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Sun

17

Aug

2008

Keeping it Simple Stupid!
Sunday, 17 August 2008 13:04
by Stephen P. Pizzo

I'm a simple man. And as such I have a lot of simple solutions to problems others seem intent on making so complicated they can't possibly work... and then don't work.

Right now there's three things Congress is fiddling over, each of which I figure could be solved on a single sheet of one of those legal yellow notepads:
- Offshore oil drilling
- America's reoccurring financial crisis'
- The so-called "war on terror."
Let's take them in that order.

Offshore Drilling

Republicans want to open more offshore tracts for drilling. Democrats want to move away from our dependence on oil and encourage development of clean, renewable energy sources.

If only Republicans (and their oil company supporters) get their way, the price of oil could fall again thereby making alternatives, like solar and wind, uncompetitive once again, thereby once again killing those babies in their cribs.

(NOTE: I don't buy GOP claims that opening more offshore areas to drilling could or would actually reduce the price of gas at the pump any time soon. But I also understand that Exxon and the Saudis can lower the price of gas anytime they figure it's serves their purposes. And under "purposes" read, "competition from alternative energy sources.")

But here's how both sides can get what they want. and the nation needs, while also insuring that ten years from now we are not having this same discussion again:

1) Lease the oil companies all the offshore tracts they can stomach — excepting, of course, areas designated as sensitive marine sanctuaries.

2) But, as part of this legislation Congress must set a firm price floor under oil that does not allow the price of gas at the pump to fall below $3.50 a gallon. If the price of oil goes up the price of gas can go up with it. But, if the price of oil goes down resulting in lower market prices for gasoline, gasoline at the pump cannot fall below $3.50 a gallon.

(WHY: Without such a price floor, oil producing countries and big oil companies will, as they have so many times before, temporarily flood the market with cheap oil, thereby smoothering still-fragile clean, renewable sources of energy, such as wind and solar. They've done it before, and they'll do it again, unless a floor is set for oil that keeps gasoline at levels that encourage both conservation and forces changes in consumer preferences for transportation.)

3) If, at some point, oil and gas prices fall due to increased production — as Republicans claim they would — the price of gasoline would still not fall below below $3.50. For example, say oil prices decline enough to force the price of gasoline at the pump down to $2.99 a gallon. In that case consumers would continue paying $3.50 gallon at the pump. But the difference, 51 cents/gallon, wouldn't go to oil companies but rather into a new Federal Alternative Energy Fund. That money would be used to for clean/renewable R&D and to temporarily subsidize emerging energy alternatives such as solar and wind.

Republicans will diss this price floor as a "tax on consumers," and Democrats will scream bloody murder about offshore drilling. Both of them need to put a sock in it and realize that there really is no free lunch. First , consumers are already paying that tax, but they are paying it to Exxon, and not getting a thing back in return for it. At least with the Federal Alternative Energy Fund consumers will get some news, clean energy to run their consumer products on down the road.

And as for the additional oil that can be recovered offshore, well, however all this plays out over time, we will conitnue to need oil for the foreseeable future. Some folks don't seem to realize that oil doesn't just fuel cars, it goes into all kinds things, including fertilizers for growing food. We can eventually cut our need for the stuff down to a trickle, but we'll always need that trickle. So developing offshore sources will pay dividends a decade or two downt the road. And by then we won't have to buy the stuff from the Saudis. America can stop sending $700 billion a year to countries run by people who like to fly commercial airliners into our skyscrapers and treat their women like livestock.

Bubbles and Financial Meltdowns

No, you're not imagining things. We really do seem to have a full-scale financial meltdown about every 8- to 10-years. And every time one of these financial bubbles burst you hear the same noises out of Washington;

"Where were the regulators?" And, "Where were the accountants?"

Well I know where the were — and still are.

Federal regulators have been knee-capped by Congress and whoever was (is) in the White House at the time, at the "request" of their well-helled financial services contributors. Those contributors don't like to have to show their books to humorless, picky, green-eye-shaded federal regulators.

Ah, but you wonder, even if federal regulators have been politically neutered, companies must still hire "outside" accounting firms to provide federally-required "independent" audits. Wouldn't they catch any wrong-doing?

The "quotes" are no accident. because the "outside" accounting firms are hand-selected by, and then paid by the very same companies they are supposed to tattle on if they discoverer wrong doing during an audit.

When it comes the relationship between auditor and auditee it's a "what a bear does in the woods" relationship, really. I mean what do we expect of a for-profit accounting firm when their own very fat-paycheck client asks that they "look the other way on that particular deal," or to give them cover by valuing a particularly worthless asset on their books with an interpretation of accounting rules that stretch credulity — and mathematics — beyond all known cosmic dimensions. You know what they do. They do what bears do in the woods.. only they do it on shareholders and taxpayers.

Current accounting rules have failed shareholders and taxpayers so many times I've stopped counting. It's a moral hazard, built atop a mountain of moral hazards. Accounting firms take care of those who feed them first, shareholders next and taxpayers last — if at all. (Need I mention Freddie and Fannie? They had a small army of outside accountants and their own federal regulator, OFHEO.)

