Nocera on Solyndra

I get Joe Nocera’s point in his latest column that there is less scandal in the Solyndra loan affair than meets the eye, but I’m still stuck on this paragraph here, which seems key:

But if we could just stop playing gotcha for a second, we might realize that federal loan programs — especially loans for innovative energy technologies — virtually require the government to take risks the private sector won’t take. Indeed, risk-taking is what these programs are all about. Sometimes, the risks pay off. Other times, they don’t.

What does this mean? It seems to imply that federal loan programs exist to take risks that the private sector won’t, which is superficially plausible, but troubling if taken very far down that road. There are, after all, good reasons why the private sector won’t take certain commercialization risks, and it’s not obvious that the Federal government is better equipped to do so. The argument changes in basic research, of course.

Related posts:

  1. Fun with Schwarzenegger Graphs
  2. Richard Koo: It’s the Balance Sheet, Stupid
  3. Does Obama Administration Have Less Business Experience?
  4. The HGP, or How Government Can Promote Social Bubbles for Fun and Profit
  5. Dan Nocera on Personalized Energy

Comments

  1. Lord says:

    It changes depending on whether private investment is highly risk adverse or highly risk seeking. Government should operate countercyclically to it. With negative real interest rates out many years, government should be willing to take on many risks.

    • MikeEE says:

      Why is the government supposed to encourage risky business ventures? I think you are all thinking about the technology and that the government should promote risky technologies that are deemed important. That is NOT what all are saying.

      If it were just about boosting solar power generation I think we could all accept that, but this looks like a payback to friends and donors. I'll need to see more before I think that someone shouldn't 'go to jail'!

  2. Matt P. says:

    It seems to me that from a policy perspective the major issue here is that the money spend was sold to the public as a way to create jobs. Betting on speculative industries LONG after it is clear to everyone else and the prior administration that it is a sucker's bet is indefensible.

    • Don't be silly, Matt.

      Technology in the sector is growing up fast. This is not your father's solar. In fact, solar panel costs have dropped nearly 400% since the last 5 years. It's a worthy investment for the future.

      First Solar (FSLR) is currently at .12 per kwh compared to $.10 kwh coal. We were nowhere near that a few decades ago when Ronald Reagan took down the solar panels at the white house.

      • Matt P. says:

        You are the silly one my friend. historrysquared and allmaine have it right below. You speak in generalities rather than facts related to THIS case. The loans were made AFTER it was apparent to virtually everyone (including the prior administration) that this company was doomed. NOT the technology as a sector but THIS company. Nocera's column is just a general opinion piece that hardly touches on the real facts here.

  3. GeorgeNYC says:

    I guess it just comes down to whether you beleive that the commercial market is always right. If it is not then here is no reason for any government intervention into anything…ever.

    So. No internet which was a government program initially. (DARPANet) Probably no cheap phone calls/cell service because the governmnet actually broken up Ma Bell (which was a monopoly. although argubly there was also deregulation). Do you remember thoe bakelite phones? They were indestructible because the phone company rented them to you.

    Not sure about other things either like jet engines/air travel since I think most of the progress on that came from government programs as well. (i.e. WWII/Boeing/McDonnel Douglas all on government contracts).

    Oh. No satellites/GPS/ anything involving space. Remember the space program? Grnated there is NOW a commerical spae program.

    I guess the "market" would have eventually gotten around to all of that.

    Or you can just comnsider that "basic" basic research.

    But for every one of those things that worked there were probably lots that failed. Some spectaulary. That is "risk."

    But we now live in Bernanke-land where there is not longer any "risk" anywhere as long as you purchased a "bond" from or own stock in a bank.

    • That is true, many of the technology research and development started within the government. They do the research and develop the technologies, then fund the entrepreneurs to go out and fully develop the technologies for the marketplace. It makes great sense to me, because not all great minds/engineers want to be government employees.

      Solyndra represents only 3% of the loan guarantee amount to the solar sector. There's still over 90% of the money out there, that will make a difference a couple years down the line. First Solar (FSLR) is very close to reach grid parity. When it gets there, it changes everything. Jobs will be created, money will be made, the government gets a return on their investment and more in tax money.

      We're already so behind, after Reagan took down those panels, in alternative energy technologies. It's silly to let the Chinese beat us.

    • Mike s says:

      Pretty much every one of those government investments you mention were originally for military purposes that were later commercialized.

      Further, the problem with Solyndra is that there was a vetting process in place to ensure some base likelihood of success, and it was circumvented.

  4. robfrank says:

    Seems like you're doing the slippery slope argument. Just about every government action is "troubling if taken very far down that road." Heck, a lot of private action is, too, come to think of it.

    cheers.

