Thursday, October 27, 2011

Climate change and the financial crisis: what can we learn?


In April 2008 I attended a workshop in Berkeley on climate change. Over dinner I had a discussion with a German climate scientist about the magnitude of the problem. I ventured the idea that it would pale in comparison with a (then hypothetical) financial crisis, looking at the the short to medium term effects. He was vehemently opposed to this idea. In the meantime climate change has receded from the headlines and the financial crisis has taken prime attention. Both issues have several things in  common, but there are stark contrasts also.
Let me start with the commonalities. Both the financial crisis and climate change are global and require some kind of global intervention, or at least an intervention by resourceful actors who are in a position to make a difference.
Both could jeopardize the well-being of societies in different parts of the world. Both require enormous amounts of money for their management. Both are wicked problems in the sense that we do not have a solution at hand that will solve the uderlying problem once and for all. But I am jumping ahead already.
What are the differences then?

No one talks about the financial crisis in terms that evoke the end of the planet. 'Saving the economy' and 'saving the planet' are differently positioned in the discourse (although Gordon Brown once famously slipped into saying that he not only saved the banks but also the world -- perhaps not too absurd an idea as it was made out to be, see the various Youtube videos). 
But the end of payments in a global economy based on payments would lead to very, very serious problems of civil unrest, hoarding, looting, violence,  etc. Politicians instinctively want to avoid this kind of scare mongering. They are probably scared themselves. Rising sea levels, changed weather patterns, more migration and other climate impacts have been cited as harbingers of global catastrophe, and politicians have been eager to espouse the threats in this case (this was the point of contention with my interlocutor if my memory serves me well).
Climate scientists (with the help of some politicians) have put climate change on the agenda. They have also framed it in a specific way and identified solutions which are 'science based'.  The financial crisis is remarkable for its absence of scientific expertise which is used to justify specific measures, be they 'parachutes', 'firewalls', 'bazookas' or what not (btw: who coins these metaphors?). Still, there are experts about the global economy and financial markets who advise politicians and pronounce in the media, but nothing comparable to what we see in climate policy. I am not saying this is a good or a bad sign. What I want to emphasize is the fact that politicians try to solve a very serious problem through bargaining and arguing, but largely without using science as a tool to stop debate. No one seems to know what the 'rational course of action' would be. Everyone probably wants the ‘least worst’ of alternative policies, one that incurs the lowest risk. But there is no agreement in economics, for example, about the virtues of trying to save the Euro and propping up credibility of the Eurozone compared to the alternative of letting the Euro go.
The political debate about the future of the Euro that we witness currently is pretty opaque as far as the financial instruments are concerned. Very few people (including myself, but probably also many politicians) understand what exactly goes on within these financial markets and how the proposed solutions will work. Of course there are experts actively seeking to influence decision makers, largely behind closed doors. Bankers are the most active and influential in this. They act out of self interest and our only hope is that the interconnectedness of the global financial markets should prevent them from acting in a short-term, self-interested way. But still this remains a hope.
In comparison, with climate change we have very detailed information available, albeit partly contested. No matter how technical the science is, many citizens can see a link between the working of the economy and the impact on the climate. This is the result of 20 years of public discourse on climate change. Also people who are highly critical of this discourse realize that we are in fact discussing the risks of climate change. However, citizens have not been consulted when it comes to solutions. Neither have they in the case of the financial crisis—but here we did not have a period of public discussion.
The former rogue trader Nick Leeson told BBC Newsnight on Nov 26 (starts at ca 20mins) that the ‘general public needs to empower itself and stop being passive recipients of what the bankers tell them. They need to be part of the equation.’ It is a sign of the times that it takes an inside informant to tell us about the essential weakness of regulations of financial institutions and the leeway any expert trader enjoys. There is no one to control him or her.
So what follows from this comparison? In my view, the limits of science have been highlighted in both cases as has the need for pragmatic, informed decision making. The inclusion of citizens in the process is lacking in both cases. Politicians still think only they can decide on issues of the highest importance. If there is one thing we can learn from the climate change debate it is this: because of the long term impacts we as societies need to be prepared for crises and disruptions. We therefore need to be discursively prepared, without scientists or politicians patronizing us. We need to generate public communication about these issues and keep them going. There is no magic wand to 'solve' either of these problems. We will need to keep talking, researching and doing things about them. By the time the current financial crisis is over, the next will be in the making.

