Saturday, April 9, 2011

When the Nobel-Prize winning economist starts to warn of man induced destruction and devasation on the planet, we had better pay attention and change our foolish ways.

Gambling with the planet
Japan's disaster and the global recession provide stark lessons on societies' failure to manage risks, economist says.
 Last Modified: 06 Apr 2011 14:14
American economic gurus deluded the rest of society by boasting about "innovating financial instruments" that would "mitigate risk" [GALLO/GETTY]
The consequences of the Japanese earthquake - especially the ongoing crisis at the Fukushima nuclear power plant - resonate grimly for observers of the American financial crash that precipitated the Great Recession. Both events provide stark lessons about risks, and about how badly markets and societies can manage them.
Of course, in one sense, there is no comparison between the tragedy of the earthquake - which has left more than 25,000 people dead or missing - and the financial crisis, to which no such acute physical suffering can be attributed. But when it comes to the nuclear meltdown at Fukushima, there is a common theme in the two events.
Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe. Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted.
Before the Great Recession, America’s economic gurus - from the head of the Federal Reserve to the titans of finance - boasted that we had learned to master risk. "Innovative" financial instruments such as derivatives and credit-default swaps enabled the distribution of risk throughout the economy. We now know that they deluded not only the rest of society, but even themselves.
These wizards of finance, it turned out, didn’t understand the intricacies of risk, let alone the dangers posed by "fat-tail distributions"- a statistical term for rare events with huge consequences, sometimes called "black swans". Events that were supposed to happen once in a century - or even once in the lifetime of the universe - seemed to happen every ten years. Worse, not only was the frequency of these events vastly underestimated; so was the astronomical damage they would cause - something like the meltdowns that keep dogging the nuclear industry.
Research in economics and psychology helps us understand why we do such a bad job in managing these risks. We have little empirical basis for judging rare events, so it is difficult to arrive at good estimates. In such circumstances, more than wishful thinking can come into play: we might have few incentives to think hard at all. On the contrary, when others bear the costs of mistakes, the incentives favour self-delusion. A system that socialises losses and privatises gains is doomed to mismanage risk.
Indeed, the entire financial sector was rife with agency problems and externalities. Ratings agencies had incentives to give good ratings to the high-risk securities produced by the investment banks that were paying them. Mortgage originators bore no consequences for their irresponsibility, and even those who engaged in predatory lending or created and marketed securities that were designed to lose did so in ways that insulated them from civil and criminal prosecution.
This brings us to the next question: are there other "black swan" events waiting to happen? Unfortunately, some of the really big risks that we face today are most likely not even rare events. The good news is that such risks can be controlled at little or no cost. The bad news is that doing so faces strong political opposition - for there are people who profit from the status quo.
We have seen two of the big risks in recent years, but have done little to bring them under control. By some accounts, how the last crisis was managed may have increased the risk of a future financial meltdown.
Too-big-to fail banks, and the markets in which they participate, now know that they can expect to be bailed out if they get into trouble. As a result of this "moral hazard", these banks can borrow on favourable terms, giving them a competitive advantage based not on superior performance but on political strength. While some of the excesses in risk-taking have been curbed, predatory lending and unregulated trading in obscure over-the-counter derivatives continue. Incentive structures that encourage excess risk-taking remain virtually unchanged.
So, too, while Germany has shut down its older nuclear reactors, in the US and elsewhere, even plants that have the same flawed design as Fukushima continue to operate. The nuclear industry’s very existence is dependent on hidden public subsidies - costs borne by society in the event of nuclear disaster, as well as the costs of the still-unmanaged disposal of nuclear waste. So much for unfettered capitalism!
For the planet, there is one more risk, which, like the other two, is almost a certainty: global warming and climate change. If there were other planets to which we could move at low cost in the event of the almost certain outcome predicted by scientists, one could argue that this is a risk worth taking. But there aren’t, so it isn’t.
The costs of reducing emissions pale in comparison to the possible risks the world faces. And that is true even if we rule out the nuclear option (the costs of which were always underestimated). To be sure, coal and oil companies would suffer, and big polluting countries - like the US - would obviously pay a higher price than those with a less profligate lifestyle.
In the end, those gambling in Las Vegas lose more than they gain. As a society, we are gambling – with our big banks, with our nuclear power facilities, with our planet. As in Las Vegas, the lucky few - the bankers that put our economy at risk and the owners of energy companies that put our planet at risk - may walk off with a mint. But on average and almost certainly, we as a society, like all gamblers, will lose.
That, unfortunately, is a lesson of Japan’s disaster that we continue to ignore at our peril.
Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is available in French, German, Japanese, and Spanish.
The article was first published by Project Syndicate.
Project Syndicate
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  • foolisholdman 2 days ago
    The article is right that we should not be gambling with nuclear energy. It has so many things that can go wrong and so many problems that are intrinsic.

