Financial Reform!

This is something I’ve been working on irregularly for the past couple of weeks. Here goes!

I’ve done some light reading from Redefining Progress, a think tank/nonprofit interested in changing our economic thinking to incorporate sustainability. The director of their Sustainable Economics Program, J. Andrew Hoerner, has an essay that makes a case for sustainable reform in the areas of finance, health, and energy. It’s a good essay to start learning about sustainable economics. I will only focus on his introduction and section on finance here. I will likely blog about the health and energy sections in later posts.

Some basic arguments:

• Most importantly, Hoerner lists the three necessary tools to create sustainable systems: the right indicators, incentives, and principles of justice. (explained further after the fold)
• He suggests we switch from the Gross Domestic Product (GDP) as our economic health indicator to the Genuine Progress Indicator, GPI. GDP measures both good and bad economic activity. Bad economic activity includes greater purchase of health care due to personal sickness, or increased purchase of oil due to rising energy costs. These are both bad for physical and mental wellbeing. GPI is a more accurate indicator of economic collapse – it incorporates human and natural capital into its calculations. We would have a better idea of the extent of natural resource depletion and overall human wellbeing.
• Proposes we align individual liberty with the general good of society – encourage individual expression, but curb it when it is detrimental to the general good.
• Compares financial firms and corporations to evolution and natural selection - firms and corporations best capable of increasing their individual fitness/profit, not collective fitness/profit, are the ones that thrive. “So for example, a fishing fleet, if unregulated, catches the number of fish that maximizes its individual profit, even though the sum of those catches over time drives the fish population to extinction and the industry as a whole to ruin.”
• Suggests implementation of new financial regulations based on unwanted natural features of the market – i.e., make financial managers more accountable by taking part of their compensation and putting it into a long-term fund (say 10 years), so that the public has some security, should a recession occur due to bad decision-making. Or, imprison financial managers for bad decision-making.

Hoerner also goes into some detail about how to improve our health care and energy sectors. More details on his recommendations after the jump.

Thinking about this essay, along with other reports and tidbits I’ve been reading lately on this topic, I definitely feel that this topic is less about specific answers, and more about a relevant approach, or process, to building effective policies. For example, how does Hoerner come up with his ideas for new financial policy? Here’s how I see it:

The thinking process:

First, I would ask what our problem is – the financial collapse. How did we get to this point? I would go for studying the history of financial operations leading up to the collapse: Hoerner observes the trends of corporations and financial institutions over time, and looks at behavior patterns that may have lead up to the financial collapse. He concludes that their activity and proliferation is all in line with natural, organic, evolution. Corporations are owned by people, after all, with all the colorful human behaviors that come with people-run institutions. Essentially, the ones best at making money in the present moment (high-risk, high-return), the short-term, squeeze out the other competitors. High-risk, high-return operations become necessary to survive in a cut-throat financial environment.

That answers our first question (ideally, we’d want to see references to studies showing that this is true, backed by research evidence and all) - the financial collapse happened because the industry was too focused on short-term high-rate returns, and neglected problems in their transactions, which also happens to be a natural feature of the market, caused by human behavioral tendencies.

Secondly, I would pinpoint this unregulated proliferation as a problem – it needs to be fixed somehow, or prevented. How can we hold financial managers more accountable for high-risk transactions? How can the public have some sort of security, should a wreckless financial manager mess things up? One idea proposed by Hoerner is to take a substantial part of the compensation for financial managers and put it into a long-term fund that can be accessed only after a certain length of time (such as 8-10 years). In case of a financial meltdown or something similar, the public has access to these funds as a form of security from bad decision-making. Another, less invasive idea, is to simply imprison wreckless financial managers.

More about the essay:

Indicators, incentives, and principles of justice

How can you measure the effectiveness of sustainable policies? Indicators provide some way to measure how sustainable a system is, and provide early warning of problems to come. The GPI is one type of indicator. Personally, I think custom indicators should be developed for all different sectors of the economy, and used in conjunction with the GPI. That way, we would have a more accurate picture of how various sectors are faring in relation to the whole.

