The Flaws of Cap and Trade: Part I: The Market

By Abel Collins

On paper, cap and trade offers a versatile regulatory strategy to reduce carbon emissions. Rather than the blunt tool of a blanket tax, the innovation of the carbon credit allows industries that might find it particularly onerous to cut carbon pollution to promote other sectors of the economy to make reductions in their place. By creating a carbon market, the world theoretically summons the mystical invisible hand of market efficiency theory to produce the most effective reductions.

Of course, market efficiency theory is now seen as a rather naïve economic model that is disproven on a daily basis, and ideas that make a lot of sense on paper are often met with resistance by reality. Such is the case with cap and trade. The translation of the theory into cap and trade reality is fraught with problems.

The most glaring problem is administration, and it is manifold. Before we delve into the many failings of the administration of cap and trade, it is important to note with administrative costs that resources dedicated to organizing and maintaining the system (administration) are resources that are being taken away from actually addressing the issue that the system is designed to resolve (e.g. healthcare). With cap and trade, there are two distinct areas of administration; the carbon markets, and the validation and verification of the carbon credits to be traded within those markets.

Large banks, notably J.P. Morgan and Goldman Sachs, have graciously offered to administer the commodity markets for carbon credits. They have not made this offer out of concern about global warming or because they have any expertise in environmental matters. No, like everything else they do, they run the carbon markets in pursuit of profits, and there are many to be had.

Not only do the banks get paid to oversee the transactions in the marketplace, they are further allowed to use this position of advantage as they trade within it. Of even greater concern is how they can manipulate the market through unregulated financial instruments (i.e. derivatives, CDOs, etc.). With massive government subsidies aimed at reducing carbon emissions and unlimited sums of low-interest money available to the big banks, carbon markets are primed for overleveraging and bubble formation. As the markets get more and more manipulated, they will become less and less transparent and farther removed from their mission. Indeed, the carbon market, itself, is a secondary approach, regulating an intangible commodity to address climate change, and it in no way needs to be made more abstract through financial wizardry.

Meditation on the Economy

Posted by: Abel Collins

A crystalline calm is upon the ocean. The washed azure sky, without even the blemish of a cloud, speaks in the most fragile whispers about the proximity of beauty and death. The emerald water swallows with greedy equanimity both the heavy and light. The sun stretches down amber rays diffusing through teeming life, down to fathomless twilight. Somewhere, black and unknowable is the bottom. Deeper and more quiet than the blackest dream, the ship is sinking. Strange sounds resonate from the hull, air trying to push its way out, the wood groaning in protest. Large pockets rise to the surface and burp erratically as the wreck shifts in the rolling currents of its descent.

It had gone quickly at the beginning. The weakness so long in atrophy relented to its fated failure in a crack of thunder. Instantaneously, the sea rushed gurgling and hungry into the lower compartments, sucking the ship down. At first, the air had freed itself in a multitude of voices, whistles, sighs, and whooshes. It was a song of physics and chaos.

Now, an eternity of moments and ten minutes later, only the stern remains above water, pointing accusingly skyward. The ship is sinking slowly and remorselessly, a death that shudders nearer with each successive belch. The sinking is slower now but no less certain. In a panic that is so blind it is also silent, the crew and passengers are mostly frozen in denial. They cling to the idea it has stopped, that they can bob above the waves until the rescuers arrive. In reality, no aid is coming.

There aren’t lifeboats enough, and the self-important are claiming first right. These are the men in fine clothing and uniform; the captains of industry, the shipwrights, and the crewmen. Behold their fear, the dawning realization in their eyes that they aren’t in control. Their reasoning is that they will be better able to get and send help to those left behind. Sure, they were the ones that had brought them to this pass, so, too, they must be the ones who can find the way back. They offer this reasoning to the others in blue gel- cap cyanide placebos. They are saying ‘god bless you,’ and there are even tears in some of their eyes as they push off. They reason and excuse themselves from guilt. Cowardice, for naught.

The clarity of the ocean air, the sharpness of the light arcing through it, and the magical colors that they elicit; these perfections are not to be denied their finality. The falling inertia of the ship will draw the lifeboats down just as surely as the planet’s gravity draws the ship to its doom. It shall be a shared oblivion. The perfection; the fragile secret spoken by the breeze of beauty and death; no one is to speak of them.

