Bacon's Rebellion

Democracy Thrives in Sunlight

Do Virginians Support Off-Shore Drilling? Maybe.

—

by

James A. Bacon
in ,

What do Virginians think about drilling for oil and gas off the Virginia coast? I haven’t seen any polls that ask that question specifically, but the American Petroleum Institute has generated data hinting that they might approve by large numbers.

In a poll that encompassed 18 key states, the Institute found that 70 percent of 501 registered Virginia voters (likely to participate in the upcoming presidential election) would “support increased access to domestic oil and natural gas resources.”

Admittedly, the question is pretty vague. While Virginians, like most other Americans, endorse the idea of producing more fossil fuels as a general idea, the data don’t tell us how they would respond to drilling in specific instances — especially if the drilling occurs near them. Would Virginians support drilling on the continental shelf off Virginia’s coastline by the same margin? The fact is, the API data doesn’t tell us.

Even if someone framed the question to ask about drilling off Virginia’s coastline, I’m not sure how meaningful the answers would be. Very few voters are conversant enough with the economic and environmental trade-offs associated with offshore drilling to have informed opinions. Virginia media — and that includes blogs — haven’t begun to examine the latest drilling technologies, the experience of oil/gas companies in other regions, or the unique factors that might come into play off the Virginia coastline. All the evidence I have seen is anecdotal.

The trouble with most polls — and that includes polls from the environmentalist/conservationist camp — is that they are designed to elicit responses that can be used for propaganda purposes. Rarely do they probe the complexities and nuances involved. Even if they did, they’d probably find that most voters were too ignorant to have intelligent opinions.

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49 responses to “Do Virginians Support Off-Shore Drilling? Maybe.”

  1. Anonymous Avatar
    Anonymous

    The AMERICAN PETROLEUM INSTITUTE has generated data? Maybe next time, get a biased source.

    Peter Galuszka

  2. Tyler Craddock Avatar
    Tyler Craddock

    Actually, Harris Interactive generated the data according to Jim’s link. API only paid for the poll.

  3. Anonymous Avatar
    Anonymous

    So that makes it OK?
    PG

  4. Tyler Craddock Avatar
    Tyler Craddock

    So you think Harris faked a poll?

  5. Anonymous Avatar
    Anonymous

    You mean they did?

    Peter Galuszka

  6. eileen levandoski Avatar
    eileen levandoski

    Yes, there is recent polling that indicates support for offshore drilling. This is the knee-jerk reaction to the blow these gas prices are delivering to our families’ budgets, which is completely understandable.

    However, follow-up polling indicates that support for drilling plummets when surveys note that drilling would not produce new, usable gas for years and would not immediately affect gas prices.

    A new Rasmussen poll shows more support for regulating energy speculators than for lifting the existing ban on new offshore oil drilling.

    Polling also indicates most importantly, that Americans want to go in a new direction – one that advances alternative energy production and greater energy efficiency.

  7. Tyler Craddock Avatar
    Tyler Craddock

    Peter — Your earlier comments made me wonder if you thought they did.

    On a separate point, maybe Eileen does correctly point out the problem with offshore drilling — the lag between drilling and getting the product to market. To that end, maybe we also need to look at the role that our current legal and regulatory framework plays in slowing this down so that when we do drill we can get it to market quicker. Great catch, Eileen!

  8. Anonymous Avatar
    Anonymous

    Tyler,
    You should read my column about Mr Big Oil of a couple weeks ago.
    Mr. Big Oil says the oil and gas won’t happen for years but it’s important for the oil inudtsry politically to get even exploratory rigs started off the Mid-Atlantic so they can end the moratorium once and for all and go after what they really want — Alaska, California and the Gulf oF Mexico.
    The way Nancy Pelosi’s been going the last coupla days, it looks like Mr. Big Oil will get his way.
    Do you know him? He’s a lobbyist, too.

    Peter Galuszka

  9. Anonymous Avatar
    Anonymous

    “A new Rasmussen poll shows more support for regulating energy speculators than for lifting the existing ban on new offshore oil drilling. “

    Sorry, what that result shows is that people don’t get it.

    Regulating energy speculators is just as bad as regulating where to explore for oil and gas.

    Speculators don’t set the price for oil or gas. Their contrcts settle at the price for which it is actually delivered.

    Americans may want to go ina direction that advances alternative energy production and greater energy efficiency, but that amounts exactly to speculation. If you think that energy prices will rise later and the cost of renewables will fall later, why in gods name would you invest NOW?

    You would get a quicker pay back and lower costs if you just wait.

    RH

  10. Tyler Craddock Avatar
    Tyler Craddock

    Peter — I saw the column, but did not read it; I will do so. I do not know a lobbyist by the name of Mr. Big Oil.

    CA, Gulf of Mexico, Alaska — sounds fine to me, as does developing alternative domestic energy sources.

  11. Larry Gross Avatar
    Larry Gross

    re: “speculators don’t set the price for oil or gas.”

    … err how about this sentence:

    “Eron speculators didn’t set the price for electricity.”

    or how about this one:

    “Mortgage banks didn’t speculate with respect to home prices”.

    I tend to be in the camp that more than speculation is in play with oil but I think we’d be not very smart to think that market manipulation does not occur or that it can’t harm anyone much less all taxpayers – who have to pay to bail out speculators that are also “too big to fail”.

    What these polls show in essence is that the average American can be told a lie, sold a bill of goods .. and believe it…

    Our political process – both sides – is so cynical that they believe that if a “message” is properly framed that it can be a lie – that is believed by a majority of voters.

    and it .. works… unfortunately because many folks are quite satisfied with sound bites.

    people actually believe – we snap our fingers – and the oil companies start moving all those oil rigs kept in ready storage to those sites previously off limits.

    what a bunch of rubes we are.

