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01 March 2011

Hold That Horse Featured

Written by Published in Issue 26 - Naked Read 13091 times

We’re running out of time. It’s absolutely vital that, as far as the three major crisis debates are concerned – finance, energy, climate – each of us makes up our mind about what we think

Here is a naked truth, as many neuroscientists see it, based on their recent research into how the human mind works both individually and collectively. Groups of humans sink too easily into dysfunctional ‘groupthink’, wherein some of us become so blind to rational argument that evidence, even if irrefutable, can actually drive us deeper into our own particular belief system.

Let us apply this discovery to the triple crunch: the crises of climate, finance and energy that are unfolding around us at present on the world stage. The two groups in the climate debate have been clear for years now. A substantial majority around the world accepts the risk analysis of the vast majority of climate scientists. We burn fossil fuels, we emit greenhouse gases, these trap heat and this destabilises the climate, so that the planet’s economies and ecosystems come under attack, increasingly ruinously. A vocal minority – and perhaps more than a minority in the US – persuade themselves that the planet can absorb all this, and that socialist scaremongers are at work, or some such construct. 

The tighter the science becomes in the one camp, the shriller the rubbishing seems to sound in the other, notwithstanding the fact that, if the vocal minority is wrong, the stakes are huge. For example, some insurers profess that under the assault of a climate thrown awry by an absence of emissions cuts, we’re beginning to destroy wealth faster than we can create it this side of 2050.

Two groups were also clear in the run-up to the credit crunch of 2007, and the financial crash of 2008. One group assured the world that new sources of wealth had been created by clever investment bankers manipulating mortgage-backed securities, and that risk had been all but excised from complex derivatives. The other, populated by a surprisingly small number of economists plus some far-sighted journalists, claimed that the derivatives would prove toxic, so much so that the global economy would come under threat.

Now that the world knows the truth about that particular groupthink exercise, we still find two camps of thinkers on the stage. One holds that the banks have learned their lesson, and should be allowed to stay in their glorified casinos essentially unregulated. It holds that banks should be able to pay their supposed stars at rates that would make international footballers envious. It maintains that modern economies so fundamentally need such activities that the taxpayer should carry on being the bail-out insurer of last resort, underwriting all the bonus-building bets in the casino.

The other group holds that unless we regulate and subdivide these institutions, we will repeat the whole financial crash all over again, creating another wave of economic recession, misery and unemployment – and perhaps worse. Indeed, this second camp observes, we still have issues hanging over us from the first crash – notably the questionable ownership by banks of repossessed homes – that may mean we have yet to see the worst of crisis number one.

When it comes to the energy crunch, one group holds that oil production can keep rising in pace with demand, that demand will peak before supply does and oil prices can remain affordable in consequence. Another warns that constraints below and above ground mean oil supply will drop within just a few short years, that it is already coming under pressure and that oil prices will become unaffordably high and volatile. In an oil-dependent world, the fate of the global economy potentially depends once again on the outcome of the debate.

The magnitude of the risks, crunch by crunch, are plain to see in opinions voiced in the week of my penning these thoughts. In the climate crisis, Nick Stern of the LSE and Fathi Birol of the International Energy Agency warn in the Financial Times that the window of opportunity to address the climate threat at levels short of appalling damage is in the process of closing. ‘We must decarbonise the power sector too, which today accounts for 40% of energy-related emissions,’ they say. ‘The problem is that, as the IEA has shown, 80% of projected emissions in 2020 are already ‘locked in’, as a result of power plants that already exist or are under construction. This limits room for manoeuvre and underlines the sense of urgency for action … For the moment, our climate goals remain attainable, but the door is shutting.’

In terms of the financial crisis, the Governor of the Bank of England warns in the Daily Telegraph that the world is at risk of another financial crisis, unless banks are reformed. The banks must stop trying to ‘simply maximise profits next week’, says Mervyn King. ‘Why do banks in general want to pay bonuses?’ Mr King asks. ‘It’s because they live in a “too big to fail” world, in which the state will bail them out on the downside.’

When it comes to the energy crunch, the revolution and protest sweeping the Arab world is priming the oil crisis. Even before there was any sense that the contagion might spread from Tunisia, Egypt and Libya to Saudi Arabia, some analysts were warning of $220-per-barrel oil even if ‘only’ Libyan and Algerian oil production was affected. As the prospect of Saudi disruption emerged, one analyst put it thus: ‘This is when you can come up with pretty much any silly number you want.’ An economics correspondent concluded: ‘The world’s economic fate now hangs on the success of Wahabi oppression.’ Wahabi oppression has duly carried the day, at the time of writing, for the time being. 

We are living through a battle of ideas in an age of consequences. Picking sides is long overdue, for all who care about the future.

 

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