And the Oscar goes to… a bank?

The 2011 Academy Awards, hosted this year by acting ingénues James Franco and Anne Hathaway, was an attempt by the Academy of Arts and Sciences to reach out to a new, younger audience.  By that measure, the Academy failed miserably, reaching 12% less viewers in the 18-49-age bracket.   Ultimately, the Academy’s strategy, to reach all audiences at once, was baldly transparent and ineffective.  The projected image of Bob Hope, who produced the funniest lines of the night, represented the Academy jumping the shark.

While The King’s Speech, a film about a British monarch overcoming a speech impediment, took the biggest honors of the night, the most competitive and interesting race was for Best Documentary.  Presenter Oprah Winfrey said that, “It has never been more important for us to see these stories to help us try to make some sense of the world we live in.” Five strong films entered, including Sebastian Junger’s Restrepo and Josh Fox’s Gasland. Inside Job, Charles Ferguson’s searing inquiry into the roots of the financial crisis, took the Oscar.  As Ferguson accepted his Oscar, he started by saying, “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong,”

One can’t help but think that JP Morgan Chase (JPMC) foresaw Inside Job’s victory and the speech by Ferguson, as no less than four times during the Oscar broadcast, their “New Way Forward” commercial appeared, promoting JPMC as a key driver of our ‘recovery:’

Conveniently, JPMC released their annual 10-K financial statement one day after the Oscars, so we can put their claims in perspective.  In 2010, JPMC held just over $50 Billion in wholesale commercial loans to United States businesses, a significant drop from their commercial commitments in 2007 and 2008.  While they are committed to making $10 Billion available to small businesses, that doesn’t mean that they will actually make the loans.  Additionally, their offer of a second review seems reminiscent of the situation when you aren’t getting the assistance you need on the phone and ask to speak with a customer service representative’s manager.  Why is this process necessary, and what does it actually offer to the small businessperson?  More importantly, why are small businesses having trouble getting access to money in the first place?

The quandary over small business loans goes to a larger question: what did the bailout of our financial institutions, through the Troubled Asset Relief Program (TARP) and FED actions, accomplish, if we don’t yet have a strong recovery?   After the financial crisis the Federal Reserve and the Treasury Department bailed out many of our largest banks, including investment banks, through funds from TARP and through access to cheap money from the discount window at the FED.  Many of the banks were overleveraged, and these programs allowed them to recapitalize.  In essence, the government allowed these banks to repair their balance sheet by printing money, and forcing the public to take the loss through devalued currency.  The actions in late 2008 and early 2009 by Hank Paulson, Ben Bernanke, and Tim Geithner certainly prevented a collapse of our banking sector.  The TARP program remains universally unpopular, despite reports that even losses from loans to AIG won’t top $14 Billion, a significant drop from earlier estimates.

During the last few years, banks like JPMC and Goldman Sachs have made tidy profits and made tidy bonus payments, but that hasn’t necessarily translated into an economic recovery.  We have stronger banks, but not a stronger recovery.  The Excess Reserves of Depository Institutions (EXCRESNS) is a valuable lens with which to view this quandary.  In 2009, after nearly 50 years of being near zero, meaning that banks lent out as much as they could based on their reserves, the data jumps to hockey stick proportions.  You don’t have to believe me, you can see the data yourself on the FED’s website.  Many banks are standing pat on reserves that they could be lending.

While JPMC isn’t actually saying much in their Oscar ad, they do sound earnest and committed to a recovery.  I wonder how much that ad cost?  JPMC paid to lobbyists $6.2 Million in 2009 to help make the Dodd-Frank Financial Reform Bill to their liking.  What if JPMC lent that money out to small businesses in 2009, instead?  In retrospect, I think the Oscar voters missed out on an award-winning acting performance by JPMC.

What can key an economic recovery?  Lets look at the stimulus efforts to date, made up of both tax cuts and direct government expenditures.  John Maynard Keynes argued that both tax cuts and government spending would help to increase the GDP, but that government investments were far more effective, driving a more powerful Keynesian multiplier.  In essence, the expenditures recycle themselves more directly into the economy and have a larger impact, whereas tax cuts are often put into savings or used to pay off debt meaning that less money gets recycled back into the economy.

Republicans often argue that tax cuts ‘pay for themselves,’ relying on the unsubstantiated and discredited ‘Laffer curve;’ for example, the Republican House does not require tax cuts to be paid for in regards to the deficit.  With Republican governors continuing to reject direct government stimulus, as Wisconsin and Florida governors recently did with high-speed rail money, this means that our efforts to stimulate the economy will still hurt the deficit, but they will not be very effective.

