The world economic crisis is an opportunity, and not an obstacle, to initiate the Green Revolution talked about by politicians, intellectuals and organizations. The moment of action has arrived.
A quote from a long-forgotten speech:
“One other thing I’ve done, is I’ve called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. There’s a lot of people in this — our communities around the country that deeply care about the issue of home-ownership, and they’ve been responsive.” George W. Bush, (March 26, 2004).
Most economists now agree that President Bush’s advice to banks back in 2004 was dangerous policy given the extent of deregulation of the United States financial system. It has since become obvious that the price to be paid for these risky loans and the lack of regulation is an international financial crisis.
Now, as governments get involved in the markets worldwide to turn the crisis around, academics and politicians are arguing that this is the time to make the environment a part of our economic decisions with a long-term payoff of a stronger, and greener, economy.
We will discuss in detail this “Green New Deal” proposed- not always in so many words- by Barack Obama, Thomas Friedman, Sir Nicholas Stern and Simon Hines, but first we take a look back at how lack of government regulation led to the evolution of the credit crisis.
Easy credit for a nice twenty-something
In 2006, Casey Serin, a then anonymous 24-year-old blogger native to Uzbekistan and living in the United States, gained fame for blogging about how he was able to buy in 2005 and 2006 eight homes on credit, with no money down.
As explained by The Economist and USA Today, Casey Serin accumulated mortgages valuing 2.2 million dollars without being asked for a deposit. His blog, three years later, is not active, but the domain explains the inevitable: www.iamfacingforeclosure.com.
Subprime mortgages were given to clients whose credit was not sufficient to acquire a conventional mortgage. The high default rates on these loans meant they were accompanied by higher interest rates, resulting in larger commissions for the bank.
When interest rates began to rise and housing prices began to fall in the U.S., the number of defaults and foreclosures accelerated rapidly from the beginning of 2007. This toxic product became a detonator of the current situation.
AAA ratings for junk
Despite the fact that a fifth of the mortgages in the world’s largest economy in the past few years were considered “toxic”, no one ever sounded the alarm.
If these agencies had fulfilled their role independently, they would have notified investors of the risk of subprime mortgage products, as well as of the intoxication of these products on the rest of the financial system.
Instead, ratings agencies gave AAA ratings to subprime securities. A triple A is the lowest possible level of risk.
A Wall Street Journal article from August 15, 2007 blamed the rating firms for fueling the subprime mess. “S&P, Moody’s Investors Service and Fitch Ratings gave top ratings to many securities built on the questionable loans, making the securities seem as safe as a Treasury bond.”
This positive rating meant that institutional investors could systematically transfer them to investment funds and pension schemes (diagram).
Given the ubiquitous nature of these subprime securities, they were able to contaminate the entire U.S. financial system. Once the subprime crisis began to affect banks and lending was restricted, the crisis went international quickly.
Normally, the world’s banks lend money to one another at market interest rates, but as the subprime crisis contaminated financial systems worldwide, these bank-to-bank loans have been paralyzed.
The crisis has provoked, at the beginning of October of 2008, numerous financial bankruptcies, banking nationalizations carried out by some of the supposedly most liberal governments of the world, banking interventions in all developed economies, drops in stock markets and deterioration of the global economy.
The world’s subprime trading cards
The list of financial companies and businesses affected by the credit crisis beginning in August 2007 grows every week.
From August 2007 through October 2008: First Magnus Financial, American Home Mortgage, National City Home Equity, Blackstone, Netbank, Victoria Mortgages, UBS, Citigroup, UBS AG, Freddie Mac, Fannie Mae, Northern Rock, Bear Stearns, Catholic Building Society, Countrywide Financial, Aliance, & Leicester, Roskilde Bank, Derbyshire Buildling Society, Cheshire Building Society, Merrill Lynch, American Internaional Group (AIG), Lehman Brothers, HBOS, Washington Mutual, Bradford & Bingley, Fortis, Dexia, Wachovia, Landsbanki, Glitnir, Kaupthing Bank, BankWest, Royal Bank of Scotland.
October 3, after passing both houses of Congress, the United States approved a financial rescue plan designed by the Treasury secretary, the controversial Henry Paulson, to provide 700 billion dollars to acquire distressed assets and to prop up the balance sheets of Wall Street.
This didn’t prevent the Dow Jones Index from experiencing its worst week in history, losing 18% of its value between October 5th and 10th. Markets around the world followed its decline.
Worldwide governments have been called to action. In Europe, several countries have unilaterally taken measures to guarantee bank deposits (Ireland) or to partly nationalize banks (the UK). On October 12, 2008, European leaders drafted an agreement to guarantee future bank debt for euro countries. The same day, Australia and New Zealand guaranteed deposits.
This damned- and everpresent- “injection”
Even casual conversations touched upon (or joked about) the “liquidity injections” in the markets, designed by Federal Reserve president Ben Bernanke, and enacted by the world’s central banks to improve the liquidity of financial markets worldwide.
