(Roughly) Daily

Posts Tagged ‘Financial crisis

“A good rule of thumb is to assume that everything matters”*…

 

Dayen-financial-climate 112019

 

Every few months, a news outlet will write a story heralding the next financial crisis, with an assumed assuredness that we should all view as suspect. Predicting the next crisis has become a sport, one that typically magnifies risks and displays an unreasonable degree of certainty. But if you had to choose a looming event that’s most likely to produce a negative shock to the financial system, it would almost certainly be the climate emergency.

That’s the takeaway from a fascinating issue brief… from the Center for American Progress’s Gregg Gelzinis and Graham Steele from the Stanford Graduate School of Business. Both worked for the Senate Banking Committee for many years, and they make a compelling case, not only that headline risks to financial stability will flow from a warming planet and the efforts to mitigate that, but that federal banking regulators have gone almost completely AWOL in monitoring or even assessing this legitimate threat.

Worse, to the extent that any financial regulators in Washington are paying attention to the climate crisis, they’re seeking to dismiss it. A subcommittee formed at the Commodity Futures Trading Commission (CFTC) to look at climate-related market risk is stacked with fossil fuel industry representatives, including several executives from climate-polluting agribusiness, banks with significant carbon-intensive portfolios, and fossil fuel giants BP and ConocoPhillips.

The committee’s clear intent is to examine the climate risks to polluting companies’ core business, not from their polluting. As one critic—Paddy McCully, the climate and energy director at the Rainforest Action Network—notes, “We should recognize that there’s risk from the climate to the economy, and that the corporate sector needs to assess their contributions to climate change and then deal with it.”

The report explains that global economic losses from a rise in temperatures of 4 degrees Celsius have been estimated at $23 trillion per year. This would pose two kinds of risk to the financial system: physical risk from natural disasters, and a more indirect risks from transitioning away from fossil fuels…

A new paper makes the case that financial regulators are ignoring the significant risks from a warming planet and even from efforts to green the economy.  The fascinating– and chilling– analysis in full at “The Biggest Threat to Financial Stability Is the Climate.”

* Richard Thaler

###

As we internalize externalities, we might recall that it was on this date in 1952 that the Great Smog of London began,  A period of cold weather, combined with an anticyclone and windless conditions, collected airborne pollutants—mostly arising from the use of coal—to form a thick layer of smog over the city.  It caused far more severe disruptions than “pea-soupers” of the past,  reducing visibility and even penetrating indoor areas.  While the Underground maintained service, bus service was virtually shut down (as visibility was so severely and reduced; and thus, the the roads, congested). Most flights into London Airport were diverted to Hurn, near Bournemouth and linked by train with Waterloo Station.

Government medical reports in the following weeks estimated that 4,000 people had died as a direct result of the smog; and 100,000 more, made ill by the smog’s effects on their respiratory tracts.  More recent research suggests that the total number of fatalities may have been considerably greater, one paper suggesting about 6,000 more died in the following months as a result of the event.

The disaster had huge effects on environmental research, government regulation, and public awareness of the relationship between air quality and health.  It led quickly to several changes in practices and regulations– perhaps most notably, the Clean Air Act 1956.

Nelson's_Column_during_the_Great_Smog_of_1952

Nelson’s Column during the Great Smog

source

 

“Emergencies have always been necessary to progress”*…

 

economy

The 2008 financial crisis continues to plague the world economy and our politics. It’s also messing with how we understand our narratives of global integration. Until recently, going global implied exuberant stories about one-world connectivity and technocratic togetherness. Now, it’s the other way around: the stories of our times are consumed with collapses, extinctions and doom. It’s a playbook for nativists, who see interdependence as a recipe for catastrophe.

Our big narratives were once capable of more nuance than the pendular swing from euphoria to dysphoria. For every 18th-century Enlightenment story of hope, there was a shadow of decline; in the 19th century, liberals had to joust with conservative and radical prophets of demise. Some even saw crisis as an opportunity. Influenced by Karl Marx, the Austrian economist Joseph Schumpeter in 1942 made a virtue out of ruin. There could be something creative about bringing down tired old institutions. The late German-born economist Albert O Hirschman thought of disequilibria as a potential source of new thinking. In 1981, he distinguished between two types of crisis: the kind that disintegrates societies and sends members scrambling for the exits, and what he called an ‘integrative crisis’, one in which people together imagine new ways forward…

Jeremy Adelman, the Henry Charles Lea professor of history and director of the Global History Lab at Princeton, argues that we should look for opportunities in our travails: “Why we need to be wary of narratives of economic catastrophe.”

See also: “The Three Revolutions Economics Needs.