37 comments:

Stan said...

http://www.scientificamerican.com/article.cfm?id=finance-why-economic-models-are-always-wrong

Both rely on computer models that are badly flawed yet championed by hubristic 'experts'.

Reiner Grundmann said...

Stan
I agree that models are part of the problem, but only a part.

My point was to raise the issue that in climate change debates we have a dominance of science and in financial crisis debates we see a dominance of politicians and the affected industry. In both cases those affected most by the outcomes are being kept out.

Anteros said...

I agree that both issues concern those who are excluded from the decision-making process. However I think you create a false equivalence - the financial situation is obviously a crisis, whereas many people (including myself) dispute that 'climate change' is any such thing. Thus I am very happy for politicians and financial experts to address the financial crisis but desire a vastly more open debate about climate. Until there is a better case made for there being a genuine problem, I obviously don't support any pointless efforts to DO anything about it.
I don't wish for surgeons to begin amputation while my limbs are demonstrably healthy!

Werner Krauss said...

what we need is red ink. This is the philosopher Slavoj Žižek's comment:
http://www.youtube.com/watch?v=oEUZNfOtPlE&feature=related

Reiner Grundmann said...

Werner
not sure what you mean by red ink.
Do you think Žižek's performance as priest is convincing? There is a mismatch between the obvious irony and the all-too-serious content (and the admiration of the praying for their guru).

BTW, he has condensed his sermon in a Guardian comment. He says the protesters do not understand that the problem is not greed, but the system as such. As a good old Marxist he shows how the world appears upside down and applies the critique. This needed to be said and is refreshing. But he ends his comment pretty clueless:

"In the aftermath of the Wall Street protests, we should definitely mobilise people to make such demands – however, it is no less important to simultaneously remain subtracted from the pragmatic field of negotiations and "realist" proposals.
What one should always bear in mind is that any debate here and now necessarily remains a debate on enemy's turf; time is needed to deploy the new content. All we say now can be taken from us – everything except our silence. This silence, this rejection of dialogue, of all forms of clinching, is our "terror", ominous and threatening as it should be."

This is laughable: the terror of the real crisis is beyond any ominous secret plans. If the movement had such plans, these would be discussed somewhere. Žižek is in a time warp but communication media has moved on since Marx.

Reiner Grundmann said...

Anteros
OK there is a difference between problem and crisis and I guess this was my starting point in the conversation with the climate scientist. But you seem to go further saying that climate change is not a problem or do I misinterpret you?

And why do you think it is OK for politicians and experts to deal with the financial crisis without public involvement? What skills do they bring to the issue? Cluelessness, self-interest and pragmatism?

Your own opinion in matters related to climate has been enabled because we do have a public debate (albeit science dominated).

Werner Krauss said...

Reiner, your question what I mean by "red ink" leaves me confused. Zizek explains the metaphor at length in his speech; it is the very center-piece of it. So why ask?

Reiner Grundmann said...

Werner
I try again: why do you think Zizek's sermon is a good comment to my blogpost? Or did you lose your own speech, overwhelmed by the great master?

Werner Krauss said...

Reiner,
definitively lost my own language. The great master says it all! Repeat: The great master says it all!

Reiner Grundmann said...

Werner,
funny indeed. Everyone is entitled to having a good laugh...

But I wonder if your rejection of dialogue here on Klimazwiebel is also indebted to the great master's script: "What one should always bear in mind is that any debate here and now necessarily remains a debate on enemy's turf"

Werner Krauss said...

This is possible, indeed.

stan said...

A couple of points to remember -- each of the financial crises is only a crisis because of actions taken by government in the first place. The term financial crisis has been used to describe the repercussions on Wall Street which threatened banks elsewhere (e.g. Europe). It has also been used to describe the problems the European Union is having with a number of member states whose fiscal deficits have led to debt loads that can't be managed. Both problems originated with govt.