Move Your Money Campaign

Posted by: Nicolas Katkevich

There is a movement encouraging people to move their funds from large "too big to fail banks" to local community banks, many of which are non-profit. This is a direct way to take a stand against the large financial institutions who's actions led to our ravished economy. Check out the video below and visit http://moveyourmoney.info/ for more information:

FCIC, Washington, D.C.

Posted by: Abel Collins

Believe what you will about the current state of the economy, whether it is that we are in the midst of a recovery or that we are still mired in a recession, there is no denying that gross financial crimes were committed to enable and sustain the housing bubble economy of the last decade. As yet, there has been no serious investigation of those crimes let alone prosecution. In fact, the Bush and Obama administrations have gone to extravagant lengths to cover up the depth of corruption on Wall St. and at the regulatory agencies that were supposedly put in place to protect the American public. Our leaders try to justify this obfuscation by claiming that if we were to be given the truth, we would lose the faith in our economic system that allows it to function. A simple question rises in my mind. Do we want an economic system that can only survive through secrecy and lies, a system whose foremost concern is catering to the demands of a cartel of banks?

At this stage of the Savings and Loan Crisis, involving significantly less grievous financial crimes in comparison to today’s mess, there were thousands of prosecutions and meaningful jail time was being served by the white collar criminals at the heart of the problem. Today, those at the center of this scandal are enjoying record profits. It reminds me of that Dylan line when he sings, ‘steal a little and they throw you in jail, steal a lot and they make you king.’ How are we to begin addressing this problem when all of the power seems to be in the hands of the banks and their army of lobbyists?

Today, I turned to C-SPAN to watch the initial hearing of the Financial Crisis Inquiry Commission (FCIC) in the hope that I might witness the beginning of a reckoning and a return of accountability to the financial system. Some of the CEOs of the large banks were brought before the commission, Lloyd Blankfein of Goldman Sachs, Jamie Dimon of JP Morgan, Brian Moynihan of BofA, and John Mack, chairman at Morgan Stanley. Unsurprisingly, their testimony can be summarized as vacuous apologies and evasions of responsibility. (You can watch the proceedings at the cspan link provided)

Sifting through the legalspeak and the financial jargon can be a frustrating and unproductive activity, but I sat and watched just the same. I watched because knowledge is power, and the public was largely victimized through its own ignorance. The people were sold a goldilocks economy, a perpetual motion machine, and they were told to believe that the laws of physics need not apply. As a society, we believed the lies, because in the short term it was to our benefit. We seemed rich, right?

Anyway, I watched to see what I might glean, and behold, wonder of wonders, I was rewarded. The vice-chairman of the commission, Bill Thomas, strengthened our tenuous grasp to democracy, inviting the public to get involved in the inquiry. The bankers agreed to answer in writing any question he would ask, and Mr. Thomas, in turn, promised to forward any questions he received through his email at billthomas@fcic.gov on to them. Regardless of our current conception of the economy, we must seize this opportunity to gain a better understanding. This is how we can empower ourselves, and at last find justice.

Here is the letter that I sent to the vice-chairman:

Dear Mr. Thomas,

Thank you for giving the people the opportunity to address this issue. I am happy to see that democracy is still alive in this country. We have an immutable right to address the grievances that the financial industry has perpetrated against the American public. I fear that all the responses that will escape the mouths of the bankers will be evasive and absolve them of whatever limited guilt they feel. Nevertheless, I would like you to ask:

1. What is an appropriate leverage ratio for a bank? Are you aware of the 12 to 1 ratio that functioned well for most of the last century?

2. What do you think about the potential re-establishment of Glass-Steagall?

3. Would your banks be solvent if you had to mark all of your assets to their fair market value and keep them on your books? Please do not tell me you don't know those market values. It is your job to know. Further, how much worse would it be if the federal government wasn't massively involved in supporting the housing market? If you plead ignorance, it will not shield you from culpability. It is your responsibility to your shareholders and the public at large to act prudently and be cognizant of risks.

Thanks again. I look forward to hearing any reply.

Take care,

Abel Collins
176 Sycamore Ln.
Wakefield, RI 02879

These, of course, are just a few of the questions that I want answered, and I will probably find the time put together a more thorough list, but it is a good start. I strongly encourage you to get involved as well. The bankers are firmly in control of this country at the moment, and this is our chance to make them answer to us.

http://www.c-span.org/Watch/C-SPAN2.aspx