Future of Finance

  • From Paris to Drawdown

    June 7th, 2017 by ewalsh


     

    Yes, it was a shameful poke in the world’s eye by the dangerously narcissistic, temporary occupant of the White House.

    Like other unconscionable and unfathomable acts of the early 21st century—a period of historic great change already—Trump’s pulling out of the Paris Climate Agreement has sent me searching for the deeper meaning of it all, while the pundits flail away.  

    The attack on the World Trade Center, an iconic symbol of globalization if there ever was one, triggered for me a period of introspection and a personal existential crisis as it opened up a possible dark side of my previously unquestioned Wall Street-influenced worldview.  Then the financial crisis drove a stake in the heart of our failed neoliberal economics and finance ideology, leaving in its wake profound and still unanswered questions.  Brexit shined a light on the flawed architecture and economic assumptions underlying the European Union, while Trump’s unimaginable election should force America’s self-anointed elites, in particular, to face their own shadow.

    Is there not a deeper message being offered up to us as we undergo the shock therapy that is the Trump phenomenon, with his extraordinary ignorance, egotism, and moral ineptitude, most recently evidenced by his unconscionable withdrawal from Paris?  It’s worth our reflection: Trump as cosmic messenger, the wake-up call we deserve.

    Consider the reality. The Paris Agreement is not an enforceable treaty with binding emissions limits.  Nor is it even an adequate statement of intention, since even if all signatories live up to their promises, the best scientific projections suggest we will not stay below the intended 2-degree warming ceiling.  And, we know we actually need to stay below 1.5 degrees warming, a radically different proposition.  Finally, nothing in the Agreement addresses the existential threat it poses to all Petro States since the math implies that 80% of existing fossil fuel reserves, the lifeblood of these societies, must remain in the ground, demanding unprecedented economic transitions requiring a new development paradigm, and that it will that take decades of investment and hard work.  See Venezuela for a preview of the challenges to come.

    Russia is such a Petro-State.  Hmm…Calling Jared?

    So perhaps the first deeper message we need to hear, disguised below Trump’s disgraceful act is: “The Paris Agreement amounts to little more than appeasement; get serious, people.”  

    So far, the initial response within the United States and globally is actually quite hopeful.  States led by California, cities led by Pittsburgh, and a vast cross-section of the business community have been emboldened to show the world (and ourselves) that the “current occupant” does not get to decide for its people on a matter of such grave importance.  “We’re still in!”  Perhaps the sleeping bear – we, the people – has finally been poked?

    Second, one primary reason the Agreement was not a binding treaty is that all participants understood that Obama could never deliver the dysfunctional U.S. Congress.  So the deeper message we must confront is that many of the leading global institutions of governance, from the United Nations to the United States, to the European Union, are all incapable of addressing the urgent and interconnected global governance crises of the 21st century.  Where are the serious plans to address this reality, while at the same time reacting to the unending crises of the day?

    Third, despite decades of scientific analysis and diplomacy around climate change, we are still working off a horribly inadequate playbook that reduces the complex challenge of restoring balance to the earth’s carbon cycle to simply a call by nations to “cut fossil fuel emissions” by some seemingly random, politically negotiated amount based on what each nation was willing to commit to, that collectively is grossly inadequate to the task at hand.

    Just in time, Paul Hawken and colleagues have recently published Drawdown. The name calls out the real goal we must embrace: “drawdown” of the concentration of greenhouse gasses in the atmosphere, rather than the insufficient objective of reducing emissions.  We are at 402 PPM today and need to get below 350 in the face of a growing population and rising standards of living for the majority of humanity.  That’s the task.  It demands an integrated, multi-dimensional, rigorous plan.  Drawdown provides the analytical foundation for such a plan, documenting the 100 top viable solutions using available technology, and conservative assumptions about their realistic scale-up rates and economics over a thirty-year period between 2020 and 2050.  

    Good news:  the math says we can do this!  It identifies 1000 Giga Tons reduction in atmospheric CO2 (or equivalent), and requires collectively a highly diversified investment of $30 trillion over thirty years, generating economic savings (in the aggregate) of two and half times that amount, on top of avoiding the worst-case consequences of climate change.  To be clear, this represents a profound and unprecedented shift in the allocation of resources from business as usual.  That’s the deal.

    The results from the Drawdown analysis are not what most will expect.  First of all, the single largest solution is not solar or wind.  It’s refrigerant management.  HFCs, the “solution” to the ozone layer problem of the past, turns out to have somewhere between 1,000 and 9,000 times the greenhouse effect of CO2.  We must simply swap out the AC, which will have nine times the impact of converting to electric vehicles (only number 26 on the Drawdown list).  Who will be the Elon Musk of AC?

    Perhaps more revealing is the combined impact of family planning and educating women, which, when looked at together, would move to the top, exceeding onshore and offshore wind combined.  Population is often a taboo subject.  But an extra billion people all desiring to live a middle-class lifestyle makes a massive difference, so we need to be able to talk about it as part of a comprehensive plan.

    And perhaps most hopeful, the report rightly turns our attention to the amazing natural “technology” we take for granted: photosynthesis, the basis of all life on this planet.  Drawdown demands we focus on the massive carbon sinks where carbon is safely stored, in addition to reducing emissions.  Remarkably, few realize that our soils are the second largest carbon sink after the oceans, comparable to the world’s forests.  Small, achievable percentage changes in the stock of carbon held in our soils, through profitable regenerative agriculture hold massive potential for drawdown, without even factoring in all the ancillary benefits to human health and, therefore, our healthcare crisis, water retention, desertification, and species loss.  The role of regenerative agriculture and land use of all varieties, from no-till crop farming to holistic grazing accounts for fifteen of the top twenty-five drawdown solutions.