  12. Anonymous Avatar
    Anonymous

    Tyler,
    Mr. Big Oil buys me lunch and tries to buy my views. It depends on the Bloody Marys. Let’s meet soon. You say where.
    Peter Galuszka

  13. Groveton Avatar
    Groveton

    It seems to me that there are two questions. First, what is the public opinion regarding off-shore oil exploration. I think that question has been answered with Nancy Pelosi’s decision to support off-shore exploration. You don’t need a poll when Nancy “which way is the wind blowing” Pelosi is on the job. Her flip flopping is an almost perfect indicator of public opinion and her vacillation arrow is pointed toward more drilling.

    The second question is whether more drilling will make a difference. This question is harder to answer since oil finds are somewhat unpredictable. There is almost certainly some significant oil off the US coast. It will make a difference to American oil independence but it will not be enough to make a big difference. Offshore drilling has been proven to be relatively safe and we should proceed with exploration.

    Overhanging this whole matter are the issues of conservation and alternate energy. These two points constitute the axis of NIMBYness. NIMBY doctrine holds that no new exploration is justified since new exploration will a) take to long b)fail to solve the entire energy problem and c)is unjustified because vast amounts of alternate energy is “just around the corner”. When the NIMBYs are confronted with the facts of alternate energy (namely, there is nothing that makes sense from an economic viewpoint) they retreat to conservation. To understand this perspective one must remember that NIMBYs are rich. Conservation entails charging more for energy without making any credible attempt to produce more energy. Under the alchemy of conservation people are wasting vast amounts of energy and all that is needed is a minor lifestyle change to drastically reduce the consumption of energy. Switch light-bulbs. Drive a hybrid. Society doesn’t need to explore for more oil, society doesn’t need new electrical transmission lines. The hidden agenda here is the ability of the rich NIMBYs to pay more for energy themselves even if other cannot make these payments. Selfishness is a hallmark of the NIMBY cult and the poor who can’t afford geothermal heating and cooling systems or hybrid cars can “eat cake”.

    The Republicans (aka pseudo-conservatives) are not in much better shape. They sit by waiting for the invisible hand of free enterprise to solve the problem.

    So, what’s the answer?

    1. Drill for oil offshore. Every little bit helps and there is more than a little bit of oil off the US coast.
    2. Tax energy. All energy. Gasoline, electricity, natural gas. In particular, we need a carbon emissions tax. $7/gallon for gasoline should be the floor price.
    3. Rebate some of the energy tax to all Americans. Every American should be allowed a baseline level of tax-free energy. All taxes paid on energy below the baseline will be rebated to the taxpayer.
    4. Use the energy tax not rebated to fund a “Manhattan Project” for alternate energy.
    5. Build more nukes. Nuclear power is relatively clean and relatively safe.

  14. Anonymous Avatar
    Anonymous

    Isn’t it true that U.S. oil companies have explored only a tiny percentage of the leases they already have?

    Maybe the feds should put a deadline on existing leases.

    Peter Galuszka

  15. Larry Gross Avatar
    Larry Gross

    I don’t disagree with the main thrust of what Groveton is advocating.

    except to point out that the same folks who think that drilling offshore will roll back gasoline prices are not going to for the hefty tax either.

    It’s easy to blame NIMBY’s for this but the bigger problem in my view is that beyond the 20% opposed to drilling, there is a far larger percentage who, despite what they say, really would be quite happy with any policy that kept gasoline prices low.

    Many want to wear “Green” credentials but they really are not prepared to cut back on energy use. Instead, we do “our part” by buying products advertised as “green”, recycle plastic bags and newspapers, etc…but in a context of 2400 square foot homes and 15mpg SUVs that use twice, three times as much energy as other people in the world.

    I do think people are willing to change – most everyone senses that we do not have an unlimited supply of oil and they also know that burning fossils fuels is a major cause of pollution.

    What we need is leadership along the lines of what Groveton is advocating.

    and …leadership… is putting together something that engages all sounds – rather than demonizing … boggeyman…IMHO.

    to me.. when we blame others, what we are doing, in effect, is giving ourselves a built-in excuse to not change… blame the problem on others – and stick with the current plan.

    We’ve got a bit of a reprieve on gasoline prices.

    It will be interesting to see is we go back to business as usual or use this lull to begin change.

    That’s one of the things I’m looking at in Presidential candidates.

    Which one is likely to demonstrate some leadership on Energy and change.

  16. Anonymous Avatar
    Anonymous

    It is a widely believed that speculators manage commodities markets, that they get their profits unfairly, and produce nothing to get them, all of which are mistaken ideas.

    There is no commodity or futures market in homes, so the concept does not apply there. To speculate on a home, you must buy and take delivery of it (Although you may do so on pretty big margin, you know in advance what the margin call (payment) will be.)

    Mortgage banks lend money, and they avoid buying homes at all costs. If they believe that home prices will remain stable or go up, then they may be willing to lend more at smaller margin (take more risk).

    Beyond that, there is no comparison between the housing situation and the typical commodities market. However, Wall street developed a secondary market in mortgage backed securities. This allowed the mortgage banks to bundle an offload their risk, and tur over the money to make more loans faster.

    Fundamentally, there is nothing wrong with the concept of mortgage backed securities. If I own a dozen houses with a solid five year rental history and offer to sell them as one lot, I should have very little difficulty doing so: the cash flow is known, and that is the primary basis of the sale. The risk is that one or more of the teneants will subsequently fall into difficulty, but with “proven” tenants that risk is small and spead out over the twelve homes. And you still have the homes.

    That is very little different from buying a bunch of mortgages which have a good payment history. So fundamentallly, the concept is OK. Where it fell apart was in secondary leverage: money borrowed to buy the mortgages – which are nothing but promises to pay back borrowed money.

    Originally, mortgage backed seurities needed a pretty good payment history, and other documentation in order to be sold and there were well recognized categories of packages with different levels of risk.

