17 August, 2007
The current turmoil hitting the financial markets might have a few interesting lessons for those political and economic leaders who keep denying the reality of declining natural resources (peak oil, gas, coal etc.).
First of all, just like the peak resources deniers, the financial “experts” and the “establishment economists” have for years underestimated the risks of deregulated globalised financial markets and have put their spin on any related story. They have also, just like in the resource debate, tried to ridicule and deride the “Cassandra’s” who dared question the established “wisdom”. Read Ann Pettifor’s analysis on this “blindness of orthodoxy” in Open Democracy.
Secondly, the blindness to risks is coupled with a strong faith that technology will save the day in case the impossible crisis might actually strike. Or, as John Michael Greer writes in an interesting comment on the financial crisis on his Archdruid blog: “Those who argue that the world still contains ample supplies of oil that just haven’t been found yet, like those who insist that innovation will take care of the problem by pulling some currently unknown technological rabbit out of a hat just in time, tend to respond to such questions as “but what if you’re wrong?” in the same tone of irritated superiority as a Wall Street financier might have done a few months ago if asked what would happen if subprime defaults got out of hand. There’s an oddly incantatory quality to this nothing-can-go-wrong rhetoric, as though it will all work out fine just as long as everybody agrees it will.“
A third lesson can be learned from the helplessness reactions of the political elites. In this age of globalisation, political leaders have neither the economic (or ecological) expertise to understand the real challenges nor the political power to do anything about them. That’s why we get these “let’s find a scapegoat” reactions like we got from the EU Commission yesterday promising to review the role of credit agencies for this financial crisis. Oil companies better prepare for the moment when the political establishment will finally grasp the peak oil crisis!
Last but not least, what the financial crisis demonstrates is the need for more transparency. The real problem of this financial crisis stems from the lack of visibility on who is hit how hard and what this means for the economy in general. This lack of transparency of the financial market functioning has its parallel in the energy world where official figures of (oil, gas, coal, uranium) reserves are more political than scientific.
Let me end with a last quote from the Greer analysis mentioned above:
“The small but steady declines in oil production that have taken place over the last two years, despite sky-high oil prices and a flurry of well-drilling that has driven rig costs to record levels, may just turn out to be the equivalent of the rising default rates in subprime mortgages that started today’s economic landslide on its way. At the moment, industrial civilization is poised somewhere in the same period of eerie calm between the beginning of decline and the arrival of panic that comes late in the history of every speculative binge. In the example now unwinding around us, that period of calm ended a few weeks ago when Bear Sterns admitted that two of its billion-dollar hedge funds were no longer worth a cent.
By ignoring the reality of risk, the money managers of the last few years left themselves with very few options once the economic situation changed in a way they hadn’t anticipated. In the same way, by ignoring the possibility that we may be running out of cheap abundant energy, modern industrial civilization could well be backing itself into a corner. Without preparations in place, or even a sense of what the options might be, we could all find ourselves desperately scrabbling around for a Plan B when the illusion of endless energy supplies pops around us like a bubble – speculative or otherwise.”
Other articles on the financial crisis worth reading:
- Financial Times: World’s investors scramble for safety
- Nouriel Roubini’s Blog: Current Market Turmoil: Non-Priceable Knightian “Uncertainty” Rather Than Priceable Market “Risk”
- Open Democracy (Tony Curzon Price): The end of gentlemanly capitalism
- Open Democracy (Ann Pettifor): Debtonation: how globalisation dies
- Financial Times Germany: Dossier “Es gibt gute Gründe für eine Panik”