    So the message we need to hear underlying Trump’s Paris fiasco:  The current occupant will be judged by history; but so will we:  wake-up call.  The U.S Congress and the Trump enablers in his Administration have a chance to restore their integrity, but no one is depending on it.  National leadership on climate has long been outside the U.S. federal government and that’s OK, but it’s a lost opportunity.  U.S. states, cities, the U.S. military, and the private sector are already mobilized and that will now only accelerate.  

    We must shift our attention from grand diplomatic gestures by institutions of governance designed for a different time to a rigorous, empowering plan where there is no silver bullet but unlimited and empowering opportunities where the real leaders are already defining our future.  Those leaders are us.

    The goal is simple: drawdown.  It’s no easy feat, and time is not on our side.  Let’s roll, people.

  • March for Science — Really?

    May 2nd, 2017 by ewalsh

     


     

    How is it possible that in America, on the 47th anniversary of Earth Day, it was concluded that our situation was so dire that what was needed was not just a march for aggressive climate policies, but rather a “March for Science” itself?  

    Small-minded, corrupt, and power hungry state governors banning the mere use of the phrase “climate change” in official communications seemed laughable at the time.  But now the ignorant and dangerous Trump regime has signaled double-digit cuts to scientific research, including climate science, after appointing a climate-denier to head the Environmental Protection Agency.

    One cannot help but notice history repeating itself.  A mere 401 years ago, an Inquisition under the direction of Pope Paul V issued a Special Injunction against Galileo instructing him to “abandon completely the opinion that the sun stands still at the center of the world and the earth moves, and henceforth not to hold, teach, or defend it in any way whatever, either orally or in writing.”

    In 1616, Pope Paul and his minions’ concerns were quite clear:  the heliocentric worldview “explicitly contradicted” the literal interpretation of the Holy Scripture. The “alternative facts” of an earth-centered universe were the very foundation of the Pope’s power over the Western world. Consequently, the unquestioned power of the Church would be undermined if the heliocentric view were to be accepted as fact.  

    Fast forward to the present day.  Like all things Trump, the present situation is both worse and more complex than it might appear.  First, let’s be clear:  Trump is more putz than Pope, an ignorant narcissist, but also a clever opportunist at his core.  Trump’s influence in the world is, by comparison, a far cry from that of Pope Paul V 400 years ago.  But we have given Trump, with the aid of the Russians or not, frightening power—in absolute terms far greater and more dangerous than any Pope has ever had. 

    But here’s why the situation is both more complex—and more of an opportunity—than meets the eye.   The science most of us believe we are marching for is the science of the Scientific Revolution that Copernicus and Galileo ushered in 400 years ago.  It is rooted in the reductionist logic—simplify what is complicated by breaking it down into understandable parts—that brought us airplanes, iPhones, and all the progress we hold dear.  It opened up the way to the Enlightenment, which replaced blind faith in the doctrines of the Church with a belief in each individual’s human potential.

    In the ultimate irony: it is the modern day Pope who understands what the reductionist science of Modernity and what contemporary “leaders” don’t see (and Trump could not understand).  In the Pope’s words, included in his beautiful Encyclical, Laudato Si, “We urgently need a humanism capable of bringing together the different fields of knowledge, including economics, in the service of a more integral and integrating vision.”  

    We appear to have entered a new era, a Second Scientific Revolution, that is permeating all fields of knowledge.  Integrated medicine, regenerative agriculture, integral urban design, and the entire study of ecology are all examples of this systems-based approach.  In it, integral or holistic thinking is augmenting the reductionist method, unlocking unimagined potential, and, in the process, the only genuine solutions to the critical and complex challenges of our time to emerge at the edges of our individual disciplines. Our failure to make this transition is a life and death matter.  It is critical to our understanding the interconnected climate and other ecosystem crises, the healthcare crises, and the economic system crises accelerating around us at an exponential rate.  

    Is it possible that the Trump insanity might just be the jolt our scientific research community needs to make the historic, essential, and immensely difficult shift into effective transdisciplinary thinking and collaboration?  For example, how much of the National Institute of Health’s immense $30 billion annual budget goes towards “chasing a cure for cancer” (using the best reductionist science) when those researching (with pennies in comparison) and practicing integral health – both physical and mental – increasingly understand that a “disease” like cancer is actually often a mere symptom, whereas the genuine root cause (holistically understood) is more likely to relate to communication breakdowns at a cellular level in the natural regenerative capacities of our immune system?

    If we want to reverse the health crisis (much less the healthcare crisis), we must invest in better understanding and support of our immune system, and immune system health begins with the food we eat and the soil it is grown in, most of it now toxic from the financially entrenched, industrial agriculture system our reductionist method delivered to us unaware of the disastrous unintended consequences.  How about in response to the Trump budget shake-up, an allocation of just 10 percent of the NIH budget to regenerative agriculture, which will enhance health and unlock the massive potential for real climate solutions through natural carbon sequestration in the process.  This is but one example of the potential that lies at the “edges” of disciplines that will be revealed in the Second Scientific Revolution. 

    Don’t get me wrong.  I don’t support cutting science research so we can increase our insanely bloated military budget. But far more important than a few years of budget chaos is the need to understand our future in the integral age lies in probing across disciplines, not merely digging ever deeper into each one, treating symptoms rather than root causes.  Systems and established institutions don’t change without a shock to the system.  Let us work creatively and smartly to use the Trump circus, with all its ignorance and bluster, as that needed shock opening up unimagined new possibilities.  In human and ecological health, and in our economic health. 