The previous leader of the Federal Reserve, Alan Greenspan, has gone from being a maestro to someone worthy of being dissected. As Barry Ritholtz elaborates in The Big Picture: “Greenspan was not only a terrible Fed chief, he was a downright dangerous one”.
Greenspan said in 2004: “not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient”.
Greenspan was comically wrong.
The multi-billionaire investor (and the second richest American, after Bill Gates, according to Forbes) Warren E. Buffet, toughened by thousands of stock market battles, observed five years ago that financial derivatives (a financial product whose value is based on the price of another stock, in a way that they are influenced by guesswork and little real value judgements) are dangerous.
Buffett, quoted by Peter S. Goodman in The New York Times: “derivatives are ‘financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.'”
“Yes, we can”
“But the American experiment has worked in large part because we guided the market’s invisible hand with a higher principle. A free market was never meant to be a free license to take whatever you can get, however you can get it. That’s why we’ve put in place rules of the road: to make competition fair and open, and honest. We’ve done this not to stifle but rather to advance prosperity and liberty… the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well-being of American business, its capital markets and its American people are aligned.” Barack Obama, at Cooper Union University in New York, March 2008 (video and transcript of his speech).
Their ideas before the crisis, however, differ, as was seen in the television debates between them, as well as in the debate between the vice-presidential candidates, Joe Biden (Democratic) and Sarah Palin (Republican).
Obama believes that accountability of the markets must be increased, after the 8 most disastrous years of U.S. economic history.
The neo-liberal recipe hasn’t worked: “We also have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain, a theory that basically says that we can shred regulations and consumer protections and give more and more to the most, and somehow prosperity will trickle down. It hasn’t worked.”
Opportunity for a “green economy”
Barack Obama promises to reduce U.S. energy dependence with investment in renewable energy, which will help to create jobs and to revive the economy as well as fighting against climate change and reducing the country’s dependence on countries that produce fossil fuels.
During the second televised debate, the democratic candidate skewered: “We are going to have to deal with energy because we can’t keep on borrowing from the Chinese and sending money to Saudi Arabia”.
McCain, continuing with the tradition of his party, is opposed to everything that sounds “Washington” and “regular”. He labels Obama a Washington insider, a bureaucrat, something negative to an American society with a Calvinist and more puritan tradition.
McCain’s solution is to cut taxes and to cut federal spending drastically, which would favor a climate for job creation.
This is the impression that the McCain campaign is attempting to spread, since one of its plans is to buy up failed mortgages to help homeowners keep their homes– a measure as populist as it is the result of “poor advice“, according to Obama-. “He’s ended up with a plan that punishes taxpayers, rewards banks, and won’t solve our housing crisis.”
A response to stock market panic: Keynesian measures?
Sir Nicholas Stern, appointed by the British Government to conduct what is now known as the Stern Report, a 2006 study that concludes that the best economic plan, not only environmental, is to introduce measures to contain the worst consequences of global warming.
The British economist, who calculates it would cost just 1% of the world GDP to tackle the worst elements of climate change, now argues that the world financial crisis could be the right moment to implement change.
For Stern, far from blocking the development of solutions for an economy less dependent on fossil fuels, the current economic collapse should promote the alternative energies.
The stance of the British economist is very close to Barack Obama’s plan to revive the American economy, if he wins the election.
A bet on green technology must confront two risks, according to Stern: “One [is] people can only concentrate on a limited number of things at the same time, and the second is people will be sensitive to cost increases… There’s a danger: it needs leadership”.
Both the United States and the United Kingdom and the rest of the European Union are preparing plans to help increase the production and use of renewable energies, but the objectives of those like Barack Obama and Sir Nicholas Stern are more ambitious.
Neither of them have publicly used the expression Green New Deal, in reference to the need to provide political solutions to the economy, something that is not viewed favorably in a country as opposed to a culture of regulation as the United States.
A Green New Deal?
The Green New Deal stems from the idea that the best way to escape from this economic crisis is to copy the model followed by president Franklin D. Roosevelt during the Great Depression.
The original New Deal, an economic policy founded in state interventionism (that has been compared with the traditional actions of the social democracies of continental Europe), set in motion several measures to contain the consequences of the stock market crash of 1929.
It fought against unemployment and poverty with two means of action:
- Revived the economy through the promotion of consumption and investment (a function of State effort, with large public works projects, for example).
- Stricter banking controls were established, to avoid similar situations in the future.
Mark Lynas explains in The Guardian that, if we are facing the beginning of a new New Deal (a New Deal that will change the rules of the financial play everywhere and will require structural changes in the economies of the entire world), it has to be a New Green Deal (originally proposed in a New Economics Foundation report .)
For Lynas, we should assure that the fight against climate change is taken into account by those responsible for reviving the economy: “We must ensure that tackling climate change is not forgotten but put at the heart of any rescue plan for the economy.”
The British journalist explains comically that nobody knows exactly what is happening. Otherwise, an analyst friend would not have recommended him to buy shares of RBS -as he then did- several months ago when he assured that the markets had hit bottom and wouldn’t drop any further.
