Why Copenhagen won’t work: Hypocrisy is built into the system

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Coming up: The Global Travel Bubble [Part 1]

In trying to figure out how to bail-out the financial institutions and avoid a global economic meltdown, finger-pointing and blame-laying has been a standard dish these last few weeks.

However, blame is seldom one-sided. Governments may have allowed it to happen and banks may have been greedy and irresponsible, but consumers have been foolish too. As UK top-job hopeful David Cameron said last week, “we have not been living within our means”. How has all this happened?

1. The Executive Story: Flawed Business Model

One one side, seriously bad decisions have been made by financial institutions and policy makers. In a bid for national economic growth, governments deregulated the financial industry allowing more lenient credit policies. Or, passed up the opportunities to introduce new regulations. Given this “freedom”, investment banks set about lending more money than they owned. Not just a little, but large amounts. Somewhere close to $700B apparently. However much economists and apologists want to complicate the explanations, this is simply a case of “truly bad business model”. That is, 1) selling something that doesn’t make you money and, 2) selling lots of it. Banks behaved just like a person on the dole signing a lease for a Hummer: can’t afford to pay for it and can’t even afford to fill it up with gas.

2. The Consumer Story: Misaligned Motivations

On the other side of the fence, consumers bought into this stuff (i.e. taking loans/mortgages they can’t afford to pay back) because of a few gross misperceptions:

1. Misperception #1: Property is an investment.
   Property is an investment but it is not the same kind of investment to everybody. If you’re buying a place to do it up and sell it off within 6 months then yes, it is a financial investment and taking a risk *may* be justified. If, however, you are buying a house because you want a home then the return on your investment is not financial. Therefore, buying a home you can’t afford is plain, er, silly, because your financial risk is not based on a financial return. Your anticipated return is security, a nice place for your kids to grow up in, or a place to relax in. This does not balance out your financial input.
2. Misperception #2: Property is safe.
   Property may be a ‘safe’ investment to the extent that people always need somewhere to live in or operate from. The property market is however not immune to the standard supply/demand economics. If (based on misperception #1) you buy a large family home that you can’t afford and you find yourself in financial difficulties, your property will not provide a safety net because: a) since you want to sell fast, buyers will take advantage to pay you less, and b) family homes might not be in high demand (smaller families, aging populations, etc may be indicators here)

So everybody involved has been living beyond their means and making decisions based on tangential data. Was it so hard to predict and avoid? No. Some thoughtfulness and foresight would have saved lots people lots of time, money and aggravation.

What interests me now however, is whether this same flawed approach can be averted in some other sectors. In Part II of this riff (tomorrow?) I will analyse why I believe similar factors are leading towards a Travel Bubble (crisis/meltdown/crunch) and what can be done to avoid it.

‘Commemorating’ Global Warming

The Windsor Hotel Toya in Japan, host of the G8 summit, has reportedly spent $1.4 million on a monument commemorating global warming. The hotel says it “should act as a message for future generations to take care of the Earth.”

It would, in my humble opinion, have been much more useful to do something with that $1.4M that would make it unnecessary for future generations to worry about global warming.

Donating the money to Friends of the Earth or to one of the many universities engaged in sustainability research would have been a proactive means of achieving practical progress. Researchers can do a lot with a million here and there. (Not to mention avoiding the carbon cost that manufacturing, installing and promoting the monument entails.)

Needless to say, in the typically brutal entrepreneurial fashion (the one that is responsible for much of the muck we’re in at the moment) it’s much ‘cooler’ to look like you’re doing something about it, than to actually help cool the climate down.

It would also have been much simpler.