After Ron Paul, every Republican in the House and a large number of Democrats pushed through H.R. 1207 (against the efforts of the Federal Reserve and their former Enron lobbyist), Bernie Sanders went soft. It appears he has comprised the teeth out of S. 604 and put the effort to audit the Fed in jeopardy. According to TalkingPointMemos.com:

“In order to allay some of the White House’s and the Fed’s concerns, [Bernie] Sanders has agreed to limit the scope of what the Government Accountability Office would be allowed to audit.”

John Tate, the president of Ron Paul’s Campaign For Liberty, has referred to this “limit the scope” compromise as follows:

“According to our sources on the Hill, Senator Bernie Sanders caved to pressure from the White House and Chris Dodd and stripped out the Paul-Grayson language from his Fed transparency amendment. “What Sanders is now proposing is essentially the Watt amendment we all opposed last year in the House. In addition, it supports just a one-time audit.”

Not particularly surprising, but disappointing nonetheless. Here’s Ron Paul discussing the latest developments:

“It’s hard to get a man to understand something when his job depends on him not understanding it.” (1)

Those are the words of Al Gore, quoting Upton Sinclair, in his Academy Award/Nobel Prize winning documentary An Inconvenient Truth. It’s the good ol’ follow-the-money line. It presupposes that American corporations oppose any measure to cap carbon emissions because it will hurt their profits. And this makes sense: if we move away from oil, oil companies will be devastated. Thus, we must push through a carbon trading scheme to offset emissions, even if, no, because corporations oppose it. Paul Krugman went so far as to call anyone who opposed such a bill a “traitor to the planet.” (2) This same sentiment is best articulated by the most liberal member of congress, Dennis Kucinich:

“[H.R. 2454, the cap-and-trade bill] is regressive. Free allocations doled out with the intent of blunting the effects on those of modest means will pale in comparison to the allocations that go to polluters and special interests. The financial benefits of offsets and unlimited banking also tend to accrue to large corporations. And of course, the trillion dollar carbon derivatives market will help Wall Street investors. Much of the benefits designed to assist consumers are passed through coal companies and other large corporations, on whom we will rely to pass on the savings.” (3)

Wait a minute Dennis, carbon trading is a regressive tax to benefit the rich, well-connected corporations? Nonsense! Or perhaps, we should go ahead and take Al Gore’s advice and follow the money. And perhaps, we should start with Al Gore’s own words, taken from the bonus material on the DVD release of An Inconvenient Truth:

“A lot of business leaders are changing their positions. New businesses and CEO’s and corporations every week are now joining this new bandwagon saying ‘we want to be part of the solution and not part of the problem.’” (4)

Where did Al Gore’s skepticism go? I thought businessmen just wanted to pad their bottom line; now they want to save the planet? If we follow the money, we can see that there’s a lot of money in “being green.” Just the image of being green helps a company’s brand name, as IBM seems to have taken note of:

Saving millions on energy costs is one of those win/win things they talk about in business school so often; unfortunately, it goes deeper than that. Dennis Kucinich is right. The carbon trading scheme that passed the House and is making its way to the Senate is a new derivatives market set up at the behest of Goldman Sachs and other major Wall Street financial firms. Out of curiosity, how did the last financial derivatives market turn out? And yes, it is also a regressive tax, (Who do you think is hurt most by higher energy bills?).

While it’s true that major energy companies are not fond of having to cap their emissions, financial firms can only gain by having a new market to trade in. What people miss when looking at the corruption caused by corporations and government being in bed together is that different corporations have different goals. Many companies may oppose government health care, but companies such as GM and Ford, who are drowning in health care costs, could benefit significantly from government-run health care. Google supports net neutrality, AT&T opposes it. And on and on it goes.

So who stands to benefit from cap and trade? Well, Goldman Sachs for one. In January of 2009, Goldman Sachs bought Constellation Energy’s carbon trading operation. (5) Maybe, just maybe, they see a potential market to exploit. Even Al Gore himself is getting in on the take. Al Gore is an owner of the venture capital company Kleiner Perkins Caufield & Byers. His company backed a small start-up firm named Silver Spring Networks, which produces equipment to make electricity grids more efficient. In October of 2009, the U.S. Department of Energy gave out $3.4 billion of “smart grid” grants; $560 million went to utilities with which Silver Spring has contracts. (6) The Telegraph predicts that “Al Gore could become the world’s first carbon billionaire.” (7) Maybe that’s where Al Gore’s skepticism went: right to the bank.