Incentives need to promote both maximal individual freedom and general societal good. Thus, incentives should discourage behavioral tendencies that cause damage. An example is the withholding of partial compensation of financial managers, and instead keeping it in a long-term fund. The repercussions of making a wreckless decision should be egregious enough to discourage high-risk operations.

I like Hoerner’s take on justice:

A system in which injustice accumulates is unsustainable because it gives rise to increasing dissatisfaction and ultimately to increasing rebellion or repression. … Injustice has its beneficiaries and its champions. So it is a feature of justice that it must periodically be fought for or it will be lost.

Arguments for justice:

• lack of access to basic needs and resources (such as clean, safe food, water, shelter, knowledge, jobs) promotes competition and crime
• necessary if we believe in aligning individual good with societal good

That essentially explains indicators, incentives, and the principles of justice. They provide a framework for developing sustainable policy.

The evolution of the financial sector:

Hoerner describes the phenomenon pretty well:

Firms that ignore risks of crashes and recessions do better in good years than more cautious firms. The market share of cautious firms shrink and they are ultimately bought out or ruined by more profitable and more reckless counterparts. Similarly, within a firm high-risk, high-return operations drive out low-return sure things—a tendency that can be accelerated by setting high internal hurdle rates for the return on new projects. Similarly, flashy daredevil managers who by luck succeed drive out cautious, responsible managers (and daredevils who fail by lack of luck). Even more disturbingly, in good times, daredevil financial managers and advisors show higher portfolio returns than cautious, careful managers. The portfolios and commissions of such managers swell; they are promoted and admired. So long as times are good, this dynamic is inherent. It is a feature of the market, not a bug.

It would be nice to somehow see the crowding out of cautious firms (based on the types of transactions conducted), and the proliferation of high-risk, high internal hurdle rate firms over time, on a graph of sorts.

Indicators and incentives for finance:

Now that we’ve established that we don’t like this natural feature of the market, Hoerner applies indicators, incentives, and justice. Risk indicators that could provide early warning of an oncoming recession should be developed for the financial market. If there does exist a risk for public bailout, then the public has a legitimate right to be aware of the financial activities of these firms.

He introduces four incentives for finance:

1. Institutional:  We need to make sure that all financial institutions make good on their promises – all institutions should have appropriate reserve requirements, not just traditional banks. “No financial instrument should be tradeable until an appropriate public process can set the reserve requirements needed to insure that the sellers can make good on its terms.”

2. Managerial: Substantial portions of compensation for individual financial managers should be deferred to a trust. In this way, when poor advice or ‘negligent risk ratings impose vast costs on the public’, the public can be compensated through the trust. If that’s too intrusive, then make the manager and the firm liable by sending the responsible managers to prison.

3. Greater transparency of all financial transactions, including risks and liabilities.

4. Need to establish a last resort insurer for all financial institutions. This could be financed by a “one tenth of a percent—tax on all transactions in currencies, financial instruments, and their derivatives.”

These incentives would reduce risky speculation, increase financial accountability, prevent future financial collapse, and in effect, would restore public trust in our money system.

My only issue with the essay is that it does not reference sources or provide hard evidence for conclusions, but that may also be for a different audience for a different written medium.

Related Links:

• Redefining Progress
• Sustainable Solutions to Current Crises: Recommendations for the New Administration, by J. Andrew Hoerner, Director, Sustainable Economics Program
• Genuine Progress Indicator, from Redefining Progress

Related Posts

• Why a Blog?
• People, Planet, Profit

- more specifics on sustainable economics and policy

- I just received Blessed Unrest, by Paul Hawken, and I will definitely blog about this. Essentially, it’s about the proliferation of the nonprofit movement. And it is super exciting and optimistic!

