Do We Need a Perfect Crisis to Get Us on a Better Path?

By Gary Berg-Cross

Seasonal, but traditional Xmas, parties sometimes offer an opportunity for good conversations.  Of course, the recent tragedy in Connecticut serves along with the looming ”cliff” talk serve up ready topics. Its human nature to pay attention to what's in front of us, rather than some abstract topics, but often the one leads to the other via generalization.

In an ad hoc small group at a weekend party a constructive discussion of what it would take to avoid more “disasters” emerged. This was not a group with an End Days belief that claims some biblical chronology of floods and other disasters after the State of Israel was founded. Give me real science and climatologists any day.

While gun security and mental health screening drove the early conversation one DOE person maneuvered the conversation to his specialties. Among his lightweight rants was what he saw as the coming energy crises as we struggle to move off of dirty coal to cleaner energy sources, safe nuclear power and CO2 sequestration. The path of that conversation was convoluted,  but the group the arrived at the idea that we need a “crisis” to “save us” and do what we must do.  In this view normal events and processes don’t seem to allow our current system to effectively self correct in time to avoid cliff-like events. This is well captured in the Toles Zombie cartoon above. What can snap us out of our torpor? Perhaps, it was suggested, a crisis would be needed to snap the system to attention and correct the path.

I had a bit of worry about this, since we seem to have had series of crises (take you pick, Hurricane Katrina, Sandy, the 2008 financial meltdown, Fukushima, European debt, climate change summit failures, any number of shootings etc.) which have moved us only a bit conversationally.  Crisis if often a difficult time since the normal reaction of people in stress is the tendency to be confused, anxious, and highly suggestible.  We may become even less rational and more swayed by emotions and thus may be more easily lead.  

 But who knows where?

In The Shock Doctrine: The Rise of Disaster Capitalism Naomi Klein documents how crises, including man-made  ones, such as the Falklands war have been cynically used to steal disasters as opportunities to get self serving rather than lasting and group solutions. It provides a template about something to worry about in times of crises and the supposed solutions they may bring when people are highly suggestible and willing to try something new. New may be better than the old, but not just because it is new of appealing. Crises can "shock" groups into buying manufactured solutions that serve particular interests.  We need to avoid this. I suggested that if we must expect the future to one of crises to produce change what we need is a “perfect crisis.”  This would be one with several ingredients that make it work to change our course. Here are a few ideas:

It can’t be so massive that our entire system is taken down and destroyed so we can’t recover. It has to cause real damage, but it should be more informative than life threatening.  This might happen if it symbolic (such as threatening one of our popular iconic cities) and thus hard to get over for that reason, rather than the swath of destruction.  It should expose the real problems and provide enough time to diagnose solutions. Perhaps it should be a harbinger of foreseeable things to come with enough time to react as in some disaster movies of comets on an intersection with the earth. Such slow trajectory, unfolding disasters give us enough time to react. Something extreme along this lines was a 2 hour show about what we would have to do to evacuate the earth if it was threatened by a rogue neutron start heading our way but taking 75 years or so to get here.

One can image some small crises growing out of the slow trajectory of climate change (including “climate refugees” and “environmental evacuees” to keep our attention on things) that might be clear enough to get a message through.  Still it will take enlightened leadership and not just a science-engineering hat trick, at the time of crises, rather than opportunists, to get us through and on to a better path.

Something to think about in seasons of hope dealing with small despairs.

Image Credits

Toles cartoon: Washingtonpost.com

Can Science Save Us?:http://www.dennytaylor.com/2012/07/can-science-save-us-when-the-temperature-rises-more-than-2-degrees-celsius-what-will-we-do-non-linear-interrelationships-between-atmospheric-and-ecosystem-stressors-and-human-activity/

Natural Disasters 1900 -2007 : http://www.storyoflove.org/2011/02/increase-in-disasters-since-1948-global.html

Stormy Fugures Map: http://blogs.forbes.com/mindylubber/

The Shock Doctrine:http://aglobalview.wordpress.com/

Kicking the Crisis Can Down the Road

by Gary Berg-Cross

We've all been awash in the recent media coverage of largely ideological arguments over the size of government and its spending , the threat if unfunded “entitlements” and the possible fall out from not increasing the debt ceiling. According to economist Joe Stiglitz much of the discussion has been aimed at the wrong issues:
“Our economic situation is the result of 30 years of unbridled right wing free market ideology. “Unaffordable tax cuts and wars, a major recession, and soaring health-care costs – fueled in part by the commitment of George W Bush’s administration to giving drug companies free rein in setting prices, even with government money at stake – quickly transformed a huge surplus into record peacetime deficits.”

Stiglitz adds, “Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government’s fiscal position, or at least yielding less improvement than austerity’s advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.”

In a way we seem to have avoided an immediate disaster, unless you count the disastrous impacts to our political system, good government or things like lowering unemployment and an anemic economic recovery. With the economy shrinking we have perhaps kicked the disaster can down an ugly and dangerous road for a few months. Looking down that road economist Michael Hudson put it:

"since the government can’t supply the credit, that means that the economy is going to have to rely on commercial banks. And they’re going to charge interest. And it means that all of the growth that does occur in the economy is basically going to be paid to Wall Street, not to the people who produce the wealth, not to industry or its employees. The economy is going to shrink. Industrial corporations will shrink. Real estate will shrink. And the government isn’t doing anything to prevent this shrinkage into a deeper and deeper recession."