  5. The argument for pro government spending is the "multiplier effect." If you look at the first stimulus program, Christina Romer and Jared Bernstein projected a 56% return on investment on the $800 billion, saying unemployment would be capped at 8% if passes. Warren Buffet's long term return is 30%+ in comparison and unemployment went to 10%, we are left with "investments" like Solyndra that was a -100% return, and nothing but a pile of debt to monetize.

    The claim is the government makes investments the private sector would not. This is true, but why. The one side argues because they are too long term for the private sector. Yet, we see investors allocating capital to many low probability long term investments like biotechnology, which takes roughly 10 years, $900 million, and has a sliver of a shot of having a positive ROI. In reality, the government make investments the private sector would not because they do not make economic sense and has nothing but a track record of waste and fraud.

    There are too many moral hazards, conflicts of interest, and lack of expertise for government officials to allocate capital well. Two thirds of congress are lawyers, not scientists, not entrepreneurs, not venture capitalists. They need money and votes to get elected, so are prone to be "influenced" by those that purchase access, such as the Solyndra connection. Big government spending breeds corruption that undermines a country's faith in government. It brings out the big donors, big donations, and big lobbying dollars resulting in regulatory capture. Expecting something different is expecting the sun to rise differently.

  6. AlMaine says:

    I think you all are missing some major points about Solyndra. First, during a refinancing, the government agreed to subordinate their claims to those of private investors. Second, who were those private investors? It appears that they were major political contributors.
    Second, if the government is going to make these investments, they should be based on a solid and thorough economic analysis. As I understand it, the due diligence was rushed so that it could get done for a Vice Presidential phot op. If true, not a good idea.
    Third, I watched pieces of the congressional hearings on Solyndra. No one in the Dept. of Energy is willing to take responsibility for this approval or be held accountable.

  7. James Cameron says:

    Further, the problem with Solyndra is that there was a vetting process in place to ensure some base likelihood of success, and it was circumvented.

    This is the key point. Whether the financing is private or public, there's a vetting process that needs to be followed, and it wasn't in this case. Nocera should read his own paper:

    In Rush to Assist a Solar Company, U.S. Missed Signs

    "But industry analysts and government auditors fault the Obama administration for failing to properly evaluate the business proposals or take note of troubling signs already evident in the solar energy marketplace"
    http://www.nytimes.com/2011/09/23/us/politics/in-

  8. GeorgeNYC says:

    Sounds like second-guessing. Anytime anything fails hindsight is 20/20. Was someone taking personal profit from it that was inappropriate? I know lots of business decisions that are made every day without following the "process." That does not automatically mean that people get fired. I guess another question would be whether there was sufficient staff available (because of budget concerns) to vet these programs.

    I agree that things should be made on a "solid and thorough economic analysis." But have you ever actually been involved in decisions like this? If so I think that you would probably realize that any decision that fails can usually, in hindsight, be found to have been someone's "fault."

    I mean rally, the "spin" is that the FBI investigation is part of the coverup? Talk about "damned if you do…." I mean everyone would be screaming for "criminal" investigations. However when you give it to them it is now a way to somehow "hide" the investigation?

    That's the problem with Obama is that he does not engage in the Republican "Big Lies" i.e. Saddam Hussein was responsible for 9/11. I mean really. Birth Certificates. A bad investment in a 2 trillion budget. Whoa. We just need a good blow job scandal. Maybe this one will be even more ridiculous. Maybe the Republicans can create a scandal about his sex life. I am sure there is some obscure law from 1805 that forbids sex in the White House that Obama is violating with his own wife! Its just going to be death by a thousand cuts.

  9. Some companies are better at jumping through hoops to get government loans than others. A sector analysis, (especially of directly competing companies) might level the playing field and reduce the risk of catastrophic loss. Why not diversify those high risk "investments"?

  10. Andy says:

    Solyndra was mainly a commodity play. They designed non-silicon panels because of the high price of silicon. When silicon prices fell, there was no way out. Apparently DOE thought the business plan was weak even when silicon prices were higher. A given number of photons will shift a greater number of electrons in silicon than in the semiconductors that Solyndra was using, so it is debateable whether or not they were providing a technological improvement.

    There are no “innovative technologies that the Chinese can’t replicate” (Nocera) on the horizon for solar. Aside from manufacturing processes, there have been no significant innovations in the past 150 years.

Trackbacks

  1. [...] In the absence of U.S. investment, the future of the industry will only be where it's been for the past few years: in the hands of an aggressive China. Still, Nocera's argument gives others pause. If the private sector's not willing to invest in Solyndra, wonders blogger Paul Kedrosky, shouldn't that tell us something? [...]