Saturday, November 3, 2012

Sandy and the Credit Crisis

Sandy and the Credit Crisis

Hurricane Sandy serves as a reminder that we aren’t very good at dealing with big long-term problems, especially if the problems are hidden in complexity and ambiguity, and if the solutions require a major element of sacrifice.  I think there are important parallels between the credit crisis and our increasingly extreme weather patterns.

We’d like to believe that Katrina, Irene, Andrew and Sandy, and the fires in the west, and the floods in upper Midwest, and the drought in the Southwest are all “one in a hundred year” events.  And, we’d prefer to think that the bubble, credit crisis, and European debt crisis fall into the same extraordinary category.  After all, if these events only occur once every hundred years, we really don’t need to change a lot about how we build our cities and houses, or how we regulate our financial system.  It’s comforting to think that we can just adopt policies that will help to clean up the next weather or financial mess.

Pfd Pay Out (1999)

Our attitudes about climate and financial issues are interrelated.   We continue to look to Wall Street for financial solutions to our climate challenges.  We like Wall Street solutions because they promise that the magic of the financial markets will solve the problem without us having to change our behavior.  So we’ve had cap and trade, carbon credits, and catastrophe bonds, to name but three financial “innovations.”  All these ideas have their place, but they aren’t going to stem the increasing variability in our climate or the rising waters in our oceans.  We like these ideas because they ask nothing from us.  Wall Street likes these ideas because they can earn a fee, whether the ideas work or not.

The first step in addressing our climatic and financial problems is to bury the warped interpretation of Ronald Reagan’s 1981 inaugural statement that: “government is not the solution to our problem; government is the problem.”[1] If we continue to regard public employees as bureaucrats instead of civil servants, we can be assured that Wall Street will continue to walk all over the federal regulators, and that companies will eviscerate the ability of the EPA to hold them accountable.  If we allow Congress to continue to get away with passing laws like Dodd-Frank or the Clean Air Act, and then use the appropriations process to starve the responsible agencies of resources, we’ll get exactly what critics expect: an inept government.

Like it or not, if we’re going to address climate change or create a more stable financial system, we are going to require a pretty big government.  You cannot possibly take on trillion dollar financial institutions with a rag tag collection of state and federal regulators, particularly if they’ve been instructed to be “industry-friendly.” 

We’re not going to negotiate with the Chinese or the Western Europeans based upon an 18th or 19th century notion of limited government, whether we’re setting standards for bank capital or industrial emissions.  Our environmental and financial challenges are going to require hard-fisted regulations that industry and many of us consumers aren’t going to like.  Like any organizational structure, government is going to produce some undesirable side effects.  Deal with it.   Any time two or more people get together, whether in a business, church, or school board, unwanted stuff happens.  Nonetheless, we’re better off for having businesses, churches and government.

We live in an economy that is measured in quarterly statements and pays huge bonuses on annual results.  Our politics is based on daily tracking polls, and our policy debates ignore the big, long-term issues.  Don't look at your political opponents to pin the blame for America’s addiction to the short-term.   The folks who took too much equity out of their homes were both Republicans and Democrats.  The people who burn fossil fuels amply represent both parties as well as independents.  If you are liberal or progressive, don’t start to feel smug.  Your leaders, President Clinton, Minority Leader Pelosi, Senators Schumer and Dodd, Congressman Frank, and many others helped to inflate the credit bubble.  Most of these folks took personal advantage of it until the bubble became a bust.  Even then, their actions were less compelling than their rhetoric.  I’m sure their environmental record isn’t as pristine as you’d imagine either.

We can’t continue on a path where we bailout banks and keep the same executives in charge after a financial crisis, and then decide we’ve solved the problem.  And, we can’t let people build beach houses right behind the sand dunes, and then after Sandy rolls through, address climate change by ordering in the Army Corps of Engineers to re-nourish the beach and ask taxpayers to subsidize flood insurance.

[1] Here’s the full quote, “In this present crisis, government is not the solution to our problem; government is the problem.”  Today’s bumper stickers drop the introductory phrase, because it makes for a generic attack on all government, which was not what the President was saying.

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