Will an ecological crisis surprise us, just like the 2008 financial crisis did? This question sets up a trap, because there was no surprise in 2008.
In the latest issue of Foreign Affairs Alan Greenspan, the former Federal Reserve Governor, endorses a pervasive narrative that economists “never saw the crisis coming”. But that narrative is wrong. Ample warning signs announced the looming financial disaster before 2008. Policy makers and regulators simply chose to ignore them.
If plenty of indicators herald the arrival of bad stuff, acting as if you are surprised only demonstrates that you were not paying attention or did not care enough to get into action.
A new book Guardians of Finance by James Barth, Gerald Caprio and Ross Levine claims that financial regulators were aware of what was going on, but that their deep-seated assumptions on finance and free markets obfuscated reality and led to inertia. With the vast amount of books out on Lehman Brothers, AIG and other firms, we already knew that many financial players saw themselves as dancing and drinking the night away, waiting until the music would stop and the lights go on.
Here are some randomly picked data that regulators knew before 2008:
1. The FBI recorded a rise in mortgage frauds by 272% from 2004 to 2008, and issued public warnings.
2. In Ireland, house prices rose by 250% from 1995 to 2006; the bank Anglo Irish expanded by 40% a year from 1999 to 2006 (every year!).
3. Greenspan’s Fed allowed banks to reduce capital drastically by purchasing credit default swaps, an insurance product. By 2006 the Fed knew of AIG’s fragility as a result from selling tons of such credit insurance, and thus knew of the fragility of the banks that had purchased the swaps.
4. Gillian Tett writes in her book Fool’s Gold that the New York Fed became very concerned about the spectacular rise in Credit Default Swaps already in 2004, especially because of the opaque nature of the trades.
5. Debt of Spanish household and nonfinancial firms went from 70% of GDP in 1997 to 170% of GDP in 2008.
6. In 1998 the CFTC (the US regulator for swaps) proposed to regulate over-the-counter derivatives, but no one heeded the call. That same year hedge fund LTCM blew up in part because of OTC products.
7. Many bank reviews before 2007 by the FDIC, a US bank regulator, signalled that banks’ exposures to risks were too large, but no one followed up.
8. Multi-billion dollar losses by rogue traders demonstrated the taking of excessive risks.
Government agencies and experts are gathering data on the possibility of an upcoming ecological crisis, just as they did on the financial crisis. A United Nations’ report of a few weeks ago showed carbon dioxide emissions today that are unprecedentedly high. The negative impact already hits communities around the world, and the longer we wait, the costlier the adaptation will be. If only financial regulators had stopped the party well before 2008, we would not pay the huge price of adaptation now. In the US, 15 million people more are in poverty today compared to 2000, and nearly all of this increase happened since 2008. In Europe, the rapid turnaround of the economy in countries like Greece and Portugal tests the limits of what societies can bear.