- technical details for various renewable energy resources: solar, wind, fuel cell technology

- news of what different companies, countries, and individuals are doing in this area

Things are going to get pretty detailed! I hope it doesn’t overwhelm anyone. Feedback for anything related to this blog is greatly appreciated – design, post content, etc.

Mitsubishi i-Miev

Many people have heard about the all-electric Chevy Volt that is set to be released in 2010. At least, I had heard about it, but nothing about other electric cars by major dealers. Now, Mistubishi is planning to produce 1,400 i-Mievs for corporate and government lease. The i-Mievs will be released in Japan, will go for around $45,300, and they qualify for a $14,300 government tax credit.

According to CNet’s CarTech blog, “The i-Miev uses a lithium ion battery pack and a 47-kilowatt electric motor to get a range of 100 miles. Recharging the batteries from a quick charger takes 30 minutes, while recharging from a 200 volt outlet takes seven hours. Regenerative brakes help recharge the battery pack during driving.”

Mitsubishi has plans to release the i-Miev in late July, at about the same time Subaru is planning to release its tiny all-electric Stella. In comparison with the i-Miev, Stella also uses a 47-kW electric motor, has a top speed of 62 mph, a range of 56 miles, and charges in 15 minutes at a quick-charge station.

I’m hoping the new interest in electric cars will generate a good amount of competition among major dealers. There’s a huge market here waiting for a good, practical replacement for my fuel-guzzling vehicle. Not only do I hope for the production of a really good electric car, but I’m also hoping to see the proliferation of quick-charging stations. Having reliable electric cars available combined with public interest and purchase will allow the infrastructure for an electric car market to develop on its own. I’m curious as to what motivated these companies to start investing in electric cars. How can we motivate companies in the future to produce products good for the public and the environment?

Related links:

• Mitsubishi i-Miev
• Subaru Stella
• Chevy Volt
• 23 Electric Cars Driving the Revolution

Solar Bus Shelters in SF

CNet reports Mayor Gavin Newsom and San Francisco Municipal Transportation Agency (SFMTA) have installed the city’s first solar-powered bus shelter, located on the corner of Geary Boulevard and Arguello Boulevard. The SFMTA plans to construct four more of these and will evaluate the initial design before replacing a minimum of 1,100 bus shelters in the San Francisco area. They aim to have the shelters complete and in place by 2013.

So what’s in these bus shelters?

The pilot bus shelters, which were designed by Lundberg Design, incorporate a bright red plastic wavy roof containing [organic dye-based] photovoltaic panels, two maps, LED lighting, Wi-Fi, space for two advertisements, and a NextMuni display that informs users of impending arrivals. … [The red plastic roof is] made of 40 percent recycled content. The bus shelter structure itself is made from steel consisting of 60-70 percent recycled material. The LED lights being used in the new bus shelters use about 74.4 watts, making them four and half times more efficient that than fluorescent lighting in the old shelters, which uses about 336 watts.

The story is here.

people + planet + profit

Since discovering the basic idea behind sustainable economics, I’ve been looking into a variety of sources for more information on this topic. The concept itself is known as a few different names, all with the same general idea. Some of the names I’ve encountered include a “restorative economy,” coined by the environmental entrepreneur Paul Hawken, a conservation economy, and the “triple bottom line” (TBL). Wikipedia has a good entry on the basic idea behind the triple bottom line.

Triple bottom line is also known as “people, planet, profit”, which is a pretty good way to introduce the idea en masse. It sends out a pretty basic message – that we care about these three things and want to have them all without a sense of compromise. It’s a catchy slogan, and it makes you feel good because seriously, who wouldn’t want a happy planet, happy people, and still have good profit?? I’ll have to talk about details in a future post.

The basic idea behind the other three names I mentioned above is the triple bottom line. The restorative economy aims to restore natural resources while encouraging industry and community growth. The conservation economy conserves natural resources, and a sustainable economy aims to make all sectors of the economy sustainable. They are all essentially the same, and they call for similar policy changes.

