Category: Finance

Environmental Markets

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There are a number of lessons to be learned from our current financial hurricane.

1) Yesterday I had a very thoughtful recent Princeton graduate ask for comments on his analysis of carbon markets, carbon tax, and the potential of water markets. His analysis was insightful and smart. I only had one concern and I related it to him as follows:

One personal comment on your thought process….you logically try to consider the impact of speculation and market manipulation on the conceptual analysis. Unfortunately, speculation and manipulative market practices inherently lead to irrational and illogical decisions that degrade any economic logic (as evidenced by our current banking crisis). Therefore, speculation and manipulative market practices are bad for economies and markets (…given all the speculation and manipulation we currently accept as common market practice, it creates an analytic headache).

2) I know I’ve said this before….but….if we can successfully measure environmental assets and services, then we can create markets/exchanges that build resilient wealth. Logical and responsible measurement, and timely monitoring/auditing, is key… (Who could possibly want to sort out the measurement black hole that exists with current mortgage securities?).

3) We need to attract environmental “investors”….folks that trust and respect our new markets and assets…and want to see their investment grow over the medium to long term. In order to do that, we need to construct very transparent securities, credits, etc. with strong scientific underpinnings.

4) Markets need to develop from local community needs. The more responsive environmental markets can be to local economic, political, and conservation needs, the more sustainable they will be. Creating big abstract systems without local oversight (think mortgage brokering over the past 10 years) the more risky the assets.

5) Governments manufacture money…businesses do not. One of the goodnesses of business is that bad practices create failures. Our government is currently lending and investing using debt…we increased the national debt to do the bailout. One of the best assets to rescue the financial debt of the U.S. government is a well-managed environment. Numerous economic studies show the value of our environmental assets are very large, and responsible enhancement of our ecosystem services…in a market environment…will go a long way toward restoring confidence in our country’s financial health.

Nature’s Loss and Wall Street’s Loss

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The global economy is losing more money from the disappearance of forests than through the current banking crisis, according to an EU-commissioned study.

It puts the annual cost of forest loss at between $2 trillion and $5 trillion.

The figure comes from adding the value of the various services that forests perform, such as providing clean water and absorbing carbon dioxide.

The study, headed by a Deutsche Bank economist, parallels the Stern Review into the economics of climate change.

For the entire BBC article:

http://news.bbc.co.uk/2/hi/science/nature/7662565.stm

Shorting…call me crazy, but

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I have often stood mystified by the ways the financial industry has found to make money… some of which leave me breathless. Not to oversimplify, but do you often invest in the potential of your neighbor’s failure (with borrowed money, no less)?

Shorting has been suspended in 799 stocks because of our current crisis. I think it is time to make some ethical choices in our American communities about what we reinforce and what we avoid.

The Michalenka Plan

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Our CPA, Henry Michalenka, has been helping households, individuals, and small businesses for thirty years. He’s honest, smart, and…from years of dealing with every financial entity on the planet…cynically funny.

Hank has an alternative plan to the Bush Administration bailout.

The Michalenka Plan will give the $700 B to American households (he figures it would be $10,000 to $15,000 per household). He will let the market decide what to do with the banks…which most likely means bankruptcy and reorganization. Stocks will further deteriorate….people will re-evaluate which investments (and people) are investment worthy…folks will buy back in to new companies at low P/Es.

The market will recover with money being invested in better companies with more responsible management.

P.S. About the credit crunch that so worries Mr. Paulson…don’t forget that retail banks still have significant good mortgages and accounts.

Ben Bernanke…and America’s New Fund

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Will America’s new $700 B fund take a bath?

Remember, housing prices are still falling….so it’s questionable whether this attempt at a resolution trust really has legs…..and we have little insight on where specifically the problems are with these illiquid bank assets. If the housing market stabilizes, will the Fed be able to sell much of this stuff at a reasonable price?…or is it so abstract that they’ll never find a buyer? Undoubtedly, both things are true…but in what proportion?

And think…. if you were in Congress, they are asking you to pass a bill in a few days with all of those basic financial questions unanswered? …based upon the notion ‘it’s too difficult to figure out right now, so let’s just underwrite it, and we’ll figure out what we’ve done later.’

So it looks like Ben Bernanke could either end up looking either like a genius or a failure…one thing is certain, he just jumped off the edge of a cliff with a very untested parachute.

Happy Birthday Social Security

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The Social Security system turns 73 this month. The Providence Journal carried an editorial this morning about Social Security. The editorial points out…in addition to the $10 trillion-plus shortfall…that the program creates no wealth. It merely pays current obligations with our withheld income.

Because it is a politically managed system, the government can change how much it withholds (it has increased payroll taxes 17 times since 1935), how it pays benefits, who benefits… As the editorial writer says, the only thing you can count on is that it is a massive drain on the earnings from your work.

The writer makes the very interesting observation that, in order to ensure a ‘retirement’ for everyone, we are depriving young workers of their ability -and freedom- to plan their own futures.

He believes Social Security is morally irredeemable.

The Limit of Property Tax Caps

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Anthony Flint of the Lincoln Institute writes:

California has been a policy innovator on a lot of things — coastal management, clean air, vehicle fuel efficiency, and now the connection between land use and greenhouse gas emissions. But in public finance and the property tax, the Golden State is a cautionary tale. Thirty years ago this summer, Proposition 13 was passed, setting a maximum rate of property taxation at 1 percent, and limiting annual increases in assessed values at 2 percent. The measure followed the property tax “revolt” in California through the 1970s, when some homeowners saw annual increases of 30 percent or more.

But assessment limits are not a particularly good instrument for property tax relief. Assessment limits leave some homeowners paying more than others, even in identical homes, and encourage families not to move, even to be closer to a new job, for example, because market value is reset in the relocation process. “Severing the connection between property values and property taxes creates a new set of problems,” said Joan Youngman, senior fellow and chair of the Department of Valuation and Taxation (at the Lincoln Institute). More effective paths to property tax relief include circuit breakers targeted on ability to pay, more deferral and exemption options, and truth in taxation to combat so-called “invisible” tax increases that occur when property values rise but nominal tax rates stay the same.

For the Lincoln Institute Report abstract:

http://www.lincolninst.edu/pubs/PubDetail.aspx?pubid=1412

A New Shared Economy for Appalachia

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John Todd has recently published this report titled ‘A New Shared Economy for Appalachia: An Economy Built on Environmental Restoration, Carbon Sequestration, Renewable Energy and Ecological Design’.

It is an expansive….and bold…. suggestion to completely reform the economy and ecology of Appalachia. There are aspects of it that are very interesting and rational. It would require enormous political change, both in governments and in corporations.

The entire report (it’s worth reviewing):

A New Shared Economy for Appalachia