    However, Brent Light Sweet Crude has kwon and stable properties, but the properties of mortgage packages were neither well known, nor stable. But because they had a good history of being stable investments they became commoditized atthe same time the mortgage banks were cheapening the product.

    The speculators, in this case were you and I and just about anyone else who owned mutual funds, along with hedge funds, etc. In the end, some mortgage banks drank their own kool-aid, but the whole thing was vastly overblown, because the mortgages in default are less than two percent of homes in America. 30% of homes are owned outright, 60% have fixed mortages, and not all the variable rate mortgages are subprime or in default. Defaults are less than 2% of the housing market, and this whole situation is vastly overblown.

    Now, we moan and wail about the home owner with a fixed morgage or paid up home being “damaged” by all of this, but how can that be if we do not consider him to be a speculator?

    This is wrong of course, because by definition a speculator never takes possession of the goods. A homeowner who lives in his home or has another use like a vacation home, has a wildly different intrinsic value than someone who merely fronts the money until a homewoner gets around to buying it.

    And Speculators like Jim Bacon, who bought some wrecks and fixed thme up are a different breed as well, because they apply value added in their speculation. In effect they speculate that they can be more efficient program managers in the fixing process than the next guy.

    But, if you buy stock in Pulte Homes, you are effectively doing the same thing: fronting money for homes until a homeowner takes possession, and you are betting that Pulte is a better manager than DR Horton.

    Regardless how it happens, what the speculator does is provide liquidity, without which prices would be much higher, not lower.

    And, there is a difference between speculators as a group and an individual speculator. As a group, they can (stupidly) wind up competing against each other and drive up prices (temporarily), but individually, they have no control over the “market”, other than the price they are willing to pay. When the property is re-sold, it has to come face to face with the wildly different intrinsic value that the actual homeowner is seeking.

    So, while there is speculation in housing, it is not anything like the market in oil, so it is a lousy comparison.

    In the end, all speculators contracts close at the market value the end user is willing to pay. The speculator does not control that.

    There are also true commodities in which there are no futures market like there is for corn or porkbellies. Pig Iron and Vanadium for example have seen HUGE run-ups in prices but those items are always sold direct from supplier to user, so you cannot blame speculators for that, unless you consider the end users to be “value added” speculators in the same sense as Jim Bacon.

    But, where you have an organized futures market, the situation is clear. There are three parties in the market: vendors, investors or endusers, and speculators. Speculators bet on whether the price will go up or down, but their contracts are settled each day AT THE PRICE SOME END USER IS WILLING TO PAY. We can easily see that when driving and other end uses went down, demand went down, and prices went down. Any speculator who was still betting on up when the tide changed found himself high and dry, just like in the housing debacle.

    But the speculators who bet on a down market made out like a bndit in the last three weeks. In the same way, a lot of former renters have now purchased homes at bargain basement prices, and they will clean up as well.

    Bottom line is that any extra, unused money has to go somewhere, even if it is under the mattress. Wherever that turns out to be, it amounts to speculation. Consequently, we are all speculators, and I don’t see it as useful to attmpt to turn the word into a pejorative and blame some sinister forces for our condition.

    The ocean is alwyas trying to become level and the markets are always trying to be efficient, but it is possible to have situations where a lot of water is trying to funnel in and out of one place, like the Bay of Fundy. Any innocent water molecule may find itself there perfectly reasonably, and still get caught up in a torrent that is not of its own making. Any innocent snowflake may settle on a hilsside and become part of an avalanche it didn’t “cause”.

    Markets are not so different: we get a lot of potential energy built up because of disparities in income and holdings, as Groveton points out, and eventually a lot of stuff moves all at once.

    It is a natural event, and blaming it on speculators is like blaming the shamans for a flood. Demonizing the other guy is usually just a bad argument for gaining some advantage to yourself.

    The way you prevent that potential energy from building up is to keep barriers out of the market. Enron tried to construct artificial barriers and the results were disastrous, same as for the Corps of Engineers.

    Make sure you know what you own, and be ready to buy or sell when the offer is fair. The problem with mortgage backed securities was that the description of what was being bought and sold became unclear: property rights were not well defined, and as a result the risk was hidden.

    RH

  17. Anonymous Avatar
    Anonymous

    “people actually believe – we snap our fingers – and the oil companies start moving all those oil rigs kept in ready storage to those sites previously off limits.”

    I believe they will never move the rigs there as long as the sites are off limits. The limitations are an artificial barrier to the market that might make little difference now, but the longer it sits there the more pressure builds up.

    RH

  18. Anonymous Avatar
    Anonymous

    “2. Tax energy. All energy. Gasoline, electricity, natural gas. In particular, we need a carbon emissions tax. $7/gallon for gasoline should be the floor price.”

    When you tax something you generally get less of it. Energy is a force multiplier that makes our labor more valuable. I’m not sure we want less energy or more expensive energy.

    Less greenhouse gasses and other pollution, sure, but let’s not throw the baby out with the bathwater. We can hitch up a bunch of horses to a turnstile and generate electricity, renewably.

    But it still might cause more pollution than a coal plant enerating the same wattage. I’d hate to think waht the carbon emissions tax on that rig would be.

    RH

  19. Anonymous Avatar
    Anonymous

    “Many want to wear “Green” credentials but they really are not prepared to cut back on energy use.”

    Simply cutting back on energy use is not necessarily green, prudent, or cost effective. Why should cutting back on energy use, no matter how stupidly, be a cause for greens to celebrate? Why should that become a single issue green credential?

    RH

  20. Larry Gross Avatar
    Larry Gross

    what a load!

    RH.. if I own mutual funds and some of the stocks are mortgage securities based on speculation and some of them are commodities based on speculation and some of them are hedge funds … does that make you a speculator?

    the point here is that speculation is the name of the game whether it be electricity or oil or mortgage securities.

