Saving the Planet: Is it a global priority?

U.S., EU override Australia to put climate change on G20 agenda

I've taken three environmental courses in my college career (not necessarily by choice) and not once have I felt scared or worried upon completing the course. Professors don't make it their goal to scare students into thinking that we are doomed from global warming. It's true, 95% of scientists agree that global warming is a real concern. Not only are there so many factors to consider, but these environmental processes are offered on extreme timescales. It may seem selfish, but I tend to consider the timescales that affect me, my family, my friends and anyone in the present, and even my future family. Because global climate change is such an extended process, with so much uncertainty, it is often difficult to really become frightened by this phenomenon.


I have no intentions of belittling the issue of global warming. However, I think it is ironic and interesting, especially after Tuesday's readings, to point out that Australia did not even want to include climate change on the G-20 agenda. A recent article on the summit wrote, 

"Asked on Sunday if he accepted the climate change was potentially one of the biggest impediments to global economic growth, Australian Treasurer Joe Hockey said: "No. No I don't. Absolutely not."

"You just look at China. China is going to continue to increase emissions to 2030," he said. "Australia is doing the same amount of work on climate change as the United States over a 30-year period. Frankly, what we're focused on is growth and jobs."

Despite Australia PM Tony Abbott's efforts, climate change was put on the agenda. To think it sparked debate makes me wonder how much climate change is prioritized in the international political economy. I feel like it's something that is always squeezed behind monetary policy, trade, tax reform, etc. talks. In other words, how important is this topic in comparison to the other factors considered in economic growth? Because the timeframe for climate change, especially globally, is so large, I, along with Abbott, am skeptical about its place in comparatively short-term economic planning. The effects of fluctuations in the economy are often more tangible and immediate than large-scale climate changes, making people respond more sensitively to factors impacting the economy. If someone loses their job, what will MOST immediately prioritize: how to get back on their feet and back into the job market, or how to stop the factory next-door from environmentally harmful emission practices? I think a similar mindset applies on a global scale. 

According to the SMH, "G20 summit concluded on Sunday with agreements to close tax loopholes used by multinationals, improve trade, encourage the setting of early emissions reduction targets, strengthen banks, reform energy markets including gas, and coordinate a stronger response to the Ebola epidemic."

Stiglitz would respond to Australia's proposal with disdain, but would be happy to see that climate change action ultimately prevailed. After spending a fair amount of time criticizing the US for refusing to comply with global climate change initiatives, including the Kyoto Protocol, Stiglitz offers several suggestions towards prioritizing the planet during the ongoing globalization process. As a world leader and contributing polluter, Stiglitz expresses the need for the US "to make small expenditures in order to reduce risks of much larger expenditures down the line" (185). He argues that  we can afford it, and by not taking action, we are hurting the rest of the world by evading responsibility and setting a poor example, especially for developing countries. Inflation targets are one solution that Stiglitz offered for the climate change issue. If this isn't enough, he provides an alternative approach based on system of "sticks over carrots", or punishments to deter environmentally threatening practices in relevant industries. I guess the next step is to wait and see how well major polluters and G20 participants actually respond to the emission reduction targets...

G-20 Summit: Is the environment a priority?

U.S., EU override Australia to put climate change on G20 agenda

Asked on Sunday if he accepted that climate change was potentially one of the biggest impediments to global economic growth, Australian Treasurer Joe Hockey said: "No. No I don't. Absolutely not."

"You just look at China. China is going to continue to increase emissions to 2030," he said. "Australia is doing the same amount of work on climate change as the United States over a 30-year period. Frankly, what we're focused on is growth and jobs."

A post with my reactions to follow...

6 Banks Fined Over $4.3bill for Foreign-Exchange Manipulation

Currencies Settlement Is Latest to Ensnare Banks

I am wondering how several of our authors are responding to Wall Street's latest mishap. Six banks- Citi, JP Morgan, UBS, RBS, HSBC and Bank of America- are paying a total of $4.3 billion to US, UK and Swiss regulators to resolve allegations of manipulating the foreign-exhcnage market. Why did banks do this? BBC most clearly explains, "traders attempted to manipulate the relevant currency rate in the market, for example to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate it had bought the currency. If successful, the bank would profit."  Financial penalties are nothing new for these firms, who have racked up over $200 bill in penalties for interest rate manipulation, sanctions violations and "improperly selling a variety of financial products." Manipulation isn't a new concept either (let's not forget the housing crisis). After reading The Big Short and capturing Lewis's cynical view of Wall Street, I'm sure he is nothing less than surprised. In his book, he continuously points fingers at the Investment Banks for their manipulation in mortgage bond structuring. In Krugman's final chapters he addresses the need for heavy regulation of both the investment and shadowing banking systems. He'd probably say, "another example of the need to regulate banks (of both kinds)." After reading Lewis's book, I'd have to agree with this system of sticks. If the housing crisis wasn't enough, banks should be regulated and otherwise penalized for manipulative actions. However, I have to wonder, with such extensive internal/ external regulation, compliance and risk management departments at these banks, how do traders continue to get away with this?