This may seem outrageous, but that whole mess of corruption pales in comparison to the company that helped draft the initial concept for a carbon trading system: everyone’s favorite, now-defunct, energy trading firm, Enron.

In 1997, then Enron CEO, Ken Lay wrote an op-ed entitled “For Prevention’s Sake: Focus on Climate Solutions.” In it he strongly advocated the Kyoto Protocol, which would cap carbon emissions worldwide. On August 4^th, 1997, Ken Lay met with Bill Clinton, Al Gore and others at the White House to discuss Kyoto. Ken Lay was an enthusiastic supporter. This may seem odd to some because George Bush was a close friend of Ken Lay, but Bush refused to sign the Kyoto Protocol. Apparently, George Bush either had other special interest groups to appease, or he simply disagreed with his friend (almost certainly the former). Ken Lay never gave up, though. In 2001, Lay sent an emissary to the Bush administration to lobby for Kyoto. Why would Enron support cap and trade? The answer is the same as the answer for Goldman Sachs: it created a new energy market for them to trade in. Enron went bankrupt soon afterwards however, before it could influence any more politicians. (8)

But even though Enron is now gone, its baby lives on. Investigative Magazine, a New Zealand journal, concluded that “…without Enron there would have been no Kyoto Protocol.” (9) This may be a bit hyperbolic, but Enron did help establish and trade extensively in the $20 billion-per-year sulphur dioxide cap and trade scheme the EPA set up to deal with acid rain. Enron’s link to carbon trading is simply undeniable.

Furthermore, making money off of global warming solutions extends beyond trading carbon credits. Archer Daniels Midlands, the company TJ Rodgers, CEO of Cypress Semiconductors Corporation, calls “the pork barrel champion of all time,” (10) has made a fortune off of corn ethanol subsidies. Regardless of whether corn ethanol reduces carbon emissions (it doesn’t), it should be quite telling that Archer Daniels Midlands has received billions of dollars from the federal government to grow corn, (and you thought farm subsidies went to poor farmers and not big corporations). Does the president of ADM care whether corn ethanol is effective? Perhaps, but he certainly cares that it is effective in padding the bottom line.

Archer Daniels Midlands has consistently donated to both parties and received massive direct subsidies as well as sweetheart regulations. Dan Carney, writer for the liberal Mother Jones magazine, states “no other U.S. company is so reliant on politicians and governments to butter its bread.” (11)

ADM benefits in three ways. First are direct subsidies, which are notably the least important. The second is an enormous tariff on sugar, (at the behest of both ADM and the Fanjul family’s sugar dynasty, which has also donated consistently to both parties) (12).  This makes sugar more expensive in the United States and thereby increases the demand for corn ethanol. The final relates to corn ethanol, which Dan Carney describes as follows:

“The third subsidy that ADM depends on is the 54-cent-per-gallon tax credit the federal government allows to refiners of the corn-derived ethanol used in auto fuel. For this subsidy, the federal government pays $3.5 billion over five years. Since ADM makes 60 percent of all the ethanol in the country, the government is essentially contributing $2.1 billion to ADM’s bottom line.” (13)

And while it’s true that Mother Jones is very skeptical of corporations and the free market itself (not that ADM represents a free market) it’s worth noting that the libertarian Cato Institute agreed with them completely, calling Archer Daniel Midlands a “case study in corporate welfare.” (14)

It becomes quite obvious that there’s a lot of green to be made in being green. But since we’re following the money, why stop with just corporations? Two other institutions come immediately to mind as possible global warming benefactors: the government and universities.

Government’s incentive should be obvious. If corporations all too often seek money without regards to the human cost, governments all too often seek power without regards to the human cost. An extremely short glance at the blood-soaked 20^th century should be evidence enough of this. And the more of the economy that the government controls, taxes, or regulates the more power they have. European governments have gone so far as to ban the sale of incandescent light bulbs. (15)

Universities are a little more complicated. It works like this: many academics are reliant on government grants to fund their research. Donald Miller, of the Science and Public Policy Institute describes how a system so reliant on government financing creates—what he refers to as—”scientific dogmas.” (16) Namely, once a “consensus” has been reached, funding dries up for any alternative theories. This is what I would refer to as the “anti-scientific method.” The scientific method involves proposing a theory and then watching as everyone and their brother attempts to obliterate said theory and make a fool out of you. If a theory can withstand the initial barrage, then it simultaneously becomes accepted while awaiting the next onslaught of skepticism. So what happens when scientific theory becomes “dogma” and scientists are reliant on government funding? It creates a major incentive for scientists to fall in line. And when that “dogma” involves a political hot-ticket, there’s major incentive to get in line for government grant money.