    You cannot outlaw it.. it would be like trying to stamp out cockroaches…. but you can regulate it..

    for instance, you can REQUIRE all mortgages to have the proper paperwork and “histories”…

    and you can tell restricted markets from letting folks buy and sell securities with 10% equity.

    and you can REQUIRE all mutual funds to FULLY DISCLOSE if they are buying speculative commodities.

    There is no feasible way to “outlaw” speculation but the government can refuse to support banks that engage in it and they can require full disclosure so that folks who buy stocks and bonds and mutual funds are fully informed of the practices.

  21. Larry Gross Avatar
    Larry Gross

    re: green credentials

    “GREEN” is a bit of a scam now days.

    People think they can BUY stuff that makes them LOOK Green …and that makes them Green.

    That’s how we market it.

    I’m not saying that they ONLY way to be Green is to cut back on energy usage or sacrifice,
    but for many of us, we’ve got to the point where being Green is just a Chinese Menu game of ticking on the things we do that make you Green while not looking at the other side of the equation that is not Green and to see if it actually end up a net Green rather than a zero sum game.

    So.. we can have a guy that buys fast food at Burger King with a ton of paper/form products … but he recycles plastic bags from the grocery ..which turns out to be 1% of the foam/plastic as compared to the fast food containers that he chucks in the garbage.

    or we have a guy that buys a hybrid but then he fertilizes the hell out of his lawn and uses so much pesticide that it runs off into the river – but he’s got his Green Lawn .. with his hybrid car in the driveway.

  22. Larry Gross Avatar
    Larry Gross

    re: oil drilling

    Here is the truth that folks don’t want to believe:

    “The projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017. Total domestic production of crude oil from 2012 through 2030 in the OCS access case is projected to be 1.6 percent higher than in the reference case, and 3 percent higher in 2030 alone, at 5.6 million barrels per day. For the lower 48 OCS, annual crude oil production in 2030 is projected to be 7 percent higher—2.4 million barrels per day in the OCS access case compared with 2.2 million barrels per day in the reference case (Figure 20). Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant.”

    http://www.eia.doe.gov/oiaf/aeo/otheranalysis/ongr.html

    so we have polls being taken from folks who are basically ignorant and then we’re using the results of the polls to have Congress do …what?

    Are they going to wave some kind of a want and undo what the Energy Department says?

  23. Anonymous Avatar
    Anonymous

    we have a guy that buys a hybrid but then he fertilizes the hell out of his lawn ….

    OK, so different people have different utility functions. Since when do the greens have a monopoly on deciding what is GC and what is not?

    ——————–
    Re speculation:

    At least you realize we cannot outlaw it. Now how do you regulate it?

    Hey you, you can only bid 10% more than the guy wants to sell for, And you there, you are spending too much of your own money making bids.

    Sure, require this and require that. Who is going to pay for all the inspectors?

    “the government can refuse to support banks that engage in it”

    That’s rich, you think the government is smart enough to know speculation from investment? Why not just let the government run the market, control all property rights, and send us all a check at the end of the month.

    Sure, maybe mortgages should be seasoned before they are repackaged and sold, but as I said mortgages are not a speculative commodity, ordinarily.

    Mutual funds do disclose their strategy, but usually they are allowed a certain amount of leeway so they cn use commodities as required, gold after all is a commodity. But commodities are normally traded on the commodities exchange not as mutual funds. There are however mutual funds that deal exclusively in commodities, and they are usually used as a hedge aginst overspeculating only in stocks, as in normal mutual funds.

    The best way to avoid problems with speculation is to stop treating it as a pejorative, and just admit that some people trade better than you.

    RH

  24. Larry Gross Avatar
    Larry Gross

    re: "OK, so different people have different utility functions. Since when do the greens have a monopoly on deciding what is GC and what is not?"

    because the POINT of Green is to IMPROVE the environment – not a zero sum game.

    When it's a zero sum game – it's meaningless. When it's worse than a zero-sum game where folks claim Green Credential for one or two things but the other harmful things far outweigh them – it's cynical.

    re: "Sure, require this and require that. Who is going to pay for all the inspectors?"

    It's the same inspectors who now audit bank books.

    You cannot stop the speculators but you can sanction federally-backed financial institutions that loan money for speculation the same way we now require them to hold a certain percentage of deposits for outstanding loans.

    re: "control all property rights, and send us all a check at the end of the month."

    badly confused RH as usual.

    The Government INSURES deposits at some Financial Institutions to PROTECT depositors from speculation and other risky behaviors.

    For THOSE insured institutions – there are regulations and sanctions if they violate them.

    This does not get rid of speculation but it does allow people who want to invest to know the difference between institutions that do speculate and ones that don't.

    What happened is that the Government, at the behest of foxes in the henhouse with their buddies in the Republican administration RELAXED the rules…to permit the government insured financial institutions to loan money for speculation.

    re: "mortgages are not a speculative commodity, ordinarily."

    RH – ANY loan, mortgage or otherwise is a speculative commodity if you don't require proof of the ability to repay and full securitization (collateral)

    re: "The best way to avoid problems with speculation is to stop treating it as a pejorative, and just admit that some people trade better than you."

    RH – when Fannie/Freddie have rules that say that each mortgage they insure, the borrower must have a verified income and the mortgage cannot be for more than 80% of the value of the home or else MGIC must be purchased and they waive these rules – what happens?

    ALSO – fyi – the State of Virginia and the Federal Retirement Thrift Funds have their own rules – they will NOT buy mortgage packages that are not 100% securitized.

    The other mutual funds knew what Fanny/Freddie did but since it was not their own company's policy they did not have to disclose that to the individual fund owners – it was a Government deal.

    The Government caused this when they quietly relaxed the rules on Federally guaranteed mortgages.

    Again – you cannot stop speculation but you can fully recognize it and refuse to buy them once you know the difference.

    If we had done this – like we had been doing it for as long as Freddie/Fannie existed – this meltdown would have never happened.

    This is just another version of the Savings & Loan debacle with the same deal – they opened up the goodie store to speculators ….
    and ordinary people who had no clue what the Feds had done – got whacked.