    The Second Scientific Revolution is indeed afoot, ushering in the rise of integral science – the physical sciences and social sciences together.  It is happening, but it is happening outside our leading institutions, which by design are resistant to such threatening challenges, just as the Church was four centuries ago.  Woven together as never before with the great wisdom traditions—Western, Eastern, and indigenous, all of which have stood the test of time—it will trigger a movement future historians may call the “Great Second Enlightenment”.  It will demand universal participation, our best and most creative minds, bodies, and souls, and give much-needed meaning to our lives. 

    That’s the parade I want to march in!

     

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  • Shifting From Parts to Patterns

    April 4th, 2017 by ewalsh


    All our knowledge has its origins in our perceptions.” – Leonardo Da Vinci

    I had the pleasure of hearing my friend Nora Bateson speak last week at The Players Club in New York City where she held a reading and conversation around her recently published book, Small Arcs of Larger Circles: Framing Through Other Patterns.

    If that title slows you down a bit, well, I think that’s the point. The book is a collection of essays and poems, and the conversation with Nora included personal stories of growing up in the Bateson household (Nora’s father was the pre-eminent systems scientist and anthropologist Gregory Bateson, whose first marriage was to Margaret Mead. Nora’s grandfather William, was a biologist who coined the term genetics.)

    Collectively, the passages in Nora’s book draw us into a state of heightened curiosity that leads us to question how we perceive reality, ultimately enabling us to better understand our world and the challenges accelerating all around us. She invites us to probe the profound difference between our now four-hundred-year-old reductionist way of thinking (which is rooted in the Scientific Revolution), and the demands and mystery of a more accurate, complex living systems view of the world. Critical to the understanding of this more accurate world view is Nora’s enigmatic assertion, itself an invitation to the most important conversation we could be having:

    “The opposite of complexity is not simplicity; it is reductionism,” she mused.

    In the context of our interconnected 21st century social, political, economic and ecological challenges, the critical distinction between complexity and reductionism is far from a trivial one. It is, in fact, a life or death insight.

    It is precisely because these indivisible challenges are rooted in complexity that our continually applying reductionist thinking to them has led to disastrous consequences.  Overcoming them depends on our shedding our unconscious reliance on reductionist thinking and adopting a more holistic way of looking at our world.  In other words, our failure to comprehend complexity itself, in an increasingly complex, interconnected world that seems to be spiraling out of control, may well turn out to have life or death consequences for many of us, and even civilization itself as we’ve come to know it in the Modern Age.

    Admittedly, reductionism – breaking down what is complicated into its component parts so they can be analyzed and understood – has made immeasurable contributions to the progress of human civilization. The laptop I’m typing on and the man on the moon are achievements made possible through the reductionist method.  But as Wes Jackson says, “there’s nothing wrong with the reductionist method so long as you don’t confuse the method with the way the world actually works.”

    Holistic thinker Allan Savory once illuminated for me that complexity is profoundly different than what’s complicated.  An iPhone or an airplane is complicated.  With time and ingenuity, it can be perfected and then mass produced, the same every time.  We humans have become experts in making what’s complicated, thanks to our now well-honed expertise in reductionist reasoning and problem solving.

    But complexity is a different animal altogether.  A nation is complex. A city is complex.  A business is complex.  A rainforest is complex.  War is complex.  So too a marriage, a family, and our human self – our physical body, as well as our collective body/mind/spirit.  The complexity of a living system is distinguished by the ever-changing context that surrounds it and affects it, with feedback loops and consequences impossible to fully comprehend in advance.  Our political economy, in the context of culture and place, is such a complex living system.

    Bateson explains that living systems that survive over time are characterized by mutually supportive learning networks that continuously communicate and interact across multiple contexts and variables in the system.  Yet we pretend to believe we can manage complexity as we manage what’s merely complicated, with our rules and protocols, and our key performance indicators designed through reductionist logic.  In today’s America — a complex system if there ever was one — the danger is compounded by leaders who seem to think they can govern without reference to accurate information, better known as “facts,” without which trust-based communication is impossible.

    Trust issues aside, our challenges run even deeper.  Bateson writes, “The education system that reaches around the globe is a mess… The violence of breaking the world into bits and never putting it back together again substantiates the kind of blindness in which we have separated ecology from economy, and psychology from politics.”  I would add another reductionist “violence”— the separation of what used to be called “political economy” into politics and economics.  From the professional silos in which business and finance, governance and the law operate today, we literally can’t “see” the patterns that define the interconnections of complexity accurately enough to have a chance to manage them in a way that the times demand.  In truth, our aim should be to constructively guide and flow with the complexity that defines modern reality, since complexity can’t really be “managed” in the sense of asserting control.  How many presidents, CEOs, or regulators, or any of “the people running the world” understand that?

    Gregory Bateson famously wrote: “Break the pattern that connects and you necessarily destroy all unity.”  Yet we don’t even see the patterns, much less honor the resulting unity as the essence of our health, even our survival.  Instead, in our ignorance, we break such patterns all the time, for example, the carbon cycle, which has resulted in the climate change that we now view as a “problem” to solve.  In reality, it is the unforeseen but direct consequence of our failure to perceive, understand, and humbly work within complexity.

    We humans have evolved into problem solvers using the reductionist method, a direct outgrowth of the Scientific Revolution.  It’s now baked into our DNA, limitations included.  A Second Scientific Revolution is underway, one that integrates the reductionist method with the patterns of connection that define our integral reality.  Our life depends on it.

    That’s worth slowing down a bit to ponder.

  • Hell No!

