Tag Archive for: national debt

“Green Banks” Will Drown in the Red by Jonathan Bydlak

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Why does federal spending matter? There are many reasons, but perhaps the most fundamental is that free markets allocate resources better than governments because markets rely on price instead of politics. Many industries show this observation to be true, but the emerging field of “green banks” offers perhaps one of the clearest recent examples.

A green bank is a “public or quasi-public financing institution that provides low-cost, long-term financing support to clean, low-carbon projects by leveraging public funds…to attract private investment.” Right now, only a handful of green banks are scattered across Connecticut, California, New York, Rhode Island, and Hawaii.

Free marketers rightly doubt whether public funds should be used to finance private startups. But regardless of where one stands in that debate, the states’ struggles serve as a valuable testing ground for future investments.

The State of Connecticut operates under a fairly significant budget deficit. California has been calculating its budgets without taking unfunded pension liabilities into account, and it’s gambling with its ability to service its debt. New York continues to live beyond its means. Rhode Island’s newest budget does little to rehabilitate its deficit spending addiction, and, despite having a balanced budget clause in its state constitution, Hawaii has a pattern of operating at a deficit.

In fact, a state solvency report released by the Mercatus Center has each of these five states ranked in the bottom third of the country, with their solvency described as either “low” or “poor.”

This all raises the question of whether these governments are able to find sound investment opportunities in the first place. Rhode Island couldn’t even identify a bad investment when baseball legend Curt Schilling wanted $75 million to make video games about something other than baseball!

Recently, though, there have been calls to extend the struggling green banking system to the federal level. Mark Muro and Reed Hundt at the Brookings Institute argued in favor of federal action in support of green banks. Somewhat paradoxically, they assert that demand for green banking institutions and the types of companies they finance is so strong that the existing state-based green banks cannot muster enough capital to meet demand.

Wherever there is potential for profit and a sound business plan, lending institutions are likely to be found, willing to relinquish a little capital for a consistent and reasonable rate of return. So where are the private lenders and other investment firms who have taken notice and are competing for the opportunity to provide loans to such highly sought-after companies and products?

Even assuming that there is demand for green banking services, recent experience shows that a federally-subsidized system would likely lead to inefficiency, favor trading, and failure. For instance, the Department of Energy Loan Program is designed to facilitate and aid clean energy startup companies. Its portfolio exceeds $30 billion, but following a series of bad investments like Solyndra, Inc., new loan guarantees have been few and far between. The program has already lost over $700 million.

Even the rosiest measurements do not show particularly exciting returns from this system. The Department of Energy itself estimates that over the lifetime of the loans it’s guaranteed, there exists the potential to see $5 billion in profit. However, those estimates also depend on the peculiar accounting methods the DoE itself employs.

This problem is apparent in other government sectors. For instance, determining how much profit the federal government makes off of student loans depends on who is asked. Some say none, while others say it’s in the billions. Gauging the economic impact or solvency of government programs is notoriously difficult, and different methods can yield what look like very different results. Add to that the consistently uncertain nature of the energy market, and profits are hardly guaranteed.

Examples abound of wasteful federal spending, and the growing green technology and renewable energy industry is no exception. The DoE Loan Program has already faced issues that go well beyond Solyndra: Abound Solar, a Colorado-based solar panel manufacturer, was given a $400 million DoE loan guarantee, only to later file for bankruptcy, potentially costing taxpayers $60 million. The Ivanpah Solar Electric Generating System, a 175,000 unit heliostat array in California, received a $1.6 billion federal loan and, because it failed to produce the amount of power estimated, was forced to later request more than$500 million in federal grants from the Treasury Department. A recent Taxpayers Protection Alliance study showed that risky investments in heavily subsidized solar energy could even lead to a bubble similar to the disastrous 2008 housing bubble.

Those who want to expand the government’s role in green banking likely want to see more clean and renewable energy reach the consumer market, and a lot of people probably applaud that goal — but the real question is whether the proposed means can reliably achieve that end. A wise manager with a solid business plan can find investors who will willingly take a chance. Considering the struggles of several states, trusting the federal government to build an even bigger system would exponentially increase that risk.

In contrast, the market offers opportunity to entrepreneurs in the green technology and renewable energy industries. For instance, GreatPoint Energy, a company specializing in clean coal, successfully went the route that other companies do: Design a product or service, find investors, and compete in the marketplace.