Voters chose the governments which created the problems. I'm not sure how one can say they aren't involved in the problems or solution. In the US, for example, the 2010 elections were a referendum on Obama's policies (some of which were in response to the crisis) and the voters soundly rejected his policies.

In climate, the voters in the US have made their opposition to radical policies quite clear. Algore and friends put together a massive campaign spending hundreds of millions of dollars, hiring large numbers of staffers around the country and enlisting massive spending support from the largest non-profits in the world (WWF, Greenpeace, Sierra Club et al). Even with the overwhelming cheerleading support of the major media, Hollywood, academia, and many major corporations, Congress had no interest in going against the voters wishers. The voters were heard.

Reiner Grundmann said...

Stan
unfortunately it is not as easy as you make it out to be. There is no single culprit in a complex world based on financial transactions. Yes, governments are to blame because of a failure to regulate. Banks are to blame for their stubborn resistance to regulation. Private investors are to blame (including me, and perhaps you as well) for wanting a good return on their pension funds. We all keep the wheels of finance in motion. But imagine private investors (collectively) withdrawing their money: we would see a run on the banks jeopardizing the liquidity of the economy.

These risks are systemic and can only be managed more or less well.

Stan said...

Reiner,

If MF Global loses it all, we don't have a crisis. But if govt has guaranteed its deposits, we now have a much bigger problem that could lead to a crisis. The operative word is crisis.

Govt laws, regs and guarantees are what turned stupidity and greed from a private problem in the financial markets for the stupid and greedy into a public problem which affected lots of others.


The problem wasn't a failure to regulate. There were lots of regulations and lots of regulators. That they failed to do the job is more an indictment of the foolishness with which they were employed (both regs and people) and the inevitable regulatory capture that dominates elected bodies. Poltical corruption is inevitable. Anyone who thinks that a perfect regulatory structure can be put in place to micromanage the economy without those affected being able to lobby politicians for relief is someone who has never lived in the real world.

Far better to keep private failure private. Privatizing gain while deflecting losses onto the public sector is a lunacy we simply can't afford anymore. The moral hazard has reached level 10.

Can you give me a sane reason why financial institutions have to be allowed to cause widespread problems for society? Keep them small and private so that the market can absorb the inevitable bankruptcies.

Reiner Grundmann said...

Stan
the answer to your question is: interconnectedness. If we had small, loosely coupled (local or regional) economies, your utopia would work. But we don't, and this is why private failure can lead to problems for society on a large scale.
Frankly I do not see how you still can believe that markets would be the solution after a period of de-regulated markets has brought this mess upon us.

Stan said...

"a period of de-regulated markets has brought this mess upon us"

When was that?! Do you seriously think that the cause of the mess was deregulation? The subprime garbage was created directly at the command of the US government. The entities that bought the A-rated junk did so because the govt required them to buy only A rated stuff. The stuff was A rated by rating agencies that the govt required be used. The banks were regulated by a host of govt entities. The flawed computer models were used because those regulators required them to be used in determining the level of risk. Perps like Fannie Mae and Freddy Mac were corrupt, crime-ridden political cash cows propped up by corrupt politicians in Congress.

Government was enmeshed in the mess over its neck. Add the deposit insurance guarantees and the role of the Federal Reserve and Treasury and the moral harard created by previous govt bailouts -- govt fingerprints are all over the crime scene and the murder weapons.

Stan said...

http://www.usatoday.com/money/books/reviews/2011-06-17-reckless-endangerment-mortgage-crisis_n.htm

Zajko said...

I think this is a really insightful comparison, reflecting both the differing position of institutionalized expert knowledge in these fields (and the persistent failures of economics), as well as contrasting the careless and careful use of fear-inducing rhetoric.

