On September 18, the Food and Drug Administration (FDA) issued a press release on a document regulating the use of genetically modified (GM) animals and products in the United States1. This document is open for public comment until November 18 and can be read here. In it, it states that GM animal developers are required to prove such animals are safe to the environment and for human consumption, as in the case of milk, cheese or meat2. Moreover, they must prove that the DNA change that has occurred in the animal as well as any products or repercussions from such a change is safe for the animal itself and the human population. Since this is a relatively new area with unknown implications, and the animals are changed on a genetic level, the FDA is proposing referring to these animals as “animal drugs.” According to Randall Lutter, the FDA’s deputy commissioner for policy, “the technology has evolved to a point where commercialization of these animals is no longer over the horizon3.”
What exactly is a GM animal, and what possible contributions could it make to our society? Achieved in the 1980s, GM animals are similar in many respects to GM plants. They both carry laboratory introduced DNA, or a gene, that is supposed to provide some benefit to the plant or animal. For plants, the new gene could provide insect or pesticide resistance. For animals, a new gene could increase the rate of maturity or have increased levels of important nutrients3. Other animals, referred to as “biopharm animals,” could be used to produce medicines for human diseases. Other versions, labeled “xenotransplant animals,” could provide tissue and organs so similar to human material that the chance of rejection would be minimal4,5. Even more categories of GM animals exist; however, they have been refused entrance to the consumer market. Aside from the obvious safety issues, many are afraid of what ecological damage could be done if one of these GM animals escaped into the wild.
Environment and Health Concerns
In 2002, the U.S. National Academies’ National Research Council grew concerned that the accidental introduction of one of these creatures could upset the current environmental balance6. If these GM animals were able to survive better and reproduce more quickly, they could push out the non-GM versions. Some are concerned not only about the environment but also their health, especially since the FDA has refused to require foods made with GM animals to be labeled as such, the same way they have refused to label food from GM crops5.
So far, only one GM animal has been released into the public realm. Although animals intended for food have not been released, in 2003, the fish Zebra danio was5. This fish was not meant to be eaten but to be seen. These modified fish, called GloFish, were able to glow in the dark and were something interesting for aquatic hobbyists. Animals meant for food could be released, however, if found to be safe. This could be particularly welcome if it could alleviate food shortages occurring around the world. Considering that most of the world, however, looks at GM crops with disdain and even horror, it is unlikely that GM animals would be received any more warmly.
If GM animals can succeed at the level GM crops have, even with so many people’s misgivings, prospects are optimistic indeed. In 2001, Bt cotton, for example, was able to grow with 50% less pesticide, or 10,500 metric tons, because it simply didn’t need it. Bt cotton allowed for more yield as well, increasing it by 25% in South Africa and 5% to 10% in China. For China, this equated to a gain of $500 million per hectare and $750 million nationally. In 2005, Syngenta, an agricultural biotechnology giant which sells GM seed, generated $8.1 billion while Monsanto believes their profits will climb to $8.5 billion in the next four years.
As for animals, cows have recently been genetically manipulated to prevent infection from mad cow disease. Considering the fear, both abroad and recently at home, of meat contaminated with this, resistant GM cows might deserve serious consideration. Furthermore, since the global population is expected to reach nine billion by 2040, the gains provided by GM crops and animals may become a necessity to continue feeding, clothing and medicating the world. With the apparently large amount of money that is on the brink of being realized by such an endeavor, there are sure to be numerous companies who will try to cash in on the idea.
1 – FDA press release on GM Animals
2 – Draft Guidance of GM Animals
3 – Science, September 18, 2008, FDA Issues Guidelines for GE Animals
4 – FDA GE Animal Fact Sheet
5 – FDA Consumer Q&A
6 – Science, August 23, 2002, Environmental Impact Seen as Biggest Risk
If you watch the news at all these days (and a case could definitely be made for avoiding this habit), then you already know that the United States imports way more cheap stuff from China than it sends over there for sale to the Chinese people. That big difference between the huge amount we import and the tiny amount we export is called the trade deficit, and you’ve almost certainly been hearing for eight years now about how it keeps going up and how that isn’t such a great thing.
What you may not realize, however, is that the recent federal bailout of the mortgage giants Fannie Mae and Freddie Mac stems in part from the strange and delicate trade relationship the U.S. has forged with China; a relationship that consists of lots of imported Chinese goods that Americans buy up with money that is essentially loaned to the U.S. by, you guessed it, the Chinese.
The Chinese do not issue loans directly to the U.S. the way that a bank would issue a loan to an individual. What the Chinese government does instead is buy up U.S. debt, mostly in the form of mortgage-backed securities. The recent tax rebate stimulus package designed to get shoppers out and spending money again to shore up the flagging U.S. economy came largely from this kind of investment by the Chinese in the debt held by American financial institutions.
While it may seem circular and confusing to think of the Chinese actually loaning the U.S. the money to buy Chinese products, the fact is that right now the U.S. government is heavily dependent on this kind of Chinese investment just for the continuation of its day-to-day business. In other words, without Chinese money being poured into the U.S. in the form of securities purchases, our government would experience such a budgetary shortfall, it would have to shut down.
