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Op-Ed: Desperate Times, Desperate Measures, Part 1


Economic crisis demands radical changes in our way of life.


This article was written by Leonard A. Spivak. Len is currently Minyanville's outside legal consultant and a member of its Advisory Board. He recently retired as partner of the law firm of Cahill Gordon & Reindel LLP in New York.

It's very likely that the current recession will be long and deep - and anyone who continues to quibble about definitional thresholds is delusional. Kevin Depew has considered the possibility that we will descend -- or have already descended -- into a "Modern Stealth Depression."

Regardless of what you choose to call it, America won't come out of its current downward spiral until fundamental changes are made in the American lifestyle. Americans must be willing to accept major (and expensive) changes in our sources of energy. Politically neutral government regulators must be appointed to proactively and exhaustively examine and respond to trends and developments in the banking and other industries in real time - rather than simply reacting, and in haste, after most of the damage has already been done.

Who can forget former Federal Reserve Chairman Alan Greenspan publicly declaring he saw no "bubble" in the housing market - only some "froth." One has to wonder whether he'd ever heard of a subprime or near-prime mortgage loan (or "liar loans," for that matter), much less recognized the sheer size of the waking monster that was about bring the construction, investment banking, banking and other markets to their knees.

The U.S. economy is embroiled in an unprecedented confluence of strong negative factors. These include the questionable (and perhaps unknowable) capital position of many participants in the financial sector, leading to the extremely tight availability of credit and a loss of investor confidence.

At the same time, the dramatic and rapid increase in the price of crude oil has impacted every facet of the American economy. Its effects can be seen in higher fuel costs (for transportation, electrical generation and home and office heating), as well as in the specter of a substantially increased rate of inflation - a 1 % increase in the cost of living in June alone.

Moreover, the skyrocketing price of oil has caused extreme dislocations in the U. S. auto industry which negatively impact both employment and suppliers; retired workers are even losing their medical benefits (And good Lord! How could it have come to this?).

The severe downturn in the housing market -- new construction is at a 17-year low and resale prices of existing homes are plummeting -- has brought the homebuilding industry to a virtual standstill, and every derivative industry has been affected as well (lumber, sheetrock, appliances, plumbing supplies, insulation, roofing materials, tools, etc. etc. etc.).

The unemployment rate is creeping up; major new layoffs are announced almost every day. Consumer confidence is at its lowest point since it began being measured. As a result, the dollar is hobbling along on crutches, and the resulting harm to the stock market, as well as the volatility in the bond market, have been beyond anyone's expectations.

2 years of significant increases have been eliminated: General Motors now has a lower market capitalization than Bed Bath and Beyond. (At least now we know what the "Beyond" stands for.)

Mutual funds are taking a bath, company and public pension funds are well short of their actuarial requirements, a number of hedge funds are falling out of bed and the value of individual retirement funds (401K's, IRA's and Keogh plans) is eroding.

And all of this is happening just as 60 million "boomers" thought they'd be able to retire in relative financial security.

This doesn't mean that money can't be made in the stock market. "Cheap stock" is doubtless available for those who can purchase and hold on to it. But those who have a short-term need to sell securities will be demolished.

While there will surely be market rallies from time to time, there simply isn't anything on the horizon to suggest that any rally will be sustainable without a commitment to pursue at least some of the fundamental changes discussed below.

We cannot look to history to find solutions, since this situation is unprecedented. And we cannot assume that the government will be able to do much more to steady the banking industry and financial markets than it has already done. Its most recent effort, pending Congressional approval, was to guarantee the obligations of Fannie Mae (FNM) and Freddie Mac (FRE) - companies which many falsely believed were already secured by the credit of the federal government.

As Lenin once asked: "What is to be done?" No, I'm not suggesting revolution - but I am saying that the American people, along with our political "leaders," need to dramatically change the way we think and the way we live if we are ever to dig our way out of this mess and prevent anything like it from happening again.

The current administration, as well as the 2 presumptive presidential candidates, have begun to mention some of these changes, but have yet to address them in any meaningful way.

Let's take our dependence on foreign oil as an example. When Jimmy Carter was President, he called weaning America from its dependence on foreign oil the "moral equivalent of war." Regardless of what one thinks of the analogy, Carter clearly had the right idea.

Of course, the Iranian Revolution proved somewhat distracting for Carter - and then he failed to get reelected. Every president thereafter has basically ignored this issue, and this lack of leadership has left America ever more vulnerable. Vulnerable not only to the whims of OPEC, or the independent actions of certain of its members, but to inevitable increases in the price of crude resulting from equally inevitable increases in demand from India, China and other developing countries. (Blaming speculators is just silly; the price of oil depndes osupply and demand and speculators are a part of any supply and demand market.)

That venerable oil man, T. Boone Pickens, is now on television, saying that America imports almost 70% of its crude; when Carter made his statement, the figure was 24%. The American government and the American people have been living in a dreamworld. We have delivered ourselves into the hands of our enemies, who can now defeat us by crippling our economy. That threat is greater than the threat of any realistically foreseeable act of terrorism that might be committed on American soil. Complacency is the greatest sin.

There's only one solution to this energy crisis that will keep it from happening again: nuclear power. The increased use of coal will kill us all (even the current Administration belatedly conceded that greenhouse gas emissions really do cause global warming. Well, duh.).
Increased drilling for oil in American waters or in Alaska (provided appropriate environmental cautions are taken) can't hurt, but it's a band-aid, at best.

Similarly, solar and wind power -- even when combined with oil from additional drilling -- will not be sufficient. Biofuels, which our government foolishly mistook for a panacea (an increase in the use of ethanol in automobile fuel has actually been mandated), come with unacceptable adverse consequences.

The increased devotion of the corn crop to the production of ethanol has raised the price of corn and other grains worldwide, threatening famine in some areas of the world. The nitrogen fertilizer used to produce corn is poisonous to the environment, and consumes large amounts of energy. The recent increase in corn planting, coupled with this spring's floods in the Midwest, have reportedly increased the "dead zone" in the Gulf of Mexico to an area the size of New Jersey.

Nuclear energy is the closest thing we have to "green energy". Nuclear facilities can be engineered to protect against known dangers of exposure, as well as against terrorism. The "not in my back yard" approach to the disposal of spent nuclear fuel must give way to either reason or -- because ending our dependence on foreign oil is a matter of national security -- to the invocation of appropriate federal powers. Our cousins in Europe have already committed to substantially increased generation of electricity from nuclear facilities. Are we to sleep again while the rest of the industrialized world marches forward without us?

Conservation can no doubt make a meaningful difference, as we have been extremely profligate in our use and waste of energy. We've already seen this: As the number of miles being driven has decreased, gasoline inventories have increased.

Mass transportation of people and goods should become a national priority. Just as the system of interstate highways was conceived and begun during the Eisenhower Administration, the next administration must foster the expansion and promotion of an improved American railroad system - the lack of foresight in the effort to reduce or eliminate Amtrak boggles the mind. The trucking of goods (using expensive diesel fuel) over distances over two hundred miles no longer makes sense (and failing to enforce truck weight restrictions has chewed up our highways). As air travel becomes more restricted (and it will happen), our intercity rail lines must be restored and expanded.

The changes discussed above will be expensive, but the expense will pale in comparison to the expense of a true long-term energy shortage. Think about oil at $300 per barrel - or the rationing if anything like that should occur.

Check out Desperate Times, Desperate Measures, Part 2 here.

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