“Eek! Markets! Wall Street! Bad!”
Paul Krugman digs into an issue that deserves more attention: will Goldman Sachs’ use of derivatives to manipulate the carbon markets inevitably cause the sun to explode, blotting out all life on earth?
Actually, he digs into the fearmongering surrounding cap-and-trade, and lays out some of the many reasons concerns about carbon market manipulation is overblown. This has been an issue I’ve wanted to devote some blog inches to for a while, but, lacking a Nobel Prize, I’ve decided to keep my own counsel. Nobel-Prize-having Paul Krugman, on the other hand, jumps right in:
> So, should fear of speculation lead us to ban trading in wheat? Nobody would say that. Yes, sometimes speculators will get it wrong — but the advantages of having a wheat market vastly overshadow the possible harm that may sometimes come from speculation.
> Now substitute “emission permits” for wheat. It’s exactly the same story. Why should you address it any differently? Yet as Joe Romm tells us, Sen. Byron Dorgan — who I suspect kind of favors allowing the market in wheat to operate — warns against cap and trade because it would offer too many opportunities to the “Wall Street crowd.” And that same line is, unfortunately, being echoed by a number of progressives.
> This is really bad — it’s not a case of the perfect being the enemy of the good, it’s a case of the perfect being an enemy of the *planet*.
The piece goes on to lay out some reasons why the carbon market won’t be subject to manipulation in the same way that, say, the California energy market was in 2000. Essentially, the carbon market will be too broad and responsive to price changes to allow for easy gaming. I would add that the cap-and-trade system described in the Waxman-Markey bill has several provisions meant to buffer against price shocks.
Even if you are worried about market manipulation in the abstract, there’s good news: the climate change bill just passed in the House includes lots and lots of provisions for reining in speculative excess. Joe Romm has plenty of details.
Part of the difficulty in batting this stuff down is that the charges aren’t generally very specific or even coherent. For example, a lot of people have tried to raise concerns about derivatives, usually while holding flashlights under their faces to appear extra-scary. But very few people know what a derivative actually is. As it happens, derivatives are an incredibly broad class of mostly benign financial instruments. Even the ones that have proven not to be so benign — say, CDOs and CDSs — weren’t really a root cause of our current financial problems. They just exacerbated a situation that was already set to explode.
A certain corner of the environmental community has been complaining about markets for a long time now, and these complaints are getting picked up more broadly as we get closer to actually passing a bill. Matt Taibbi recently wrote a piece for Rolling Stone that named “global warming” as the next speculative bubble. The article (or at least the carbon market section, which is the only bit I read) is spectacular in its incoherence, but similar sentiments can be heard even from such environmental heroes as James Hansen.
Which is really too bad, because the concerns are overblown, and they’re now being picked up and broadcast opportunistically by many who would prefer we do nothing at all about climate change.