Obama’s Velvet Glove

President Obama is the iron fist in the velvet glove. When possible, he makes things move without making waves. He doesn’t grandstand, and he doesn’t pick fights. But he moves his agenda forward, often with subtle ploys below the mainstream media’s radar. That approach appears to be his style, and it looks likely to continue throughout his administration.

In less than a month, the velvet glove has made notable progress on several fronts. Not coincidentally, those fronts are vital to our economic recovery and our hope of national renewal.

The first, of course, is the $787 billion stimulus-investment bill that the President signed Tuesday. The media made much of the “failure” of his bipartisan initiatives. But the bill is now law. It provides massive relief to our nearly bankrupt states and suffering workers. Equally important, it makes a down payment on national investment in our decaying infrastructure and a transition to rational energy policy.

Second, the velvet glove has separately advanced the cause of renewable, carbon-free energy. It has revisited waivers for states that wish to require greater fuel efficiency in cars, and it has begun a regulatory process to control greenhouses gases as air pollution. Thus has the President signaled industry that pressure to do the right thing will be relentless.

Up to now, the fossil fuel industries and their apologists have ignored three basic truths. First, the marginal cost of wind and solar power is next to zero. Once you build the windmills, solar arrays and electric grid, there is no additional cost for power but maintenance. No fuel costs. No transportation costs. Zip.

Second, the so-called “lower” costs of fossil fuels neglect the enormous “external costs” of environmental and planetary degradation. When you include those costs, renewables are already cheaper. They will get even cheaper in comparison as the global economy recovers and the highly nonlinear effects of demand inelasticity for fossil fuels work their dark miracles. Finally, many people who run these industries have kids who’ve been taught these truths since kindergarten. They are starting to come home from school and say things like, “Daddy (most of the troglodytes are men), why are you helping destroy our planet? Why aren’t you saving it?”

As this relentless political, legal and social pressure grows, the ocean liner of industrial denial, ignorance and sloth will begin to turn. Even the dumbest business people eventually bow to the inevitable. That’s why nascent carbon-credits markets already exist, although more abroad than at home.

A third example of the velvet glove is the President’s recent announcement of his foreclosure plan. About $75 billion will go for subsidies to prevent and cure foreclosure. That money will mostly help suffering homeowners and their lenders. The rest of the allotted money—some $200 billion—will go to Freddie and Fannie to support new loan-making apparatus, including new, rationalized and standardized securitization packages.

Why is that a velvet glove? Because it avoids talk of “nationalizing” financial institutions—the third rail of financial politics. Unnoticed (or at least unremarked) by virtually everyone, including the mainstream media, Fannie and Freddie are already nationalized. The people who ran them when they nearly failed are gone. Now the government, through its ownership, controls them and can replace management any time it pleases.

By providing government subsidies to these nationalized institutions, Treasury and the Federal Reserve have effectively nationalized the future of the mortgage market and its securitization. Nationalized Freddie and Fannie, not Wall Street, will develop the standardized loans, securitized packages, and other accoutrements of our highly sophisticated housing mortgage markets. As the months roll by, historical experience and more realistic mathematical models (perhaps also promulgated or standardized by civil servants) will help industry price these instruments realistically.

Under present circumstances, this sort of nationalization is vital. Only a rare few heads have rolled in our private financial sector. The management structure that destroyed our economy is still largely in place, often with perverse incentives. It wants to show the world (counterfactually) how it really wasn’t that stupid after all. And it wants to increase its own compensation (through stock and bonuses) by selling toxic assets for more than they are worth. Part of the reason for our present financial stasis is the bluff and bluster of people who created toxic assets and are trying to restore their reputations and wealth by holding out for a higher price. They want to hold our economy hostage to their egos and greed.

By working primarily through nationalized Fannie and Freddie, the Obama Administration will bypass these obstacles to progress. The miscreants will sit on their toxic assets, cooling their heels in their corner offices, while the rest of the world does business. Smarter folk will bow to reality, take the inevitable losses, and sell their toxic assets at reasonable prices or repackage them in standardized form. As the “stress tests” for their institutions approach, the holdouts either will incur further losses from being late, or they soon will be gone.

That, at least, appears to be the plan. Those for whom denial has become a way of life won’t see the iron fist in the velvet glove until they are about to lose everything, including their management perks. Few will cry for them.

With smarter folk like SecDef Gates and Generals Petraeus and Odierno in charge of our military effort, we are committed to using every aspect of our national power in foreign conflicts, including so-called “soft power.” The President is doing the same thing on the civilian side. He is not just relying on legislation like the recovery bill. He is using existing law, executive orders, regulation, economics and social pressure to achieve his ends.

As a “C” graduate of business school, Dubya never “got” law. By and large, his approach to law was to ignore it. A charitable view of his trashing our Constitution might be that he never understood its importance or how it works.

In contrast, President Obama was a top graduate of our nation’s premier law school and a long-time professor of law at another top school. He knows the law, its purposes, effects and limitations better than most of the distinguished lawyers who work for him. He will not likely overreach, but he will use every legal lever to achieve his goals. With his additional understanding of economics (rare among politicians) and his superb command of the public mood, he is a formidable leader.

Most people accept good leadership eventually. The smarter ones just do it sooner. Already in December, a month before the Inauguration, leading innovative businesses formed a battery development consortium, as I had suggested last June. They recognized, as they should, that electric cars and renewable energy are our future and where the President wants to go. They also understood that whittling down the Asian lead in lithium batteries will require a national effort.

Slower learners may take more time. Having been left rudderless and leaderless for most of four decades, they may resist national leadership. But eventually they will recognize that our President is far too clever and capable to ignore, and that anyway his goals are good for our nation and our species and good for business as well. Then our recovery will really start to roll.


Footnote: The recent crash of oil prices illustrates the highly nonlinear relationship between the demand for oil and its price. Since its peak last July, the price of oil dropped by more than a factor of four, from $145 per barrel to about $33. That drop was in response to a decrease in global demand of six percent (no, that’s not a typo). These facts suggest that, if demand grows more than six percent as the global economy recovers, the price of oil will exceed $150 per barrel. If global demand increases further, the sky’s the limit.

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