  25. Anonymous Avatar
    Anonymous

    "When it's worse than a zero-sum game where folks claim Green Credential for one or two things but the other harmful things far outweigh them – it's cynical."

    I agree. I think that is the point of many of our arguments. I look at an entire system and often I can see that it is very close to being a zero sum game. It is MUCH harder and more expensive to actually accomplish anything green than most greens acknowledge.

    I also think that there is too much whacky green exuberance or proseletising. If normal people think there is too much Chicken Little or too much Holier Than Thou, there will be a harmful backlash. Then there is the creeping environmentalism syndrome: if a little is good more is always better. Eventully this wrecks credibility and leads people to think when does this end, how much is enough?

    —————

    It is not the same inspectors as audit bank books: that is FDIC not SEC. Anyway a lot those guys are kids right out of accounting school, and they are busy auditing banks: you can't get something for nothing. They are also the same ones that were supposed to prevent the savings and loan problem, and we know how well that worked.

    ————–

    I don't know that there are any federally backed institutions that loan money for speculation, but then, we disagree on what speculation is. I can go to the ag department and get a farm loan to convert this place to corn, and the rate is nearly zero. I can hardly think of anything more speculative than that, but some people would call it an investment.

    I call a speculative commodity one that is traded on the commodities exchange: corn, cotton, soybeans, gold, oil, etc. Speculative contracts in these products are settled at the end of every day, based on the actual cost of goods sold and delivered. At the end of every day these contracts are fully colateralized, if you will.

    Mortgages are different because those conditions don't apply. It isn't even remotely the same kind of thing. A house sits in one place in a known neighborhood, but it is virtually never paid off. It is still one of the best and most stable investments around.

    ———————

    The governemtn advertised when the rules were relaxed, and normal people paid little attention because it didn't apply to them. There were good and valid reasons to relax the rules: job security and temporary assignments soared. People making good stable salaries, but from different sources were unable to get past the paper work to buy a home.

    ————————–

    If you had full securitization, you wouldn't need the loan. Anyway, what happens when you have full securitization and then the value of the security drops, as in the housing market. You are asking to control things that can't be and shouldn't be controlled, even you admit you cannot stop the speculators. I think speculation is a normal part of the market and should not be controlled, other than licensing to keep felons out, and we can't even seem to do that well.

    Speculation is simply not a pejorative to me, it is a necessary part of the market.

    —————-

    The government doesn't insure the banks. They pay into a fund that is managed by the government. Same with retirement funds and brokerage accounts. Banks are required to have a certain amount of their deposits on hand, and there are standards for loan performance. But the bank examiner only knows if the loan payments are being made, he doesn't know if it is a doublewide in shantytown or a McMansion.

    He might be able to tell something about the paperwork or documentation on the loan, but all that stuff is subject to change, anyway. I have a good job and a downpayment, buy a home. Then I lose my job, start selling cars for commission, move back home to Mom's house and rent the home. Suddenly it is a risky loan, and the bank examiner has no way of knowing.

    There were banks that deliberately made such loans, knowing that they were going to unload it anyway. They make those loans at a higher interest rate to cover the risk (which as I pointed out is about 1.5% unless that is all the loans you make.) So the bank makes a loan, after a short period they re-sell it, and their books are good. What does the examiner see?

    Those loans are allegedly packaged according to maturity, etc., so that the risk level can be set and then they are sold as a bundle to investment banks. These are supposedly sophisticated buyers, and they can do their own due diligence far better than a bank examiner. In turn, shares in the packages are sold to mututal funds, retirement plans and other institutions, and again, these are supposedly sophisticated buyers.

    Mortgages go bust, crops fail, airplanes crash, and it is all part of doing business. The people that pay their mortgages, buy food, and travel by air pay for those risks and failures.

    Now what we are talking about is how much risk is acceptable, and how much is avoidable, and how much we are willing to pay to avoid the risk. This is the same conversation we have about the environment. Apparently, I'm less willing to pay to avoid risk, and more willing to take the risk than you are.

    It isn't that I'm less willing to pay, but I know there are more risks than I can ever hope to cover. I'm unwilling to pay when the cost of avoidance is higher than the risk, and ususally the cost of avoidance is known, but the cost of the risk is less well known.

    I'm unwilling to pay $550 a month on a $65,000 loan today to avoid the risk that my electric bill will go from $300 a month to $900 a month over the next twenty years. (This is an actual example froma California man, not MY electric bill.) I'm even less willing to be forced into that situation by some greenie who thinks it is a good idea. And then if I have tohave full collaterization to get the loan, I couldn't do it anyway. (And don't even mention that the deal includes a $16,000 tax credit subsidy, paid for by someone else.)

    That's just one example, and when I look at all the risks I face every day I know that there is no way on god's green earth we can afford THAT kind of expenditure to avoid every kind of risk.

    We have to prioritize what we are spending on to only the very best returns, or we are committing collective hari kira. We simply cannot spend an infinite amount to prevent every risk that will eventually be borne by an innocent consumer who never "signed up" to that risk.

    You think tht this results in people getting "whacked" because of some kind of conspiracy betweenthe "feds" and "speculators". I think that people who own their homes outright didn't get damaged by the housing deal: they still have their homes and they still have the same payment. On paper the home is worth less, but they are homeowners not speculators, right?

    Same with people who have a fixed rate loan.

    Now, someone may have a (recent) fixed rate loan and suddenly see that he culd buy the same model house on the same street today for less money than he paid. His mortgage is a non-recourse loan, so he can walk away from it and buy the house down the street for a lower payment.

    I don't think it is right, necessarily, but that is the contract his bank signed, he has the right to walk away, which means his bank and it's customers get stuck holding the bag.

    It doesn't affect the people who own or people who already have a fixed rate loan. It doesn't affect those with deposits in the bank. It affect the bank stockholders, and they get to vote for the board of directors who are supposed to keep the bank on the straight and narrow.