So, how do we fix this accident waiting to happen before another one happens? Again, the solution is so simple it boggles the mind why it has not been adopted.

1) Change the rules so that publicly traded companies and federally-insured financial institutions (including Feddie and Fannie) so they are no longer required to hire outside accounting firms.

2) Instead such firms would be required to purchase "audit insurance." Such policies would be priced based on the amount of risk the insurance company determines it is assuming. The lower a company's risk profile, the lower their audit insurance premiums. (That's called "market forces" you Republicans out there.)

3) Audit insurance would insure the company/institution against claims by shareholders or government regulators if they've cooked their books or otherwise broke accounting/SEC rules regulating their particular industry's financial dealings.

4) There would still be plenty of work for accountants under this plan. But rather than companies hiring their own auditors, the insurance companies would hire and pay them. After all, the insurace company would be on the hook for any legitimate claims, so they would want auditors who had the insurance company's best interests at heart. As a side benefit of no small import, that self interest on the part of the insurance companies would also serve to protect shareholders and taxpayers as well.

Such a change would not only create an entirely new business opportunity for insurance companies, but would remove the inherent conflicts of interest under current rules which have repeatedly — and expensively — failed shareholders and taxpayers. (See Accounting Scandals in US History)

Rather than companies and banks hiring accountants to check their books, the insurance company would do so. And, since the accountants would be working for the insurance company that's on the hook financially for any "mistakes" you can bet your sweet bippy audits would be complete and accurate. Because if insurance companies hate anything it's paying on claims.

You see, that's how "free markets" are supposed to work, at least that's what all those free-market Republicans keep telling us — you know, how free-markets can regulate themselves when risk and incentives are in balance.

So let's balance those risks and incentives where it really counts — at the audit level. And then next time something goes sideways in the financial markets we won't have to ask, "where were the accountants," but rather, "what's the phone number for the audit insurance claims department?"

The "War on Terror"

This one's really easy. People who purposely crash cars into other people and/or buildings are arrested and put in jail. Why? Because they're criminals, and that's how society reacts to such anti-social behavior. If they violently resist arrest they get shot, and maybe killed.

Something like 40,000 Americans are killed each year in auto accidents, but we don't have a "War on Automobilies," do we? No. We try our best to manage the carnage by putting cops on the highway to catch reckless and drunken drivers. Is it a 100% effective? Obviously not. But we still don't dispatch the National Guard to patrol our highways and streets. We don't bomb Chrysler or occupy Toyota plants in Japan.

All of which tells me we have a pretty amazing tolerance for selfinflicted carnage. Would that we showed the same restraint after 9/11.

(Oh, and as the RAND folks suggested, drop the "War of Terror" slogan. Because the only thing that's made it a war is the Yosemite Sams in this administration.)

Just this week, the Pentagon's favorite right wing think tank, the Rand Corporation, released a study showing that only 7% of the world's terrorist groups have been defeated militarily. The other 93% who were defeated either negotiated a political settlement or were arrested or killed by the police.

So.

1) As for domestic security turn the job over to the nation's cops, FBI, and America's Most Wanted. Yes I know they failed us on the lead up to 9/11. But interagency cooperation and intelligence-sharing has since been greatly improved. Improve it more. Make sure the channels of communication between local and federal law enforcement are unencumbered by turf nonsense and that local authorities have the information, tools and authority to act independently and quickly. The idea that somehow the Pentagon and NSA can protect folks in San Francisco's financial district is absurd in the extreme. No one knows their own community, and the people in it, than local cops.

2) But what about Islamic nations that continue supporting and/or harboring terrorists? We won a much more potentially dangerous war, the Cold War, by containing our would-be enemies. Containment worked then and it can work here again. Remove our troops from the entire region. Let the countries involved that we will have nothing to do with them until they get a handle on things within their own borders. That means no military aid, no humanitarian aid, no food aid, no World Bank loans, nothing, nada. (Oh, and yes, that includes the Saudis. In fact they would be the first ones on our list of countries to isolate, if we weren't hooked on their oil. Which brings us back to the first part of this post... put a floor under the price of gas, then choke the Saudis off where it really hurts, the palace pocketbook.)

3) But what if we are attacked by terrorists from one of those countries anyway? That's what all that expensive, high-tech stand-off weaponry we keep paying to develope is for. Any attack traced to terrorists from a particular country or countries, would be responded to with a punishing round of cruise missiles. But let's not waste these expensive dodads on terrorist mud huts. Instead target that nation's expensive infrastructure; bridges, dams, power grids, stuff that cost money and takes time to replace. (As you can tell, I'm not a turn-the-other-cheerker. I'm Sicilian.) I call it my "Just Don't Do That" defense policy. When a troublesome nation gets tired of replacing all that expensive infrastructure they'll have to decide if they want to keep replacing it or if maybe it wouldn't be cheaper to just get rid of of the terrorists. If not, and it happens again, we do it again. After all, it's no skin off our nose since we won't have our own troops in harm's way.

There. Now will someone in Washington just get this stuff done. I pay taxes so I don't have to get involved in this kind of nitty gritty, day to day operations of government. That's what we pay you guys and gals up there to do. So for Christ sake do it, will ya?

Oh, and do try to keep it simple — stupid!
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