Before anyone brushes away this idea of people, planet, profit, I’ll share my perspective on this issue. First, we have a financial problem right now in our global economy. Many people have already admitted that we have a problem. There are a few different approaches in the next step. My natural inclination, as a trained research scientist, is to ask questions about the problem at hand. What caused this problem? What will happen if we return to the status quo? Is there any way to prevent this outcome? Others will jump to studying the problem, or jump to making quick fixes to restore the economy to the status quo. No studying necessary, just go back to the way things were before. Questions are important because they address the unknown variables of a situation. It’s true that the more questions you can think of, the more answers you’ll be forced to produce. That’s definitely difficult, but it’s unrealistic and unsustainable to simply ignore the challenging questions, and hope for good luck.

We definitely have a problem, people are studying it, and currently there are new economic models in production. TBL is essentially one of these economic models. While it is still just a concept, we can take this concept and ask if it can be translated into viable policy. We can treat this like an experiment, and see what sort of policy ideas will arise. Democracy is an ongoing experiment – if one law doesn’t work, repeal it.

Links:

• Conservation Economy Net
• Related post – Why a Blog?

Toxic Nail Polish

I’m going to start volunteering for Coalition for Clean Air (CCA). I currently work full time in biochemistry, but am interested in getting into environmental nonprofit work, so this is a way of getting my foot in the door. CCA works to reduce pollution in our environment through community awareness and political advocacy, tackling major issues like pollution in our ports and the widespread use of toxic cleaning products.

I will be assisting in a project to persuade the LA Unified School District (LAUSD) to switch from conventional, toxic cleaning products to safer, nontoxic ones. I’m excited! This is my first foray into a real-life project. Businesses that produce safe, nontoxic cleaning products are in luck, too! They can make a case for their products and have a reliable customer. I will be researching information on the products used by the LAUSD, communicating with researchers at Occidental College and USC on the harmful health effects caused by long-term use of these products, and looking at the LAUSD school locations to see if they are near any polluting facilities.

Click for more on CCA…

They are an interesting organization, and I like what they do (or else I wouldn’t have contacted them). As everyone is well aware, Los Angeles has an air quality problem. As with most environmental issues, there are many facets to the problem. One of the largest polluters to the city is the movement of goods – including the Ports of Los Angeles and other large freight transportation. These large vehicles are usually powered by diesel fuel, are quite old, and thus spew out harmful pollution that residents will have to pay for with their lungs and lives. CCA campaigns to raise community awareness about the issue, stop the proliferation of large polluting ports and distribution centers, and works with industry professionals and legislators to reduce the amount of pollution created (including the use of cleaner equipment).

CCA is also working on the problem of toxic volatile organic compounds (VOC’s) found in everyday cleaning products and personal care products. There are many people that make their living around working with these toxic products, including custodial and maid service staff, hair and nail salon stylists, and dry cleaners. On top of their exposure to toxic compounds, they most likely have little or no health care. CCA is working to show companies and their workers that there are safer alternatives to conventional products. A switch to safer alternatives is not only necessary, it’s beneficial in the long-term. Many workers with daily, high-level exposure to VOC’s suffer from complex hormone and breathing problems. Investing in safer products reduces the number of consequent health problems, giving workers more healthy working days and saving employers from the associated costs of healthcare.

Like I mentioned above the fold, it’s great that CCA is working with community members and legislative officials. But I think they could do a lot more too, if they reached out to businesses involved in creating cleaner, safer alternatives to toxic conventional products. I’m hoping eventually to get involved with the communications department, and learning more about what it takes to reach out and form partnerships with other organizations, whether they be for profit or not!

