How Did We Get Into This Mess?

01/19/2009 05:12 am ET | Updated May 25, 2011

A close examination of our current financial morass shows that bad policy (or a lack of policy) on energy efficiency accounts for a surprisingly large part of the problem, and remedying this failure can deliver a large part of the solution.

The most direct cause of the economic breakdown is mortgage defaults. This problem is linked to energy policy in two ways. First, the mortgages that seem to have the most problems are those located in neighborhoods that require lots of auto use. Cars account for about 18 percent of all consumer expenditures -- almost as much as mortgage loan payments -- and these costs can increase if gas or insurance prices rise.

Second, much of the default problem is a consequence of adjustable rate mortgages whose low initial interest rates rose during the last several years. They rose so fast in large part as a result of increases in short term interest rates. Interest rates increased in response to inflationary pressures, which in turn were largely caused by energy prices. We can see how the last several months' decline in energy prices due to recession-related drops in demand have virtually solved the inflation problem. Energy efficiency could have done the same thing.

One of the problems of America's current problem that influential economists like Paul Krugman and others fail to consider is that our country's savings rate has been hovering near zero for several years. It is one thing to call for consumers and/or the government to spend money to stimulate the economy when there's money to spend. It is another thing entirely to spend money that isn't there.

How can we increase demand without drowning in debt? The best answer is to spend the money on investments that pay us back in 2 or 3 or 5 years. Energy efficiency investments in buildings and industry can do this. The opportunity is immense: there are over a hundred billion dollars of high-return investments in homes and commercial buildings and factories that can be leveraged by national or state energy policy. NRDC is sponsoring initiatives for retrofits of homes and commercial buildings that could be adopted and begun early in 2009.

Another answer is to spend some money now to avoid the need to spend much more later. A good example of that is the California High Speed Rail initiative, which was just approved by voters in November. By authorizing $10 billion in bonds, the state can leverage $30 billion in private and federal funding to construct a project that the High Speed Rail Authority's Business Plan projects will save $100 billion in government spending on freeways and airports while also providing 450,000 permanent jobs.

I will address these issues in more depth on my blog and in my upcoming book Invisible Energy. They are discussed in a broader way in "Saving Energy Growing Jobs."

This post originally appeared on NRDC's Switchboard blog.