From the desk of author Michael Solomon

Michael Solomon was a 15-year veteran of the New York City Police Department and served  in its drug enforcement division, receiving well over a dozen awards for his excellent service
Date: September 23, 2008   Vol. 3 2- Issue 15

Sir Isaac Newton And The Economy

Where is Stefan Banic when we need him? For those of you who do not know who Stefan Banic (1870-1941) was, he invented the parachute. We really could have used him on Wall Street this past week. A soft landing is what the economy needed, but it did not come.

This week's meltdown on Wall Street, with Lehman Brothers declaring bankruptcy, Merrill Lynch being purchased by Bank of America and AIG looking for a bailout, recalls an earlier time in U.S. financial history. The failure of Lehman Brothers may only be the early stages of who is next.

However, where should the blame lie? Listening to Barack Obama speak this morning, I was dismayed when I heard him blame Ronald Reagan for loosening the restrictions on the Savings and Loan institutions. Someone on his staff had said remember the Keating-Five. Wow! Does he have it wrong! I wonder who writes his material. This is just another example of someone who is not ready to lead. If he did his homework instead of allowing his staff to lead him by the nose and continue to align John McCain with George Bush, he would have learned the following facts.

The Keating-Five were five U.S. Senators accused of corruption in 1989. It set off a major political scandal as part of the larger Savings and Loan crisis. Of the five Senators, four were Democrats [my italics], Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), and Donald W. Riegle (D-MI). They were accused of improperly aiding Charles H. Keating, Jr., chairman of the failed Lincoln Savings and Loan Association, which was the target of an investigation by the Federal Home Loan Bank Board. The fifth senator, John McCain (R-AZ) was found not to be involved in the scandal.

Oh! By the way Barrack, Franklin Raines former Clinton director of the OMB and your current advisor, is the former President and CEO of FNMA or have you forgotten? He paid himself $90 million and was widely hailed as a genius. The first African-American to hold the job, his avarice while at the helm of the FNMA is incredible. There is too much information about him to write here. I suggest if you want more information about him, do a web search. You will be amazed.

The next issue was Bill Clinton, who through his Secretary of HUD, Henry Cisneros, eased the rules on obtaining mortgages, allowing more exotic mortgages and "No-Doc" mortgages. The resulting consequences led to low housing inventories, followed by skyrocketing housing prices. Sellers became greedy and buyers got greedier as speculators entered the market.

Believing that they would be out of their adjustable mortgages before the first adjustment they feared not. In many instances, it worked. Some speculators made millions in a short amount of time. Former Secretary of Labor Robert Reich in a recent interview, referring to the No-Doc mortgages said, "I was long gone when that happened. It got so bad that if you could stand up straight you got a loan."

The main core of the problem goes back to 1999 when Bill Clinton repealed the Glass-Steagall Act of 1933. The act was enacted during the Great Depression. It protected bank depositors from the additional risks associated with security transactions. Passed by Congress in 1933, the act prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities. Glass-Steagall was one of the moves made by FDR to deal with the Depression. It was essentially repealed in 1998 and officially overturned in 1999 by the Clinton administration when Travelers Insurance, the parent of Salomon Smith Barney acquired Citicorp.

The repeal has effectively returned us to the 1920's, when recently three of the largest independent investment houses were either sold or failed. It brought us back to the era when both banks and investment houses cohabited under one roof. It should provide an admonitory tale for the recent events, especially the failure of Lehman Brothers this past week. Accordingly, the dissimilarity between commercial banks and brokerage firms has blurred many banks own brokerage firms and provided investment services. However, "Oil and water don't mix."

So where do we go from here? There are two avenues we could take. The people with the most spendable capital presently is Abu Dhabi. In recent years, the capital of the United Arab Emirates has been on an enormous buying binge. Fueled by record high oil prices, they have a mammoth sovereign wealth fund. They purchased 4.9% of Citibank, their Investment Authority has been gobbling up blue chip American and other western firms, like a $7.5 billion stake in Citigroup. Mubadala Development Co., a separate investing arm, has bought portions of automaker Ferrari and the Carlyle Group, a Washington-based private equity firm.

How does that affect the U.S. economy? Simply put, let us say GM wants to build a new plant to produce cars that get 40 MPG. They go to Citibank for a $5 Billion Loan. The Saudi Board says no problem here is your money. However, instead of building it in Detroit you will build it in Dubai. Get the picture?

The second avenue of escape and probably the simplest is drilling our own oil. We have more oil on American soil than Saudi Arabia. If we become energy independent, we will not have to send over $700 billion each year to countries that hate us.

Since the European Central Bank's interest rate is tied to the price of commodities, the price of Crude Oil comes down as soon as we drill, followed, by Gold, Platinum, Copper, et al. The ECB will be forced to reduce its interest rate causing the Euro to tumble and the dollar to rally. At the same time, we are creating new jobs and new industries will open up, as we also construct alternative energy sources such as Nuclear, Wind and Solar.

However, the Obama's of America (Pelosi, Reid, et al) refuse to drill. They make up excuses that it will take ten-years and we will only save a few cents per gallon at the pump. How stupid do they think we are? President Bush lifted the executive order prohibiting drilling and the price from that act alone reduced the price by over 40-cents per gallon. Once we start drilling who knows how low it could go.

One of the reasons it could take ten-years, is because of the Environmental Impact Studies that must be performed, which could take up to four-years. Congress could rescind them but will not. What impact will drilling on 1200 acres in the ANWR that contains 27 million acres have. We only have to look back at the original Alaskan pipeline from Prudhoe Bay to Valdez to see what the impact on the environment will be. The oil industry experts have said that we could start seeing oil in less than two-years. It only took eight-years to get to the moon and that project was started from scratch.

When 74% of Americans want us to drill now, shouldn't 74% of Congress feel the same way? Whom do they think they represent? The time to become vociferous and tell our representatives how we feel is now.

Economically it can; No it will work, I am confident it will. Why do you think a gallon of gasoline is 15-cents in Venezuela and 40-cents in Saudi Arabia? Remember when the quantity dials spun faster than the money dials on the pump. It could happen again.

Therefore, with that in mind we only have to look back at the great economists of the world. When I think back, the smartest economists were not Keynes, Friedman or Greenspan it was Sir Isaac Newton. His theory is apropo to what is happening around us. "What goes up must come down."

And, that is my opinion.

Michael Solomon

Author of "Where Did My America Go?"


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