    February 28th, 2017 by ewalsh
    PaulPolman

    Paul Polman, Unilever CEO (Photo courtesy: Forbes.com; Photographer: Munshi Ahmed/Bloomberg)

     


    Sustainability icon and Unilever CEO Paul Polman made his feelings crystal clear on the unsolicited merger offer last week by Kraft Heinz, backed by the Brazilian cost-cutters at 3G Capital and their partner Warren Buffett:  the proposed deal, Unilever said, “had no merit, either financial or strategic.”  Ouch.

    I recall early in Polman’s CEO tenure hearing him say there were many cynics watching him and his sustainability quest, hoping he would fail (so their single-minded focus on shareholder value could continue while the invisible hand takes care of complicated global matters like ecological footprint). Right on cue, we see the 3G boot attempting to pin Polman’s head under water for the greater good of short-termism, furthering the scourge that financialized capitalism has become for society.

    Unilever swatted away their unwanted financial-driven suitors like a grizzly bear smacks down an interloper if her cubs are close by.  How could the purportedly well-respected 3G financiers — and Warren Buffett no less — fail to understand that Unilever was not just a commodity portfolio of consumer brands to manipulate for a quick short-term profit boost before moving on to the next “opportunity”?  Unilever is, rather, a purpose-driven company on a quest to “make sustainable living commonplace” and show that sustainability can also be good business.  In other words, Unilever has meaning for its customers, its employees, and the world.  It’s a “baby cub” that mama bear – Polman in this case — will protect to the death.  It is hard not to conclude that the 3G suitors – often referred to as mercenaries for their ruthless cost cutting, eliminating 13,000 jobs from Kraft Heinz for example – must have viewed the “sustainability stuff” as little more than corporate waste and soft public relations B.S., and that Polman would have a price for his dream.  They miscalculated, “friendly” offer notwithstanding.

    But the fundamental issues at play here are worth more serious reflection than the mere machismo of win-or-lose deal-making in the greed-driven world of finance. We must ask ourselves three questions. First, is a genuine commitment to sustainability compatible with winning in the competitive global marketplace?  Second, is it possible for courageous business leaders to lead this transformation in the face of “market reality,” rather than rely on government regulation?  And finally, how does a company like Unilever navigate the short-term demands of stockholders (and protect itself against the sharks) while at the same time working to effect the difficult, long-term transformation that a genuine commitment to sustainability demands?

    I will assert the answer to the first question is, “yes, definitely in the long run, and no large company, including Unilever, is close to being truly sustainable”;  and, to the second, “yes, we had better hope so, and thank goodness for the example provided by Polman, whom business leaders like Buffett and his 3G friends should be studying not stalking.” With respect to the final question, I say, “it may well be impossible to accomplish within the current capital market context.”  Let me explain.

    The increasing short-termism driven by so-called “investors” who are simply speculators having nothing directly to do with real investment and the real economy—including activist hedge fund operators, algorithmic “high-frequency” traders and a lot in between—is well understood, with negative implications for the long-term health of the real economy.  But with respect to businesses’ ability to transition their business models to sustainability-focused ones—which is the long-run imperative for civilization itself—this short-termism cancer may be terminal.   Unilever found itself in the heart of this dilemma last week, ironically with none other than the champion of long-term investment, Warren Buffett, sitting across the table on the side of the short-termism opportunists.   We live in confused times.

    Both perspectives are valid when looked at through the lens of the speculative capital market paradigm – what’s needed is a shift in perspective to an alternative paradigm, ironically, a shift back toward a more evolved version of the buy-and-hold real investment approach upon which Buffett built his stellar reputation.  In doing so, we discover a third way to address both the genuine needs and desires of prudent investors, as well as the sustainability transformation imperative of the economy and civilization.

    The food products business (not to be confused with fresh, nutrient-rich food) is mature, which means little if any growth.  Yet brands like Unilever’s Hellmann’s mayonnaise generate stable cash flow, the classic “cash cow” businesses.  But because they grow slowly, if at all, the stock market rightly values them at a low multiple of cash flow.  So these cash cows become a valuation burden, dragging down the stock price multiple of their parent companies and inviting ruthless (and in part sensible) cost-cutting to generate earnings growth.  But transitioning them to more sustainable products – mayonnaise using non-GMO soybean oil grown using regenerative rather than industrial agricultural practices and paying farmers a living wage – often means higher costs at least in the short-term.  So there is a tension that is difficult if not impossible to reconcile for a company whose stockholders (speculators) hold their feet to the fire with a short-term perspective.

    But enlightened investors like pension funds should see the opportunity.  They want two things for their pensioners:  stable cash flows purchased at a reasonable price (Unilever’s cash flows are cheap, which is why Buffett and friends had an interest) so they can match the fixed pension obligations they have with less risk than speculating in the stock market. And second, they also should demand products from the companies they invest in that are both healthy for their pensioners and healthy for the planet on which their pensioners and their children need to live.

    Drawing on the framework of regenerative economics, we see that “right relationship” – relationships that are mutually beneficial – is the critical principle out of alignment here, and thus a profound opportunity.  There is no “right relationship” between stock speculators and the companies whose shares they speculate in.  There is often no genuine relationship at all.  And a “relationship” with a suitor like 3G that would mean destroying the well-considered purpose of the company is hardly a “right relationship”, as Mr. Polman made abundantly clear with his “hell no” response.  But if large institutional investors like pension funds could see outside the capital markets paradigm, they would notice vast opportunities for win-win “right relationship” in creative partnerships at scale with purpose-driven companies like Unilever.  The Evergreen Direct Investment method is but one of many possibilities for such creative real investment partnerships.