    Where the author is wrong is in his description of the bankers as "gamblers". They are not gamblers! A gambler can lose his shirt. A banker who loses his shirt will have another one courtesy of the taxpayer + plus a few million to be going on with. Apart from that the central and the commercial banks are forgers with a licence to print money. What they do is no different to what illegal forgers do, except for three things: They are allowed to do it, they operate on a vastly greater scale and they lend their product at interest.
  • In my country, the illegal loan borrowers were labelled as "the loan sharks" but it was no different compared to the "legal and licensed" commercial banks which our central bank could do nothing to interfere their "businesses" simply because they are being protected by the current government in power and the corrupt politicians who always backing up their corrupt "corporate giant executives" who in return providing them peoples money for their own political milestones, their cronies and proxies.

    They, the corrupt politicians and corporate giant executives learnt these evil "business ventures" from their colonials and imperialists friends who are based in London and Washington long before our independence about 50 years ago. They become more aggressive to become more evil greedier than ever before by the late 70s and early 80s.

    The corrupt politicians who currently in control the country's administration office will die-die to protect the power they have now and will put many new slogans to their people portraying as though that the country is in the right track to become a new develop nation by 2020.

    But the reality is after more than 50 years of independence, my country could not achieve similar or even at par the currency rate within our closest neighbour who are the tiny nation of port island where previously was administered by iron-fists and dictator style of gangsters whom their ancestors came from the China mainland!
  • Lee Kuan Yew? 
  • what should we do ? Hunt down every bank & big company 's CEO?

    I wonder have those CEO ever notice that the world is getting smaller & smaller and there is no place left for them to hide from their act.
    (sorry about my english)
  • No need to hunt them, their own actions and the concept of profit are making capitalism obsolete.

    To understand this look into automation, mechanisation and now cybernation to understand that it's not outsourcing that is making man, in the workplace, obsolete, it is machines. When a machine can produce goods at a fraction of the cost a person can why would factories employ people?

    The beauty of the system is that the fewer people are employed the fewer people are getting paid. Thus profit, greed and the entirety of capitalism are coming to an end. Once upon a time, in the era of scarcity capitalism was somewhat necessary but now, thanks to an over abundance of food, minerals and our ability to produce more than man can use or need we no longer need capitalism.

    The two following movements have a vision of the future, one that can exist for man and already does in parts of the world (Amish, Kibbutz) where money has become obsolete, thanks to mans own need for profit and desire for ever more.
    The Zeitgeist Movement.
    The Venus Project.
  • This is a very good article depicting the flaws in human character that serve to be overly optimistic when privatized gains can be made. Those private gains and socialized losses, as the author states, are the real crux of this rapidly "financialized" world where every idea and motive is done to make a dollar. There is no responsibility and accountability among big banks and corporations for the risks they are taking with this planet, be it resource exploitation or copious greenhouse emissions. We as a society pay with our blood sweat and tears for their mistakes.