The declared victory is avoiding default, a downgrade from the ratings agencies and resulting higher interests rates that would be paid to borrowers. But this got me thinking about the power of rating agencies and their investment allies. You remember these rating guys - S&P and Moody's. During the run up to the debt ceiling these were the organizations threatened to cut the US's sweet AAA credit rating for sovereign debt for the first time in its history. This is a real threat since countries have to pay a higher rate if they are risky. As a recent WAPO story said:

"Investors drove borrowing costs for Italy & Spain to 14-year highs, fueling sharp stock market drops in London, Frankfurt, Paris, Milan and Madrid. Though Italian and Spanish bonds later rebounded, borrowing rates for both nations remained dangerously high, at more than 6 percent — and closing in on the 7 percent threshold that eventually triggered bailout talks with Greece, Ireland and Portugal."

Rating agencies had a lot to do with framing the debt ceiling debate as a crisis with unsustainable $14.3 trillion U.S. debt. They even provided their view of a credible medium-term plan to reduce the debt. It had to be at least by $4 trillion or they still might consider a downgrade leading to higher interest rates.

To some this seemed sound advice and people follow the bond market's prophecies closely:

"The bond market is, as they say, the smartest market in the world; so they must know what they’re doing when they send yields on the ten year Treasury down to 2.6% and the thirty year bond down below 4%." Don't Get Caught in the Treasury Bond Trap


But to me this is all conditioned by the memory that these forms are the same ones that liberally giving out top ratings to ultimately worthless structured mortgage products in 2005-2007. These are the fiscally irresponsible guys who facilitated the housing and credit bubble inflation. They did not provide sound advice and seemed to put their own interests along with their allies ahead of the ultimate customers and the nation. One reason the debt is soaring now is that incompetent economics involving unsecured loans and irresponsible credit allowed an $8 trillion housing bubble to grow out of control so that when it crashed it melted the larger economy. This drove down our tax base so that governments have to borrow money to meet their budgeted needs.

Following the housing bubble collapse with its resulting financial meltdown, there was widespread agreement on the need for reform both banks and rating agencies. One idea was that the banks, aka securitzers, should be forced to keep some investment “skin in the game,” meaning a stake in the mortgages they issued. If they collapse then the bank loses money directly. The Dodd-Frank included bill required to this effect, but only got a minor piece of skin. Many wanted to require a 10 or even 20 percent stake in mortgages, but the final bill had just 5 percent. Furthermore, the regulators exempted traditional 20-percent-down mortgages that have low risk of the fault. So now banks need keep no skin in the game on those.

Rating companies were the other target. They had to defend themselves in the face of all of this and said, "Well, yes, we gave AAA ratings on junk mortgages, but they’re legally only opinions."

The Dodd-Frank bill was the Feds attempt to correct this saying that rating agencies are liable for their opinions. Seems reasonable and responsible, but the rating agencies and their investment bank allies who have real political clout didn't want any skin in that game either. The responded in effect that they expected a free lunch just like always:

"We want to make money by selling our opinions. We need to. It's what we do and people need an idea about what options might make them money on a reliable basis. But we don’t want to have to take any responsibility for those opinions. That''s too hard. It might get in the way of us making money. Don't ask us to do that. It sounds too much like Social Justice. We live by the phrase, 'let the buyer beware.'
And one more thing. We'll show you what we can do if you upset us. We might have to downgrade the U.S. government rating. Our banker and investment friends will make a good profit from this. Good for then, but you wouldn't want to play the rate that Greece has, would you? "


So now a few organizations sit in judgment of the viability of national finances. If you go into debt an entire nation might be up for sale at fire sale prices. You can read about just such things starting now in Greece, but likely in other parts of the Euro-zone. It looks like one western history's great fire-sales is starting, as Greek officials began appointing advisers for the country's ambitious privatization drive. Last week Europe's banker, Germany, signaled it was interested in snapping up assets in the energy and tourism sectors. The Chinese are already buying up ports and Greece is thinking of selling some islands. Greek finance minister, Evangelos Venizelos announced:

"Our target is clear, and it is to generate €1.7bn from privatizations by the end of September and €5bn by the end of the year,"

By one report Austria is thinking of selling mountains to pay off their national debt and on this side of the Atlantic cities are thinking of privatizing their parking meters. All part of a process that turns historically public assets over to the control of private actors, whose bottom line is less investment than extracting maximum profit in the short run.

This all does reminded me a bit of the warning that Naomi Klein provide in Shock Doctrine: The Rise of Disaster Capitalism. Klein argued that crises are intentionally created to push the free market agenda or fight government actions. You see this whenever a natural, economic, war-related, or other disaster such as a financial meltdown happens. Narrow profit driven folks seize this as an opportunity to quickly impose a brand of economic policy benefits an oligarchic elite at the cost to most everyone else. This may result in increased unemployment, pushing the cost of essential goods up rapidly, and otherwise increasing poverty. All this may happen while the masses of people are still in shock and unable to react within a slow moving Democratic system. In the midst of such crises free marketers are able to destroy social protection, such as union rights, and to install a virulent, mutant version of free market capitalism. An example of profits from financial crisis such is being seen in the Greek fire sale. It could happen it, and is happening across Europe. See America Is Being Raped ... Just Like Greece and Other Countries.

It is perhaps why we are seeing such calmness among some as we slowing move along kicking a mix of crisis and future disasters down the road.