The relationship between science and society changed fairly dramatically in the 1970s, at least in the United States. Prior to that decade, almost all science served a notion of Progress. However, around that time, the consequences of progress could be felt by enough people and observed by enough scientists that the enterprise changed fundamentally. Instead of Making Progress Possible, a growing cadre found themselves in the role of ancient prophets, warning people they had gone too far.
Right now I'm listening to a fascinating discussion about carbon accounting by the CSIS, which has a great series of Energy and Climate Change. A big question asked right off the bat is how actually access how much carbon gets released, much less the impact of those emissions. It's a fascinating to hear a discussion of how to do things like determine the carbon footprint of a screwdriver.
This is a very important question,and any international agreement on managing the transition to a sustainable economy depends on getting this right. However, when science and policy collide like this, uncertainty quickly becomes wiggle room, and wiggle room quickly leads to acrimony by those genuinely worried and "junk science" accusations by those who are not. How is the non-scientist to approach this?
For a partial answer, I recommend reading Michael Pollan's book "In Defense of Food." In it, he quite aggressively attacks the practice of nutrition science, itself not much older than climate science, for pursuing molecules instead of foods, and in so doing allowing themselves to be caught by "regulatory capture" as food manufacturers use their work to selectively add or remove nutrients. We've known that the western diet high in grain-fed meats and highly refined grain products is the best way to encourage heart disease, diabetes and most cancers, but our "science based" policy on food has encouraged trying to find the right balance of molecules instead of encouraging people to eat the whole plant-based foods that kept generations healthier (well, until they died of infections before we figured out penicillin)
Likewise, I recommend a similar approach in discussing climate science and its relationship to public policy. Carbon dioxide absorbs infrared radiation in the wavelength that the Earth radiates out into space, but does not affect the rate at which the Earth receives higher frequency radiation from the sun, resulting in a positive net heat flux, or, put simply, wrapping the planet in a blanket as it spins around its heat-lamp. The precise effect of this is hard to determine, but it's pretty well understood now that the climate is a "meta-stable" system, kind of like a marble on a rough surface. We know that we like were that marble is, and that we probably won't like any of the places it would roll to if we poked it too hard.
The goal of climate policy must be be to limit that poking. The gritty details of exactly how hard a poke we can stand, how to account for the carbon cost of a hammer, and who or what groups gain and lose in the trade off are worthless if we lose sight of that goal. We don't know exactly what will happen if we give the planet over to full-scale human modification, but given how we've treated out bodies, the answer is certainly not going to be good.
Tuesday, June 29, 2010
Sunday, May 23, 2010
The joys of "stuff"
Last post, I was riffing on the story of how commercial banking got replaced by investment banking. I implied that it was bad that this happened, and the great crash of the last few years has largely confirmed this model. Unfortunately, I wasn't clear on the real ontological problem: "stuff" and money have become disconnected in the financial world.
Consider bank capital. What is it? Sophisticated investors, regulators and scholars fundamentally disagree about what should be counted and how to count it. So the fundamental building block of bank, and thus finance, regulation is something that bankers try to inflate, regulators cannot measure and investors just have to hope is real.
Meanwhile, equity markets have fallen from their "assured 11% growth" that was promised to your piemaker by a man in a sharp suit in 2004. I was told that day that betting against the NYSE was "betting against America!" Turns out I would actually have been betting against algorithms playing arbitrage games with exchange order books and Congressmen with insider information (h/t to Dan Carlin). To this day I'm not sure if the man in the suit was foolish or disingenuous, but his passion and intensity convinced me that he did not work in a rational market.
Normally, when money and "stuff" go their separate ways, there's hyperinflation. Indeed, the price of gold (~$1200/ounce as of this writing) would seem to bolster this claim. Unfortunately for large debt holders, the rest of the economy is extremely deflationary. Housing prices are such that homes financed after 2005 (give or take a couple years depending on the market) cannot even be rented at a high enough rate to cover the mortgage. Those same houses are now unaffordable to the people who would buy them until three years ago, and people with highly mobile careers (essentially the whole upper-middle class) have been taught the hard way that equity can be an anchor instead of an asset.
