Monthly Archives: November 2011
[Here is my sustained attack on the currently available instruments which have been proposed to bring about sustainable growth. I didn't originally intend it to be so sustained, but due to a combination of the bias expounded in the preliminary note and "blogger's guilt," it has become so. The main criticisms that can be brought against it are that I intermingle rational arguments with empirical ones and Canadian politics with global politics. As well, my main source is fairly dated, but I'm nevertheless impressed with his ability to refute political programmes a priori.
Furthermore, it would seem that with this essay I am making my Leftist leanings explicit for the first time, but I'd like to think that the matter is not so cut-and-dried. I support whatever political and economic programs works, and environmentalism is one such issue where performativity is important above all else. I am not committing myself to a Leftist stance per se, but side with it here only because Conservatives (with the exception of Iain Murray and his book The Really Inconvenient Truths) have contented themselves thus far with sticking their heads in the sand. I find it quite intriguing to think of the kind of policy the Conservatives would develop if they decided to take environmental issues seriously.]
Discussion Question 3: Will a post-liberal state be required before we can reach sustainability? [In response to Wissenburg - Sustainability and the Limits of Liberalism]
Preliminary Note: After some consideration of this question, I have realized that it is contains an inherent incentive for agreeing with the existing (neo)liberal system. As I mention below, the real question is, of course: “Is there any method of reaching sustainability within a (neo)liberal framework, i.e. not calling for massive systemic change?” (‘Yes’ in the latter phrasing of the question would mean ‘No’ in its original phrasing.) The bias lies in the fact that in order to argue that a post-liberal state isn’t needed, one need only show one method capable of working within a (neo)liberal framework. If one argues otherwise, they must show that all possible methods cannot work within (neo)liberalism, and of course, no self-respecting student is going to do any more work than they absolutely have to, no? Given that I do not fall within the latter category of students (i.e. that I lack a self-preservation instinct, that I’m utterly enraged by sloppy thinking and/or obscurantism in academia, and that tedious academic assignments have not yet suffocated my love of writing), I have decided to be a smart-ass by developing a meticulous argument that liberalism is insufficient to reach sustainability. I append this note here simply in order to show that I am not being a smart-ass simply for the same of being a smart-ass.
A fascinating chart of the US economy can be found here, neatly arranging the country’s entire GDP into little colored squares, starting from $1 (green), building up to aqua-colored squares each representing a trillion dollars. It’s utterly brilliant, and deserves to go viral.
Furthermore, the chart is now available for download, in 12538-by-8352-pixel glossy. Alternatively, it is up for sale as a poster. Credit to Cruel Mistress for the find.
Credit default swaps may sound fiendishly complex, but they’re actually relatively simple instruments. Imagine a family—call it the Bonds family—moves into a beautiful new home worth $1 million recently built in your neighborhood. The local bank has given the Bondses a mortgage. Trouble is, the bank has too many loans on its books and would like to get some of them off its balance sheet. The bank approaches you and your neighbors and asks whether you would be interested in providing insurance against the chance that the Bonds family may one day default.
Of course, the bank will pay you a fee, but nothing extravagant. Mr. and Mrs. Bonds are hardworking. The economy is in solid shape. You think it’s a good bet. The bank starts paying you $10,000 a year. If Mr. and Mrs. Bonds default, you owe $1 million. But as long as Mr. and Mrs. Bonds keep paying their mortgage, everything is fine. It’s almost like free money. In essence, you’ve bought a credit default swap on Mr. and Mrs. Bonds’s house. One day you notice that Mr. Bonds didn’t drive to work in the morning. Later you find out that he’s lost his job. Suddenly you’re worried that you may be on the hook for $1 million. But wait: another neighbor, who thinks he knows the family better than you, is confident that Mr. Bonds will get his job back soon. He’s willing to take over the responsibility for that debt—for a price, of course. He wants $20,000 a year to insure the Bondses’ mortgage. That’s bad news for you, since you have to pay an extra $10,000 a year—but you think it’s worth it because you really don’t want to pay for that $1 million mortgage.
Welcome to the world of credit default swaps trading.
Many CDS traders, such as [Boaz] Weinstein, weren’t really in the game to protect themselves against a loss on a bond or mortgage. Often these investors never actually held the debt in the first place. Instead, they were gambling on the perception of whether a company would default or not.
If all of this weren’t strange enough, things became truly surreal when the world of credit default swaps met the world of securitization. [Aaron] Brown had watched, with some horror, as banks started to bundle securitized loans into a product they called a collateralized debt obligation, or CDO. CDOs were similar to the CMOs (collateralized mortgage obligations) Brown had encountered in the 1980s. But they were more diverse and could be used to package any kind of debt, from mortgages to student loans to credit card debt. Some CDOs were made up of other pieces of CDOs, a Frankenstein-like beast known as CDO-squared. (Eventually there were even CDOs of CDOs of CDOs.)
Just when things seemingly couldn’t get stranger, CDOs underwent a completely new twist when a team of J. P. Morgan quants created one of the most bizarre and ultimately destructive financial products ever designed: the “synthetic” CDO.
In the mid-1990s, a New York group of J. P. Morgan financial engineers began thinking about how to solve a problem that plagued the bank: a huge inventory of loans on the bank’s balance sheet that was earning paltry returns. Because the bank was limited in how many loans it could make due to capital reserve requirements, those loans were holding it back. What if there was a way to make the risk of the loans disappear?