Links:

• CCA Campaign to Prevent Port Pollution
• CCA Campaign on VOC’s

Solio Hybrid Charger

EcoTechDaily reports on a solar charger, from Solio, that can be used to power your cell phone or MP3 player! It costs about $100, charges your gadgets at about the same rate as a regular wall socket, and stores up to 10 hours of power for multiple charges. One hour of sun produces 15 minutes of talk time, or 40 minutes of MP3 playtime.

The great thing about this charger? It doesn’t cost a ridiculous amount (although it is on the higher end), you’ve just taken your iPod or cell phone off the grid, you can charge those items anywhere there’s sunlight, and you’re now clean tech-savvy! I could see myself purchasing an item like this because it’s so affordable.

Check out the story here.

Click to learn more about the report…

The report studied the trends toward and causes of our latest economic collapse, over a period of 20 years. It suggests that our drive for continual and persistent economic growth, without concern for environmental and social consequences, is what caused the collapse. This “growth imperative” caused the financial industry to continuously lobby for deregulatory policy, and was a partial contributor to the creation of the credit derivative market that grew out of proportion. As stated before, the SDC suggests we shift our focus from economic growth to individual prosperity. Prosperity includes several factors. Firstly, it covers basic material needs such as food, shelter, and water. It also includes an individual’s ability to participate and contribute meaningfully to society, so as to give individuals a sense of purpose and significance within the community. The authors warn us not to fear taking difficult paths to achieve sustainability, otherwise, to settle for anything less will ultimately lead to another economic collapse. Additionally, they state that now, even in the midst of a great recession, is the time to start working towards a sustainable economy. It is the best way to emerge from the recession more robust.

They outline the steps necessary to achieve a sustainable economy, which I will reproduce here (italics are my addition for more clarification):

Building a Sustainable Macro-Economy:

Debt-driven materialistic consumption is deeply unsatisfactory as the basis for our macro-economy. The time is now ripe to develop a new macro-economics for sustainability that does not rely for its stability on relentless growth and expanding material throughput. Four specific policy areas are identified to achieve this:
1. Developing macro-economic capability (look into various requirements for macro-economic sustainability)
2. Investing in public assets and infrastructures (investing in public sector jobs, public assets, transport, renewable energy)
3. Increasing financial and fiscal prudence
4. Reforming macro-economic accounting (include social and environmental costs)

Protecting Capabilities for Flourishing

The social logic that locks people into materialistic consumerism is extremely powerful, but detrimental ecologically and psychologically. A lasting prosperity can only be achieved by freeing people from this damaging dynamic and providing creative opportunities for people to flourish – within the ecological limits of the planet. Five policy areas address this challenge.

5. Sharing the available work and improving the work-life balance
6. Tackling systemic inequality (including inequalities for income and access to quality education, discrimination, crime)
7. Measuring capabilities and flourishing (develop national accounts of wellbeing)
8. Strengthening human and social capital (Strengthening communities and social wellbeing provides greater resilience during times of economic crisis. This requires the creation of public spaces, strong community-based sustainability intiatives, giving members more responsibility in the maintenance of their communities, and investment in public projects including libraries, museums, and theaters.)
9. Reversing the culture of consumerism

Respecting Ecological Limits

The material profligacy of consumer society is depleting natural resources and placing unsustainable burdens on the planet’s ecosystems. There is an urgent need to establish clear resource and environmental limits on economic activity and develop policies to achieve them. Three policy suggestions contribute to that task.

10. Imposing clearly defined resource/emissions caps
11. Implementing fiscal reform for sustainability (shift the burden of taxation from the income tax to activities that harm the ecological environment)
12. Promoting technology transfer and international ecosystem protection.

The report is quite long, and I haven’t read through the entire 100 pages yet, but this is the basic idea presented. When I do read through the entire thing, I will probably blog about it again.

I first blogged about this report here.

Related Links:

- Recession must make us question relentless pursuit of growth, Sustainable Development Commission
- Transition to a Sustainable Economy, Share the World’s Resources