The linchpin in this arrangement, obviously, is U.S. housing values. If the value of the properties backing the mortgage debt purchased by the Chinese remains stable or increases steadily, everything continues to hum along normally (or at least normally on the surface of it). The Chinese have an asset they see as increasing in value (that is, American mortgage-backed debt securities), and the U.S. government has the money it needs for its day-to-day operations. The Chinese make money off of their exports to the U.S. and off of their investments in U.S. housing-backed debt, and U.S. citizens continue to consume the cheap Chinese goods we have grown accustomed to buying.
That’s the U.S. consumer economy in a nutshell, and if it sounds a bit Orwellian, bizarre, and unbalanced, that’s because it is. Nevertheless, that’s how we roll these days, or did, until the housing bubble burst and the values of the properties actually backing all this mortgage debt began to drop precipitously. At first it was only subprime debt that went bad, but that spread to what is known in the mortgage industry as Alt-A debt (which is a notch above subprime and once considered quite a safe risk).
Now even homeowners who are in no danger of defaulting on their mortgages are seeing dramatic drops in their property values due to a badly inflated housing market and the subsequent bursting of that bubble. And as if that isn’t all bad enough, the problem is rapidly spreading to other kinds of U.S. debt: credit cards, car loans, home equity lines, and small business lines of credit.
To put it in just a few words: the actual assets backing U.S. debt are now depreciating instead of appreciating in value, leaving the Chinese holding substantial investments in the U.S. that are looking less and less profitable. The Chinese have been friendly to the U.S. because they are making lots of money from the relationship. With the bursting of the housing bubble, not so much. They have been growing more and more nervous about this fact.
What does that have to do with Fannie and Freddie?
Fannie Mae and Freddie Mac back most of the mortgage debt in the United States, but because they have always had a quasi-governmental status, they have not kept the kind of prudent reserves on hand that a private financial institution would be required to keep to mitigate such losses. As it became more and more clear over the course of the past year or so that Fannie and Freddie didn’t have adequate financial reserves to back the debt they held, the Federal Reserve and the Treasury Department began to talk about a bailout.
It’s a bad thing that housing values are plummeting in the U.S., but it has to happen because they were so wildly inflated during the boom years. That hard correction would be painful for the U.S. no matter what, and we are certainly feeling the pain already in the form of a major economic turndown that looks like it will last at least through the better part of 2009. But what would be even more catastrophic than the pain we are already feeling in our collective national pocketbook would be a decision by the Chinese to pull back on their investment in us. Such a move would literally throw us into a financial meltdown that would make the Depression era look pretty cheerful by comparison.
So, while it may or may not be true that Fannie and Freddie “are too big to be allowed to fail,” what is unquestionably true is that the U.S. government is too big to be allowed to fail, and fail it would without a steady influx of Chinese money.
All of this is more food for thought that I can possibly digest in a single sitting. If you pay close attention to the expressions on the faces of Bernanke and Paulson, you may well detect a hint of dyspepsia there, too.
The day is saved. Again. For now.
And yet once again, in the smoking (and indigestible) aftermath, a familiar and phrase rears its ugly head:
The present financial crisis – probably the worst in decades – is making the lawmakers in Washington, D.C., strongly consider the need to dust off a 1980’s era plan to help save the banking industry and stabilize the economy.
The idea of setting up a government corporation to deal with toxic assets has invoked strong interest among both Democrats and Republicans. Lawmakers are eager to find some solution to the crisis. Eleven banks have already failed this year, and there are questions surrounding the major financial institutions. On September 6, the federal government took over mortgage lending giants Fannie Mae and Freddie Mac as they teetered near collapse. Lehman Brothers has filed for bankruptcy. Merrill Lynch & Co agreed to sell itself to Bank of America. And the government has just bailed out American International Group, Inc., a financial behemoth.
The bailout of AIG, one of the world’s biggest insurers, cost the government $85 billion. Doubts remain whether the bailout will effectively help stem the ripple effect that failing banks and financial institutions are having on the economy. AIG’s cash squeeze is driven in large by losses in a unit separate from its traditional insurance business – the financial products unit, which sold credit default swap contracts designed to protect investors against default in an array of assets including subprime mortgages.
The Treasury Department is planning to sell bonds for the Federal Reserve in an effort to help it deal with the unprecedented borrowing needs resulting from the present financial crisis. And lawmakers are now appearing open to the idea of creating a government entity akin to the Resolution Trust Corporation (RTC). The RTC was formed amid the savings and loan crisis in the 1980’s. The RTC resolved and liquidated the assets of 747 thrifts with total assets of $394 billion.
What is needed is an institution or a mechanism of a supertrustee to handle incredibly large financial institutions which may be allowed to fail and how those assets get managed and ensure they are handled in an expeditious manner. The absence of such an institution or mechanism could in the future result in one failure after another. The failures will keep blossoming. Many lawmakers are calling the creation of such a mechanism a legitimate idea that merits consideration.
The creation of a new federal agency would only put taxpayers at risk for billions of dollars in bad debts. The parallels with the 1980’s are inexact. The mission of the RTC was to dispose of the assets as quickly as possible for maximum value and reduce taxpayer exposure. Unlike now, the government had no choice but to acquire the assets from savings associations because they were backed by federal deposit insurance. The mortgages, which are at the heart of the present crisis, are not backed by federally insured deposits.