    In the end we really just have to wake up. This is not a game, Earth is a special planet that needs to be respected and cared for in a holistic matter not only for us caught in the present but also for the future generations of humans. I feel we are rapidly destroying and deteriorating the very essence that give us life, all for the soulless pursuit of profit and glory. Like an addict shooting up for that last high, a temporary high that has brought his body and his organs to the brink of death, this Earth can only take so much before a point of criticality is reached and the fallout is catastrophic.
  • JerichoWhiskey 2 days ago
    The margin of safety Fukushima was designed to resist an earthquake was lower than what had actually occurred and the fact that the core was not breached or the building itself wasn't damaged too much is a testament to the engineering involved in it. The fact is it was due to an unfortunate loss of electrical power from the emergency generators that brought about the current situation. An easy solution would be to have a transportable generator on stand-by or two in case the on-site generators are damaged. Also of note, Fukushima is a discontinued and poignantly, an old design.

    As for spent fuel, if our nation didn't have their panic about nuclear power we could've had reactors that are designed to process spent fuel even further for electrical generation.
  • reply to jerichowhiskey: The cores have been breached, and the top halves of at least 2 reactor buildings were BLOWN SKY HIGH and the tops were full of spent fuel rods.

    As for our nation's "panic about nuclear" ain't seen nothin' yet!
    btw: where do you get your "facts"? Fox?
  • What are the real costs of the Japanese nuclear disaster? Lives lost so far only 2, from the tsunami, and two more with radiation burns. The total cleanup costs will be in the billions to tens of billions of dollars, but that is small relative to the tsunami it self.

    Relative to the environmental impact of coal on human health (hg, sulfur, particulate) and even the amount of radiation exposure (yes, coal dust contains radioactive materials), nuclear power still looks good.

    As an economist, he should do a complete relative analysis before voicing opinions. How many reactors with similar designs are at risk for 10 meter Tsunami's and only have 5 meter Tsuanami walls. Remember, it is only underwater earthquakes that generate major Tsuanami's. Perhaps he needs to talk to some of the people over in engineering at his university and learn something about reactors and the impacts of alternative energy. I have great respect for his economic analysis and believe his is right about financial risk.
  • What if in the next such disaster, wind would blow over Tokyo instead of blowing to wast and mostly empty Pacific?

    Can you say "evacuation of a 30 million people megapolis?"
  • It would be more expensive. If you spread the radiation over that large of area and the press didn't make a panic, it probably wouldn't even add much cost. Yes, you would take iodine pills to keep iodine 131 out of your thyroid, however in a few months all the iodine 131 will be gone. Unlike mercury from coal burning or Cadmium from solar cells, it goes away but these toxic heavy metals stay around forever.
  • Mike4444 1 day ago
    There are risks to being human; otherwise natural selection would not have occured and we'd still be single-celled creatures.
  • Are you suggesting these global criminals have evolved to a higher life form and thus deserve the right to risk our very lives?
  • For starters, if I were the Democratic Party leadership in the US, I think I'd really explore that "socialized risks, privatized gains" theme and say things like "the Republicans are all for socialism when it comes to risk, but when it comes to benefits they're firm believers in 'every man for himself'."
  • Insightful as usual and worthy of reading
  • TeRobanELIVU 2 days ago
    all the governments of the world promote this kind of gambling behavior from corporate giants, there's a promise of huge profits for them, then they sell the idea, well in many cases, in most cases they just imposed it to all citizens like is good for the way of life and progress and whatever they could come up to.
    they will never loose, is a win win they make it big nothing happens got their money, incentives recognition, a good life paid by the people.
    then they loose, a disaster comes, the blame, they should have never done this or that, they knew it. anyway, they got their money incentives, a bad reputation maybe, doesn't hurt when you secure your gazillion dollars on the banks and the best part, who pays for the recovery? the same people who had no saying in the first place when they where pushed to accept the idea.
    Isn't great to be one of this corporate giants?
  • Money again and again it is the bottom line. When will we learn that money does not follow us to our graves?
  • Only when the last tree is cut; only when the last river is polluted; only when the last fish is caught; only then will they realize that you cannot eat money.

    Cree Indian Prophecy
  • MissusComprehensivePerspective 1 day ago in reply to FreetoBmew2
    Though a wealthy man be called home by his creator, he is allowed in death to keep his personal fortune intact through the vehicle of private inheritance.

    Heirs have done nothing to earn the free-gratis money they get.

