What is a collateralized debt obligation?

You might like to watch this 11-minute film, which is an illustrated example of lots of the terms that have been bandied around in the past couple of years, like collateralised debt obligations and credit-default swaps. It doesn't go into the politics of money or the way banks create money, but it does manage to make the technical stuff quite fun. Tweet

Where Scepticism Meets Denial

I have recently had two arguments with intelligent colleagues about whether we really need to act on carbon emissions. I think it would be fair to say that both my interlocuters have come to this discussion fairly recently and, interestingly, both consider themselves to be rationalists.

It has been my observation for a long time that people do not make up their minds on the basis of evidence and the climate change debate seems to bear this out. Martin Amis once joked 'I don't know much about science, but I know what I like', and it seems that many people do not like the implications climate change has for their way of life. As an economist I spend a lot of time with people who are part of the self-deluding and irrational paradigm that most threatens the balance of the planet: neoclassical economics. As I have blogged elsewhere, the environmental crisis requires us to reassess how rational we are as a species.

The media is not helping here.* The error in the IPCC report concerning the speed at which Himalayan glaciers were melting and a few indiscreet emails about unprofessional relationships sent by scientists at Britain's leading climate-change research centre have both been presented as major scandals casting doubt on the decision to take climate change seriously as a political issue. In an area where human survival is at stake this is, at best, irresponsible. It would be unsurprising if there were not errors in a report with such a massive number of data, and to imagine that academic scientists are wholly beyond reproach is naive in the extreme.

None the less these tiny grains of resistance to the tide of scientific evidence that climate change is happening, that it is accelerating and that the cause is human burning of fossil fuels are being grasped by those who are terrified of the prospects of being swept away by this tide and losing so much of what presently makes up their reality that their very sanity might be compromised.

I think in this context the use of the word 'denial' to describe such people is appropriate. My personal experience is that understanding this as a psychological response, a concern for psychological survival, and a fear of the sudden change that climate change threatens, helps me to find sympathy rather than respond with anger. It might also influence our ways of sharing the message of climate change: with clarity and certainty, but always also with solutions and a clear message about what we should do in response. This certainty about where we are going can help provide the psychological support that those in denial obviously need.

*Roger Harrabin has a two-part series called Uncertain Climate, taking a wider perspective on how the media deals with climate change. The first part is available for download as a podcast here. Tweet

No Respite from the Debt Hangover

So where were we before the media and the powerful generally conspired to deny that anything serious was happening for a month? Oh yes, we were in the middle of the biggest recession for a century. Now that those further from the spotlight have jetted back from warmer climes and baby Florence Rose Endellion is sleeping peacefully in her crib perhaps we can turn our attention back to this rather serious matter?

The tendency of every debate to fall into a dichotomy is a perennial irritation. In this case we now have the split between the cutters - neo-Thatcherite shock tacticians either born with silver spoons or made rich through the banking boom - and the post-Keynsian, New-Labour-cum-Old-Labour big state advocates, who are prone to use the ugly phrases 'double dip' and 'fiscal stimulus', both of which have sinister overtones of something unpleasant and sexual.

As usual, the green position trascends this dichotomy, and as usual it is not being heard. As I posted previously, our role as visionaries of a green future is to make clear that the economy has grown beyond the planetary boundary and so it needs to contract, but that this should be used as an opportunity to achieve the greater levels of equality that research indicates would make for a happier society. Elsewhere I have argued that we could frame this within the contraction-and-convergence that we use when thinking about climate change. Not an attractive slogan, I grant you, but it might just save the human race. Tweet

Intermission

The bank holiday is coming, the TV is packed with adverts for sofas and electronic gizmos, so it is time for me to engage in a little marketing of my own. First, I am proud to announce that Gaian Economics has been listed at no. 6 in the green blogs this year, one place ahead of George Monbiot. Not that I am competitive, of course, but it can be irritating that he is so endlessly the green talking head.

The Total Politics annual poll of political blogs is a bit of fluff that Ian Dale engages in each year, mainly to draw attention to his own blog, the quaintly named Ian Dale's Diary.

