The end of neoliberalism?

John Quiggin157 Comments

Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.

Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.

While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the reason for their failure. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of the existing loan book, then put them into run-off mode, writing no new business. But given the failure of the private sector, that would, mean, in effect, making it impossible for anyone to write a mortgage contract.

The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.

In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major Wall Street banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well.

Further update As various commentators point out, the failure here is one of actually existing neoliberalism. The “unknown ideal” of a perfect free market system remains pure and unsullied by empirical experience.

More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.

Brown coal

John Quiggin44 Comments

I’m planning a full-length post on Garnaut, but I thought I’d do a quick check on what would be involved in meeting the target of a 10 per cent reduction in emissions between 2000 and 2020. My guess is that the increase in oil prices we’ve already seen will be enough to bring consumption of petrol and diesel back to the 2000 level, and that other sectors like agriculture will be roughly stable. That means that most of the reduction will have to be found in energy generation.

My rough estimate is that the use of brown coal in energy generation contributes around 10 per cent of total emissions (Update:After I revised my estimate to 15 per cent, reader Chris Short pointed me to a section of Greenhouse Gas Inventory I’d missed, which gives brown coal a 30 per cent share of electricity’s 34 per cent of emissions, so 10 per cent was right ), so, as a first approximation, the Garnaut target could be met shutting down the brown coal sector and replacing it with enough renewables to cover the brown coal share of existing electricity, and any growth in final consumption. Consumption growth would be constrained both by increasing prices and by conservation measures.

That would certainly require a substantial adjustment assistance program in the Latrobe valley and similar locations. We’ve done this kind of thing before, for example, with the end of the steel industry in Newcastle, sometimes well and sometimes poorly.

My guess is that the actual outcome would involve keeping some brown coal stations, with drying technology that reduces emissions to a level comparable with black coal, and some expansion of gas-fired power stations, offset by a combination of domestic offset measures and purchases of international offsets. The Garnaut cost estimates of around 1 per cent of GDP look pretty plausible for this. This story actually suggests a lower value, since $35 billion over 10 years is around 0.3 per cent of GDP.

All change in NSW

John Quiggin35 Comments

One thing I’ve learned in life, though not always applied, is that if you ignore a job long enough, it often goes away. I was going to write a post excoriating Maurice Iemma and Michael Costa for their handling of the electricity privatisation issue, but it doesn’t matter much now (retail privatisation may still go ahead, but that’s not such a big deal either way). The earlier departure of deputy premier John Watkins is more of a loss, though no real surprise.

Labor now has a chance to salvage a government that looked to be utterly doomed. It’s a long shot, but the NSW Liberals have a long record of snatching defeat from the jaws of victory, so who knows.

Double dissolution ahead

John Quiggin38 Comments

A week ago my Fin column (over the fold) predicted a double dissolution over legislation to establish an emissions trading scheme. The rejection of the government’s changes to luxury car tax shortens the odds considerably. The government made a number of compromises to satisfy the Greens and Nick Xenophon that highly fuel-efficient vehicles would be excluded, but that only made it harder (in the end, impossible) to deal with Steve Fielding of Family First. The same problems will emerge, in spades, with an emissions trading scheme.

It seems likely that lots of legislation will be rejected between now and the time an ETS becomes a trigger,. If the government can hold its nerve, and its popularity, a double dissolution will look very attractive by then.

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Methane

John Quiggin38 Comments

I spent most of yesterday at a symposium organised by the Australian Institute of Agricultural Science and Technology. A lot of topics were discussed, but one that interested me was methane, mainly that emitted from both ends of ruminants such as cows.

There’s plenty to to say about this, but I’m just going to repeat one point that I made briefly and that subsequent speakers like Snow Barlow from Melbourne expanded on. Methane belched or farted by a cow is not just a greenhouse gas, it’s nutrition wasted by the digestive process. So, if we can find ways to reduce methane emissions, they should also increase the productivity of agriculture.

That’s not to say that there are $50 bills lying in every cowpat, waiting to be picked up. If there were a cheap and easy way of improving digestion it would have been found by now. But there’s certainly a potential for increased output to offset the costs of finding, developing and implementing ways of reducing methane emissions, for example by making cows fart like kangaroos

As an illustration of the complexities, some other research reported at the symposium showed that having more CO2 in the atmosphere will increase the growth of some tropical grasses (this was a bit of a surprise because these are C4 plants, generally thought to benefit less from this effect), but will reduce the nutrient quality which makes digestion more difficult and therefore tends to increase methane emissions. For any “Greening Earth’ fans out there, I should point out that, as in previous work, studies reported at the symposium found that adverse effects of higher temperatures and more variable rainfall will outweigh any net benefits of CO2 fertilisation

Here’s my presentationMosquito the Rapist aka Bloodlust on dvd

Oil and war

John Quiggin29 Comments
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It’s pretty widely assumed that several recent wars (most obviously those in Iraq and Georgia) have been motivated, in part at least, by the desire to control oil and other valuable resources including natural gas and (one that is close to my heart) water. The other side of the same coin is the idea (again evident in both these cases) that countries with control over valuable resources can use that control to further their own geopolitical ends.

But examples where either of these strategic ideas has been applied with success are thin on the ground to say the least. While I don’t subscribe to simple ideas of “war for oil” in relation to Iraq, it’s pretty clear that one of the many motives for going to war was the desire to put Iraq’s oil under the control of a government friendly to the US (and preferably not so friendly to rivals like France and Russia). The war has been as spectactular a failure in this respect as in many others. With the best part of a trillion dollars already spent and trillions more to come, the US is worse off in the oil market than it has ever been.

On the other side, the oil embargo of 1973 signalled the change from a market dominated by a buyer cartel to one dominated by a seller cartel. But in geopolitical terms it was a disaster. The Israeli occupation arising from the 1967 war, then only six years old, is still almost intact 35 years later (the Egyptians got the Sinai back, but not because they had any oil).

More generally, I suspect that countries wanting oil can’t do better than to buy it at the going price, and that those wanting to maximise the benefits from owning oil would be best off selling it for the same price and using the money to promote their strategic goals (or, more sensibly, investing it in projects like education).

Of course, showing that it’s stupid to go to war over oil doesn’t prove that people won’t do it. Empirical observation gives us plenty of evidence of the fact that people are more than usually stupid when war is concerned. In the early 20th century, Norman Angell’s Great Illusion demolished the idea that modern nations could secure economic benefits by fighting over war and resources. He was proved right in the most appalling way possible: the Great War that began in 1914 led to the ruin of all the parties.

More MWF blogging: Who are the gatekeepers

John Quiggin13 Comments

I’ve been to some great sessions at the Melbourne Writers Festival, most recently meeting and listening to Andrew Davies who’s written of the lot of the great BBC adaptations of classics like Pride and Prejudice, not to mention Bridget Jones’ Diary.

My first session last night was about blogging, under the title “Who are the Gatekeepers” with Margaret Simons and Antony Loewenstein, both of whom, unlike me, had an actual book to talk about. I read both The Content Makers (made even more relevant by the Fairfax job cuts and strike happening as the Festival got under way) and the Blogging Revolution and both are well worth it.

The topic led me to think about the gatekeeping function of the mass media (this is cultstud jargon for deciding what’s important and who’s authoritative). My assessment, based on recent experience was fairly negative. I see three ways in which the old media gatekeepers have failed, and in which bloggers have been effective critics.

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