In this post, I consider some major issues contributing to our current financial problems, before making a financial forecast for 2009. These are

1. Why so many asset classes are so highly correlated in times of distress. This chart gives my interpretation of part of the problem.

3. Where we are now, and the role reduced resources (including peak oil) are likely to play as we go forward.

4. My forecast for 2009.

Back in May 2008, I wrote a post on the US Electric Grid. With the Obama administration taking over shortly, I expect there will be more discussion about upgrading the US electric grid, so below the fold is a re-post of the earlier essay.

One obstacle to upgrading the grid not discussed in my earlier post is the issue of the differing costs of electricity around the country, depending on the fuel used to produce the electricity (natural gas tends to produce high-cost electricity; coal and nuclear produce lower cost electricity). As the grid currently operates, the limitations of the grid tend to discourage huge long-distance redistribution of electric power. If the impact of a new electric grid back-bone is to start evening-out electric rates across the country, customers currently in low-cost areas will tend to oppose the change, because their rates may be higher. This could create a significant obstacle to passing legislation to upgrade the grid.

Nate will be a guest on Jason Bradford's Reality Report radio show today, discussing, among other things, the natural gas cliff and the current credit situation. The Reality Report will be on KZYX&Z between 12:00 noon and 1:00 pm Eastern Standard time today. You can listen live, by using one of the links on this page.

My earlier wind diaries can all be found here: Wind power series

Banks are engaged in a massive deleveraging exercise right now. One part of that has been much described and commented upon: the elimination of bad assets, either by taking the losses or by dumping them on the tax payer. The other part of the process is much more devious, as it means choking off new activity, even when sound, to avoid any new build up of assets. Debts that mature and are paid help shrink the balance sheet; giving new loans goes against that process and is thus avoided as much as possible by banks right now.

New lending activity is therefore much more scrutinized from a risk perspective, sees its conditions made much less favorable than they used to be, and is especially frowned upon for long term commitments, as long term liquidity is scarce and expensive.

In my case, working in a bank that suffers from a huge gap between its predominantly long term assets, and its short term liabilities, was basically bankrupt earlier this autumn, had to be bailed out via nationalisation and has not yet announced its forthcoming strategy (ie I still don't know yet if my ativity will be a "core business" or not), funding has been especially restricted.

The wind sector requires long term funding in order to spread out the initial investment over a long enough period (so that the levelized cost per MWh is low enough) and it was a massive user of debt finance to get investments done. This means that it is an industry particularly vulnerable to the credit crunch. And indeed, expectations are that the fourth quarter will show a severe drop in new activity. Construction will still be at a record high, as projects which got their financing in the past year and a half get built, but new funding is drying up and next year is thus likely see a significant drop in actual building activity as those investors that relied on debt finance have more difficuly finding it and have to delay their plans.

In this context, I must admit that I'm especially pleased to be able to announce that we closed the financing of a new wind project, with a $60 million loan to build, over the next 12 months, a 30MW wind farm in the Caribean island of Aruba (part of the Kingdom of the Netherlands).