SolarCity, a California-based and publicly traded corporation of over 2,500 employees, entered the industry before many government loan programs were established. Thanks to a sound business model and subsequent horizontal and vertical expansion, it has become a leader in the industry. SolarCity’s success, however, cannot be touted by the Department of Energy’s Loan Program, which declined to invest in the company, leading SolarCity to try — and succeed — in finding private investment.

If GreatPoint or SolarCity had failed, only those who willingly participated in the startup would suffer the consequences. The issue with green banking — and indeed government “investments” more generally — is that taxpayers are not party to the negotiations but are the ones ultimately on the hook for failures.

In absolute terms, these billions of dollars are a lot of money. But in the grand scheme of government spending, the amount of money invested in green banks and renewable energy production is relatively small. If Social Security is the Atlantic Ocean, and wasteful defense appropriations are the Mediterranean, then green energy investments fall somewhere in the range of the Y-40 pool: easily measurable but certainly not insignificant.

Your odds of drowning may be smaller in the pool than the ocean, but that doesn’t make the drowning itself any more pleasant. The federal government is already under water; adding new liabilities on the hope that politicians can guess the future of energy is merely a step towards the deep end, not the ladder out.


Jonathan Bydlak

Jonathan Bydlak is the founder and president of the Institute to Reduce Spending and the Coalition to Reduce Spending.

Why Does Obama Get Job Performance Approval?

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It is one of the great mysteries. How does Barack Obama continue to generate job approval ratings that say he’s doing a good one?

On a recent weekend Rasmussen Reports rated him at 51% while Gallup gave him a 49% rating. At the Pew Research Center, his rating was at 47%, but they noted that at this time in his presidency, George W. Bush had a job approval rating of 33% while Bill Clinton was rated at 63% approval.

Of course, Bush and Clinton were President at different times dealing with different factors but metaphorically Obama’s ratings suggest that close to half of the voters polled still thought he was doing a good job or, at the very least, not a bad one.

Are the voters that are being polled simply not paying that much attention to the White House and its occupant?

Consider some aspects of his record in office to date:

As 2014 came to a close, Tyler Durden, writing on Zero Hedge, addressed the U.S. debt, noting that it had “just hit a new historic level…which also means that total U.S. debt had increased by 70% under Obama, from $10.625 trillion on January 21, 2009 to $18.005 trillion most recently.”

The level of debt led to the first downgrade of the U.S. credit rating in the nation’s history. At the same time federal spending (25% of Gross Domestic Product) was the highest since World War II.

Obama has presided over a terrible economy for the past six years and, while other Presidents came into office facing a comparable recession, Obama’s failed policies turned it into the Great Recession. Employment sank to the lowest since 1983 at 58.1% of the working population and long-term unemployment (45.9%) was the highest since the 1930s.

One might think that so many people either out of work or who had given up seeking it would be unhappy enough to credit Obama with the economy’s sluggish state. He is currently taking credit for any improvement, but much of it is attributable to the energy sector and he has taken steps to harm it since 2009 with “a war on coal”, restricting any exploration or drilling for oil and natural gas on federal lands, and most recently, attempting to put one of the most energy-rich regions of Alaska off-limits to any access.

AA - Poll of DropoutsAs we begin to work on our tax returns, it’s worth noting that only 49% of taxpayers will be paying an income tax, the lowest level in the modern era and, predictably, government dependency (47%), defined as the percentage of people receiving one or more federal benefit payments, is now the highest in American history.

There was a time when being on welfare was something people tried to avoid. That suggests that something has changed in the American character, but we know that all too well as we watch our society accept a range of conduct that includes demands for same-sex marriages, legalization of marijuana, a growing population of single-parent families, attacks on the saying of prayers at public ceremonies, hostility to the police who protect us, and a host of other behaviors that undermine the moral values that previous generations of Americans passed on to their descendants.

Another mystery is the way facts about Obama seem to stir so little interest. He allegedly has a Social Security number from a state in which he has never lived. Many of the records of his life that other Presidents have made public have been kept sealed from examination. A birth certificate has been deemed a forgery by document experts. Whole books have been devoted to the disparities between his two memoirs and facts that have raised many questions.

At the least, one might assume that Americans know that he lies all the time. The typical television news program includes video of something he said previously that clashes with whatever his recent version is. Why would voters grant a 50% approval rating to someone who so consistently lies to them?

The fact is that his namesake legislation—ObamaCare—has been a disaster from the day it was passed. It was sold to the public with a series of outrageous lies told by the President. Passage was based solely on the votes of a Democratic Party that controlled Congress but the recent election did shift control of Congress to the GOP, so the voter’s actions do speak louder than words.