    Or that is the theory.

    In fact, the board of directors is controlled by those with the most stock and the most money at risk to gain or lose. If you are a minor stockho
    lder, well, you are along for the ride, pretty much. You do not have and should not expect to have the same expectation of risk as the big players, but buying the stock under those conditions is, as you say, your choice.

    And the insurance may not be enough, as we saw in the S&L situation, because so many things went wrong at once. It is exactly the same as the homeowners association that finds they have not been paying enough dues. What happens is that the newcomers get the bill, and we call it a credit crunch.

    And the whole reason the credit rules were relaxed in the first place was to prevent a credit crunch. We don't have the same kind of society we once had.

    —————-

    It looks to me as if you don't want a nanny state, and don't want extra taxes, but then you want enough government inspectors to make sure you never feel the effects of an externality, no matter how small, remote, or unexpected.

    So, we can raise the amount of insurance the banks have to buy, we can force them to hold more deposits in cash, we can raise the taxes they pay to hire more inspectors, and on and on (more creeping regulations) until there is no way for them to make money.

    If we think the government can do that much better, let them take over the banks, and be done with it. The banks can loan themselves government guaranteed money to buy our homes and everything will be fully securitized. Then they can tell us where to live so we don't have to commute (preventing more externalities), and how much rent to pay, because they will have full knowledge of everyone's full locational cost.

    No one will bear any unknown externalized costs or risks, and everyone's property rights will be perfectly protected – because they have none.

    Won't that be a lovely world?

    RH

  26. Anonymous Avatar
    Anonymous

    Look, the whole thing boils down to the fact that the true risk levels for the mortgage backed securities were not assessed properly. The people who bought those loans did not have secure property rights in what they bought, and there was no independent way to assess the risk.

    In the commodities market you have to settle your contract every day, based on actual prices of products deleivered, and that his how the risk is assessed – by the market. the market controls the speculators, not the other way around. At the end of the day, somebody buys something, and they own it. No individual speculator controls that.

    RH

  27. Anonymous Avatar
    Anonymous

    “Scientists at the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) have set a world record in solar cell efficiency with a photovoltaic device that converts 40.8 percent of the light that hits it into electricity. This is the highest confirmed efficiency of any photovoltaic device to date.

    The inverted metamorphic triple-junction solar cell was designed, fabricated and independently measured at NREL. The 40.8 percent efficiency was measured under concentrated light of 326 suns. One sun is about the amount of light that typically hits Earth on a sunny day. The new cell is a natural candidate for the space satellite market and for terrestrial concentrated photovoltaic arrays, which use lenses or mirrors to focus sunlight onto the solar cells.”

    RH

  28. Anonymous Avatar
    Anonymous

    “Congress just decided for the umpteenth time not to renew tax credits that are the lifeblood of the solar- and wind-power industries. “

    WSJ

    “But this latest development should be deployed by enviros as a rhetorical weapon to establish tougher laws that bludgeon them into doing more. This just isn’t going to be a voluntary process. Coercion is green.”

    Discover Magazine

    RH

  29. Larry Gross Avatar
    Larry Gross

    re: “I call a speculative commodity one that is traded on the commodities exchange: corn, cotton, soybeans, gold, oil, etc. Speculative contracts in these products are settled at the end of every day, based on the actual cost of goods sold and delivered. At the end of every day these contracts are fully colateralized, if you will.”

    If you are using your own money but if you are borrowing money – from a bank that does not have to have more than 10% in deposits for your loan – then both of you are speculating.

    If the money they are loaning you is based on mortgage securities – that are, in turn, insured by the Feds – then your speculation is being indirectly insured by the Feds.

    This is what happened with the meltdown.

    The Feds .. as a requirement of insuring mortgage loans – REQUIRED two things:

    1. – that documentation showed that the applicant had a current verifiable job

    2. – that there would be 80% equity for the loan – or the borrower would have to pay for additional insurance.

    this insurance was known as MGIC and it was common for all loans where the borrower did not have at least 20% equity.

    The Fed then did away with BOTH of these rules for insured mortgages.

    That set in motion – mortgages being given to folks who did not have verifiable employment nor 20% equity – and guaranteed by the Feds that if the loan went sour – they’d take it over.

    … and that’s exactly what they did… at the end of the day…

    everyone who followed the rules got screwed – they now have to pay the damages for those that did not.

    I can see how you think this is an okay idea but I can assure you that there are a lot of us that do not.

  30. Larry Gross Avatar
    Larry Gross

    re: “I don’t think it is right, necessarily, but that is the contract his bank signed, he has the right to walk away, which means his bank and it’s customers get stuck holding the bag.

    It doesn’t affect the people who own or people who already have a fixed rate loan. It doesn’t affect those with deposits in the bank. It affect the bank stockholders, and they get to vote for the board of directors who are supposed to keep the bank on the straight and narrow.”

    RH – the only reason the banks loaned these “no recourse” loans was because the Feds – Fannie/Freddie would buy those loans…

    get it?

    Would those banks have loaned that money if the Feds would not buy them?

    and a LOT of innocent folks go hurt.. because everyone now will have to pay more to make up for the bad loans.

    re: ..”because so many things went wrong at once.”

    bullsnot – the foxes got into the henhouse – they gutted the regs that protected taxpayers and the whole thing went to hell in a handbasket with the real culprits escaping … with profits…while everyone else got holding the bag.

    it’s the same scenario…

    these guys get into office.. they gut the rules .. then they let their buddies run amok and it collapses in a steaming heap and they all run like hell…

    this is nothing more than legalized thuggery… the only difference is that the Mafia types carry guns..

  31. Larry Gross Avatar
    Larry Gross

    re: “So, we can raise the amount of insurance the banks have to buy, we can force them to hold more deposits in cash, we can raise the taxes they pay to hire more inspectors, and on and on (more creeping regulations) until there is no way for them to make money.”