Not even the most interesting shares in the cleantech market have been spared the crisis. The Spanish wind turbine manufacturer Gamesa lost 45% of its value in just the last quarter, while the wind power company Vestas, has been falling since September, and Germany’s solar panel firm Q-Cells continues its downward trend of the past year.
Why? Mark Lynas believes that optimism in the future has evaporated. “No one thinks that substantial clean energy investments can be made so long as the money markets are in crisis – without sufficient liquidity to oil the wheels of financial capitalism, nothing much gets built.”
Old formulas for new problems
A return to Keynesianism, an economic theory designed to give institutions the power to control the economy during periods of recession or crisis, could become a reality in the UK and the U.S.
The new Keynesianism, or state interventionism to reinvigorate the markets as motor of the economies, would be focused on investing in sectors capable of creating employment, to reduce the consumption of fossil fuels and to fight against climate change.
In an interview (video) for The New York Times, a newspaper where he writes an editorial, Friedman believes that “the reason green has gone main street basically, the reason we’ve seen this green, very quiet green, revolution emerging in the United States, is because of a convergence, really a perfect storm: and that perfect storm was 9/11, Katrina and the Internet Revolution”.
We’ll have to wait to see if the crisis prompts a green Keynesianism or slows down the Green Revolution that Friedman discusses.
Without fear of exposing the role of institutions
The New Economics Foundation (NEF), a British think-tank that calls itself “an independent think-and-do tank” focused on economic, environment and social issues, is one of the British agencies that talks about a Green New Deal (A Green New Deal).
The credit for coordinating the effort behind this new plan goes to Colin Hines, an ex-advisor to Greenpeace and to politically conservative Britons. Hines brought together a group of environmental, energy, tax, and finance authorities from the United Kingdom to form the Green New Deal Group.
The group published, in July 2008, the report in which its signatories (Larry Elliott, Tony Juniper, Jeremy Leggett, Caroline Lucas, Richard Murphy, Ann Pettifor, Charles Secrett and Andrew Simms) argue that the United Kingdom “needs [a] ‘Green New Deal’ to tackle [the] ‘triple crunch’ of credit, oil price and climate crises”.
The Green New Deal would help to revive the British economy after the stock market crisis, besides investing in the fight against climate change.
The plan is “an alternative to global fatalism“.
The New Green Deal proposed by the Green New Deal Group coincides with Thomas L. Friedman when the signatories of the manifesto propose: “The global economy is facing a ‘triple crunch’: a combination of a credit-fuelled financial crisis, accelerating climate change and soaring energy prices underpinned by encroaching peak oil. It is increasingly clear that these three overlapping events threaten to develop into a perfect storm, the like of which has not been seen since the Great Depression, with potentially devastating consequences.”
Like Friedman, the Green New Deal Group believes that it is exactly the difficulty of the situation that would act as an impetus for change, becoming a challenge for a new generation that wasn’t born in the postwar period of World War II.
The Green Revolution would be carried out by a new political, economic and intellectual generation, represented by Barack Obama and not by “baby boomer” John McCain.
The Green New Deal Group proposes, to escape strengthened from the current world recession:
- Establish a low emissions energy system that would include converting every building into an energy station.
- Create and educate a “carbon army” of workers, a new type of “green collar” workforce.
- Establish an Oil Legacy Fund, paid for by windfall taxes on Big Oil. With this money, invest in sustainable projects and create new “green” banking bonds.
- Establish more realistic fossil fuel prices, since at present their cost to the environment is not counted. The benefits of this improved fiscal accountability for fossil fuels can be directed toward energy efficiency projects and to create quality jobs in the new sector.
- Minimize tax evasion of large businesses, that use tax havens and legal formula to avoid the taxes of the countries where they are headquartered.
- Re-regulate the domestic financial system (they refer to the British one). Cutting interest rates and allowing low interest loans for businesses that build the multi-billion-dollar new infrastructures for transportation and energy based on sustainability.
- Break up the financial institutions discredited during the crisis, those which have fought for deregulation until, in the end, they asked for public money to save themselves.
The group, finally, believes with this plan: “we can begin to stabilise the current crisis, and lay the foundations for the emergence of a set of resilient low carbon economies, rich in jobs and based on independent sources of energy supply”.
Both the Green New Deal group manifesto as well as some of the quotes from Obama’s speeches give hope, despite the crisis.
From Obama’s speech in Berlin, Germany, in July of 2008:
“This is the moment when we must come together to save this planet. Let us resolve that we will not leave our children a world where the oceans rise and famine spreads. Let us resolve that all nations – including my own – will act with the same seriousness of purpose as has your nation, and reduce the carbon we send into our atmosphere.”
We hope that, in winning, Americans hold Obama accountable on his victory night with “do not fail us”: the chant heard in Spain in March of 2004 with the change of government after the Madrid bombings. And we hope that the Green New Deal will be given a chance not to fail.