The recently-released emails between leading climate scientists lend a lot of creditability to this argument. For example, look at this one from climatologist, Kevin Trenberth:

“If you think that Saiers is in the greenhouse skeptics camp, then, if we can find documentary evidence of this, we could go through official AGU channels to get him ousted.” (17)

Basically, Trenberth is trying to oust a scientist from a professional organization for disagreeing with him. Dogma indeed. Other emails allude to manipulating data to fit with this “dogma.” Furthermore, we have to ask whether academics and scientists proposing solutions such as cap-and-trade (a system that would give the government more power) would be more likely to receive grant money and political attention than those proposing, say, deregulating nuclear power. It may sound a bit conspiratorial, but it’s a question worth asking.

Now none of this is to say that corporate-financed research is any less biased. It would seem that smoking isn’t bad for you if you trusted the tobacco companies’ research back in the day. It’s just to say that skepticism needs to be applied everywhere. And the money needs to be followed everywhere.

And following the money leads to some interesting conclusions doesn’t it Mr. Vice President? As I illustrated in my previous article, there are plenty of other, better ways to deal with global warming than cap-and-trade, assuming it’s worth dealing with at all. Unfortunately, those methods don’t enrich the special interests. So understandably, albeit shamefully, those methods are ignored.
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Previous: The Market and Global Warming: Alternatives to Cap and Trade
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(1) Al Gore, An Inconvenient Truth, Lawrence Benders Productions, 2006
(2) Paul Krugman, “Betraying the Planet,” The New York Times, June 26, 2009, http://www.nytimes.com/2009/06/29/opinion/29krugman.html?_r=1
(3) Dennis Kucinich, “Passing a weak bill today gives us weak environmental policy tomorrow,” Speech on House floor, June 26, 2009,  http://kucinich.house.gov/News/DocumentSingle.aspx?DocumentID=134813
(4) Al Gore, An Inconvenient Truth, Lawrence Benders Productions, 2006, the bonus section can be seen at http://www.youtube.com/watch?v=TPem4XLr-Bc
(5) “Update 1-Constellation to sell London unit to Goldman,” Reuters, January 20, 2009, http://uk.reuters.com/article/idUKN2031523720090120
(6) John M. Broder, “Gore’s Dual Role: Advocate and Investor,” The New York Times, November 2, 2009, http://www.nytimes.com/2009/11/03/business/energy-environment/03gore.html?_r=1&em
(7) “Al Gore could become world’s first carbon billionaire,” The Telegraph, November 3, 2009, http://www.telegraph.co.uk/earth/energy/6491195/Al-Gore-could-become-worlds-first-carbon-billionaire.html
(8) See Dan Morgan, “Enron Also Courted Democrats,” Washington Post, January 13, 2002, http://www.washingtonpost.com/ac2/wp-dyn/A37287-2002Jan12?language=printer and Timothy P. Carney, The Big Ripoff: How Big Business and Big Government Steal Your Money, Pg. 200-203, John Wiley & Sons Inc., Copyright 2006
(9) Thomas Lifson, “Enron, Kyoto, and trading pollution credits,” American Thinker, March 12, 2007, http://www.americanthinker.com/blog/2007/03/enron_kyoto_and_trading_pollut.html
(10) T.J. Rodgers, “The Free-Market Case for Green,” Uncommon Knowledge, September 26, 2008, http://www.youtube.com/watch?v=jCjM2leF5F8
(11) Dan Carney, “Dwayne’s World,” Mother Jones, July/August 1995, http://www.motherjones.com/politics/1995/07/dwaynes-world
(12) Timothy P. Carney, The Big Ripoff: How Big Business and Big Government Steal Your Money, Pg. 56-63, John Wiley & Sons Inc., Copyright 2006
(13) (11) Dan Carney, “Dwayne’s World,” Mother Jones, July/August 1995, http://www.motherjones.com/politics/1995/07/dwaynes-world
(14) James Bovard, “Archer Daniels Midlands: A Case Study in Corporate Welfare,” September 26, 1995, http://www.cato.org/pubs/pas/pa-241.html
(15) James Kanter, “Europe’s Ban on Old-Style Bulbs Begins,” The New York Times, August 31, 2009, http://www.nytimes.com/2009/09/01/business/energy-environment/01iht-bulb.html
(16) Donald Miller, “The Trouble With Government Grants,” Science and Public Policy Institute, April 21, 2008, http://scienceandpublicpolicy.org/reprint/gov_grant_system_truth_or_innovation.html
(17) See “ClimateGate – Climate center’s server hacked revealing documents and emails,” Examiner.com, November 20^th, 2009, http://www.examiner.com/x-25061-Climate-Change-Examiner~y2009m11d20-ClimateGate–Climate-centers-server-hacked-revealing-documents-and-emails#update

