wave of real estate challenges: commercial properties.

http://www.time.com/time/business/article/0,8599,1893125,00.html

As the article above notes, we are facing a “ticking time bomb.” Why?  Because some $1.3 trillion in mortgage loans to commercial properties will come due between now and 2013.  Deutsche Bank estimates that some 50% of these loans won’t qualify for re-financing. And when the owners inevitably default, it could lead to losses of at least $200 billion.  That’s billion with a “b”.

How are we poised for another real estate disaster?

Here is how.  The way the mortgage market for commercial real estate works is this: they are structured as 5-to-10-year loans, after which re-financing takes place. But since property values have dropped, owners will not be well-positioned for re-financing.

And keep in mind that the height of the mortgage boom took place from 2004-2007. Many of the commercial real estate mortgages created during this time were set with trigger interest rates that will begin to accelerate at 36 to 60 months from the date of the loan’s closing. I’m no math expert but that tells me we’re not out of the woods yet. With fuel prices going back up, and a potential commercial real estate collapse combining with the ongoing residential real estate crisis, we could soon hit the trifecta of economic crises.

If any of you are thinking about buying a new house, ranch or commercial property, hold on! I think things are going to get real cheap. And as we all know “cash again is going to be king.”

Today, our series on the economic challenge facing our country looks at the Fall of 2008. How did this perfect storm gather and then erupt?

As previously noted, the dramatic increase of gas prices in the summer put enormous pressure on family budgets all across the country. Folks with more mortages than they should have had began having trouble making payments. And that led to the housing crisis that had been building for some time.

Next came the banks. With so many people defaulting on their mortgages, banks began to struggle. And when banks struggled then the financial services industry began to struggle. It was a chain reaction that devastated our economy.

And what was the common thread among all these problems? Speculative buying. For example, people bought more home than they could afford because they speculated the values would rise and they would make the money up. But when the housing market crashed, the bubble burst and folks ended up losing their investment.

Tomorrow we’ll take a look how the Fall of 2008 might recreate itself again in the commercial real estate market.

Today, as we begin our second week of blogging about the economic crisis, I want to focus on planes, trains and automobiles.

Since the Industrial Revolution, the American economy has traveled down the road of transportation. Cars move people; planes and trains move people and products.

And that makes energy the key ingredient in our entire economy. When
gas prices are low, the economy moves along just fine. But when gas
prices go up, the economy starts to slow down.

We saw that again last summer when gas prices reached record highs. It wasn’t long before everyone was feeling the pinch.

Now, despite demand being moderate and inventories being high, gas prices
are rising. How is that possible?

http://www.time.com/time/world/article/0,8599,1901446,00.html

According to this article, the Saudis explain the rise in gas prices this way:
“The price rise is a function of optimism that better things are coming in the future.”

What?  So today’s gas prices are not based on today’s reality.

This week, as we begin to focus on solutions to our economic challenge, we’ll be looking more at how we can “re-fuel” our economy with different sources of energy.

With volatile fuel prices chocking the auto, agriculture, transportation and construction industries, we can kiss goodbye to any hopes of a quick and solid economic recovery. Its going to take something drastic to shock the heart of our economy and get it restarted. We need what I am calling CPR (Cheap Petroleum Reserves) to get us back to building, buying and hiring.

As we continue our series on the economic downturn of 2008, we need to discuss one of the most important factors of all: the price of oil.

Since the industrial revolution, fuel has been the key ingredient powering our machines and our transportation.  Quite literally, our economy is greased by oil.  So in the summer of 2008, when oil reached nearly $150 a barrel, it didn’t take long before that started to impact other sectors of the economy.  In my opinion, it’s no accident that about this time increasing numbers of people began getting behind in their mortgage payments.  When you’re paying $4 a gallon at the pump in order to drive yourself to work, money gets tight.  And the already deteriorating housing market began to deteriorate even more.

But 2008 was part of a pattern.  If you have a minute, take a look at this website for a graph showing the spikes in oil prices over the years:

http://www.wtrg.com/prices.htm

Notice that every time there was a huge oil spike there was a bad economy: 1973 and 1979, for example.  This shouldn’t come as any surprise.  As a simple rule: when oil is heading north, the economy is heading south.

We learned that lesson again in 2008.  And it’s another reason why before this recession is over, we will have to deal with energy policy in this country.

And so I ask the question: Have you been keeping up with the price of oil over the past four months? Do you know what it is today? It’s going up and at a concerning rate. The “green sprouts” that we hear economists talk about in the news are weeds growing in the economic garden. Tune in on Monday and see how selling new cars and $20 oil will play a role in the turnaround.

Two days ago, we talked about the Bear Stearns collapse. Yesterday, we discussed the Bernie Madoff implosion. These may seem like two different financial scandals. But they were essentially both runs on the bank. And as such, two common threads tie them together.

First, any run on the bank begins with a deception. In some way, investors are conned into believing one thing about their money when another thing is the truth. In the case of Bear Stearns, it was deceiving investors about how much of their investments were exposed to the subprime market. In the case of Bernie Madoff, it was deceiving investors into thinking that the unreal returns they were seeing were real.

