The Dodd-Frank Act that in a mere 2,000 pages sought to put the control back in financial regulation skipped right over Fannie Mae and Freddie Mac the Government Sponsored Enterprises that were at the heart of the fiscal crisis and are bleeding red ink.  Focusing instead on those evil bankers on Wall Street the Dodd-Frank Act really put those guys in a box, until Goldman Sachs slipped its fetters faster than Houdini.  So who’s buried under the pile of rubble that is the latest masterpiece of our massive government, Betsy Jensen.  Who is Betsy Jensen?

Betsy Jensen is a farmer in southwest Minnesota.  She and her family grow wheat and soy beans.  She doesn’t have a mortgage, so she didn’t cause the housing bubble.  But she does use derivatives to control the risk in farm prices which can be rather volatile.  For example, a bushel of wheat went for $18.69 in February of 2008 whereas it was selling for $3.49 in July of 2010.  A farmer has to buy their seed and fertilizer at the beginning of the growing season and they don’t sell their product until the harvest.  If prices fluctuate wildly during that interval, it isn’t hard to imagine what that can do to your business, let alone your sleep patterns.

So where do derivatives come in?  Farmers like Betsy can negotiate a guaranteed price for their grain with their customers.  Betsy risks missing out on some profits if the prices go up as they have recently (45%) due to fires in the wheat producing region of Russia, but she also is protected against a price drop, for similar reasons beyond her control.  She recently negotiated a price of $7.15 per bushel and with that knowledge, she can manage her farm business and sleep a little more peacefully.  For her purchases she can also use derivatives to buy fuel and fertilizer, where the latter has seen price fluctuations of $435 to $685 per ton.  Then along come Barney Frank and Chris Dodd, a couple of career politicians who never worked in the private sector.

The Dodd-Frank Act says it is unlawful to enter into swaps (derivatives) “in excess of such amount as shall be fixed from time to time” by the Commodities Futures Trading Corporation (CFTC).  That doesn’t sound like a free market to me.  What if, in Betsy’s example, the CFTC didn’t get around to raising the amount on wheat above $5 per bushel?  Betsy couldn’t arrange to sell it for $7.15.  What if the grain elevator couldn’t turn around and sell Betsy’s wheat for the 45% increase in price due to the Russian fires?  Do you think with a cap on the upside they might not be willing to pay as much for Betsy’s wheat?

From Dodd-Frank to Bill O’Reilly we hear about the evils of speculators.  O’Reilly used to rail against the speculators when gas prices were rising toward $5 per gallon.  The evil, greedy speculators were driving up the price of gas!  But little mention was made of speculators when the price of gasoline fell back down?  Did the speculators retire?  Go on vacation?  The reality is that speculators don’t care if the price goes up or down, they only care it moves in the same direction on which they are betting.  They can drive the price down just as fast as they can drive it up.  But they are useful, not evil.

Speculators bring liquidity, that is, money to the market.  Betsy Jensen estimates that about one-third of the purchasers of wheat contracts are traders who never take physical control of the product.  But by adding their view and their money to the market they keep prices from fluctuating wildly.  If these traders are banned then, as she put it, one-third of her customers would disappear.  With one-third fewer customers the price swings will increase rather than decrease.  Remember, a trader who does not take delivery of the wheat can make money on small swings in the price and is likely to get in or get out on smaller moves and thus change the market price accordingly.  If only those who take physical possession of the product are in the market, then other factors such as transport, storage, spoilage, must be factored into each transaction and the price swings will be wider and wilder.

But Betsy said it best, “I may not be able to manage Mother Nature, but I can manage my risk with derivatives.”  If only our government would get out of her way and let her do so.

He looked nervous.  He curled up the corners of his two hole cards, aces.  He eased them back down on the table and scanned the other players.  Nancy Pelosi had a stack of chips totaling $25 billion and he wanted all of them.  No, he needed all of them.  Desperately.  The other three, all Japanese, sat expressionless behind their dark glasses.  At every hand all they said was “Call”.   No raise.  No drama.  Very cool.  Very dangerous.

He looks again at the four cards on the table.  Nothing to help him there.  He needs another ace. He needs the ace he calls the Volt. Pelosi turns to him. “So, what’s your plan?”  He swallows hard, trying hard not to show it and says, “All in,” and pushes his remaining chips into the center of the table.  The dealer burns another card and then peels off the “river.” And we’ll be right back for the final outcome of tonight’s game.

GM on the Precipice

That must be how Rick Wagoner feels.  It seems he’s betting everything on the Chevy Volt. If he draws that ace, he’s a hero.  If not, he’s history.  So what are his chances?

If that’s all he’s got, they’re pretty long odds.  The Volt is not due to hit the showroom floor until 2010, and at a whopping $40,000 per copy.  Not a bad price for a Cadillac, but for an untested electric car with a 40 mile range?  That’s a tough sell.  Even at that, the $40,000 might not be profitable, just break even.  But, there will be a tax credit of $7,500 to help take the sting out of it.