Perhaps this is why H.R. 1207, the bill introduced by Congressman Ron Paul, has garnered support of 282 cosponsors. The Federal Reserve, for the first time, hired a lobbyist at taxpayer expense, whose previous experience included work for Enron. It appears to have at least slowed down the bill’s momentum; however, a new Rasmussen poll states that 75% of the American people want the Fed to be audited. Here’s hoping they get their wish…

Often, when deregulation is blamed, no specifics are given. In Barack Obama’s inauguration speech he only said, “…this crisis has reminded us that without a watchful eye, the market can spin out of control.” (1) When specifics are given, the finger is usually pointed at the Gramm-Leach-Bliley Act, which overturned much of the Glass-Steagall Act of 1933. Gramm-Leach-Bliley effectively eliminated barriers between investment banks, commercial banks and insurance companies. The idea behind keeping these institutions separate was to prevent conflicts of interest when evaluating risk. The lack of these barriers is blamed for some of the rampant speculation in the housing market.

Others point to a general lack of regulation in the mortgage industry. Most banking institutions gave what were called “stated income” loans. In essence, you told the bank how much money you made, they would take your word for it without a second thought, and give you several hundred thousand dollars to buy a home with. Since shockingly, people are not always honest, this put many homeowners in loans they could not afford. This also created the dreaded NINJA loan (No Income No Job No Assets). NINJA’s are typically bad at making their payments.

A lack of regulation is also blamed for allowing adjustable rate mortgages to become commonplace, especially in the sub-prime market. These loans would start out with a teaser rate and then, after a year or two, adjust to a much higher rate. When real estate was appreciating, this was fine, the homeowner could simply refinance. Unfortunately, once real estate began to depreciate, many homeowners found themselves unable to pay the increased mortgage payments, and without enough equity to refinance.

All of this makes a pretty compelling argument; however, it’s missing some key ingredients. First of all, there is already a lot of regulation. There’s a ridiculous amount of regulation in fact. As Austrian economist, Tom Dilorenzo clarifies,

“…we have 15 cabinet departments devoted to regulating different aspects of the economy. There are over 100 federal regulatory agencies. There are 73,000 pages of regulations in the federal register. And not to mention state and local governments that have hundreds and hundreds more regulatory agencies that regulate everything from zoning to anti-trust, to everything else.” (2)

Furthermore, the housing market was not only not deregulated, it was often regulated in the opposite direction. Many government programs (such as Fannie Mae, Freddie Mac and the Community Reinvestment Act, all to be discussed further in part 2) put as much pressure as possible on lenders to increase the availability of credit. All with the goal of creating what George Bush called, “an ownership society.”

If there still was a lot of regulation, what exactly are we blaming? What does deregulation even mean? Deregulation should mean to remove all government barriers from any given industry. However, whether they know it or not, this is not what anyone is referring to when they say “deregulation.” Unfortunately, the term “deregulation” is basically useless now. Let’s look back to the Enron debacle, which was also blamed on deregulation, to see how this misunderstanding plays out. Nobel Laureate, Paul Krugman, professed that Enron’s illegal behavior in California, which lead to rolling black outs, was caused by “…an attempt to give market forces freer rein, by deregulating the market for electricity, [which] turned into a disaster. The nature of the disaster was obscured by rigid free-market prejudices.” (3) However, what was touted as deregulation was nothing of the sort. As journalist Timothy Carney explains:

“What California tried, and Enron “gamed,” was really reregulation. It was freer than the old system, but in such a way that called for more government meddling and rules. Not only did the complex rules allow Enron to get rich, it also led to the price spikes, the energy shortages, and the blackouts that Californians suffered in 2000 and 2001.” (4)

Cato Institute Scholar, Jerry Taylor elaborates further saying, “On balance, Enron was an enemy, not an ally of free markets. Enron was more interested in rigging the marketplace with rules and regulations to advantage itself at the expense of competitors and consumers than in making money the old fashioned way.” Enron took advantage of price controls and tariffs to make a mess of California’s energy market. By definition, there can be no price controls and tariffs in a deregulated market.  By Taylor’s estimation, if Enron had been unable to take advantage of the strange new regulations, as well as other government support, “…Enron would probably still be a small-time pipeline company.” (5)