* “Emergencies have always been necessary to progress. It was darkness which produced the lamp. It was fog that produced the compass. It was hunger that drove us to exploration. And it took a depression to teach us the real value of a job.”                               – Victor Hugo

###

As we search for silver linings, we might recall that it was on this date in 1728 that John Gay’s The Beggar’s Opera premiered at the Lincoln’s Inn Fields Theatre in London.  It ran for 62 consecutive performances, the longest run in English theater history and second longest run in the Western world up to that time (after 146 performances of Robert Cambert’s Pomone in Paris in 1671).

260px-william_hogarth_016

Painting based on scene 11 Act III of The Beggar’s Opera; by William Hogarth, c. 1728 [source]

Written by LW

January 29, 2019 at 1:01 am

“Economic theory is the art of pulling a rabbit out of a hat right after you’ve stuffed it into the hat in full view of the audience”*…

 

economic-crisis

Many critics were disappointed the 2008 crisis did not lead to an intellectual revolution on the scale of the 1930s. But the image of stasis you’d get from looking at the top journals and textbooks isn’t the whole picture — the most interesting conversations are happening somewhere else. For a generation, leftists in economics have struggled to change the profession, some by launching attacks (often well aimed, but ignored) from the outside, others by trying to make radical ideas parseable in the orthodox language. One lesson of the past decade is that both groups got it backward. Keynes famously wrote that “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” But in recent years the relationship seems to have been more the other way round. If we want to change the economics profession, we need to start changing the world. Economics will follow.

From J.W. Mason‘s helpful survey of economic thought since the Crash of 2008: “How a Decade of Crisis Changed Economics.”

* Joan Robinson

###

As we contemplate counting, we might send revolutionary birthday greetings to Alexander Hamilton; he was born on this date in 1755 (or 1757, there is some scholarly debate about the year, but not the date).  A Founding Father of the United States, Hamilton created the Federalist Party (proponent of stronger national government than provided by the Articles of Confederation), the United States Coast Guard, and the New York Post newspaper.  But he was probably most notably the creator of the new nation’s financial system.  The main author of the economic policies of George Washington’s administration, he took the lead in the Federal government’s funding of states’ debts, and established a national bank, a system of tariffs, and friendly trade relations with Britain.  His vision included a strong central government led by a vigorous executive branch, a strong commercial economy, a national bank supporting manufacturing, and a strong military…. in all of which he stood most frequently opposed to Thomas Jefferson, who favored agrarian and small government policies.

220px-alexander_hamilton_portrait_by_john_trumbull_1806 source

 

“The prevailing ideology of the modern west – which is political economy – is in the doghouse”*…

 

recession

 

This weekend marks the 10th anniversary of the collapse of Lehman Brothers (the largest bankruptcy in U.S.history) and the start of the Great Recession.  We took a look at the crisis, it’s dimensions, and its aftermath last month (“Not every business cycle has a financial crisis. Frequently they do“); but there’s so much to remember– and so many may smart folks from whom to learn…

In “From Trump to Trade, the Financial Crisis Still Resonates 10 Years Later,” Andrew Ross Sorkin thinks about the consequences of the crash still unfolding.  In “Can We Survive the Next Financial Crisis?,” Bloomberg’s Yalman Onaran, considers both the ways in which the system that led to the last crisis has become safer and also the pockets of risk that have grown since 2008.  (Keep your eyes on CLOs– collateralized loan obligations– this decade’s version of the CDOs that tanked the economy in 2008…)

The always-illuminating Matt Levine, considering John Cassidy’s review of Adam Tooze’s new history of the financial crisis/crises, Crashed, highlights Tooze’s central argument: that much of our current geopolitical situation — the nativism and fragmentation and general rejection of decades of stability and elite consensus — is a consequence of the 2008 financial crisis and the flawed response to it.  Levine concludes with a striking observation…

Finally here is a passage I found interesting from Tooze’s “Crashed,” on quantitative easing, political volatility, and the U.S.’s flirtation with defaulting on its debt in 2013:

That the astonishing events in Congress in 2013 did not lead to an immediate crisis in the bond market pointed to the resilience of the US Treasurys as the global safe asset of choice. Though the Chinese and Germans might complain and the market blipped, demand for US Treasurys quickly recovered. Ultimately, the market for IOUs drawn on the American taxpayer was underwritten by the Fed. Unlike the ECB, America’s central bank left no doubt that it backed its governments’s debt. QE3 bond purchases provided immediate support, keeping prices up and rates down. This provided at least one point of stability for global investors. But after the events of 2013 questions could no longer be avoided. Was one of the unintended side effects of the stability generated by the Fed to free politics from market constraints and thus enable Republican extremism? Did America’s ability to ride out short-term budget crises like those of 2011 and 2013 lead contemporaries to underestimate the future dangers that the degeneration of American democracy might bring with it? And how long would the Fed’s technocratic interventions compensate for America’s lackluster economic recovery and the shambles in the legislative branch?

