Part of the Triple Crisis Spotlight Rio+20 series.
Rio+20 came and went. The UN Conference on Sustainable Development (UNCSD) could have been an important event. Instead it set new standards on how to make oneself irrelevant. One quick recipe: pretend you have never even heard of the global economic and financial crisis!
Consider the following. UNCSD’s Outcome Document does not contain a single reference to the global financial and economic crisis. Never mind that this collapse is now entering its fifth year and threatens to become the Second Great Depression. Somehow the folks at UNEP and the participants in dozens of preparatory conferences concluded this was not relevant for their mandate.
Probably the most important flagship document for Rio+20 was UNEP’s report, Towards a Green Economy (TGE). Here a green economy is defined as one that ensures improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities. According to UNEP this implies a low-carbon, resource-efficient and socially inclusive economy.
The key conclusion in TGE is that investing 2% of global GDP per year (between 2010-2050) into ten key sectors of the world economy can initiate the transition towards a low-carbon, resource-efficient economy. It states that if backed by appropriate policies at the national and global levels, this growth process would be possible without increasing risks, shocks, scarcities and crises inherent in the existing resource-depleting, high carbon “brown” economy.
According to TGE, “the financial services and investment sectors control trillions of dollars that could potentially be directed towards a green economy. More importantly, long-term public and private institutional investors, banks and insurance companies are increasingly interested in acquiring portfolios that minimise environmental, social and governance risks, while capitalising on emerging green technologies.” UNEP’s commitment to the financial sector is confirmed by the list of new markets and instruments that it finds are already being used with good results: green bonds, carbon markets, REDD+, green property as a new class of assets, etc.
So, there it is, what we really need is greater financialization of nature! It never occurred to the authors of TGE that the development of these “novel markets and instruments” results from the quest for profitable outlets in a world where profits in the real economy are stagnant.
UNEP fails to present a serious analysis of the role of the financial and banking complex in the world economy today. The international financial sector has been at the centre of every important crisis since the U.S. savings-and-loans debacle in the late seventies. The basic characteristics of financial capital are its propensity to engage in speculative activities, as well as its volatility. In the context of today’s crisis the opacity of operations in the financial sector help explain today the velocity of contagion and the persistence of the freeze of the inter-bank money markets, the uselessness of flexible monetary policy and the duration of the crisis.
But that’s not all. Yes, the financial sector has a lot of resources at its disposal. But didn’t it ever occur to the folks at UNEP and related agencies that this is precisely one of the signs of the pathology of the global economy today?
Sure, the financial sector disposes of a huge amount of resources. But is this a good thing? Stagnant wages are behind the growth in household indebtedness since the 1980s. Aggregate demand has been driven by debt in a circular process that feeds the growth of the financial sector as people become increasingly dependent on debt to maintain their living standards. In turn, the expansion of the banks and hedge funds in Wall Street helps explain the enormous redistribution of wealth from the bottom to the top. Many of the instruments used by the banking sector since the eighties (credit cards, car loans) functioned as giant vacuum cleaners that sucked family income and channelled it to the financial sector.
In addition, the size of the financial sector with respect to the rest of the economy is not the result of a healthy evolution of mature or emergent capitalist economies. In fact, one of the forces explaining the expansion of the financial sector was its propensity to introduce financial innovations that rendered the operations of the sector increasingly opaque, hiding real risks, inclining firms to engage in greater leverage and in general, making the system more prone to episodes of intense volatility. As these innovations were disseminated throughout the global financial system, for example through securitization, strategic activities became no-go areas for regulators and oversight agencies. That’s when self-regulation kicked in, providing the illusion that the industry could take care of itself.
A considerable amount of the “resources” of the financial sector is just paper wealth. It comes from the process of asset-price inflation that marks the mega-bubble that started back in the nineties. The crisis is the process through which a lot of this paper wealth gets destroyed. And according to guys like Roubini and Baker, we still have some distance to go in this deflationary process.
Furthermore, a significant chunk of those resources comes from monetary creation by the banks. In Europe, for example, banks in the European Union have created trillions of euros ex nihilo (in fact, only tiny fraction of loans from these banks was backed by actual deposits). This giant balloon is still in the process of being deflated.
UNEP should take a serious look at the relation between the financial sector and the real economy. For one thing, transmission channels between the financial and real sectors are critical to assessing macroeconomic stability. In our world, operations in the financial sector have propagated and amplified disturbances that brought the real economy to its knees. A perusal of its publications shows that even the Basle Committee on Banking Supervision is concerned about these things. What does it take to catch the attention of the folks in UNEP?
The Triple Crisis blog invites your comments. Please share your thoughts below.