And what was true with Enron was even more true with major mortgage institutions. There was no deregulation in the lending industry. Instead, there was simply reregulation. Lending standards were loosened some, but many regulations were kept and many more were added. Deregulation was not the problem, but the regulatory framework certainly bares much of the blame. Liberal economist, Dean Baker, describes the key problem about as well as anyone:

“…Certainly most of what we’re seeing today was due to, I don’t know if I would say deregulation, I would sort of like to say misregulation of the financial sector. Because, one of the stories here is that we never really deregulated the industry fully, in the sense that the government always has been very heavily involved in the financial industry. You know, for example if you go to the bank your deposit is insured by the Federal Deposit Insurance Corporation [FDIC]. And there are many other ways in which the government is involved. The biggest way in which it is involved is what we’re seeing right now; that we have the too big to fail doctrine. That when things really go badly the government steps in and doesn’t just allow the system to collapse. And we all kind of knew that. And what is really going on is the “too big to fail” is really a form of insurance. The regulation that we put on the banks so that they don’t get involved in very speculative activities is designed, in effect, to limit the cost of that insurance. (6)

Everyone knows about the massive $700 billion dollar bailout and the second bailout built upon private-public partnerships. What is important to this discussion is not that it happened, but that everyone knew it would happen before it did. The federal government has been in the bailout business for a long time. They had already bailed out Long Term Capital Management during the Asian Financial Crisis, bondholders in Mexico and the Savings and Loans in the 1980′s. The Savings and Loans crisis was very reminiscent of what we are seeing today. Lending standards were loosened while the FDIC continued to back deposits. Thus, the Savings and Loans made riskier and riskier loans with higher payoffs. But with these riskier loans came, well, more risk. Luckily for the lenders, it didn’t matter, because when everything fell apart, the government was there for them. That’s how it’s been and that’s how it still is. Profits are privatized and risk is socialized, which leads libertarian economist, Tom Woods, to agree with Dean Baker, that “…a mixture of liberalizing banks’ risk-taking ability while maintaining a government guarantee may be the worst of both worlds.” (7)

Since the market was never completely deregulated, the housing bubble was not the result of a “free market.” Instead, it was the result of a market fettered with a new set of regulations, rather than the old set. The new regulatory framework reduced the oversight of lending standards (or didn’t address new issues, like adjustable rate mortgages), while continuing to back deposits, and with a wink and nod, let the banks know if anything went wrong, Uncle Sam would be there for them. All this leads Tom Woods to conclude:

“When the moral hazard of deposit insurance is combined with the “too big to fail” mentality, which will not allow large institutions to fail, the result (a conclusion compelled by common sense and bolstered by recent research) is that banks will take on considerably more risk than they would if they were subject to market pressures.” (8)

Thus lenders felt comfortable making more and more loans, to less and less suitable customers. As demand skyrocketed, housing prices soared upward in an unprecedented way. Builders took this as a sign to massively increase housing starts, thereby increasing supply. This was obviously a house of cards, and as soon as foreclosures began to spike, it all came collapsing down, creating the recession we are currently facing.

Deregulation is not the proper word, but the regulatory framework was a major contributor to the crisis. It is, however, only one factor, and not the biggest one in my humble opinion. The misregulation theory by itself leaves a few key questions unanswered. Why was it the housing sector that was hit so hard? And why was there so much credit to push into housing in the first place? Well you’ll just have to wait until part 2 to find out.

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(1) Barack Obama, Inauguration Speech, January 20th, 2009, Trascript found at http://www.nytimes.com/2009/01/20/us/politics/20text-obama.html?_r=1&pagewanted=2

(2) Thomas Dilorenzo, “The Great Depression: What We Can Learn From It Today,” The Mises Circle in Colorado, April 4th, 2009, http://www.youtube.com/watch?v=0UQUMYO9zt4

(3) Paul Krugman, The Great Unraveling, Pg. 295, Norton Books, Copyright 2004

(4) Tim Carney, The Big Ripoff, Pg. 204, John Wiley and Sons Inc., Copyright 2006

(5) Jerry Taylor, Enron Was No Friend of the Free Market, Wall Street Journal, January 21st, 2002

(6) Dean Baker, Interview with Mind Over Matters, KEXP 90.3 in Seattle, Washington, TalkingStickTv, January 3rd, 2009

(7) Thomas Woods, Meltdown, Pg. 47, Regnery Publishing Inc., Copyright 2009

(8) Ibid., Pg. 46