Heating Up

Nice piece by New York Times columnist Thomas Friedman comparing our financial meltdown with our environmental one: "The Price is Not Right." Whether or not you believe in global warming, under-pricing carbon leads to excess consumption, with potentially catastrophic consequences in terms of scarce resources, shaky geopolitics, and all manner of other negative externalities.

And Friedman is right that the same principles are at play in both cases: everything has consequences, and the minute we forget that and start leveraging ourselves up accordingly, watch out for an impending day of reckoning when it all unravels:

This system was a powerful engine of wealth creation and lifted millions out of poverty, but it relied upon the risks to the Market and to Mother Nature being underpriced and to profits being privatized in good times and losses socialized in bad times. This capitalist engine doesn’t need to be discarded; it needs some fixes. For starters, we need to get back to basics — accountable lending, prudent saving, reasonable leverage and, most important, more engineering of goods than just financial products.

Some of our biggest financial firms got away from their original purpose — to fund innovation and to finance the process of “creative destruction,” whereby new technologies that improve people’s lives replace old ones, said the Columbia University economist Jagdish Bhagwati, in an interview in The American Interest. Instead, he added, too many banks got involved in exotic and incomprehensible financial innovations — to simply make money out of money — which ended up as “destructive creation.”

“Destructive creation” has wounded both the Market and Mother Nature. Smart regulation and carbon taxation can heal both.

Easier said than done, but still spot on. Here's hoping we can find some reasoned answers amidst all the bickering, for the sake of our current economic livelihoods and our future environmental survival.