Without Bankruptcy

Without a major revamping of their cost structure that can probably only be achieved through the bankruptcy courts, GM is still carrying $2,000 per vehicle in labor costs that its competition doesn’t have.  And what about those three players to his right in the dark glasses, do you think they are standing pat?  Although very low key, it is reported that Toyota, Nissan and Mitsubishi are all planning to introduce electric cars in the same time frame.  If they do that and they also have the $2,000 per vehicle edge, it will be very bad for GM and any bailout will go down the drain.

The other factor is the way the Japanese do strategic planning.  They typically do not look to just the next quarter.  They are known for developing 50 and 100 year plans.  That is not a typo.  So if they introduce a vehicle they will do it for the long haul.  Believe it or not the Toyota Prius has been on the market for seven years already.  The Japanese are not afraid to introduce a pretty good model and then continuously improve it and if they believe the direction is right, they are willing to wait for the results.  The Big Three, on the other hand tend to have a shorter planning horizon.  Witness Ford’s announcement that it intended to build 250,000 hybrids and then did a market survey when gasoline was about $2.30 per gallon, and decided that they should not go forward.  When gas prices took off they were caught flatfooted while Toyota was selling Priuses at a premium and they couldn’t make them fast enough.

New Administration, New Congress, New Energy Policy

Then there is the energy issue.  Putting more and more electric cars on the road is a good idea and a way toward energy independence.  However, the new administration and the incoming Democratic Congress want to kill the coal industry.  Coal currently generates 49% of our country’s electricity and when it comes to coal reserves, the U.S. is to coal what Saudi Arabia is to oil.  But the new incoming chairman of the House Energy committee, Henry Waxman of Beverly Hills, California, is more determined than ever to implement a green agenda and kill coal.

So what do you replace the coal with?  Oil? Gas? Nuclear?  On the campaign trail, I heard Barack Obama and Joe Biden mumble some things about nuclear being okay, but it was hardly a ringing endorsement.  Do they think for a minute that wind or solar are anywhere near replacing coal?  So, they actually plan to reduce our electric generating capacity by 49% and then not only replace it but grow it to be able to handle all these electric cars.  Where’s that plan?

If you don’t have enough electricity, you can’t charge up your electric cars.  If good old supply and demand does its usual thing, the price of electricity should skyrocket and I can tell you first hand that in New York, it’s not cheap right now.  If electricity skyrockets, whatever manufacturing is left in New York and other rust belt areas will be pulling up stakes left and right and heading south.  If that population follows the jobs, does that mean more votes for the red states and a shift in Congressional seats as well?

The Democrats better re-think that plan if they want to stay in power.

I got the phone call around 7:30AM.  It was my wife and her voice was shaking, choking back tears.  She said she was in an accident and that the truck was totaled. Totaled? I thought to myself, my God, what kind of accident could have totaled a 2 ½ ton, hulking Ford Excursion SUV?  Before I could ask the next question, the one I didn’t want to ask, she said, “The girls and I are alright, just some cuts and bruises.” I was able to start breathing again.  She began to apologize for the SUV and I gently cut her off.  “I don’t care about the truck, as long as you and the girls are okay.”  The girls were my two daughters.

I got the location of the accident, briefly told the lead guy in my shop the situation, light on the details which I didn’t have anyway, and jumped in my truck to find them.  As I approached the accident scene, I saw an ambulance, with siren blaring and lights flashing, going the opposite way.  I called my wife’s cell phone and when I got her I asked, “Did you just pass me in the ambulance?”  She said, “Yes, we’re headed to the hospital to be checked out.”  So I made a U-Turn to go meet them in the emergency room.

The Accident

What had happened was that my wife was crossing an intersection when another car blew through the red light.  According to one witness it looked like he was going 60 mph, according to another it looked like he was going 100 mph.  They said the nearly 19′ long, 2 ½ ton vehicle with a massive V-10 engine that my wife was driving was lifted up in the air, turned 180 degrees and landed on its side.  My wife had to kick out the windshield to crawl out and guide our daughters out behind her to safety.  Thankfully it didn’t catch fire.

Why the other driver was driving the way he was we never found out.  He was pronounced dead at the scene. He was driving a Kia, a small Korean import, and before impact, I’m sure he was getting great gas mileage.  He went from leaving a small carbon footprint to leaving no footprints at all.

My wife was exonerated from any responsibility for the accident.  She and my daughters were completely innocent.  Had Ford been required only to build highly fuel efficient econoboxes, half my family would have been killed that morning.  In fact, the driver who was behind my wife said that if she had not been there, he was sure he would be dead, as it would have been him that was hit by the speeding car in her place.

Freedom to Choose

They are alive because I have the liberty, so far, to buy any vehicle that I choose and can afford.  The choices are many and I have made many choices through my life.  That is primarily because the government has not yet taken away that liberty and demanded what types of vehicles can be built and by whom.