    Is this the future of “investor relations” in the transition to a just and regenerative economy led by courageous pioneers like Polman in partnership with bold and truly responsible institutional investors, where retail investors can tag along for the ride to participate in the essential and profitable transition of big business?  Hell yes!

  • Broken Trust

    January 27th, 2017 by ewalsh

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    At this year’s World Economic Forum gathering in Davos, Switzerland, PR firm Edelman shared its comprehensive annual Trust Barometer, confirming what we all know: global trust in institutions and leaders is at an all-time low.  Fully two-thirds of countries are now considered “distrusters” (under 50% trust in the mainstream institutions of business, government, media and NGOs to do what is right), compared to about half a year ago.  This is a stunning collapse in trust, even from last year’s low base.

    Trust in leadership is equally low. Only 37 percent of the general population believe CEOs are credible, even worse for government officials – 29 percent credible.  A paltry 15 percent believe the system is working.  Ironically, it was Chinese Premier Xi, in his first address at Davos, who stood in defense of globalization (quoting Abraham Lincoln, it should be said), arguing that the system is sound, but it is (Western democratic) governance that has failed.  Note China ranked second on the trust index, second only to India.

    Talk about a humbling moment (if that’s possible) at the annual gathering of the global economic and political elite.

    There was lots of talk this year at Davos about “inclusive capitalism” (Jack Ma actually puts substance behind the slogan in his must-watch interview — a great example of Alibaba’s seemingly regenerative business model in service to its network partners rather than extracting from them, and a sharp contrast to Amazon’s model, as Ma explains).  But the “inclusive capitalism” talk included little honest analysis of the root cause of this stunning collapse in trust, why it is so dangerous (the rise in extreme forms of authoritarian populism rooted in emotion more than evidence and its unpredictable path), and what if anything can be done about it at this late date.  Nobel Economist Joseph Stiglitz wrote a prescient piece on this topic in 2013, and called for strong regulation and bold regulators to enforce the laws.  Clearly, we have failed.  And without a culture that not only values trust but demands it, I am not optimistic about better regulation and stricter enforcement.

    The decline in trust pervades all four institutions studied in the Edelman survey. Unfortunately, Edelman did not single out finance and report on it separately from business.  Surely few would doubt that the finance sector (Wall Street mega banks, in particular) would rank at the bottom of the trust barometer within the business category.  In fact, research confirms that bankers are more likely to cheat than the rest of us. (As a former banker, this is upsetting to me!)

    Nothing defines banking’s breach of public trust better than the 2008 financial collapse.  Being told to move on, It is easy to forget how much of the world’s current social and economic woes can be traced to the financial bubble and subsequent 2008 systemic collapse, either directly or indirectly.

    Recall that the financial collapse destroyed $19 trillion of economic value in the U.S. alone, permanently destroying the economic security of millions of families across America.  An estimated 34 million jobs were destroyed globally in the process.

    The rise of today’s dangerous brand of authoritarian populism—manifesting first in Brexit and now Trump—is directly connected to Wall Street’s breach of trust.  It’s not just because of “globalization” or “technology” taking our jobs as if it were all inevitable.  We cannot forget that compounding and exacerbating these legitimate and complex challenges, and more (climate change-induced drought driving immigration, linked to the Syrian carnage comes to mind) was the willful act of dropping a bomb into an already vulnerable society.  The Goldman Sachs/John Paulson Abacus trade was the Hiroshima of modern financial history.

    The mortgage fiasco was a massive, reckless act of violence, perpetrated upon global society by an industry failing in its critical purpose while instead proving itself willing to do just about anything to make grotesque profits through fraud and egregious deceit.  The efficient market narrative of bringing home ownership to the masses was all a cynical cover.  And the industry’s ongoing fraudulent activities post the crisis, from the LIBOR scandal to FX price rigging, to wrongful foreclosure with robo-signers to Wells Fargo’s opening millions of fake accounts out of its “community banking” division of all places (where the do-gooders are supposed to work), sealed the fate of the industry as devoid of trust for some time to come, unfair as that may be for the many honest bankers out there.

    Blaming populism on bankers’ unparalleled breach of trust is a strong claim.  But think about it:

    Less speculative finance, less speculative real estate lending.  Less boom created from unsustainable misallocation of human, physical, and financial capital to speculative real estate. Less wasted carbon in the atmosphere and less farmland destroyed, exacerbating the drought-driven migrations.  Less unearned wealth for bankers and less resulting inequality, and less power for the sector to rig the rules, buy off and brainwash the politicians and even regulators, resulting in asymmetric risks only the opportunist bankers truly understood.  (Trump once referred to the bankers—now his advisors—as “killers” on the campaign trail, and he’s had to cross them more than once, so he knows).   Less demand on the public sector to socialize the losses to “save the system” and therefore less public debt and no need for the misguided austerity driving society further into despair.  That means more resources available to address the consequences of globalization and automation, and greater acceleration of investment into the transition to renewable energy and into rebuilding our aging yet vital infrastructure.  More assets channeled into education, perhaps even into the revival of civics classes!  We know how this narrative continues.  We know it does not end with the election of a fraud to the most powerful office in the land.

    Donald Trump, whose ethics seem guided by the probability of winning lawsuits, is about as unlikely a remedy for broken societal trust as one can imagine, as his hopeful supporters are sadly about to learn.  Coal is not coming back, sorry.  So the consequences of lost trust will only amplify in dangerous and unpredictable ways that now stunningly include the Orwellian introduction of “alternative facts” into the Trump Administration’s everyday narrative.