Second, any run on the bank ends with fear. When people are afraid, they are ready to storm into the bank and demand their money. And when that happens, it’s bad for everyone.

The good news is, it doesn’t have to be that way. With honest lending by financial institutions and calm thinking by investors, we can have a steady financial system. That’s why I support many of the new regulations put in place by the Federal Reserve to shine the light on the financial system.

Information is power. And sunlight is a great disinfectant. It’s too bad it took Bear Stearns and Bernie Madoff to remind us of this. But it’s a good lesson to learn.

Yesterday, we talked about the collapse of Bear Stearns and the impact it had on the economy in the Spring of 2008. But if Bear Stearns became the company most associated with the 2008 market meltdown, then Bernie Madoff was the person most associated with it.

Madoff had been one of the most respected investors on Wall Street. He had set up an investment fund called Ascot Partners. For years, the Ascot Partners fund provided outstanding returns for investors. But when the stock market collapsed in 2008, Madoff found himself in trouble. His investors came calling and wanted their money.

But there was a problem: the money wasn’t there. Almost from the start, the Ascot Partners fund had been a Ponzi scheme. Madoff would pay off investors with new money from new investors. No one really made any money off their investments other than Madoff who was laughing all the way to the bank. When Madoff’s house of cards collapsed and he was arrested, the market continued to tank. Thus, Madoff’s devious ways hurt not only himself and his investors but anyone connected to the stock market, which is to say everyone.

So what began in housing, then spread to major financial houses like Bear Stearns and later to rich and powerful investors like Bernie Madoff. By the end of 2008, the American economy was in a complete free fall…and it is only now beginning to stabilize itself.

In March of 2008, Bear Stearns looked to be on top of the world. For the first quarter, the legendary financial house was set to announce $115 million in profits. By the middle of the month, the company had collapsed. Eighty-five years of history vanished. And with it, the economic meltdown of 2008 began. The aftermath continues today.

What happened? It all begins at home. Or, in this case, it all began with housing. A few years before, Bear Stearns pioneered the securitization and asset-backed securities market. As investor losses grew in 2006 and 2007, Bear Stearns increased its exposure to mortgage-based assets, including many that would become central in the subprime mortgage crisis.

Subprime mortgages were loans given to folks with poor credit histories. In previous times, most of these folks would not have received a mortgage. But thanks to government pressure, financial institutions began offering subprime mortgages as a way to democratize the housing market. But when many of these new home owners had to default on their loan, the subprime mortgage crisis was underway. And since Bear Stearns had invested so much in the securitization of these loans, the entire company began a rapid descent into disaster in March 2008.

But Bear Stearns was just part of the problem. Check out the blog tomorrow for more information on how the 2008 economic crisis went from bad to worse.

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This week the president arrived in the Middle East:

http://blogs.telegraph.co.uk/toby_harnden/blog/2009/06/03/two_kisses_for_king_abdullah_from_barack_obama_but_no_bow_this_time

Much is being made about the speech the president will give in Egypt.  But before that, he began his trip by landing in Saudi Arabia and meeting with King Abdullah. Political scientists say that in diplomacy, what you do often matters as much as what you say.  Starting the trip off in Saudi Arabia says a lot.  This is the same country that is gouging us at the gas pump and where much of the money that funds terrorist networks comes from.

I wish the president would have left Saudi Arabia off his travel itinerary.  But at least he supports alternative energy, like biomass.  The time has come to get off of Saudi oil and get onto American biomass.

Yesterday, I wrote about the news that oil had dropped a bit.  Today
comes news that OPEC will do everything it can to push it back up
again:

http://www.reuters.com/article/GlobalEnergy09/idUSTRE5513BW20090602

Since the 1973 Yom Kippur War, Arab states have used oil as a
geopolitcal weapon.  OPEC wants us to use its oil resources to make all
of us dependent.

As the article notes:

"'The price will go to $80-$90 maybe at the beginning of 2010,'"
OPEC's Abdullah al-Badri told the Reuters Global Energy Summit.

"'I don't think the price will go down... By the end of the year
we'll see $75. $80-$85 is possible -- not with the demand we see at
this time, but if demand picks up month after month, then maybe we'll
see this price.'"

I ask the question again: how long are we going to let groups like
OPEC have this kind of power over our energy policy?  It's time for a
change.  It's time for biomass.

This week we learn that the price of oil has begun to slip:

http://apnews.myway.com/article/20090602/D98IG75O0.html

As I’ve previously written on this blog, I think oil is overpriced and will eventually come down.  This is a small example.  What’s interesting is why the price is down: investors fear that inflation is on the horizon.  And they may be right.  The projected Obama budget during the next few years is expected to add more to the national debt than all the other presidents combined from Washington to Bush.  Now, I’m not a mathematician.  But that sounds like a lot of money.

Inflation is another good reason why we need to invest in renewable energy.  Energy sources like biomass are affordable and effective…and can help get us off our oil addiction.

Check out my website for more information on how our new Advanced Trailer for Biomass is changing the energy industry.

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