However, the recent ‘Obama’ tax cuts, the extension of the Bush tax cuts including those on the top 2% of wage earners, amounts to Supply Side economics redux.  Capital gains cuts are similar in their effect to tax cuts, as the windfalls go to wealthy taxpayers who won’t spend the money immediately.  Supply Side economists argue that by reducing tax rates and eliminating regulation, businesses will be able to hire more workers, and increase the GDP.  To date, after many rounds of tax cuts for businesses, unemployment (and more importantly, underemployment) remains high.   Looking at the big picture, the actions of our government in response to the financial crisis is a bit like the Academy – trying to please a lot of different audiences at once, without delivering a clear, concise, and effective message.

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Your land, my land, Gasland.

Before I begin to tell you what brought me to tears this morning, I want to ask you what exactly you would be willing to sacrifice for cheap energy.  Think about all the material goods that you buy with cheap energy, all of the disposable and replaceable goods.  Think about all of the devices in your home that consume electricity, and all of the functions they provide for you.   Now, consider what you would be willing to give up in order to ensure that the supply of cheap energy is unending.  What if you learned that the water from your tap was no longer drinkable?  What if you learned that you might have irreversible brain damage?  What if you learned that you might lose your sense of taste and smell?  Would that be worth it?

Gasland Director Josh Fox lighting some polluted tap water on fire.

Well, this morning I watched the new documentary Gasland, which premiered on HBO last night.  Immediately, my connection to the subject matter was visceral, because like the filmmaker, Josh Fox, I am a Pennsylvanian by birth.  Fox owns a home on 19 acres of pristine forest that is part of the Marcellus Shale, a formation of sedimentary rock that stretches throughout the Appalachian Basin from New York, south to Virginia.  Energy companies targeted the Marcellus Shale for its natural gas resources, along with other shale formations across the country.  The Marcellus Shale alone was estimated in April 2009 by the Department of Energy to contain 262 Trillion Cubic Feet of Natural Gas.  However, industry estimates exceed this amount.  To extract natural gas from shale formations, energy companies use Halliburton-proprietary technology.

How is the natural gas extracted?   A technique known as hydraulic fracturing, or fracking is used.  A well is drilled deep (typically about 8,000 feet) into the shale formation, and millions of gallons of water, sand, and proprietary chemicals are injected at high pressure into the well.  The pressure fractures the shale and opens fissures, which allow the natural gas to flow freely out of the well.  Sounds simple, right?  Well, 596 chemicals are used in the fracking process.  In 2005, the Bush/Cheney Energy Bill (known officially as the Energy Policy Act of 2005) exempted natural gas drilling from the Safe Drinking Water Act?  Why was that legislation necessary?  It exempted the energy companies from disclosing the chemicals used in the fracking process.  For each frack, 80-300 tons of chemicals may be used. Scientists have identified volatile organic compounds (VOCs) such as benzene, toluene, ethyl benzene and xylene.  Fracking produces wastewater, and the VOCs in the wastewater are evaporated into the air, where they produce ground level ozone, which can travel up to 250 miles.

Shale formations in the United States.

The really disturbing part of this process is the contamination of drinking water.  Fox travels across the country to Colorado, Wyoming, Arkansas, and Texas, where this technology has been deployed, and goes into homes where the tap water is now flammable.  The scale of the development is extensive.

I urge you to watch this film, and spread the word about this ongoing environmental catastrophe.  This technology raises the question of what lengths we as Americans will go to for cheap energy.  Is our standard of living sustainable?  What are the consequences of that cheap energy?  Economists consider consequences that are not reflected in the cost of a product externalities.  Right now the costs of our energy are not transparent, but purposely opaque.  The 2005 Bush/Cheney exemption is a prime example of this.  Clean natural gas is just as much of a misnomer as clean coal.  There is no free lunch.  Americans need to reconsider the sustainability of our economy, of our lifestyles.  Permanent damage is occuring daily.

However, there is one thing that you can do now to help the communities affected, and help to increase the safety requirements in natural gas extraction: call your Senators and Representatives, and demand that the Frac Act be passed.

The Fracturing Responsibility and Awareness of Chemicals Act (H.R. 2766), (S. 1215)—was introduced to both houses of the United States Congress on June 9, 2009, and aims to repeal the exemption for hydraulic fracturing in the Safe Drinking Water Act. It would require the energy industry to disclose the chemicals it mixes with the water and sand it pumps underground in the hydraulic fracturing process, information that has largely been protected as trade secrets. The House bill was introduced by representatives Diana DeGette, D-Colo., Maurice Hinchey D-N.Y., and Jared Polis, D-Colo. The Senate version was introduced by senators Bob Casey, D-Pa., and Chuck Schumer, D-N.Y.  Needless to say, the energy industry opposes this act.  Gasland breaks my heart, because the Pennsylvania that I grew up in is at risk.  So is the water supply of New York City and Philadelphia.  Please see this important film, and take action.