    The so-called “activist investor” Carl Icahn is Trump’s fellow bully buddy and now Special Advisor on Regulatory Reform.  He has defended the need for Dodd-Frank banking reform in the past and held the banks responsible for the financial crisis in public statements.  That is a testament to his common sense and refreshing objectivity as a Wall Street insider.  Time will tell whether a man who has spent half a century as an opportunist (bully) stock speculator can come to see that an ideology that conflates speculation with investment and means (finance and the stock market) with ends (a healthy economy) can guide us to a more enlightened and still desperately needed financial system reform and begin the long process of rebuilding trust in Wall Street, and in the process within society.

    Not holding my breath.

  • City States Rising!

    December 29th, 2016 by ewalsh

    city-states-rising-graphic

    Globalism’s associated and accelerating complexity of interconnected crises from migration to terrorism, from pandemics to climate change, define the new context of our 21st-century reality.  Unmanaged technological change and an outdated economic ideology compound the already unfair burden these crises impose on global citizens.  One need only consider the 18 percent approval rating of the United States Congress, the recent U.S. election, the EU/Euro fiasco, Syria, Israel, Egypt, Turkey (and more) to question whether the Nation State, a 400-year-old response to a different challenge in a different context, is up to the task.

    Ideological rather than pragmatic, a political abstraction that has no grounding in the concrete reality of where and how we live and how life-supporting ecosystems function, the Nation State, together with its political party structure, is not well equipped for today’s most important globally interdependent challenges that cannot be solved through inter-State rivalries where self-interest and might rule the day.

    The “City State” predates the Nation State; it endures.  Rome is older than Italy, Alexandria is older than Egypt.  Cities are expanding as we know.  They are already home to more than half the world’s population, and 80% in the developed economies.  They are home to 85% of the global economy (and associated greenhouse gas emissions) and much of the evolution of our culture.  Like it or not, we have become an increasingly urban species.  Visionaries like Jonathan Rose are showing the way to regenerative cities with his timely publication of A Well-Tempered City.  At the same time, rural culture, small towns, and life-sustaining rural landscapes, historically understood as essential extensions of the City State, have never been more vital, as I will discuss below.

    Cities are also where many of the world’s great challenges must be met. The migration crisis and terrorism are urban affairs.  Since most cities are on coastlines or rivers, climate change will increasingly dominate the agenda of cities.  And cities will be the target of a nuclear attack if dangerous men go unrestrained.  Wise and competent city governance is a matter of life and death, not political theater among self-important globalist and nationalist bureaucrats.

    In response to the governance failures of the global system of Nation States, political theorist Benjamin Barber wrote an important book in 2013 called, If Mayors Ruled the World: Dysfunctional Nations, Rising Cities.  The Global Parliament of Mayors (GPM), which he inspired, held its inaugural meeting in The Hague, two months before rural America elected Donald Trump against the wishes of a strong democratic majority of citizens living in America’s cities.

    Interesting.

    Mayors must be pragmatists first.  Ineptitude, ignorance, and ideology give way to the concreteness of real problems of real people living in real communities. New York Mayor Fiorello La Guardia once famously said, “There is no Democratic or Republican way of fixing a sewer.”  So too for dealing with rising sea levels or, God forbid, a nuclear attack.

    When our centralized governing bodies fail to uphold their responsibilities, a power vacuum ensues, creating an opening for dangerous “strongman” responses, as we are now witnessing in the U.S and abroad.  Our present moment is particularly dangerous, with the simultaneous failure of other critical and powerful institutions – banking and the media in particular – to uphold their civil responsibilities and serve the health of the whole rather than their narrow self-interests.

    Banking’s consequential leadership failures are now a matter for the history books.  But the media’s complex leadership failures are still unfolding, perhaps best epitomized by CBS CEO Leslie Moonves’ shamefully cynical comment at a Morgan Stanley analyst conference earlier this year:

    “It may not be good for America, but it’s damn good for CBS,” he said of the election circus.  “Sorry. It’s a terrible thing to say. But, bring it on, Donald. Keep going.”

    Well, the young crowd at Morgan Stanley chuckled, “Donald kept going,” and we have elected a man to the highest office in the land who numerous respected psychologists believe has a (dangerous to the world) incurable mental illness known as “Narcissistic Personality Disorder.”

    Not so funny, is it, Mr. Moonves?  Enjoy your good quarterly profits.  Just as the reckless behavior of Wall Street was not funny, its ongoing consequences leading directly to the rise in authoritarian movements across the globe are not funny.

    A core principle of sustainable systems is that a system must adapt to its changing context or it will collapse. The current context of accelerating, unpredictable (by definition) complexity and too powerful, dysfunctional critical institutions – Nation States, banking and finance, and the media, together providing much of the essential fabric of our modern democratic and free society – creates the pressure for real change and the very real prospect of possible collapse.

    Our response most certainly lies in the concept of subsidiarity, one of four tenets of Catholic social doctrine, balancing power away from the center and closer to where the inclusive and democratic will of the people is still expressed: the modern City State.  Rise up Mayors!  And, rise up regional banks and community newspapers!

    Looked at through a regenerative systems lens, this is a return to the natural “fractal” ordering of things, demanding an emergent network of City States to counterbalance the corrupted power at the center. Indeed, such a response is already underway with the numerous networks of city-based initiatives such as the prescient GMP, the C-40 focused on climate change, UN-Habitatthe Strong Cities Network, and numerous “Smart Cities” initiatives.

    Rural communities, too, have a vital role to play.  In addition to preserving the ageless wisdom embedded in the diversity of rural cultures and communities, they have the critical responsibility to steward our essential landscapes – our forests, our soils, our watersheds, all under threat from our short-sighted, extractive, industrial economy.  Critically, the regenerative management of forestry and agriculture, with the potential to massively increase natural carbon sequestration, now holds perhaps the missing critical dimension of our ability to respond in time to climate change.  Therefore, City States have a self-interest in valuing and supporting the culture of land stewardship, the very foundation of human civilization and still very much alive in rural communities.  No soil, no water, no life.