Quick Recap: Eric Rosengren

"The Federal Reserve must respond as vigorously to inflation that is too low as we have, historically, when inflation has been too high."
"Policymakers should remain patient about removing accommodation until it is clear that we are on the path to achieving [our] 2% inflation target..."- Eric Rosengren 

President and CEO of the Federal Reserve Bank of Boston Eric Rosengren gave a rather short presentation tonight on the implications of low inflation. His main point: the Fed needs to respond to inflation that is too low as forcefully as it would to inflation that is too high. Rosengren's main concern is the current US inflation rate, which stands below the Fed's 2% target. With interest rates remaining near zero after QE, another obstacle for the Fed is deciding when to start raising rates to a more normal level.  Rosengren suggests that the Fed should be patient in the process of raising interest rates until inflation reaches a level closer, or at 2%. Why is it so hard to raise inflation rates right now? According to Rosengren, major factors are the general fall in commodity prices, including oil and agriculture and the appreciating dollar. Rosengren used Japan and Europe as examples of the risks of letting inflation rates slip, leading to deflationary responses in the economy. This contributes to another concern: the Fed's loss of creditability from its inability to reach its target rate, ultimately lowering consumer and producer expectations.  After using graphical evidence to present the association between high unemployment/ lower inflation (low unemployment/ higher inflation), Rosengren expressed his goal of reaching an even lower unemployment rate of 5.25% (in comparison to the current 5.8%).

Rosengren's talk was more informative than provocative. The talk was very relevant to class material and I enjoyed hearing his summary and "safe" opinions on issues in current monetary policy.  If you missed it, revisit The Economist article we read a few weeks ago - it overlaps with many of Rosengren's points about the dangers low inflation.

Reflection on Michael Lewis's The Big Short: Inside the Doomsday Machine

(Note: Relevant article at the end)

If you’re looking for a textbook, definitional account of the Financial Crisis, this is not the book for you. Rather, Michael Lewis describes the onset of the housing bubble and eventual crash using a dry-humored, story-like style. His book is both entertaining and informative, especially for those (like me) who lack extensive background in the development of the housing bubble. By telling the stories of a few men who recognized the failure of the subprime mortgage bond market before it happened, Lewis explains how subprime lending worked and why the market essentially failed.

The Wall Street “big shots” like Goldman Sachs, Merrill Lynch, Bear Sterns, Morgan Stanley, and JP Morgan found themselves in the midst of a booming mortgage bond market that took off in the 1980s. Mortgage bonds, as Lewis describes, were “a claim on the cash flows from a pool of thousands of individual home mortgages” (7). Investment banks structured mortgage bonds by “tranches.” The lowest tranches were more risky, with higher interest rates, while higher tranches had lower interest rates and lower risk. Subprime lending began as lenders disregarded the fact that a low credit scored- borrower may not be able to make mortgage payments, because as home prices kept rising, borrowers could just pay off the mortgage by selling the house. As subprime mortgages became packaged into bonds, investors relied on Moody’s and Standard & Poor’s ratings to make their investment decisions, where riskier mortgage bonds would receive lower ratings. Lewis, however, highlights a botch in the rating system, found in collateralized debt obligations (CDOs). AIG insured CDOs, which “disguise the risk of subprime mortgage loans,” by packaging them with “better loans,” ultimately allowing them to receive a better rating (72). Stephen Eisman, Michael Burry, Jamie Mai and Charlie Ledley not only recognized this “ponzi scheme,” but they took advantage of it.