I find especially interesting the reaction to the Greek "bombshell" announcement that the government will actually seek the public's approval for austerity measures. As if the Greek public has forfeited their right to any say, or such decisions should be left to the leaders and experts who have toiled so hard to craft the latest deal. Canada's central banker is apparently admired among the higher-ups in a world currently lacking good examples, but has been rather outspoken lately, from seeing the Occupy movement as a healthy sign of democratic participation, and now arguing that it is "imperative there is widespread democratic support for those [Greek] measures".
Meanwhile, democratic support is seen as an impediment by many seeking change on both issues. International economic policy is typically crafted behind closed doors, but international climate policy simply doesn't have much of a history, and public pressure has long been seen as a possible driver. With its failure, it is now possible to see the public largely as an impediment for climate policy (with no apparent alternative). The difference is that it seems currently difficult to even get climate on the table, whereas immediate economic interests demand that the economy be on the table - the question being, which table?

Reiner Grundmann said...

Stan, you quote me
"a period of de-regulated markets has brought this mess upon us"
and then ask:
"When was that?!"

This was October 27 1986, also called 'Big Bang', when the financial City of London was de-regulated by the Thatcher government. Last week there was the 25th anniversary
http://www.bbc.co.uk/news/business-15486300

As regards the US, you must not confuse the ownership structure of two financial institutions (Fanny Mae and Freddie Mac) with the financial system. With regard to the former, there are stories to be told about corruption and greed, no doubt about it. But would non-greedy, non-corrupt banks have prevented the crash? I doubt it. Fanny Mae had the political role to facilitate extend home ownership to lower income groups, a strategy employed across the political spectrum.

Regarding the de-regulation of the US financial system it was Alan Greenspan, chairman of the Federal Reserve bank from 1987-2006 who developed the policy of unregulated financial markets. He was so persuasive that Bill Clinton in his 2006 State of the Union address famously said 'the era of big government has ended'.

Wender said...

And why do you think it is OK for politicians and experts to deal with the financial crisis without public involvement? What skills do they bring to the issue? Cluelessness, self-interest and pragmatism?

And why do you think that you are able to diagnostic "cluelessness" when you admit yourself being "clueless"?
What skills does the public bring to the issue?
If anything, the public makes the mess even messier.
For what is the real cause of the crisis in Europe?
That most states have been taking "social measures" on credit.
To be fair, not all - Czechs, Slovaks, Poles, Finns etc have a public debt of 30% - so it is obviously possible to act responsibly and reasonably.

But who is the beneficiary of credit financed "social measures" and not only in Greece?
Right, the general public.
Why do you think that the Greeks yell and riot?
Well because they would like that their salaries, pensions, advantages, social security etc continue being paid (and preferrably increase) like they did during the past 30 years.
They don't give a fig that financing such measures with credit has one and only one outcome - bankrupcy of the whole state in a time that economy experts can estimate with a good accuracy.
They don't even understand the link between their personnal situation and the state debt!

They yell (and probably believe) that everything is the fault of the banks.
Banks are here playing the role of the witches in the middle ages-what you don't understand and is harmful simply must be the work of some incomprehensible dark forces.
That avoids asking hard questions about your own responsabilities and as a bonus provides a simple obvious solution.
Just burn the witches and the evil will disappear at once.

The "Occupy Wall Street" crowd is full in this trip. They believe in all powerful vicious dark forces lurking in the shadows and self-exonerate totally themselves of any responsibility in the real world situation. One cannot be more mystical and clueless.

Self-interest and delusions at its best.

Now how to solve this apparent contradiction between the cluelessness and selfishness of the angry crowd and the democracy where this same angry crowd decides about who and how will govern a country?
I strongly believe in the virtue of the pedagogy : "You get what you want and pay the consequences."
I think that the Argentians have learned the lesson of state bankrupcy and paid the price (-25% of purchasing power and loss of savings) so that they won't repeat the same mistake.
The East european countries have been taught the lesson of totalitarian communism so they won't repeat the mistake of egalitarian marxist inspired politics either.
Etc.