Meanwhile, globalization's march to ever cheaper labor helps ensure that there will not be too many dollars chasing too few goods. Quite the opposite, as imports continue to hold steady or rise slightly and the effective monetary destruction of housing debt defaults and write-downs (Planet Money's "pet" Toxie tells this story well). So instead, too few dollars wind up concentrated in the hands of relatively few people and companies with declining incentives to invest in the face of uncertain regulation and government action.
Clearly something has to give. The question is are we Turning Japanese, or going medieval? I'm not sure how the world's reserve currency can hyperinflate when the second largest economy intentionally devalues itself, and the other major currencies face similar (or worse) economic pictures.
Is there a brighter future? Quite possibly. The loss-making rentals I mentioned aren't so bad when the Mortgage Interest Tax Credit is taken into account. There is simply not enough oil that can be extracted at $70/barrel to keep up with demand for the next several years, and so there will be innovations in transportation and infrastructure. Where and how that happens depends on the policies of various countries, but we have the cash and expertise to take the lead in the US. Support your favorite climate legislation and encourage investment in "stuff."
Consider bank capital. What is it? Sophisticated investors, regulators and scholars fundamentally disagree about what should be counted and how to count it. So the fundamental building block of bank, and thus finance, regulation is something that bankers try to inflate, regulators cannot measure and investors just have to hope is real.
Meanwhile, equity markets have fallen from their "assured 11% growth" that was promised to your piemaker by a man in a sharp suit in 2004. I was told that day that betting against the NYSE was "betting against America!" Turns out I would actually have been betting against algorithms playing arbitrage games with exchange order books and Congressmen with insider information (h/t to Dan Carlin). To this day I'm not sure if the man in the suit was foolish or disingenuous, but his passion and intensity convinced me that he did not work in a rational market.
Normally, when money and "stuff" go their separate ways, there's hyperinflation. Indeed, the price of gold (~$1200/ounce as of this writing) would seem to bolster this claim. Unfortunately for large debt holders, the rest of the economy is extremely deflationary. Housing prices are such that homes financed after 2005 (give or take a couple years depending on the market) cannot even be rented at a high enough rate to cover the mortgage. Those same houses are now unaffordable to the people who would buy them until three years ago, and people with highly mobile careers (essentially the whole upper-middle class) have been taught the hard way that equity can be an anchor instead of an asset.
Meanwhile, globalization's march to ever cheaper labor helps ensure that there will not be too many dollars chasing too few goods. Quite the opposite, as imports continue to hold steady or rise slightly and the effective monetary destruction of housing debt defaults and write-downs (Planet Money's "pet" Toxie tells this story well). So instead, too few dollars wind up concentrated in the hands of relatively few people and companies with declining incentives to invest in the face of uncertain regulation and government action.
Clearly something has to give. The question is are we Turning Japanese, or going medieval? I'm not sure how the world's reserve currency can hyperinflate when the second largest economy intentionally devalues itself, and the other major currencies face similar (or worse) economic pictures.
Is there a brighter future? Quite possibly. The loss-making rentals I mentioned aren't so bad when the Mortgage Interest Tax Credit is taken into account. There is simply not enough oil that can be extracted at $70/barrel to keep up with demand for the next several years, and so there will be innovations in transportation and infrastructure. Where and how that happens depends on the policies of various countries, but we have the cash and expertise to take the lead in the US. Support your favorite climate legislation and encourage investment in "stuff."
Friday, May 21, 2010
Hitting the limits
Disclosure: The author has intentionally, and continues to, hold only assets that are either liquid or utilitarian. He does not own stocks or property and considers the mobility required to use his education to be of greater importance than financial investment.