The then-Speaker of the House, Nancy Pelosi, summed it up saying they had to pass the 2,000-plus page monster “in order to find out what’s in it.” That is not how government is supposed to function, but worst of all, ObamaCare requires Americans to purchase a product, health insurance, they may not want or may not need. That is a lot closer to a dictatorship than a democracy.

How many scandals have occurred during the President’s six years in office? The short answer is “too many”; the most recent being the exchange of five Taliban generals for one American soldier deemed by those with whom he served to have deserted his unit. In the same fashion it has taken months to pry information from the White House about the Benghazi attack that took the life of a U.S. ambassador and three others. As is frequently the case, it is the cover-up that rivals the event.

In the end, one must conclude that Obama’s job performance approval ratings say as much about the mood and outlook of the voters who were polled as the facts cited above would suggest. A lot of Americans continue to express their anger and frustration with Obama, myself included, but that is not showing up in the ratings that suggest that a least half the voters think he’s doing, if not a great job, at least a good one.

© Alan Caruba, 2015

Former CIA Officer — Its the National Debt Stupid! Beware of the Bail-in!

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“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” – Thomas Jefferson, 3rd U.S. President

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Gary Berntsen

Decorated former Central Intelligence Agency (CIA) career officer who served in the Directorate of Operations between October 1982 and June 2005, Gary Berntsen was in Sarasota, Florida to talk about the greatest threat to the national security of the United States of America. Speaking at an event hosted by the Concerned Veterans for America, Berntsen said that the greatest national security threat to the U.S. is not the Russian incursion into Ukraine, the Chinese expansion into SE Asia, the threats from Middle Eastern terrorists, its the growing national debt.

Berntsen went on to say that the debt bubble is about to burst. It is when, not if, ordinary Americans will feel the impact of a weakened dollar and the failure of Congress to deal with the national debt and spending.

Berntsen quoted a number of recent books warning about the coming fiscal crisis, including The Death of Money: The Coming Collapse of the International Monetary System by James Rickards. Berntsen said that after reading Rickards book he understood how vulnerable Americans are to two fiscal bubbles – the dollar bubble and national debt bubble. Berntsen said that the pins that will burst these bubbles are: inflation and China stopping to buy U.S. Treasury Bonds.

Berntsen raised the specter of a new financial global paradigm called the “bail-in“. The Financial Times defines “bail-in” as, “[A] desire to make bondholders – who after all helped lend the money that allowed banks to lend imprudently – share the burden in future by making them forfeit part of their investment to “bail in” a bank before taxpayers are called up on to bail it out. In theory, this will force them to be more careful with their investments and protect the taxpayer from a re-run of the recent crisis.”

Berntsen noted that the bail-in paradigm was used in Cypress. In his article Bail-in vs. Bailout, David Kotok writes:

In the aftermath of the bungled Cyprus affair, we are now observing a major transition underway with regard to bank-deposit safety.

In the Eurozone and in Europe generally, the sacredness of an insured deposit was bludgeoned by the finance ministers in their botched attempt to impose a cost on insured deposits in Cyprus. The finance ministers were taken to task decisively by their political constituents. Imagine: it was the parliament of Cyprus that stood between the insured depositors in Eurozone banks and the outrageous attempt to breech the sacred promise that insurance entails.

One has to be thankful for the democratic political process that elects parliaments, even in Cyprus.

Now we are seeing a different form of attack on depositors. We are transitioning from a system of bank bailouts to “bail-ins.”

Read more.

Berntsen said that Alan Greenspan in his book The Map and the Territory: Risk, Human Nature and the Future of Forecasting alluded to the new paradigm of the bail-in. The bail-in is available to President Obama and Congress as it was included in H.R. 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act. The Financial Times in the definition of bail-in uses the Example of Dodd-Frank stating, “The US has already put in place bail-in-like powers as part of the Dodd-Frank financial reform act passed last year [2010]. The law includes a resolution scheme that gives regulators the ability to impose losses on bondholders while ensuring the critical parts of the bank can keep running. Employees would be paid, the lights would stay on and derivatives contracts would not have to be instantly unwound, one of the areas that caused market confusion when Lehman Brothers collapsed in September 2008.” [Emphasis added]

The danger is clear and present. The media is not covering this existential threat. Rather the news outlets are more interested in any issue other than the one most important to Main Street America.

Time will tell and time is running short according to Berntsen.

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