The Greeks (and some others) didn't learn their lessons yet. So I agree with the Greek referendum.
I predict that the result will be "No to Euro" equivalent to the irrationnal shout "Burn the witches".
The consequences are easy to predict too and any Greek could read them in newspapers if he decided to use his brain instead of his emotions.
Crash of their currency, hyperinflation, halving of purchasing power, implosion of the banking system (here they can cheer, the evil banks will be destroyed)and some more.
Normally if that doesn't teach a lesson, then they have a real problem for a VERY long time.

And finally I don't believe that there is any serious analogy between the climate and the finance crisis.
The former is a vague possibility of some not obviously harmful events (a warmer world is for most people a rather good thing) in a very far future while the latter is the reality of today and obviously extremely harmful.

eduardo said...

Reiner

there are further contrasts between economics and climate science regarding their interaction with policy makers. Inaction on climate issues is sometimes justifies by the huge uncertainties still unresolved -which really exist. However, Central Banks may embark on huge financial 'experiments' without knowing whether or not they will work and, if yes, which are the mechanisms through which they work. The sums involved do not seem to be small.

Reiner Grundmann said...

Wender
>>And why do you think that you are able to diagnostic "cluelessness" when you admit yourself being "clueless"?<<

It tells us that politicians and bankers have lost trust. This raises the question why they should be taking these decisions without public deliberation.

Your excited rant contains some valid points but is flawed in that it blames the whole thing on the 'stupid public' who 'need to learn their lessons'.

Reiner Grundmann said...

Eduardo
Not sure if I agree entirely. Uncertainty reigns in both cases. And uncertainty has not been used as an excuse for inaction in the financial crisis. The question is which actions to take.

There is another parallel between both cases in the loss of trust. Barclays CEO Bob Diamond has admitted as much in a comment made yesterday.
I do not remember 'climategate' scientists making similar noises. The need for regaining trust was made by 'advocates of reconciliation', also here on this blog. Of course, Diamond's comment is corporate spin - but at least he recognizes the problem publicly. Climategate scientists have blamed it on evil campaigns from the 'deniers'.

Wender said...

Reiner

It tells us that politicians and bankers have lost trust. This raises the question why they should be taking these decisions without public deliberation.

You are avoiding the hard questions too. I asked what makes YOU believe that YOU are able diagnostic cluelessness while being clueless.
It seems to me really the most important point in your rant (excited or not, I cannot know).
Because if you explain that, then it can be extrapolated to the whole clueless subset of the "public".
I didn't say that it solves anything but it allows to understand how some people can lack a critical spirit at such a scale.

This other trivial question you raise had been already answered in my post.
You could have understood it if you focused on the content instead of leashing out mindlessly and agressively for some strange reason (you can be sure that I am not an "excited" person, quite a contrary).
And the answer is that they KNOW that the general public is clueless. They can predict as well as I do what the result of a referendum would be.
They know that the crowd, especially the street crowd doesn't think and is governed by emotions and that's what its "deliberations" are often worth.
Now an economical or a scientific problem has never been solved by emotions.
Emotions mostly make the problems worse, not better.
Now be very sure that as long as we live in a democracy, there WILL BE a concrete result of their "deliberations".
The point I have been making is that we might all be very unhappy with the results.

Do you want to know why the clueless public (actually we are talking here just aabout fraction of the population) lost trust in banks and in a smaller measure in politicians?
Because they were the messengers of news that this part of public doesn't want to hear.
It doesn't want to hear that the debt mountain that may very well crush them is the result of 30 years of spending more than they could afford and that their reaction during those 30 years had been to stick their fingers in the ears and sing "Lalala, I hear nothing".
So what you call "loosing trust", I am calling "shoot the messenger".

That this doesn't solve anything should be obvious and the details why it doesn't solve anything were already given in my first post.

stan said...

You have apparently fallen hook, line and sinker for the narrative of people trying to absolve the govt for the enormous role it played in the crisis. If you really think that there was no regulation of the banks, financial system, or Wall Street, I have some beautiful tropical beachfront in Siberia you might like to buy.

Reiner Grundmann said...

Wender
I don't think it was controversial to say that pretty everyone is clueless in the present situation. The question is what follows from this diagnosis. You make a forceful assertion that the public should be kept out because they are stupid and emotional. This may be your private opinion but I cannot see an argument in your post.