My first car was a Toyota Celica, which I purchased just after graduating from college.  It was well made, well equipped, and although a little expensive at $4,700 brand new, I thought it was worth it.  That car served me well for 105,000 miles. When it was time for a replacement I bought a Plymouth Sapporo and I really liked it. Unfortunately, someone liked it as much and it was stolen when it had just 9,000 miles on it. It was a Chrysler Corporation car, but under the hood it was Japanese.  Still living in the Bronx, I decided to buy something functional but not too attractive.  I remember my friend’s rationale for buying a Subaru while living in the city.  None of the parts fit in a gypsy cab. My next vehicle was a Toyota Corolla.

Cars for a Growing Family

When my wife and I married in 1986 she brought to the marriage her Ford Mustang.  My Corolla was starting to get tired and my wife was pregnant, so it was time to get a new vehicle.  I bought a Ford Probe, with front wheel drive and turbocharged.  It was hard to decide if it was American or Japanese.  It was sold by Ford, built in the United States by Mazda which is a Japanese company, but Ford owned 25% of Mazda at the time.  It made for interesting conversation, but not worth losing any sleep over.

After our second child, the Probe and the Mustang were getting a little cramped.  So we said goodbye to the Mustang and hello to a Volvo 740 Turbo Wagon.  This was my wife’s dream car, owing somewhat to her Swedish heritage.

Things were going well for us and it was time to replace the Probe.  I leased a BMW M Roadster and had more fun behind the wheel of a car than I can remember before or since.  We both thoroughly enjoyed tooling down the road with the top down, turning heads as we went.  Life was good.

My wife and I had two more children and as they grew, the jump seat in the back of the Volvo was less than optimal.  In the winter the heat never seemed to reach back there and in the summer the kids in the back felt like a couple of tomato plants in a hothouse.  So it was time for our next vehicle, which for the first time I bought completely on the Internet.  It was a Ford Expedition.  I had seating for eight and room for some cargo as well, and heat and air conditioning all the way to the back.  The kids could each sit comfortably without bumping into each other and to reach out and smack someone next to them took some effort.  That vehicle served us well for a couple of years and then as they grew, our needs grew and when it was time for the next move, we got the Excursion, bigger, they didn’t come.

Meanwhile things became a little more challenging for us.  When the BMW’s lease was up, back it went.  I took over the Volvo for a while until I started a new construction related business and then I took over my father-in-law’s Chevy pick-up truck which he left for my son when he passed away.  After a year when the business got more established I put the Chevy aside for my son and the company bought a Ford F-350 Super Duty, dual wheel pickup truck with a diesel engine, which I still drive.

The Nest Starts to Empty

Then came the accident.  As soon as we got the insurance money for our totaled vehicle we immediately went out and bought another Excursion, with safety the foremost reason.  Ford wasn’t making them anymore so we bought a used one.  I wanted my family protected.

When my son moved out freeing up a seat on the “bus” and my wife started selling real estate and gas prices started to climb, we reevaluated the Excursion.  The Volvo was gone, and at twelve mpg and my wife driving a lot more, it didn’t make sense.  With five of us at home, at worst we could all fit into the pickup truck with its crew cab.  So she bought a Volkswagon EOS.  The savings on gas would make up for any differences in payments on it.  She now had her own convertible and was very happy.

About six months later, my older daughter got her license and wanted a car.  She didn’t have much money for purchasing it or for gas so she needed something economical.  Her choice, a Volkswagon Jetta.

Individual Liberty or Government Diktat

What’s the point of this stroll down vehicular memory lane?  To demonstrate that with liberty we have a great many choices.  We also have different needs at different times in our lives.  Through a free market I was able to select from a number of vehicles from different manufacturers, from different countries, to find what fit our needs.  Those companies decided what to build to suit the market.  The cars that I eventually chose, though not done conscientiously at the time, were from each of those manufacturer’s strengths, not their weaknesses.  I did not choose an economical car, when I needed one, from one of the Big Three.  We did however, choose some of their sporty models (Mustang, Probe) and their trucks (Excursion, Expedition, F-350, Silverado).

The market should tell them what cars to build and build at a profit.  Government should not require them to build six or eight cars that they have to sell at a loss for each vehicle they can sell at a profit, to meet some government mandate such as CAFE standards. As the market causes fuel prices to rise, the market will react with increased demand for more fuel efficient cars.  We should be able to choose when that works best for us.  If we have a distance to commute, we will more inclined to factor fuel efficiency into the equation.  However, if we want to travel in luxury two miles to our favorite restaurant, who cares if the car that gets us there only gets 8 mpg?  Many families have more than one car for that very reason.  Who is some government bureaucrat to tell us what we can choose among?

This Thanksgiving I can sit down with my family, and be thankful that I had that choice, and I can hug each one of them and pray it stays that way.