Lewis introduces Michael Burry, a neurosurgeon with Asperger’s who was fascinated by the bond market, specifically the subprime mortgage boom. Burry watched the housing bubble grow, leading to his discovery and purchase of credit default swaps (CDS)- “insurance against the failure of a mortgage bond” (72).  Eisman, a fickle and hotheaded hedge fund owner, saw disaster coming when Wall Street banks’ fixed-income departments would package mortgage loans with “teaser” fixed interest rates into mortgage bonds. He saw the rating inefficiencies and the potential for profits by betting against (“shorting”) the bonds with the worst underlying loans.  Ledley and Mai started Cornwall Capital Management and executed investments based on predicted failures in certain markets. After getting placed on Deustche Bank’s “institutional” trading platform, they bet against (bought CDS) CDOs. By 2007, as defaults rose and CDOs began to fail in large numbers, Burry and Cornwall Capital sold their credit default swaps and heavily profited. The subprime mortgage- backed financial system collapsed as housing prices fell and borrowers defaulted on their loans, bringing a series of bankruptcies and acquisitions on Wall Street. Lewis ends with the startling statistics, including the Fed’s announcement of a $85 billion towards AIG to pay off its losses on the CDS sold to Wall Street.

I’ll start with what I liked. I liked that Lewis used his book to describe the Financial Crisis from a rare point of view; “rare” based on the fact that he followed those few who predicted and benefited from this economic catastrophe. Instead of saying “This is how the housing bubble started, this is why it was bad,” Lewis takes a journalistic approach (appropriate since he is a financial journalist) and includes quotes and thoughts that these financial geniuses had as they watched the housing bubble expand and pop. For example, Lewis quotes Ledley in his discovery of the botched rating system, “The more we looked at what a CDO was, the more we were like, Holy shit, that’s just fucking crazy. That’s fraud (129). By including actual quotes and reactions of the “winners” in his book, Lewis depicts their personalities and their ability to analyze a complex situation.  Including the fascinating stories behind his core characters, like Murry’s battle with Asperger’s, made learning about the subprime mortgage crisis more personal, enjoyable and overall, readable. The insertion of the “F Bomb” throughout the book made it feel like I was hearing a real conversation between Wall Street honchos and big-time money managers.

While the writing style and context of the book encouraged me to read more Michael Lewis books (next on my list is Panic!), I’m somewhat uncomfortable with his portrayal of these figures as “heroes.” Eisman, Murry and the Cornwall brothers saw an opportunity and seized it. When I was little, I had 10 pennies and gave my younger brother a proposition: “I will trade you ALL of these pennies for that ONE, single dollar bill.” Naively, he thought he struck gold. Does the recognition of an opportunity for personal gain (and his loss) make me a hero? Yes, the housing crisis is far more complex, dealing with numerous additional variables. The point is, the characters in this book also recognized opportunity and seized it. Regardless of their gain, thousands suffered from substantial losses (on the lending and borrowing side). They benefited while everyone else suffered. This, in my opinion, may make Eisman, Murry, Ledley and Mai clever, observant and financially talented—not  heroic.

Lewis acknowledges the weaknesses in rating agencies, but for me, not enough. He constantly points back to Wall Street and the big banks, the investors and manipulation in bond structuring. According to Lewis, Wall Street firms were able “to hide the risk by complicating it.” He includes an interaction between Eisman’s partner and a woman from Moody’s: “How could you rate any portion of a bond made up exclusively of subprime mortgages triple-A?” asked Eisman’s partner. The Moody’s rep responded, “That’s a very good question” (103). Lewis used this to point out that the banks convoluted the structure of subprime mortgage bonds to facilitate more investment. However, reading this made me attribute a large part of the blame to the rating agencies themselves. They have the responsibility of evaluating and reviewing bonds in order to designate a specific rating, meaning they should have reviewed all loans within the bonds thoroughly. So, while I agree that the banks were manipulative in their structuring of the CDOs, Moody’s and S&P are also a large part of the issue.

Reading The Big Short: Inside the Doomsday Machine was both critical in my understanding of the development of the housing crisis and towards my ability to develop an opinion of those directly involved. Prior to this book, I have not considered the position of the rating agencies, who I now think play a substantial role in the mismanagement and mistakes behind CDOs and faults within the subprime mortgage market. Lewis took a darker view of Wall Street, opening his book with discouraging words about working in finance and banking. While I acknowledge that he is far more experienced than I am, I cannot completely agree with the representation of his characters as “heroic” based on the fact that they foresaw the explosion of the housing bubble and used this to reap profits. As far as designating a victim, I still go back and forth between investors and borrowers. Lewis presents his characters as sympathetic to the borrowers. Personally, I can’t help but to feel that both the investors and the borrowers acted without thinking in the long term. 

Recent and relevant article about AIG: Former CEO Hank Greenberg files a lawsuit against the US Government for 'overstepping its authority in demanding a 79.9% equity stake in exchange for providing an $85 billion emergency loan." ....Mr. Greenberg, you accepted the bailout package and you needed it. There's no such thing as a free lunch. 

http://online.wsj.com/articles/greenberg-may-be-called-to-testify-at-aig-trial-1414970835