Wednesday, January 12, 2011

From CASSE: The Financial Crisis is the Environmental Crisis

The Center for the Steady State Economy is a nice think tank for ecological economics, and has a great team of contributors, including Herman Daly himself, Brian Czech, Brent Blackwater, and a young scholar named Rob Dietz.  Here´s a selection from a recent piece at their blog: 

January 5, 2011

The Financial Crisis Is the Environmental Crisis

by Eric Zencey

In May of 2009, U.S. federal legislation created the Financial Crisis Inquiry Commission, charged with investigating the causes of the financial crisis that led to the largest economic downturn since the Great Depression. The Commission’s report is due in January. But don’t get your hopes up; they’re more than likely to get it wrong.
The Commission has held hearings with and gathered testimony from quite a few experts, all of them entrenched within the mainstream of neoclassical economic theory. The experts have named the usual suspects: cyclical swings between greed and fear; feedback effects that “disequilibrate” markets; cheap and “poorly documented” mortgage financing; bank accounting that kept some liabilities “off balance sheet;” the international sale of debt that guaranteed that a collapse in one market in one country would ripple out to affect the world; foreign demand for American debt, which created demand-pull for riskier and riskier American investments; and unworkable hedge funds that appeared to transform sure-to-fail loans into sure-to-pay investments.
It’s likely that all of these played a role. Fixes for most of them ought to be undertaken on their own merits. (Who could be in favor of “poorly documented mortgages” or “off-balance-sheet” investments?) But none of the testimony makes this point: the financial crisis is also the environmental crisis. We won’t solve the former until we start solving the latter.
Two facts about this crisis stand out: the world came to the brink of global economic collapse, and the world is and remains on the brink of ecosystem collapse. The economy is humanity’s primary instrument for interacting with its environment; this suggests that these two facts are somehow related. And yet none of the standard diagnoses come anywhere close to acknowledging that there might be a connection, let alone start to illuminate it. In the standard view, the financial crisis beset an economy that consists solely of humans acting within formalized systems of their own creation —systems that have no connection to a larger world.
And that’s why the standard view won’t succeed in fixing the problem. The spasm of debt repudiation with which the crisis began — the collapse of the sub-prime lending market — is what happens when an infinite-growth economy runs into the limits of a finite world.
That insight comes from the reference frame suggested by Frederick Soddy, as elaborated by Nicholas Georgescu-Roegen, Herman Daly, and others. Soddy offered a vision of economics as rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief in the economy as a perpetual motion machine, capable of generating infinite wealth....

read the rest at

      The author´s discussion later suggests a 100% reserve requirement as a preferred sustainable policy for banks.

      I think it´s an idea that makes sense to start with, though providing loans immediately depletes reserves as a natural function of the connection between deposit reserves and loans.  Apparently reserve levels have traditionally been around 10% or so, even for credit unions, allowing 90% of reserves to be loaned.   Based on my agreement with advocates for employee and local ownership like co-operative development services, my assessment is that the longstanding US regulatory policies like the Glass-Steagal Act since the 1930s New Deal with limits on interest rates and lending constraints for financial institutions are soundest.

see, for example: M. Waldman, Who Robbed America? A Citizen’s Guide to the Savings & Loan Scandal, New York, NY: Random House, 1990   
A. R. Sorkin, “Lehman Files for Bankruptcy, Merrill is Sold,”  The New York Times, Sept. 14, 2008;
W. Greider, “Establishment Disorder,” The Nation, Oct. 29, 2008; 
P. S. Goodman, “The Reckoning: Taking a Hard New Look at a Greenspan Legacy,” The New York Times, Oct. 8, 2008; 
F. Partnoy, “Danger in Wall St.´s Shadows,” The New York Times, May 15, 2009; 
D. Leonhardt, “Reconsideration: Washington’s Invisible Hand,” The New York Times, Sept. 26, 2008 

No comments:

Post a Comment