Obviously one can disagree with some of the characterizations there. But one thing that we used to talk about a lot around here was that people were worried that people weren’t worried enough: Financial-market volatility seemed eerily low given the apparent instability of, you know, the world. That worry turned out to be overstated — volatility picked back up without causing any particular crisis — but it really was a bit eerie: Apparent actual volatility in the world kept not causing volatility in asset prices. But an implication of Tooze’s argument is that some of the causality went the other way: Because financial markets were calm in the face of geopolitical instability, they enabled more geopolitical instability. If you don’t have bond vigilantes checking up on you, then you can get up to a lot of weird stuff.

[image above: source]

* James Buchan

###

As we try to keep cause and effect straight, we might recall that it was on this date in 1920 that the biggest incidence of domestic terrorism in U.S. history to that date occurred: the Wall Street bombing.  At noon, a horse-drawn wagon passed by lunchtime crowds on Wall Street and stopped across the street from the headquarters of the J.P. Morgan bank at 23 Wall Street, on the Financial District’s busiest corner.  Inside the wagon, 100 pounds of dynamite with 500 pounds of heavy, cast-iron sash weights exploded in a timer-set detonation, sending the weights tearing through the air.  30 people were killed immediately, and another eight died later of wounds sustained in the blast.  There were 143 seriously injured; the total number of injured was in the hundreds.

Though investigators and historians believe the bombing was carried out by Galleanists (an anarchist group responsible for a series of bombings the previous year), the attack– which was a part of postwar social unrest, labor struggles and anti-capitalist agitation in the U. S.– was never officially solved.

The aftermath of the explosion

source

 

Written by LW

September 16, 2018 at 1:01 am

“You know what’s truly weird about any financial crisis? We made it up. Currency, money, finance, they’re all social inventions.”*…

 

napoleon curency

First Argentina. Now Turkey. The next country to face a financial crisis could be any one of a slew of emerging-market economies that have grown dangerously dependent on borrowing in dollars and other foreign currencies.

As of the end of 2017, corporations in emerging markets owed $3.7 trillion in dollar debt, nearly twice the amount they owed in 2008, according to the Bank for International Settlements. Analogies to 1997’s Asian financial crisis and Mexico’s “Tequila” crisis of 1994 abound. But the roots of emerging-market crises lie further back in the history books. In The Volatility Machine: Emerging Economics and the Threat of Financial Collapse, finance professor Michael Pettis urges us to look to Europe in the early 1800s, just after the end of the Napoleonic Wars. The financial conditions and innovations that gave rise to the first truly global crisis, in 1825, are in many ways similar to the conditions that have led Turkey and Argentina to their current precarious states…

Learning from the past: “The global financial crisis of 1825 foreshadowed the problems of emerging markets today.”

* Bruce Sterling

###

As we contemplate currencies, we might recall that it was on this date in 1955 that the Manilla Pact was signed, creating the Southeast Asia Treaty Organization (SEATO).  Intended as “an Asian NATO,” SEATO was a collective defense agreement aimed at stopping the advance of communism in the region.

Despite its name, SEATO mostly included countries located outside of the region but with an interest either in the region or the organization itself: Australia, France, New Zealand, Pakistan (including East Pakistan, now Bangladesh), the United Kingdom and the United States; only the Philippines and Thailand were actually in the region.

While SEATO-funded cultural and educational programs some long-standing effects in Southeast Asia, the alliance is largely considered a failure, as its military/defense mission never gelled.  In June of 1977, after many members had lost interest and withdrawn, SEATO was dissolved.

220px-Flag_of_SEATO.svg

The official flag of SEATO

 

Written by LW

September 8, 2018 at 1:01 am

Never going to happen…

One might express the exceedingly low probability that one might agree (that, say, Adam Sandler is the artistic and comedic rival of Buster Keaton) in a variety of ways.  Here in the U.S., it might be “when pigs fly” or “when Hell freezes over”.  Now, thanks to the good folks at Nautilus, one can answer with the appropriately idiomatic expression of improbability all over the world.  Just click the image above…

###

As we substitute hyperbole for hyperventilation, we might recall that it was on this date in 2008 that Lehman Brothers filed for bankruptcy, setting off the worst financial crisis since the nineteen-thirties, a seven-hundred-billion-dollar bank bailout, and a painful recession.  On this dark anniversary, John Cassidy asks, “What Has Changed Since Lehman Failed?”  James Kwak answers, “5 Years Later, We’ve Learned Nothing From The Financial Crisis.  And for a really deep dive, leap in here.

Then-Secretary of the Treasury, Henry Paulson

Written by LW

September 15, 2013 at 1:01 am

Money, money, money…

More bracing bank notes at Occupy George.

As we remember that four out of five U.S. bills are contaminated with cocaine, we might also recall that it was on this date in 1901 that a “get-away car” was used for the first time– by bandits fleeing after the robbery of a Paris shop.

1901 Darracq Type C Tonneau (source)

Written by LW

October 26, 2011 at 1:01 am

%d bloggers like this: