JSeptember 18, 2008
Sir Isaac Newton And The Economy
Vol. 3 Issue 15
Where is Stefan Banic when we need him?
For those of you who do not know who Stefan
Banic (1870-1941) was, he invented the
parachute. We really could have used him on
Wall Street this past week. A soft landing
is what the economy needed, but it did not
come.
This week's meltdown on Wall Street, with
Lehman Brothers declaring bankruptcy,
Merrill Lynch being purchased by Bank of
America and AIG looking for a bailout,
recalls an earlier time in U.S. financial
history. The failure of Lehman Brothers may
only be the early stages of who is next.
However, where should the blame lie?
Listening to Barack Obama speak this
morning, I was dismayed when I heard him
blame Ronald Reagan for loosening the
restrictions on the Savings and Loan
institutions. Someone on his staff had said
remember the Keating-Five. Wow! Does he have
it wrong! I wonder who writes his material.
This is just another example of someone who
is not ready to lead. If he did his homework
instead of allowing his staff to lead him by
the nose and continue to align John McCain
with George Bush, he would have learned the
following facts.
The Keating-Five were five U.S. Senators
accused of corruption in 1989. It set off a
major political scandal as part of the
larger Savings and Loan crisis. Of the five
Senators, four were Democrats [my italics],
Alan Cranston (D-CA),
Dennis DeConcini (D-AZ),
John Glenn (D-OH),
and
Donald W. Riegle (DMI).
They were accused of improperly aiding
Charles H. Keating, Jr., chairman of the
failed
Lincoln Savings and Loan Association,
which was the target of an investigation by
the Federal Home Loan Bank Board. The fifth
senator, John McCain (R-AZ) was found not to
be involved in the scandal.
Oh! By the way Barrack, Franklin Raines
former Clinton director of the OMB and your
current advisor is the former President and
CEO of FNMA or have you forgotten? He paid
himself $90 million and was widely hailed as
a genius. The first African-American to hold
the job, his avarice while at the helm of
the FNMA is incredible. There is too much
information about him to write here. I
suggest if you want more information about
him, do a web search. You will be amazed.
Next issue was Bill Clinton, who through
his Secretary of HUD, Henry Cisneros, eased
the rules on obtaining mortgages, allowing
more exotic mortgages and "No-Doc"
mortgages. The resulting consequences led to
low housing inventories, followed by
skyrocketing housing prices. Sellers became
greedy and buyers got greedier as
speculators entered the market. Believing
that they would be out of their adjustable
mortgages before the first adjustment they
feared not. In many instances, it worked.
Some speculators made millions in a short
amount of time. Former Secretary of Labor
Robert Reich in a recent interview,
referring to the No-Doc mortgages said, "I
was long gone when that happened. It got so
bad that if you could stand up straight you
got a loan."
The main core of the problem goes back to
1999 when Bill Clinton repealed the Glass-Steagall
Act of 1933. The act was enacted during the
Great Depression. It protected bank
depositors from the additional risks
associated with security transactions.
Passed by Congress in 1933, the act
prohibited commercial
banks from collaborating with
full-service brokerage firms or
participating in investment banking
activities. Glass-Steagall was one of the
moves made by FDR to deal with the
Depression. It was essentially repealed in
1998 and officially overturned in 1999 by
the Clinton administration when Travelers
Insurance, the parent of Salomon Smith
Barney acquired Citicorp.
The repeal has effectively returned us to
the 1920’s, when recently three of the
largest independent investment houses were
either sold or failed. It brought us back to
the era when both banks and investment
houses cohabited under one roof.
It should provide an admonitory tale for
the recent events, especially the failure of
Lehman Brothers this past week. Accordingly,
the dissimilarity between commercial banks
and brokerage firms has blurred many banks
own brokerage firms and provided investment
services. However, "Oil and water don’t
mix."
So where do we go from here? There are
two avenues we could take. The people with
the most spendable capital presently is Abu
Dhabi. In recent years, the capital of the
United Arab Emirates has been on an enormous
buying binge. Fueled by record high oil
prices, they have a mammoth sovereign wealth
fund.
They purchased 4.9% of Citibank, their
Investment Authority has been gobbling up
blue chip American and other western firms,
like a $7.5 billion stake in Citigroup.
Mubadala Development Co., a separate
investing arm, has bought portions of
automaker Ferrari and the Carlyle Group, a
Washington-based private equity firm.
How does that affect the U.S. economy?
Simply put, let us say GM wants to build a
new plant to produce cars that get 40 MPG.
They go to Citibank for a $5 Billion Loan.
The Saudi Board says no problem here is your
money. However, instead of building it in
Detroit you will build it in Dubai. Get the
picture?
The second avenue of escape and probably
the simplest is drilling our own oil. We
have more oil on American soil than Saudi
Arabia. If we become energy independent, we
will not have to send over $700 billion each
year to countries that hate us.
Since the European Central Bank’s
interest rate is tied to the price of
commodities, the price of Crude Oil comes
down as soon as we drill, followed, by Gold,
Platinum, Copper, et al. The ECB will be
forced to reduce its interest rate causing
the Euro to tumble and the dollar to rally.
At the same time, we are creating new jobs
and new industries will open up, as we also
construct alternative energy sources such as
Nuclear, Wind and Solar.
However, the Obama’s of America (Pelosi,
Reid, et al) refuse to drill. They make up
excuses that it will take ten-years and we
will only save a few cents per gallon at the
pump. How stupid do they think we are?
President Bush lifted the executive order
prohibiting drilling and the price from that
act alone reduced the price by over 40-cents
per gallon. Once we start drilling who knows
how low it could go.
One of the reasons it could take
ten-years, is because of the Environmental
Impact Studies that must be performed, which
could take up to four-years. Congress could
rescind them but will not. What impact will
drilling on 1200 acres in the ANWR that
contains 27 million acres have. We only have
to look back at the original Alaskan
pipeline from Prudhoe Bay to Valdez to see
what the impact on the environment will be.
The oil industry experts have said that we
could start seeing oil in less than
two-years. It only took eight-years to get
to the moon and that project was started
from scratch.
When 74% of Americans want us to drill
now, shouldn’t 74% of Congress feel the same
way? Whom do they think they represent? The
time to become vociferous and tell our
representatives how we feel is now.
Economically it can; No it will work, I
am confident it will. Why do you think a
gallon of gasoline is 15-cents in Venezuela
and 40-cents in Saudi Arabia? Remember when
the quantity dials spun faster than the
money dials on the pump. It could happen
again.
Therefore, with that in mind we only have
to look back at the great economists of the
world. When I think back, the smartest
economists were not Keynes, Friedman or
Greenspan it was Sir Isaac Newton. His
theory is apropo to what is happening around
us. "What goes up must come down."
And, that is my opinion.
Michael Solomon
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