More significantly, at least from my point of view, I would like to draw your attention to my new website: greeneconomist.org. The idea is to draw in people who presently think a green economy just means shareholder-owned factories making wind turbines and set them onto the true path. There are also lots of my presentations that you are welcome to use and other resources for journalists, students and teachers. I hope you find something to enjoy. Tweet

Eat Your Greens not Your Shreddies

I share with Christopher Somerville, whose book Never Eat Shredded Wheat is published today, a recent interest in geography, a subject which we were both alienated from at school as a result of disastrous teaching. I am not sure that our reasons for revaluing the subject are the same, but I entirely sympathise with Somerville's intention to reacquaint us affectionately with our native land that seems both quaint and anachronistic in these days of Google Earth.

The book adopts a breezy, arm-waving tone which is probably inevitable when an author attempts to summarise a whole country's natural endowments in less than 200 pages, more than 20 pages of which are taken up with a pub quiz to make sure you were paying attention. This leads to some irritating generalisation and a few howlers, but I'm with the author in spirit.

My own interest in geography, and here I sense some further commonality with Mr Somerville, is twofold. First, I share his amazement at our ignorance of these native shores. As he explains:

'Geography helps me notice and appreciate what's around me, while I'm on the way to where I'm going. It puts a polish and a sparkle on thing. . . The British are lucky enough to live in just about the most diverse, compact, beautiful and endlessly fascinating set of islands in the world. To have the privilege of travelling them - which we endlessly do, for work and play - is to move through the world's best art gallery, nature reserve, library, concert hall and theatre - all for free.' (p. 3)

Rather more priggishly, I might suggest that, if we work a bit harder at embedding ourselves in our landscapes we might put a bit more effort into protecting them.

And then there is his idiosyncratic categorisation of England in 10 regions he seems to have chosen almost on a whim. I enjoyed this chapter, because it demonstrated a gleeful disregard for textbook geography or the statistical regions used by policy-makers. Combined with the chapter on the land's great rivers, it might provide a good starting-point for creating the bioregional map of the UK which could help us to plan a resilient and sustainable future. (See Australia's exercise along similar lines here).

The publisher's A4 sheet informs me that the author is based in Bristol, and he apparently hails from Dinder near Shepton Mallet, which may help to explain why, if he were facing in only one direction, the South-West appears especially neglected. None of its rivers are included in the chapter on 'watery bits', nor Plymouth amongst the country's great cities. Or perhaps his affection for the West Country has encouraged him to keep his own neck of the woods just a little bit private? Encouraging your countrymen to holiday at home is one thing, but seeing your own beautiful landscape overrun by the outcasts from the home counties might be too much to bear. Tweet

This is fun!

David Harvey explores and explains the financial crisis, with brilliant cartoons! Tweet

Topsy-Turvy: Turning that Well-Worn Graph on its Head

Here is one for the theorists amongst you - a longer and deliciously academic paper available on request. But for now just enjoy the sense of complete upset that could be caused to a neoclassical economist by the thought that, not only is there supply and demand model (see the figure) ridiculously simplistic, but both lines might actually be oriented in the opposite direction from those conventionally illustrated.



Such is the hypothesis of the German-New Zealand economist Stefan Arne Kesting, who argues that, not only might the directions of the two curves be reversed, but it might actually be possible to posit that an equilibrium is reached.

Conventionally (see the diagram) the supply curve is illustrated as upward sloping, since as the price of a good increases the producer is willing to supply more. However, Kesting points out that, 'Based on arguments of economies of scale and increasing returns by Alfred Marshall. . . marginal and average costs of production and prices are shown to decrease in some instances when output is extended.' This might suggest a supply curve that slopes downwards for a certain range of prices.

In the case of the demand curve, Kesting argues that Veblen's ideas about conspicuous consumption might cause this to be upward sloping. The conventionally downward sloping curve is based on the assumption that as goods increase in price people buy less of them. But if those goods are status goods, the higher price might increase demand (superior branded clothes might be an example).

Kesting argues that the two curves might again meet at an equilibrium point, although each is the mirror image of that suggested by orthodox economic theory.

The easy way in which the most basic apparently scientific formulation of neoclassical economy theory can be turned on its head in this way indicates clearly the vulnerability of the whole house of cards by which our complex global economy is justified. Tweet

British Broadcasting Co-operative

There is something intensely depressing about the way Labour politicians seem so much more comfortable in opposition. As though they collude in the Tories' long-held view that they are the natural party of government, even the ruling class? Suddenly, now that they no longer have the power to do anything about it, Labour seem to have all the answers.