I've had a lot of time to reflect on property management and economics over the past week, and the exercise has not been uplifting. It has produced, however, an interesting narrative that you readers might enjoy.
In my youth, I spent a great deal of time with bankers. As a result, the old small bank "rules of thumb" for income/loan ratios, price/earning ratios and some of the mechanics of commercial finance were drilled into me from the beginning. My reaction to events of the last twenty years is heavily influenced by that experience. The most interesting story, I think, has been the transition of commercial banking into investment banking.
The commercial bank model assumed that a borrower would provide a stream of revenue. The banker's job was to find new customers, arrange lines of credit, and then help those customers continue paying by arranging new credit terms or special deals with other bank customers. For instance, a bank with a large construction business as a client would be more likely to lend to a hardware store, since their original customer could use the goods in the new customer's warehouse if something went wrong. Thus, banks tended to be tied to a given industry, and rose and fell with one sector of the economy. Today, this is still done, but it's called "private equity." (there's a great story about a firm buying a fashion magazine and using it to promote "thin belts" as the new fashion item, boosting sales from another company of theirs)
The Investing Banking model assumes that any stream of revenue should be sold to investors. In the short run, this is enormously more profitable because instead giving out a bunch of capital and waiting for loan payments to trickle in, the banker "originates" the loan and sells it to an external investor as a Structured Investment Vehicle (SIV) or Collateralized Debt Obligation (CDO). Thus, issuing loans doesn't affect the capital base of the bank, unless they do something like insure the value of the security, but that's an off-balance sheet transaction and so doesn't count. As a result, the amount of credit available, and thus money creation, is limited only by the amount investors can buy.
This approach also move innovation up the value chain. Instead of employing tens of thousands of commercial bankers to find relatively simple innovations (the builder helping out the struggling hardware store), now the world needs thousands of very smart "quants" to find statical arbitrage. Since banks don't need to keep industry experts on staff, and they have more money to lend, interest rates go down. If something goes wrong, instead of an "offer you can't refuse" to receive help from another bank customer, it's much easier to get an extra bridge loan. As long as there's someone to buy that next security, life is good.
But what happens when the market for iffy debt saturates? Well, either everyone goes bankrupt together or we go find another sucker. With TARP, the US government promised to be the Sucker of Last Resort, and now the EU's large Eurozone economies have promised to do the same thing for sovereign debt. Is this "find another buyer" model sustainable? I'm starting to doubt it.
Equity markets, social security and Chinese purchases of US Treasury bonds all represent wealth transfer mechanisms that count on relatively young people giving money to their elders. Middle managers at the Chinese central bank and treasury are typically fans of Currency Wars, a book that makes very a clear case that the Politburo's export-subsidizing policies are effectively a huge tax on them. The loudest advocates against any changes to Social Security in the US come from people who also demand no new government revenues, and so the SSA will turn to statical tricks to keep payments reasonable. Stagnating real wages and rising unemployment, especially among people under 30, chokes off the flow of money into 401ks, and so depletes the order books on the NYSE and other exchanges.
I'm thinking that this is actually very good news, net. Moving innovation away from the "real" economy and into finance has encouraged manufacturing and physical R&D to leave the United States. If the most profitable move for a pension fund is to build a wind farm or factory instead of buying the bad mortgages, that has to be good for the country as a whole. The next few years will be rough, but I think we'll emerge with a better world for it.
I've had a lot of time to reflect on property management and economics over the past week, and the exercise has not been uplifting. It has produced, however, an interesting narrative that you readers might enjoy.
In my youth, I spent a great deal of time with bankers. As a result, the old small bank "rules of thumb" for income/loan ratios, price/earning ratios and some of the mechanics of commercial finance were drilled into me from the beginning. My reaction to events of the last twenty years is heavily influenced by that experience. The most interesting story, I think, has been the transition of commercial banking into investment banking.