    Make private inheritance public. Return the money to the rightful worker-earner-owners of it, from whom it has been legally stolen.

    Private inheritance and land monopoly: these are the backbone of rule by the rich.
  • parvenu 2 days ago
    Just my own personal observation here. I think President Obama is passing up a great opportunity in not taking advantage of the nuclear disaster in Japan. Just what do I mean by this statement? Well Japan has to move away from the post-war McArthur introduced atomic power as the primary source of power for Japan. Japanese participation in World War II was essentially an outgrowth of Japan's economic and industrial expansion, for which she lacked the raw materials to continue. These materials were coal and iron ore. This was the reason Japan's first point of aggression was against China, which is rich in coal and other natural ore deposits. When the war ended Genral McArthur recognized that Japan's industry needed rebuilding and since all of the countries pre-war steel making plants had been destroyed, new plant would have to be built. The timing for this need was quite interesting as the American steel industry with its out of date coal fired Bessermer Converters was facing the prospect of needing to modify their methods of producing steel. This need to redesign steel making furnaces was due to the huge energy ineffecies of the old pre-war furnaces. McArthur decided that Japan''s new steel industry should be rebuilt with the newly designed American ELECTRIC furnaces. Additionally his staff recommended that nuclear power station be built to supply the huge amount of electricity needed by these new steel making converters. It was a plan made in heaven, post war construction using equipment made in America! Obviously no one can argue against the success of the McArthur plan, just look at Japan's pre-earthquake economy and her export strength across the world. However, the earthquake has brought about a day of seriouus contemplation in Japan concerning her future energy resources, keeping in mind the huge energy requirements needed to keep her vehicle manufacturing industry operating.

    I digressed above to provide a little background for my observation. It is obvious that Japan has power needs very similar to that of the United States, especially when one consideres the power requirements needed for industrial expansion. A joint well financed research project supported by the U.S. and Japan into the development of new large scale power generating resouces would certainly benefit both nations and involve some of the best scientific minds in the world. At this point let me make it clear that I have no idea what scientific discipline would emerge from such a Japanese-American search for a viable 21st century electrical energy power resource. However, I doubt that it will be any of the alternative energy buzzwords that we are all familar with such as "Wind Power", or "Clean Coal", Solar Power, etc. My money is on some currently unknown technology that might be discovered during this joint research effort. I suggest starting with the well known fact that Japan sits on the "ring of fire" an established earthquake zone. Using this fact as a starting point we should initiate a research effort aimed at better understanding the transfer of energy interaction between the tectonic plate pressure zones and cycles of volcanic activity along with the predictive ability to map the movement of such forces occuring therein.
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  • EricZay 6 hours ago
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    Gambling with the planet - Opinion - Al Jazeera English via @AddThis
  • pdjmoo 6 hours ago
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    RT @AJEnglish Gambling with the planet - Opinion
  • Beannietoo 13 hours ago
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    Nuclear and financial industries claimed no risks ||Gambling with the planet - Opinion - Al Jazeera English via @AddThis
  • bl8ant 20 hours ago
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    Gambling with the planet - Opinion - Al Jazeera English via @ajenglish
  • jeanbozlov 1 day ago
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    Gambling with the planet - Opinion - Al Jazeera English via @AddThis
  • OmarVelascoM 1 day ago
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    Apostar con el planeta: Joseph Stiglitz "Japón nos ha demostrado el mal manejo de los mercados ante desastres naturales"
  • ma2bee 1 day ago
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    RT @yosske: ノーベル経済学学者スティグリッツによる原発事故と経済危機の共通するリスクについて示唆する記事(英文)。 興味深い。 | Gambling with the planet - Al Jazeera |
  • GaryYeritsian 1 day ago
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    Joseph Stiglitz - "Gambling With the Planet" -
  • CriticalReading 1 day ago
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    Joseph Stiglitz: Gambling with the planet Al Jazeera English via @AddThis The self-delusion of the ruling class
  • MnlyBeach 1 day ago
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    "Gambling with the #planet.. Societies' #failure to manage #risks" #disasters #nuclear #redistribution #mfg_risks