The lastest example is the suggestion by David Milliband and Tessa Jowell that the BBC should become a co-operative. How disappointing that Tessa Jowell didn't think of this excellent idea when she was Culture Secretary, and so had the power to make it happen. Are we to assume that if, by some miracle we were to have another election and Labour were to win, she would forget the idea again as she moved through the revolving doors into her department?

Cynicism aside it is an interesting idea and could be taken in a number of directions. Will this be a worker co-operative, where decisions about programming will be made by journalists and producers? Or will we all be offered shares and then enabled to stand for election to the board which will decide what we will be watching. Could it be, and I admit I am going out on something of a limb here, that I could put myself forward to be part of a monitoring panel to check the balanced nature of reporting about Palestine?

Ed Mayo, of Co-operatives-UK welcomed the news in typically measured tones:

'It is brilliant to see such senior Labour voices raise the stakes in terms of the potential for co-operative action. This proposal does address the current weakness of BBC governance, which leaves the BBC open to the unedifying spectacle of growing bullying over recent years by government. If the BBC were answerable to members and license payers in a democratic way, its independence would be strong.

'Making this happen could only take time, because co-operative membership is built from the bottom up, not the top down, and should be voluntary not compulsory, but it would be inspiring to see the public trust and sense of ownership of the BBC turned into a genuine engagement and co-operative ownership stake.'

Since we pay the licence fee directly we might be argued to have already paid for our ownership stake in the Corporation. Translating it into a Co-operative and giving us control as well might be seen as the natural next step. Perhaps Mr/s Milliband and Jowell should turn their attentions to the banks next? Tweet

Media Blind Side

Aside from Mickey Mouse studies, which was surely an urban myth, the most reviled course available to our young people is media studies, which is routinely compared unfavourably with useful courses such as astro-physics or pharmcology. Yet there seems to be very little research (and I would welcome suggestions) into the extraordinarily biased way in which the media has dealt with the financial crisis and the public-spending crisis it has given rise to.

I cannot be sure what media students do during their three years in college, but not enough of them are exposed to the sort of critical work that is undertaken by Greg Philo and his colleagues at the Glagow Media Centre. How does this power system work? Philo has previously suggested that the bias against Israel in the media is deliberate but it need not be. So long as there are sufficient high-level executives who make it clear which sort of stories lead to promotion and which do not, aspiring journalists will write their stories to suit.

The level of self-respect in what was once referred to as the profession of journalism has reached new lows this week, when we finally heard about the trial of Charles Taylor. The three years of his trial during which victims displayed their mutilated limbs and children who had been press-ganged into soldiery told their tragic tales caused no flicker on the news monitors. Now that two celebrities and a celebrity hanger-on have taken the witness-stand it is the top news story.

This sort of behaviour is a moral disgrace, but more serious is that way that these ephemeral non-stories fill the news hours so that a thorough examination of how the financial crisis has led to a massive deficit and what the options for dealing with this might become excluded. In this context it is easy for the Tories to repeat the Big Lie that the public-spending disaster results from Labour economic mismanagement until at last, perhaps, everybody will believe it. Tweet

Brother, Can You Spare a Paradigm?

I've had a bee in my bonnet for a while now about the need for a paradigm shift. This began when I came up with the title for a paper: 'Let's Twist Again: Time for a Real Copernican Revolution'. Don't worry, this is the sort of party game academics get up to - yes really! My own favourite is 'Haydn Sikh: The Adaptation of the Classical Form in Britain's Minority Religious Communities', or something like that.

The idea of a paradigm shift comes from a hugely influential paper written by Thomas Kuhn in 1962 and called 'The Structure of Scientific Revolutions'. Kuhn's conclusions were intended specifically for the hard sciences. Amongst the scientific community this was taken as a harsh blow by some, implying that there was not a single, objective and irrefutable system of knowledge discovery, but that what counted as true and how it could be developed and communicated changed through time.