Enter the credit default swap. The bank came up with the novel idea of creating a synthetic CDO using swaps. The swaps were tied to the loans that had been sitting on J. P. Morgan’s balance sheet, repackaged into a CDO. Investors, instead of buying an actual bundle of bonds—getting the yield on the bonds, but also assuming the risk of default—were instead agreeing to insure a bundle of bonds, getting paid by a premium to do so. Imagine, in other words, thousands of swaps tied to bundles of mortgages (or other kinds of loans such as corporate and credit card debt) such as those owned by Mr. and Mrs. Bonds.
By selling slices of synthetic CDOs to investors, J. P. Morgan offloaded the risk of the debt it held on its balance sheet. Since the bank was essentially insuring the loans, it didn’t need to worry anymore about the risk the loan holder would default. With that—presto change-o—the bank could use more capital to make more loans … and book more fees.
Patterson, S. (2010). The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. New York: Crown Business, pg. 167-8
[This assignment was something of a rush job, but I figure that I might as well post it, if for no other reason than to break my current writer's block. Though my conclusions are on the whole pessimistic, next week I'll be writing a paper on Green GDP, which to me has sounded much more promising than any of the other methods to mitigate climate change that I know of.
Anyway, I thought that the questions for this assignment were fairly weak, which explains my quasi-ironic use of Hegel in my second answer (a tactic which I would normally dismiss as tacky & pedantic) and my data roundup sans commentary in my third answer. I would be grateful if someone could refute the points I make in my first answer, however.]
1. Liberal-democracy does not facilitate prompt action on environmental problems. Discuss critically. (300 words)
Those who advocate eco-authoritarianism, for example Hardin and Heilbroner, can easily fall back upon this statement, one which receives ample empirical corroboration, particularly in the case of Copenhagen. However, such an approach is presumptuous in that it places blame for lack of promptness primarily on ‘red tape’ and other such factors which can (presumably) be circumvented by authoritarianism. I will argue, however, that the nature of environmental problems (and the politics surrounding them) is such that even this will not achieve ‘promptness’.
Writing about the Copenhagen conference, Hijioka et al. outline a prime example of a problem which precludes rationally motivated consensus. It is agreed that greenhouse gas emissions must be reduced in order to stave off climate change. However, there are multiple methods of gauging the percentage by which each nation should reduce their emissions, but only one can be utilized. The problem lies in the fact that differing criteria produce quite disparate results: in the case of Japan, a criterion based on responsibility for environmental damage (since the base year 1990) dictates that Japan reduce emissions by 30%, but an efficiency/economy based criterion recommends a reduction of 5%. In the absence of metacriteria―which could only be produced to all parties’ satisfaction by deontological proof―the problem is intractable. Even if a dictatorial cosmopolitan government were formed to solve the problem, presuming that it is benevolent, it could not solve the problem without perceived injustice on the part of those paying more than they would be required under different criteria.
It is a commonplace among environmentalists that any environmental issue has the potential to become global in scope. Since any effect which is deleterious to the environment rarely has a single origin, the allocation of responsibility is a necessary preliminary for any global environmental policy. Therefore, the issues of criteria exemplified at Copenhagen apply in unaltered form to the vast majority of environmental problems.
- : Dryzek, J. & Schlosberg, D. (2005). Debating The Earth: The Environmental Politics Reader, 2nd Ed. New York: Oxford University Press, pg. 645, endnote 2.
- : Hijioka, Yasuaki, Yasuko Kameyama, Norichika Kanie, and Hiromi Nishimoto. “Allocation and Architecture in Climate Governance Beyond Kyoto: Lessons from Interdisciplinary Research on Target Setting.” International Environmental Agreements: Politics, Law and Economics 10.4 (2010): 299-315.
- : The most popular of suggested criteria are: 1) historical responsibility, 2) cost relative to GDP, and 3) equal marginal abatement costs among industrialized nations (ibid, pg. 303-305).
- : ibid, pg. 308.
- : I have in mind, as a rough example of what such metatheory would resemble, the work of Jürgen Habermas.
- : This is, of course, a ridiculous notion. Even if the choice of criteria was the only stated purpose of the new government, it would beg the question to decide which current world leaders would become members of the authoritarian regime. In the case of autocracy, the only way to achieve this would be via world war, which would render the environment the least of humanity’s problems.
Science fiction writer Arthur C. Clarke visited [Claude Elwood] Shannon’s house a number of times. A device Shannon called the “ultimate machine” left him unnerved. “Nothing could be simpler,” Clarke later wrote. “It is merely a small wooden casket, the size and shape of a cigar box, with a single switch on one face. When you throw the switch, there is an angry, purposeful buzzing. The lid slowly rises, and from beneath it emerges a hand. The hand reaches down, turns the switch off and retreats into the box. With the finality of a closing coffin, the lid snaps shut, the buzzing ceases and peace reigns once more. The psychological effect, if you do not know what to expect, is devastating. There is something unspeakably sinister about a machine that does nothing—absolutely nothing—except switch itself off.”
Patterson, S. (2010). The Quants. New York: Crown Business, pg. 25