Spiegel Online International has an article German Solar Firms Eclipsed by Chinese Rivals detailing how German subsidies for wind and solar power are actually helping to destroy smaller to middle-sized German companies that had once been world leaders.  I am horrified by the German inability to use the most basic economic reasoning to foresee why those subsidies would be a catastrophe for them.  If even the Germans can get this so wrong, their example basically proves that Western-style energy subsidies cannot possibly work.

The business model of the smaller German companies, the mittelstand,  is to become dominant in one small field.  The Germans prior to their subsidies had achieved this goal in certain areas of solar and wind energy.  Reaching out to the Greens, the more conservative of the major German political parties then decided to change the rules of the game under which the smaller German firms had been achieving success to new rules where there was a much higher floor on guaranteed demand for solar and wind energy.

The completely predictable result is that the German government has subsidized the creation of larger Chinese competitors that are driving the smaller German firms out of business in what are supposedly leading technologies for the future.  Had the German government simply done nothing for a few more years the smaller German firms would have been able to maintain their business model and been able to develop an insurmountable lead as their brethren in other fields had achieved in prior eras.  The Germans can only count themselves as being fortunate their governments decades ago did not create a vastly higher demand floor on luxury automobiles back when that technology seemed the future.

I believe that Secretary of the Treasury Hank Paulson and Federal Reserve Board Chairman Ben Bernanke have endangered the United States’, and possibly the world’s, financial system by presenting an unreasonable bailout plan that may be unable to muster bipartisan support. I am appalled that they do not appear to have consulted with Nouriel Roubini to develop a plan that would have addressed all of the financial problems and would have been much more politically sellable to the American taxpayer who is being asked to fund an amount that will leave the country with no further financial resources.

Roubini’s plan addresses all problems of illiquidity and insolvency not just for Wall Street but for homeowners. The one detail that Roubini does not mention but that Bernanke should be well familiar with, because Bernanke has written and spoken about mortgages and the Great Depression , is that mortgages threatened with default must be restructured for a longer length, here perhaps 40 to 50 years.

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I believe that Secretary of the Treasury Hank Paulson and Federal Reserve Board Chairman Ben Bernanke have endangered the United States’, and possibly the world’s, financial system by presenting an unreasonable bailout plan that may be unable to muster bipartisan support. I am appalled that they do not appear to have consulted with Nouriel Roubini to develop a plan that would have addressed all of the financial problems and would have been much more politically sellable to the American taxpayer who is being asked to fund an amount that will leave the country with no further financial resources.

Roubini’s plan addresses all problems of illiquidity and insolvency not just for Wall Street but for homeowners. The one detail that Roubini does not mention but that Bernanke should be well familiar with, because Bernanke has written and spoken about mortgages and the Great Depression , is that mortgages threatened with default must be restructured for a longer length, here perhaps 40 to 50 years.

Read More →