There’s a lot of debate, in Copenhagen and elsewhere, about whether cap-and-trade is a good way to fend off the impending global-warming catastrophe. What most of that debate ignores is that, unless we set some rules for Wall Street, cap-and-trade is a recipe not for avoiding disaster, but for bringing it on — twice over.
It comes down to one word which is a lot scarier than it sounds: bubbles. Speculative bubbles caused last fall’s catastrophic financial collapse, which sent the world into a deep recession. Bubbles in food futures were one big cause of last year’s food crisis, which plunged 100 million people into hunger.
A bubble is when Wall Street greed makes markets fail. In a bubble, market prices for anything stop reflecting real-world supply and demand, and instead start reflecting the supply of hot money from the alternate-reality world of finance (what NPR has called “The Giant Pool of Money”). Stampeding investors bid prices up and up, all singing the Official Bubble Theme Song, “It’s Different This Time,” and all trying to surf the bubble’s rapid rise and bail out before its even more sudden collapse.
All this leads to “volatility,” which is a polite way of saying “Mr. Toad’s Wild Ride, without seat belts, for the entire planet.” Volatility leaves farmers in the dark about how much to plant, builders in the dark about how many houses to make, and — coming soon, if we don’t head it off, to a planet near you — factory owners and energy users with no clear signals to tell them how much to cut emissions.
A good description of Wall Street’s stampede behavior was given by Nobel-winning economist Robert Solow when humor columnist Gene Weingarten called him up in 2003:
Weingarten: … would it be your professional judgment that Wall Street, the principal bulwark of the American financial system, is … as skittish as, say, a zebra dropped off at Lion Country Safari?
Solow: Well, they don’t know what’s happening and so try to interpret the significance of every leaf that falls.
Weingarten: That is not a funny analogy.
Solow: Every sea gull that defecates.
Weingarten: That’s much better!
Solow: Thank you.
Jokes aside, bubbles threaten the planet with a crapstorm of unprecedented proportions. If we allow futures-market speculators to have an open season on carbon emission credits, whipsawing prices will derail any consistent or meaningful “market signals” that would stem global warming. But wait, there’s more: Carbon bubbles also threaten the world with yet another financial crash like last fall’s. It’s two planetary catastrophes for the price of one.
One reason bubbles are getting worse is the increased — and, since 2000, virtually unregulated — popularity of buying “derivatives” — things that are supposed have a basis in reality (food futures, mortgage-backed securities, etc.), but without all the bother of taking delivery of any actual grain, houses, etc.
The good news is that it doesn’t have to be like this, if we reverse the failed, anything-goes regulatory policies of the past decade. These failures can and should be fixed, starting with the financial-regulation reforms that Congress is currently considering. One fix would be a small financial transactions tax, which would get the many-trades-a-day hot-money speculators while having no significant impact on genuine long-term investors.
Another idea — currently in imminent danger of being loopholed out of existence in the bill before the House of Representatives — is to reinstate and improve the brakes on derivatives speculation which existed prior to the infamous 2000 Commodities Futures Modernization Act. A third strategy is to fix the tax double standard whereby Wall Street types speculating on food, oil (and carbon) futures pay less tax than genuine farmers, etc. hedging their bets do. Sen. Wyden is putting out a bill on this, currently just with oil futures, but food and carbon-emissions futures can and should be added.
The last two ideas, incidentally, are backed by the most wildly bridge-building coalition I’ve ever seen — PICO on the list right next to the Petroleum Marketers Association of America. I hope that it’s a forerunner of an Anti-Bubble League — because it’s come down to bubbles vs. the planet.
Elizabeth Palmberg is an assistant editor of Sojourners.