Stan
I would appreciate if you could come back with an argument. You asked with apparent incredulity when the de-regulation of the financial markets happened and i gave you some evidence which you chose to ignore. Instead, you start accusing me falling for government propaganda. And what has Siberia to do with it?

stan said...

http://www.powerlineblog.com/archives/2011/11/what-caused-the-financial-crisis.php

Reiner Grundmann said...

Stan
putting up a link without engaging is not a convincing response, but anyhow: what this comment on the powerlineblog shows is that US government wanted to widen the access of poorer people to private houses and therefore to mortgages. It was a regulation that extended the free market in financial services. Are you now saying we should take away the lesson that:

a. governments should never intervene in such matters?

b. poorer people should not be allowed to get mortgages?

Don't you think a more nuanced account is needed, not the simple big government bashing posture.

stan said...

Reiner,

I've already engaged. I wrote: "The subprime garbage was created directly at the command of the US government. The entities that bought the A-rated junk did so because the govt required them to buy only A rated stuff. The stuff was A rated by rating agencies that the govt required be used. The banks were regulated by a host of govt entities. The flawed computer models were used because those regulators required them to be used in determining the level of risk. Perps like Fannie Mae and Freddy Mac were corrupt, crime-ridden political cash cows propped up by corrupt politicians in Congress."

Government was involved from A to Z. If you would like a more detailed account which backs all that up, read Gretchen Morgenson's book. She is a NY Times reporter (no right winger). I've already provided a link to a book review of it in comment on 11/2.

Fannie Mae and Freddy Mac don't represent the free market. I don't see how you can say they do. That's not even a credible assertion. And when the politicians running them were caught engaging in corrupt and criminal practices, they were protected from oversight by corrupt politicians in congress. How does that represent the free marktet?

Anonymous said...

Horst Köhler, President of Germany from 2004 to 2010, Member of the Trilateral Commission (the Trilateral Commission was created during a Bilderberg Meeting) called the world's financial market 2010 a "monster". I've heard there are "monsters" in climate science, too.

Within "our" systems Bilderbergers seem to be able to occupy "our" governments and media etc. (maybe there are some who try to create crisis and then the very same people offer "solutions" to these crisis). Are climate scientists as powerful (Well, the established media (mainly "churnalists") are seemingly with the True Believers of AGW.)?

namenlos

Reiner Grundmann said...

Stan
you are repeating yourself (even quoting yourself) without adding anything new, I hope you realise this. I have put some specific points to you which you chose to ignore. Let me try again: Do you really believe the US subprime mortgage crisis was a government conspiracy? Didn't it take banks to 'securitize' the bad debts?

Reiner Grundmann said...

Coming back to the introductory comment and the issue about differential use of alarmist scenarios, there is an interesting comment from Paul Mason, the BBC Newsnight editor.
He says that
"I was leaked some bank research and the sliding scale of banks that went bust was so frightening I decided it was impossible to report without causing panic."

http://www.guardian.co.uk/commentisfree/2011/nov/11/the-conversation-eurozone-crisis

(the whole piece is worth reading)

This puts the 'end-of-the-world-scenarios' in climate change into perspective. While it has been common to communicate climate scare stories (without really believing them?) it seems impossible to communicate real (perceived) threats. Or is this unfair?

Anonymous said...

Reiner, did Stan say "propaganda" or/and "conspiracy" here?

namenlos

Anonymous said...

silent/hidden "interconnectedness" of the elites?

namenlos

Reiner Grundmann said...

There is an interesting study covered in the New Scientist which shows how market competition leads to concentration and centralization of capital. The consequence is potentially the abolition of competition, ONE of the reasons why regulation will never vanish.

The study analyzed a database of 37 million companies and investors worldwide and then "pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power."

They found that a core of 1318 companies with interlocking ownerships. "Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network...
Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group."

Anonymous said...

Reiner, "regulation" by whom?

namenlos

Reiner Grundmann said...

Namenlos
Regulation is done by regulators, this can be voluntary or state agencies.