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Archive for August 4th, 2010

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When the Polynesian inhabitants of Easter Island first began to carve Moai, the enormous monolithic human figures, their island was lush and filled with birds and animals. Erecting Moai, which could be up to 10 meters high and weighing up to 75 tonnes, were truly a sophisticated intellectual and physical feat. But soon, tribes began competing to erect larger and more sophisticated sculptures. A lack of foresight left them using resources at increasingly unsustainable rates:

Forests were clear-cut for canoes, ropes and firewood. Farms producing sweet potatoes, taro and sugarcane stripped soils of available nutrients. Bird, fish and porpoise populations dwindled to extinction by overhunting. Blind to the impact that a growing population would have on the environment, inhabitants used up the island’s resources until there was nothing left.

Clearly, our small planet has limited resources and unsustainable growth can lead to a society’s demise. Amazingly, most economists have not cared to heed these warnings. One group that has, is known as the school of ecological economics, which uses the phrase “uneconomic growth” to refer to economic expansion that depletes valuable resources in a way that makes us worse off:

When the economy’s expansion encroaches too much on its surrounding ecosystem, we will begin to sacrifice natural capital (such as fish, minerals and fossil fuels) that is worth more than the man-made capital (such as roads, factories and appliances) added by the growth. We will then have what I call uneconomic growth, producing “bads” faster than goods—making us poorer, not richer.

-Herman Daly

The goal is often referred to as a “steady-state economy,” (which is different than the steady state considered in the Solow growth model). Here, the economy is stable in size, only fluctuating mildly, and it remains within ecological limits. An important aspect of such a school of thought is the interdisciplinary nature, which requires input from natural and social scientists of all sorts.

A steady state economy, therefore, aims for stable or mildly fluctuating levels in population and consumption of energy and materials. Birth rates equal death rates, and production rates equal depreciation rates.

Loads of information can be found at http://steadystate.org/

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I haven’t commented much on FinReg, mainly because I don’t have much novel to say. I’m excited about the prospect of someone like Elizabeth Warren running CFPB, but the direct impact of that bureau will be limited in its onset. Months back, I reviewed David Westbrook’s excellent book, Out of Crisis– unfortunately, Westbrook doesn’t blog, but he does email. He graciously is letting me post his responses to a reporter for another publication on Dodd-Frank:

In Out of Crisis: Rethinking Our Financial Markets, I try to reconsider financial market regulation, and by extension, political economy.  While I support many of Dodd/Frank’s provisions in a general sort of way, at the philosophical level, I do not think we have come nearly far enough – we have not learned enough from this crisis – and the Act reflects that.  So the political discourse surrounding most of the Act is rather well-rehearsed.  None of which is very surprising; cultural learning does not happen very often.  This is important legislation, and there is much new in it, but most of the thinking that underlies the bill is rather familiar.

Although this legislation is inevitably compared with the 1930s, the comparison should not be pushed too far.  In the 1930s, the United States introduced a new philosophy of governing financial markets, based largely on disclosure and transparency as prerequisites to market activity.  That philosophy really swept the globe; you see it when a Chinese bank does a big IPO.  At the same time, the federal government began regulating institutions and entire industries that had been the responsibility of the states.  At least on the text of the Act, and depending to some degree on how authority granted by the Act is actually employed, it does not look like any steps of similar intellectual or constitutional magnitude have been taken by this Congress.

However, let me make the argument on the other side.  It is unlikely, but possible, that the government will start taking systemic risk seriously, and acting on that impulse.  If that happens, if, for example, the government starts breaking up companies, so they did not get too big to fail, or assumes oversight of systemically important insurers, then the Act would have inaugurated change of a magnitude that stands comparison with the 1930s.

I’ve argued that such a total reconsideration of how we think about markets would be good.  Frankly, however, I do not see that happening in the current political climate.

All those things said, many of the things that Dodd/Frank accomplishes – or will accomplish, if the agencies in fact regulate as Congress expects – are quite sensible…

What we do know is that lots of things went wrong, in lots of markets, in the plural.  It is important to keep in mind that the financial markets, particularly in the United States, are numerous and vast: the credit card market is not the market for auction rate securities is not the market for municipal debt is not the market for corporate equity is not the market for interest rate swaps . . . you get the picture.  So one of the problems is thinking about a network of discrete, but interconnected, markets.  And at this level, I do not think the Act accomplishes much.

What Congress has done, however, is address a number of perceived abuses or weaknesses in various financial markets.  Most of these markets had problems over the last years, and the Act addresses very, very many of these problems, in an effort to improve the soundness of the markets.  

I think progressives, liberals, and radicals alike are disappointed with responses to this crisis in a number of ways. There’s a deep sense that result-oriented pieces, like the stimulus, have been weak tea. However, the assumptions underlying any given response to the crisis must also be analyzed. Westbrook, by comparing the current moment to the New Deal, explicitly raises this side of analysis, and it isn’t pretty. Whatever the causes (regulatory capture, political cravenness, et al.), it is undeniable that pre-crisis thinking is shaping the reaction, or at very least that a new way of thinking is not reshaping policy. By leaving systemic risk regulation up to regulators, we depend on regulators who are willing to think differently; if rethinking is not happening at the high levels, why should we expect it to at the lower levels?

There aren’t ready solutions to this issue- the bill as it is has come together from many political forces, while the intellectual sphere has moved closer (but not close enough) to a relevant rethinking. Perhaps these battles can’t be won in the realm of politics, or at all.

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