The commercial bank model assumed that a borrower would provide a stream of revenue. The banker's job was to find new customers, arrange lines of credit, and then help those customers continue paying by arranging new credit terms or special deals with other bank customers. For instance, a bank with a large construction business as a client would be more likely to lend to a hardware store, since their original customer could use the goods in the new customer's warehouse if something went wrong. Thus, banks tended to be tied to a given industry, and rose and fell with one sector of the economy. Today, this is still done, but it's called "private equity." (there's a great story about a firm buying a fashion magazine and using it to promote "thin belts" as the new fashion item, boosting sales from another company of theirs)
The Investing Banking model assumes that any stream of revenue should be sold to investors. In the short run, this is enormously more profitable because instead giving out a bunch of capital and waiting for loan payments to trickle in, the banker "originates" the loan and sells it to an external investor as a Structured Investment Vehicle (SIV) or Collateralized Debt Obligation (CDO). Thus, issuing loans doesn't affect the capital base of the bank, unless they do something like insure the value of the security, but that's an off-balance sheet transaction and so doesn't count. As a result, the amount of credit available, and thus money creation, is limited only by the amount investors can buy.
This approach also move innovation up the value chain. Instead of employing tens of thousands of commercial bankers to find relatively simple innovations (the builder helping out the struggling hardware store), now the world needs thousands of very smart "quants" to find statical arbitrage. Since banks don't need to keep industry experts on staff, and they have more money to lend, interest rates go down. If something goes wrong, instead of an "offer you can't refuse" to receive help from another bank customer, it's much easier to get an extra bridge loan. As long as there's someone to buy that next security, life is good.
But what happens when the market for iffy debt saturates? Well, either everyone goes bankrupt together or we go find another sucker. With TARP, the US government promised to be the Sucker of Last Resort, and now the EU's large Eurozone economies have promised to do the same thing for sovereign debt. Is this "find another buyer" model sustainable? I'm starting to doubt it.
Equity markets, social security and Chinese purchases of US Treasury bonds all represent wealth transfer mechanisms that count on relatively young people giving money to their elders. Middle managers at the Chinese central bank and treasury are typically fans of Currency Wars, a book that makes very a clear case that the Politburo's export-subsidizing policies are effectively a huge tax on them. The loudest advocates against any changes to Social Security in the US come from people who also demand no new government revenues, and so the SSA will turn to statical tricks to keep payments reasonable. Stagnating real wages and rising unemployment, especially among people under 30, chokes off the flow of money into 401ks, and so depletes the order books on the NYSE and other exchanges.
I'm thinking that this is actually very good news, net. Moving innovation away from the "real" economy and into finance has encouraged manufacturing and physical R&D to leave the United States. If the most profitable move for a pension fund is to build a wind farm or factory instead of buying the bad mortgages, that has to be good for the country as a whole. The next few years will be rough, but I think we'll emerge with a better world for it.
Wednesday, May 12, 2010
Improved Applesauce Pie
Week Of Pies, Day 3
Roll out a Whole Wheat Pie Crust and get it into a deep-dish pie pan, preheat the oven to 400F.
In a medium mixing bowl, combine:
3 eggs at room temp
1/3 Cup brown sugar
1/4 Cup granulated sugar
Mix until combined. Then add:
2.5 Cups homemade applesauce (much better this way)
1/4 butter, melted
pinch of allspice
~1T lime juice
Pour the mixture into the crust, place on an upper rack and bake for ~50min. Let cool and serve.
Roll out a Whole Wheat Pie Crust and get it into a deep-dish pie pan, preheat the oven to 400F.
In a medium mixing bowl, combine:
3 eggs at room temp
1/3 Cup brown sugar
1/4 Cup granulated sugar
Mix until combined. Then add:
2.5 Cups homemade applesauce (much better this way)
1/4 butter, melted
pinch of allspice
~1T lime juice
Pour the mixture into the crust, place on an upper rack and bake for ~50min. Let cool and serve.
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