People now tend to use the phrase 'paradigm shift' in a more New Agey sense, of a questioning and overthrow of the most basic assumptions of our worldview. It is in this sense that I have become increasingly convinced that we need such as shift. What we are seeking is a new system, not just a change in some of the parameters of the existing system. This explains why it is so difficult to explain green ideas to the mainstream, because you cannot explain, say, why you need a Citizens' Income to somebody who doesn't understand the problems with global capitalism, or the need for a bioregional, provisioning-focused economy. All these concepts make sense as part of a wholly different paradigm of economic life; individually they appear marginal, if not absurd.

But how deep should our questioning of the paradigm go? Paul Feyerabend, scourge of the methodological community and child of the 1960s, takes the phrase 'accept nothing; question everything' to its logical conclusion. In the unpublished manuscript called The Conquest of Abundance that was left unfinished at his death, he suggested that it may be our habit for analysing the world that has reduced our ability to show reverence and wonder. It has thus in a fundamental way limited our perception of the abundance of nature.

'Variety disappears when subjected to scholarly analysis. This is not the fault of scholars. Anyone who tries to make sense of a puzzling sequence of events, her or his own actions included, is forced to introduce ideas that are not in the events themselves, but put them in perspective. . . There is no escape: understanding a subject means transforming it, lifting it out of a natural habitat and inserting it into a model or a theory or a poetic account of it. But one transformation may be better than another in the sense that it permits or even explains what for the other transformation remains an unsolvable puzzle' (p. 12)

Feyerabend develops his theme by exploring the point at which Greek culture underwent a shift from the mysterious, poetic understandings of Homeric times to the intellectually impressive mind-games of logic, evidence and proof. You might argue that this is the first step along the road that has led us to evidence-based policy-making and the impossibility of making anything change unless you can show that position B is better in terms of something measurable (and probably in money terms) than position A. In this world we cannot save hummingbirds unless they have a finanacial value, and hence they, and a thousand other species, are doomed.

The legalistic, taxonomising worldview has labelled us as Homo sapiens. This tells us a lot about how we think of ourselves as a species, and perhaps some of the assumptions we need to challenge if we are to be a species with a flourishing future to match our glorious past. To what extent being a species that focuses so exclusively on one gender may be a problem is a question that intrigues others. I am more interested in the 'sapiens' part of this formulation. Such a characterisation accords with our exaltation of the intellect, since 'sapiens' is usually translated as knowing. However, the online dictionary tells me that the derivation is actually from 'sapere', to be wise or to taste. To think of ourselves as a species that tastes the richness of life and does so with true appreciation seems to offer us a better hope than any amount of numerical analyses. Tweet

Laughing all the way . . .

So the banks are in profit again, and this is apparently a cause for celebration. The number of questions being begged by the mainstream media mounts by the day. Robert Peston, our most promising hope as a curious voice, limits his comments to an arm-waving complaint about the banks' failure to lend in sufficient quantities to small business, a complaint they bat away with tired lies about low levels of demand. Politicans have failed to enforce strict new capital requirements, indicating that banks are still more powerful than our political representatives. And the profits are a clear indication that the money being made at the public expense is being spent on both bonuses and shareholder dividends, and not to rebuild capital reserves.

We are living through a time when history is being rewritten. The Tory line is that Labour has mismanaged the economy leading to a fiscal crisis, a socialist tradition they enjoy drawing attention to. This is a Big Lie to conceal the reality that we have barely survived a monetary crisis that is a periodic symptom of a capitalist economy system.

Let's ask a few of the questions that the pundits are ignoring. The first is: where do the profits come from? This is a difficult one to pin down, for the very reason that the banks' international venture-capital operations are mixed up with their domestic banking operations so we cannot easily see where the profits are being made. However, the wider distance between Bank of England base-rate (which has been at half a per cent for 18 months) and bank interest rates indicates that much of the profit is coming from the people they lend to. Another source of public subsidy to the banking industry and small cause for celebration.

The media line that we should greet news of a return to profitability by the banks with unbounded joy since belong to us and so their profits are our profits also seems disingenuous at best. The debts we incurred by rescuing the banking system in its entirety two years ago are on the public balance-sheet and the cause of the massive public-sector deficits and consequent cuts. The odd billion here and there that may come into the public finances via the bank levy seems a small compensation. Tweet