Big Oil is Back in Iraq

Remember the steady stream of comments from the White House and Pentagon stating that the war in Iraq would cost American taxpayers almost nothing?

Well, with actual expenses now over $600 billion and total incurred costs estimated as high as $3 trillion, we can pretty much rule out the idea that the war will "pay for itself." Or, to be more precise, it won't pay back the American taxpayer. We'll leave that debt to be paid by future generations.

But Big Oil can't wait that long, and others will now be able to join Halliburton (and former Halliburton subsidiary Kellogg Brown & Root) at the trough. ExxonMobil and other Big Oil companies have already benefitted as disruption in the flow of oil and uncertainty in the Middle East has sent oil prices (and oil company profits) to record highs.

But it gets better... a lot better. Iraq’s Oil Ministry announced last month that a handful of Big Oil companies will be awarded no-bid contracts to develop Iraq's oil resources. Four of the larger companies (Exxon Mobil, Shell, Total and BP) were original partners in the Iraq Petroleum Company, until the Iraqi petroleum industry was nationalized in 1972 by none other than Saddam Hussein.

Saddam's gone and Big Oil is back in business in Iraq.

Meanwhile, the State Department is trying it's best to maintain the appearance of neutrality (and a straight face), and will at least pretend to investigate allegations that the State Department provided behind the scenes support in the negotiations.

So who really caused the price of oil and gasoline to skyrocket? Well, a recent McCain TV ad strongly implies it was......none other than Barack Obama!

Seriously, you can't make this stuff up.

Selling Fannie and Freddie Short

Rarely do such obscure businesses as Fannie Mae and Freddie Mac make the front page, but then these are rare times. As many know by now, Fannie and Freddie are "Government Sponsored Enterprises," and are responsible for repackaging and reselling almost half of the mortgages in this country.

As Fannie and Freddie nearly folded their tents last week, U.S financial markets came close to what could have led to a Depression-style collapse in our economy. But the interesting sideline to the story is buried in the details.

Along with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, SEC Chairman Christopher Cox decided to come out of hiding. Chairman Cox was appointed by President Bush a few years ago when "business interests" expressed dissatisfaction with his predecessor, William Donaldson. Although "business interests" have been pleased with his willingness to look the other way, Cox has been the subject of public controversy since his appointment, and gathered headlines last year when he took steps to protect corporate interests in the Tenet Healthcare fraud.

Last week, Cox announced restrictions that will be put in place on "short sales" of the stock in 19 of the largest financial services companies. Without getting into the details, a short sale allows the sale of a stock one doesn't own, and a profit if the price of the stock falls. As it turns out, this can result in a very big profit for short sellers.

Up to this point, the SEC has done little to enforce existing regulations (Regulation SHO), and last year eliminated the little-known "uptick rule," included in the Securities Exchange Act of 1934. The "uptick rule" was put in place a few years after the Crash of 1929, and was intended to prevent fear from creating a stampede of selling and another stock market crash.

The rule was eliminated by the SEC, effective July 6, 2007, which raises an interesting question: why would the SEC eliminate a rule that was put in place more than 70 years ago to prevent another market crash? The "uptick rule" doesn't restrict the sale of a stock an investor owns. It only restricts the sale of a stock one borrows ("short sales") or fabricates ("naked short sales"). So why would the SEC eliminate this restriction?

Maybe it was the average "Mom and Pop" investor who put pressure on the SEC, but I doubt it. Or perhaps it was the typical 401K account holder who demanded a change in the rule, but 401K plans almost never include funds that sell stocks short. Folks with IRA's insisting that the rule be eliminated? Nope. You can't short stocks in an IRA.

The answer says a lot about how the Bush administration views the role of government, and special interests. The largely unregulated hedge funds that specialize in short selling wanted the "uptick rule" eliminated, and so it was. Hedge funds have traditionally been limited to wealthy investors ($1 million or more in net worth), so the average American doesn't qualify.

So the SEC made the decision to give wealthy hedge fund investors a little extra bonus last year. And billions were made driving down the price of financial stocks, making it difficult for the banks to bring in new capital to deal with the housing crisis, and ultimately putting the economy as a whole at risk.

This may seem like a minor detail and it didn't "cause" the mess we're in, but it says a lot about the current administration's attitude toward regulation, and whose interests they really care about (hint: not yours). You may not think it's especially important, but you'll feel the impact when you see your next IRA or 401K statement.

And you'll also get to help pay for the taxpayer bailout of Fannie and Freddie, if Hank Paulson gets his way.

Mental Recession

There's no hiding from the impact of the falling value of the U.S. Dollar, which is likely to get worse before it gets better. Not surprisingly, most of us are more focused on day-to-day concerns, including sticker shock when we fill up the gas tank or buy a gallon of milk.

There's a growing awareness that the economy is in trouble, and guidance from political leaders ranges from denial to misdirection.

It's encouraging that even presidential candidate John McCain has progressed from his comment last December ("economics is not something I've understood as well as I should...") to at least publicly expressing concern about the impact of the economy on Americans.

It didn't help that McCain economic advisor and former senator Phil Gramm (R-Tex.) described the state of our economy as "mental recession" last week, and went on to complain that we've "become a nation of whiners." Needless to say, McCain scrambled to distance himself from Gramm's suggestion that this is just a figment of our imagination, which was difficult, since Gramm is McCain's national campaign co-chairman.

Gramm's credibility was already in question, since he co-sponsored the bill that deregulated the commodities markets (Commodity Futures Modernization Act of 2000), and included the so-called "Enron loophole." The debate rages on, as Congress tries to pin down the extent to which speculators are responsible for the high price of oil.

There's another major contributor; the falling value of the U.S. dollar, now at its lowest level since the United States abandoned the gold standard in 1971. After strengthening during the Clinton era, the U.S. Dollar Index has been on a steady decline and lost nearly half its value since 2001:

Is it really a surprise when the price of products traded in international markets doubles when the value of our currency has been cut in half?

This isn't just about oil, or even the real state bubble. It's about a soaring national debt, the balance of trade deficit, rising inflation, and a weak economy. It's also about the failed Bush economic policies (including the Bush tax cuts), which McCain has yet to reject.

And it's not a figment of our imagination.