When economists talk about the crash, they usually blame
subprime mortgages and profligate lending by the banks.
However, our financial problems are only a side-effect of
the real issue, which is that, last summer, we experienced
our first taste of what it is like to butt up against the
limits of the earth's ability to sustain our growth.
Things have changed so much that it is almost impossible to
look back to those days and remember what it was like, and
yet it's only a few months ago.
Starting in early 2007 and peaking last summer, commodities
prices shot up massively across the board, culminating last
August when oil reach $149.00 a barrel, and gasoline prices
around the world shot up by as much as two hundred percent
in some countries.
At the same time, food prices shot up and shortages of corn
and rice caused terrifying breadlines in many countries, and
even in the US and Western Europe there were rice shortages.
At the same time, many people in the US had bought houses
using mortgages that they could only afford if they were
able to refinance in order to avoid cost increases
associated with the end of the interest-only period of their
mortgages.
However, starting in mid 2007, rising food and fuel costs
began sucking cash out of the economy. At first, consumer
spending was unaffected as people used credit card debt to
finance their lifestyles, then later, to buy necessities.
Staggering fuel cost increases occurred. Between December of
2006 and June of 2008, the average price of a gallon of gas
in the United States rose from $2.80 to $4.10. Meanwhile the
fuel efficiency of automobiles had remained stagnant for
years and years. And price increases in other large
countries, with the exception of India, China and a few
others that subsidize gas costs, went through the roof.
The combination of exploding food bills and exploding fuel
bills sucked cash out of the economy at the same time that
consumer credit in the US maxed out and hundreds of
thousands of mortgages increased in cost as prinicpal began
to be added to interest.
As a result of the lack of cash in the economy, two things
happened: house prices began to drop with sales, and less
financially able owners were forced to make a choice: eat
and go to work or pay for the house. Refinancing wasn't
possible because the value of the house had declined.
Mortgage payments became overdue, and by October the
foreclosure rate was beginning to rise alarmingly.
Because mortgages had been turned into fake securities, it
ceased to be possible to tell which of these securities were
healthy and which were not, which led to banks being
unwilling to loan each other money on the basis of these
assets. And the rest is, basically, financial history.
But it isn't the whole story and it isn't even the most
important part of the story. When you hear pundits talking
about the credit crunch, the financial crisis, the banking
crisis and the stock market collapse, they are talking about
side-effects.
The core of the problem is to be found in the most
fundamental place their is: humankind's relationship with
its planet, and our management and use of its resources.
What economists don't say is this: the whole problem started
not with the financial system but here: with our
relationship to the earth itself. To
some degree, the increase in commodity prices was made worse
by institutions and hedge funds attempting to trade
commodities to raise cash, as their real estate related
activities began to turn into losers.
This was not a major factor, however. The major factor was,
quite simply, increasing demand and decreasing supply.
Because of high oil prices, demand for ethanol increased
dramatically in the United States, with a resulting
challenge to supply.
Around the world, droughts and floods caused problems with
rice production, cattle ranching and many other essential
crops. At the same time, people in Asia were beginning to
eat more as and use more energy as their economies expanded
and they became wealthier. This, along with steady and
massive demand in the west, simply broke the back of the
planet's ability to supply the resources demanded.
So it is important to understand: it was the pressure of
demand that caused the disaster, not financial manipulation,
and the crisis is not going to be solved by financial
bailouts and reconstruction of the banking system. As soon
as the system is repaired, and it will be, demand will rise
again and the same thing is going to happen, only this time
it will be worse because global warming is getting worse,
not better, with the result that weather extremes are
harming more and more crops of all kinds.
So what do we need to do? Beyond fixing our broken financial
system, we absolutely must do two things if we are going to
survive. First, we must find effective ways to start
atmospheric carbon accumulation on a downward path. Right
now, we are at 385 parts per million. If we go much higher,
the present crisis will develop into the greatest
catastrophe we have ever known.
Second, we need to innovate in every area from fuel
efficiency to food production. In fact, innovation is at
least as important as reducing carbon emissions, and the two
are synergistic: innovation in cleaning up our planet
counts, too.
Will we succeed or fail? With the present administration's
commitment to the environment, there is more of a chance,
but it is going to be a very near thing.