    We are passing from the 500-year-old Modern Era in which great progress including the Nation State emerged in response to pressures from a different context.  We are entering the “Integral Era,” in response to new pressures and a new context.  Power is shifting from corrupted institutions of an extractive and overly powerful center to a regenerative and more distributed network of interconnected City States.

    Happy New Era!

  • Sail On, Sail On, Sailor

    September 16th, 2016 by ewalsh

     

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    Image Courtesy of BlueOrigin.com

     

     

     

     

     

     

     

     

     

    The following blog post originally appeared on EcoWatch.com.

    “Our vision is millions of people living and working in space, and New Glenn is a very important step,” said Jeff Bezos, unveiling this week his space travel company Blue Origin’s giant rocket named after Astronaut John Glenn.

    Of course there is also billionaire entrepreneur extraordinaire Elon Musk’s SpaceX, Richard Branson’s Virgin Galactic, and Paul Allen’s Vulcan Aerospace. Dream big, that’s the spirit! The final frontier with limitless possibilities. Our boys and their toys. Great fun!

    Most of us sail at a lower orbit of course. Our games, our striving and exploration, our fun, takes place a little closer to earth. My soul is nourished near and on the sea, so boats are my toys of choice. In my middle age, I have largely traded the competitive sailboat racing of my youth for a desire to “mess around” in relatively small, wooden boats in particular – sail and power – luxuriating in their handcrafted and poetic aesthetic.

    As I’ve documented previously, large, ocean-going yachts are a whole different kettle of fish, and pose a particularly grotesque challenge to any sense of a responsible carbon footprint, even if money is no object. My “boat toy” desires are far more humble. Until a couple weeks ago, my “yachting” consisted of a high performance paddle board with a bamboo deck – sustainable right? In my future, I see a pretty day sailor, handcrafted in Maine out of local wood (I sold my prior sailboat since the kids preoccupied my free time), and a small motorboat to explore harbors (we call this “toodling around”) and to make occasional short journeys around the southern New England coast where I live.

    This summer, I visited the talented craftsman Doug Hylan and his partner Ellery Brown of Hylan & Associates in Brooklin, Maine to continue a conversation we’ve had on and off for over a year about building a small “green” powerboat. Same logic as a car or a house – energy, materials, etc. The challenge of making motorboats fuel-efficient is that it takes much more energy to push a boat through the water than to roll a car down a road. And a boat requires an exponential increment of power to push it faster than what’s called “hull speed” – in other words to make it rise up and plane.

    So the design challenge was to find the right shape (long, narrow, and light), but stable enough for offshore conditions (wide and heavy is better) and with a highly efficient engine that would go “just fast enough”. Doug has done some cutting edge work in this arena, with some updated versions of classic designs and power system innovations. But even with Doug’s design ingenuity, latest technology, and lightweight building techniques, he hasn’t yet come up with a way to overcome those pesky laws of physics. Water is heavy and hydrostatic pressure is a bear.

    As we were talking over the concept we had in mind, I sensed a distinct lack of enthusiasm for my vision of the first truly “green” picnic boat, locally crafted, that had the potential to redefine pleasure boating away from the unsustainable fiberglass that ends up on a junk heap, and overwhelm Doug with new orders in the process. That’s when he turned to me and said, “You know John, if you want to enjoy green, responsible boating, just slow down.”

    Doug’s truth pierced Maine’s stark summer beauty as we looked across the cove, silently absorbing the implications that ran far beyond boats. All the latest advances in design and technology couldn’t come close to simply riding down the steeply sloped and physics determined energy curves he had showed me (slow down, use exponentially less energy).

    I gave up on a new, high tech wooden boat and bought a classic bass boat that has been for sale all summer, built out of wood in 1969, and totally restored in 2009. For a fraction of what a new boat would cost I might add. Reuse, recycle!

    And I’ll be the guy going slow, at least most of the time. At hull speed (about 10 miles per hour), I’ll burn less than a gallon of diesel per hour, a quarter of that when just calmly exploring a shoreline with friends in good conversation, going slow, enjoying the quiet. That’s when the experience feeds the soul, and relationships deepen, so it’s not all sacrifice. Going “fast” when we “need to get somewhere” (about 22 miles per hour is tops in this case), I’ll burn 8 gallons per hour with a guilty conscious.

    In contrast, a yacht like I wrote about before will burn between 20 and 40 gallons per hour going 10 miles per hour. And a fast offshore fishing boat designed to get out to the shelf for the big fish and back in a day, burns 150 gallons per hour at the high speed necessary to be home for dinner – in other words, a 500 gallon a day toy.

    My boat toy fetish makes me complicit, as does the rest of my lifestyle. But it’s mostly the flying I do. As many have pointed out, we sustainability workers sure do fly around a lot. Flying kills a carbon budget fast. Physics again. No doubt we Americans have a big adjustment to make with our living. Much less flying and offshore fishing. More fly fishing. And more sailing, sailor. Not so bad.

    Which brings us back to space travel. There certainly are real societal benefits from space exploration, and some interesting space opportunities only these super-human entrepreneurs could ever dream up. But a little research suggests a frightening energy curve – based on those same pesky laws of physics – that we must confront (hopefully with Doug Hylan’s wisdom hovering about).

    Aside from the money issue, the amount of fuel for a one day (probably hour or less) zero gravity tourist experience in space you wonder? Well, according to my calculations based on one seemingly reliable source, it’s 64,000 gallons of diesel equivalent.