    We can do this.

    Fannie/Freddie will NOT buy any mortgages that are not fully securitized – the SAME EXACT WAY that the state of Virginia Pension Fund works.

    The banks are then free to do business whatever way they wish but the Feds will not buy risky mortgages.

    this is not rocket science and your implication that banks will not be able to stay in business if they cannot speculate at will and be insured by the Feds in case they screw up is … awful.

  32. Larry Gross Avatar
    Larry Gross

    re: “If we think the government can do that much better, let them take over the banks, and be done with it. The banks can loan themselves government guaranteed money to buy our homes and everything will be fully securitized.”

    the government has NO BUSINESS making loans.

    the problem is that the Feds will insure risky/BAD loans that these banks would not make if the Feds refused to insure them in the first place.

  33. Larry Gross Avatar
    Larry Gross

    re: “Look, the whole thing boils down to the fact that the true risk levels for the mortgage backed securities were not assessed properly. The people who bought those loans did not have secure property rights in what they bought, and there was no independent way to assess the risk.”

    why should we care if a business makes dumb decisions and as a result goes broke?

  34. Larry Gross Avatar
    Larry Gross

    re: “In the commodities market you have to settle your contract every day, based on actual prices of products deleivered, and that his how the risk is assessed – by the market. the market controls the speculators, not the other way around. At the end of the day, somebody buys something, and they own it. No individual speculator controls that.”

    RH – I don’t care what they do in the commodities market as long as my wallet is not involved.

    If someone wants to risk their money on the commodities market – more power to them – but don’t ask me to insure their activities.

  35. Larry Gross Avatar
    Larry Gross

    re: “”Congress just decided for the umpteenth time not to renew tax credits that are the lifeblood of the solar- and wind-power industries. “

    why don’t we consider this as an incentive for NOT polluting?

    …or .. let’s charge for polluting – and have a level playing field for whatever technologies pollute less…

  36. Anonymous Avatar
    Anonymous

    “If you are using your own money but if you are borrowing money – “

    Commodities contracts are usually bought on margin, but you have to settle at the ned of every day – in cash, and based on real values of commodities sold and delivered.

    There was no such guarantee in the mortgage market of what the underlying products were worth.

    RH

    RH

  37. Anonymous Avatar
    Anonymous

    “then your speculation is being indirectly insured by the Feds.”

    You still have to settle with cash at the end of the day. At that point there is no loan risk.

    RH

  38. Anonymous Avatar
    Anonymous

    “everyone who followed the rules got screwed – they now have to pay the damages for those that did not.”

    Regardless of how we got here, we are where we are: less than 1.5% of the loans are in default.

    Now, we can either have unoccupied homes/crack houses on the block or we can help pick up the pieces.

    And, not everyone got screwed. A lot of people are buying foreclosures on the cheap.

    —————————

    “why should we care if a business makes dumb decisions and as a result goes broke?”

    The people buying mortgage backed securities had nothing to do with the lending banks. But The people buying mortgage backed securities did it with borrowed money. That is the money that is at risk and that is what took Bear Stearns down.

    So, if Fannie and Freddie didn;t buy any unsecuritized loans, what’s the problem? The good loans were guaranteed and the bad ones weren’t.

    Who cares if Bear Stearns goes under?

    RH

  39. Larry Gross Avatar
    Larry Gross

    re: “You still have to settle with cash at the end of the day. At that point there is no loan risk.”

    and what happens if you lose?

    is the person taking the risk the same person paying the costs if the risk fails?

  40. Larry Gross Avatar
    Larry Gross

    “There was no such guarantee in the mortgage market of what the underlying products were worth.”

    there are no guarantees but there IS degree of risk.

    Providing a loan with someone who has a good credit record and is putting up front 20% equity is a much better risk than not…

    The Government has no business subsidizing truly risky mortgages.

  41. Larry Gross Avatar
    Larry Gross

    “
    Regardless of how we got here, we are where we are: less than 1.5% of the loans are in default.

    Now, we can either have unoccupied homes/crack houses on the block or we can help pick up the pieces.”

    “we” should not have to be taxed to pay for folks who were irresponsible.

    this is exactly why the Government should not be involved in buying mortgage securities.

    Before this is over with – the original rules that prevented the government from subsidizing/insuring irresponsible risk investing should be put back in place – and kept there.

  42. Larry Gross Avatar
    Larry Gross

    re: “The people buying mortgage backed securities had nothing to do with the lending banks. But The people buying mortgage backed securities did it with borrowed money. That is the money that is at risk and that is what took Bear Stearns down.”

    the people buying those securities were STUPID if they did so without the same level of due diligence that the State of Virginia Pension Fund does when it will not invest in securities which are not 100% securitized.

    That’s what the Feds should have been doing also – and they did not.

    We should not be rescuing folks who did stupid things …

    if we do.. we will get more of the same…

    If Bear Stearns goes under because of it – then we need to stand back and let them go.

    It’s the height of absurdity and unfairness to make the folks who were careful and used good judgment pay the penalties for those that were not.

    We are essentially rewarding fat cats who played fast and loose with money that was not theirs and we supported it where the Fed agreed to buy mortgages that they KNEW were much more risky than securitized mortgages.

  43. Anonymous Avatar
    Anonymous

    the people buying those securities were STUPID"

    I agree, and we are not rescuing those people. However, you are correct about the genesis being related to lower loan requirements.

    Bear Stearns went under, and we let them go.

    ————————

    "It's the height of absurdity and unfairness to make the folks who were careful and used good judgment"

    You let political judgement cloud practical judgement.

    The fact is that we are now in the place we are. The people who were careful and used good judgement will be worse off if we do nothing than if we do something.

    While things might have been different, they are not, and there is no point pontificating about what should have been.

    In other words, how long do you want a vacant house on your block?

