Wednesday, April 1, 2009

Linking the Financial Meltdown to Global Warming: Toxic Assets and Toxic Air

NY Times foreign affairs correspondent Tom Friedman is the first columnist I’ve seen link the financial meltdown to global warming.

At the onset of the G-20 meeting, Friedman begins his op-ed:

I don’t expect much from the G-20 meeting this week, but if I had my wish, the leaders of the world’s 20 top economies would commit themselves to a new standard of accounting — call it “Market to Mother Nature” accounting. Why? Because it’s now obvious that the reason we’re experiencing a simultaneous meltdown in the financial system and the climate system is because we have been mispricing risk in both arenas — producing a huge excess of both toxic assets and toxic air that now threatens the stability of the whole planet.

Friedman argues:

Whenever products are mispriced and do not reflect the real costs and risks associated with their usage, people go to excess. And that is exactly what happened in the financial marketplace and in the energy/environmental marketplace during the credit bubble.

Naming the sins of our financial services companies and energy companies:

Our biggest financial-services companies, some of which came to be seen as too big to fail, engaged in complex financial trading schemes that did not adequately price in the costs and risks of a market reversal. A.I.G., for instance, was selling insurance for all kinds of financial instruments and did not have anywhere near adequate reserves to cover claims if things went badly wrong, as they did. And our biggest energy companies, utilities and auto companies became dependent on cheap hydrocarbons that spin off climate-changing greenhouse gases, and we clearly have not forced them, through a carbon tax, to price in the true risks and costs to society from these climate-changing fuels.
The premise of a new accounting system:
That’s what “Market to Mother Nature” accounting is all about. It begins with the premise that the distinction between the G-20 and the Copenhagen climate change negotiations is totally artificial. They are just flip sides of the same global problem — how we as a world keep raising standards of living for more and more people in ways that will not, as a byproduct, have both the Market and Mother Nature producing huge amounts of toxic assets.
The old system, which has reached its financial and environmental limits, worked like this: We built more and more stores in America to sell more and more stuff, which was made in more and more Chinese factories powered by more and more coal that earned more and more dollars to buy more and more U.S. T-bills that got recycled back to America in the form of cheap credit to build more and more stores and more and more houses that gave rise to more and more Chinese factories. ...

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