    —————————-

    "First, various regulators put pressure on lenders to loosen underwriting standards for minorities and low-income borrowers. That provided the kindling for the housing bubble.

    Next, increasing numbers of borrowers started speculating in homes. These borrowers were attracted by adjustable-rate mortgages, because they expected to sell the homes for a profit before the rates adjusted. The fact that we now have such a large inventory of unoccupied homes is consistent with the view that many of the new owners were speculators, not owner-occupants.

    Liebowitz is a bit weak in explaining how Wall Street was able to sell so much paper backed by these risky mortgage loans. Although I think it is important to point out the role that government policy played in forcing regulated institutions to relax underwriting standards, I do not think that the private sector is blameless here. There was some very serious mispricing of risk going on."

    From a summary by Arnold Kling of a paper published by Stan Liebowitz.

    http://economics.about.com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=economics&cdn=money&tm=580&gps=54_1088_1148_685&f=00&su=p649.0.147.ip_&tt=3&bt=1&bts=1&zu=http%3A//econoclectic.powerblogs.com/

    The last sentence is very similar to what I said about there being no realistic risk evaluator, as there is in the commodity markerts.

    RH

  44. Anonymous Avatar
    Anonymous

    “we” should not have to be taxed to pay for folks who were irresponsible.”

    But the people who were isrresponsible lost their money. They have nothing to pay with.

    As far as I know, Fannie and Freddie never bought into the low doc or zero dwon loans, they kept certain minimum standards. But they are being hurt the same as anyone else because the value of ALL homes fell, putting pressure on documented loans as wel as undocumented ones.

    Add to that the new pressure created by “short sellers”. someone has a home loan, even a well documented one, yet they find they can walk away and buy essentially the same home for less money, even after taking a loss on the first home.

    I couldn’ see myself doing it, but one could argue that THEY are being careful and using good judgement.

    RH

  45. Anonymous Avatar
    Anonymous

    “They[Freddie Mac] also did a lot of Alt-A in the last few years (currently about 10% of book). These have high downpayments and high credit scores, but are performing lousy.”

    ???

    RH

  46. Larry Gross Avatar
    Larry Gross

    FYI:

    “n the mortgage industry, they are called “liar loans” — mortgages approved without requiring proof of the borrower’s income or assets. The worst of them earn the nickname “ninja loans,” short for “no income, no job, and (no) assets.”

    The nation’s struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.
    .
    .
    .
    Fannie Mae and Freddie Mac, the nation’s largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.

    Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.
    .
    .
    The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher interest rates.

    Even riskier were “pick-a-payment” or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.
    .
    .
    Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year, fixed-rate mortgages.

    “I personally think that they ventured beyond their mission,” said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of their decision to back shakier loans, he said, “the home-buying public is going to have to pay.”

    Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings Inc. were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.

    Freddie Mac wanted “to stay competitive in the market and take steps to preserve market share,” spokesman Michael Cosgrove said.

    Fannie Mae increased its purchases of liar mortgages “at the requests of many of our customers,” according to spokesman Brian Faith.

    Both companies also were able to use subprime and liar-loan investments to meet government-set affordable housing goals.

    Now Fannie, Freddie and other mortgage investors are reviewing defaulted loans to see if lenders committed fraud. If they find enough evidence, they could force lenders to assume responsibility for losses.

    But it’s unclear how much money they might recover, especially from lenders that have gone under or been seized by the government.

    http://ap.google.com/article/ALeqM5jhZwMfeNXfD5OvIA8NL8X6uDUPFAD92KRKL00

    bottom line: Feddie/Fannie relaxed their standards – there ain’t no way to spin it otherwise.

  47. Anonymous Avatar
    Anonymous

    Feddie/Fannie relaxed their standards – there ain’t no way to spin it otherwise.

    You are right. I was mistaken on that.

    But remember, Freddie mac and Fanny Mae have been operating on very low capital margins. It would have been OK to take on more risk, had they also taken on more capital margin, and more diversification.

    The combination of having all their eggs in one basket, changining their procedures without self insuring more, and exuberant fear over home prices led to a perfect storm.

    My first loans were “risky” loans, and I was happy to have them. They paid both the bank and me well. I refuse to beleive that such loans are always bad and should never be allowed.

    RH

  48. Larry Gross Avatar
    Larry Gross

    my first loan was a “risky” loan also as I did not have 20% equity and I had to buy MGIC insurance and continue to pay it well past the time that I had built up 20% equity (that was their rules and of course they made money on it).

    I also had to “qualify” for BOTH payments – the mortgage loan AND the MGIC insurance.

    If ANYONE was going to establish capitalization minimums for risky loans – it would have to start with Fannie/Freddie ..

    and it’s what I told you before.

    Virginia Pension funds will not buy securities that are not adequately capitalized (securitization).

    You need to admit that in their zeal to promote home ownership and profits that the Fed regulators acted grossly irresponsibly with taxpayer money that was not theirs and now taxpayers have to pay for the damage the foxes did in the henhouse when the Feds shirked their fiscal responsibilities.

    All in the name of encouraging homeownership -with subsidies and incentives.

    this is what happens when you subsidize something… eventually enough folks learn how to “game” the system until it is corrupt.

    this is why subsidies are not a good thing…

    as soon as we let them do it -they’ll figure out a way to raid the funds…

  49. Anonymous Avatar
    Anonymous

    Look at the bright side….
    Rents are way down.

    this is why subsidies are not a good thing…

    Yeah, well, try to remember that when it comes to alternate fuels.

    I still maintain, there was nothing wrong with relaxing the rules, except a) they went overboard, b) they had all their eggs in one basket, and c) they didn’t accept the risk. They always worked with too low a cash cushion, and they did not increase it with increasing risk.

    $8 billion in cash against $5trillion in loans?

    Part of the reason was there was no good way to assess the risk, as there is in the commodities market.

    I still think there is plenty of blame to go around on this, Freddie and Fannie aside.

    RH

    RH

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