    Some fun. Sail on, Sail on, sailor.
     

  • Brexit: Ignorance Calls Out Ignorance

    July 12th, 2016 by ewalsh

    “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

    Image Courtesy of www.newmoney.gr

    Image Courtesy of www.newmoney.gr

     

     

     

     

     

     

     

    Former U.K. Prime Minister Tony Blair discussed the momentous June 23 Brexit Referendum on a still “Too Big to Fail” bank conference call last week. Revealing how he really felt near the end of the interview, he proclaimed, “Knowing what you’re talking about became a disqualifier during the Referendum.”

    Blair typifies the neo-liberal elite who as Twain observed “know for sure” what they are talking about, despite overwhelming evidence to the contrary. One would think the Brexit debacle (not to mention the Trump debacle, the rise of Sanders, and the race tensions spinning out of control in the U.S., all rooted in a deeply flawed and divisive economic system that works too well for a few, and not well at all for too many) might cause these leaders to seriously ask themselves whether what they “know for sure just ain’t so.” And we wonder why today’s “elites” attract such disdain.

    No doubt, the Leave vote was supported by many who had little understanding or interest in the European Union (E.U.); this has been well-documented. No doubt we also find its roots in the rise of xenophobic, anti-European opportunists who spearheaded the Leave campaign, only to shamefully disappear from the public stage when they surprised themselves and got their way.

    The potential damage caused by Leave vote is a consequence of the far greater and more destructive ignorance on the part of the elites, including Blair himself. This elite ignorance arises from a blind faith in a dangerously-flawed neo-liberal economic ideology and the E.U.’s misguided, core architecture: monetary union without fiscal union. A basic understanding of biology tells you that organisms move toward food and safety when their life is under threat. Take away the adjustment mechanism of national currencies; squeeze people until they cannot live under a misguided austerity ideology; combine this with a commitment to free labor mobility – and you have designed a guaranteed refugee crisis with all the social turmoil that comes with it. So yes, Mr. Blair, as you said, “these people” as you called them – presumably you were referring to the ignorant little people who voted to Leave – “really do want these problems solved.”

    In that same interview, Blair also put his finger on a root cause when he said, “The basic concept of Europe is about how to exercise power in a multi-polar world. Small countries need to band together to exercise collective power.” This fear-based philosophy is understandable in our highly competitive and too often violent world. But, building this fear-driven competitive narrative into the architecture of our political economy guarantees we will never transcend it. The logical extension of fear-based division and extreme competitiveness is violence in all its forms, from the violence that we have seen play out, too often, over much of modern Wall Street, to the violence we see in our divided communities, to the violence of war.

    This competitive narrative is at the heart of neoliberalism with its belief in: uncontrolled globalism; the financialization of unrestrained “free markets;” and “free trade” defined around mega-corporate interests which locks the world into a race-to-the-bottom around health, labor, and environmental safeguards.

    So how will Great Britain fare outside of the E.U., assuming the Brexit vote will not get a do-over? The pundits and economists are all alarmed about the loss of growth. They “know for sure” that less growth means a poorer Britain, but they appear to be ignorant of the uneconomic growth now emanating out of the City of London. Could it be that Brexit’s ignorant, xenophobia-fueled vote will have the ironic effect of breaking apart the entrenched, systemic ignorance of neoliberal elites, and lead to a healthier and wiser Great Britain?

    Let’s imagine what a better Britain might look like. First, the financial sector might be cut down to size as it splinters into more manageable units across Europe. The consequence of London as a world financial center (do we really need one?) is a national economy way out of balance, dependent on a too powerful, extractive export industry that corrupts politicians with influence (even if subconsciously); drives extreme inequality; and separates London’s elite from the rest of the U.K. as Brexit demonstrated. A smaller financial sector in London, more aligned with the genuine needs of the real economy (rather than playing to its own speculative wants) is a good thing – unless you happen to own expensive real estate in London. We see similar consequences in corrupt, extractive export dependent economies in Africa. There it is diamonds and oil rather than finance, and the corruption may be more brazen, but the consequences for society follow a similar pattern.

    Second, the U.K. had the foresight not to sign up for the fatally-flawed common currency. The British Pound has depreciated nicely making the country immediately more attractive as a trading partner or investment region to the rest of the world. If it could now shake the destructive austerity ideology imported from the E.U. (i.e., Germany), it would have the opportunity
    to take advantage of historically cheap borrowing-costs to invest in its health, education, and critical infrastructure beginning with a smart, clean, energy systems, the foundation for a thriving economy in the 21st century. To do this, some tax shifting (and collecting) will be necessary over the long run. For starters, by imposing a financial transaction tax, the new Britain could send a positive signal across the Channel by finally joining the rest of Europe in nudging finance away from excessive speculation. This new revenue stream will actually enhance the resilience of capital markets and, with it, the health and stability of the real economy (notwithstanding the ignorant neoliberal cries to the contrary).

    Think of it as the “Brexit wake-up call.” It was certainly not an intelligent way to remake the European Project on the fly, leaving great risks in its wake. But there remains the potential for a flourishing Great Britain of the future, a gleaming light in the diverse, culturally-rich mosaic that will always define Europe. All this, if it can only transcend its elites’ flawed economic-thinking.

  • What’s the Matter with America? The Breakdown of Love, Strength & Intelligence

    June 21st, 2016 by ewalsh

    The following guest blog post is by Dr. Sally Goerner, Capital Institute’s Science Advisor.

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    Why have millions of American voters selected Donald Trump, a narcissistic, neo-fascist salesman whose policies run from irrational to dangerous? There are, of course, many facets to this conundrum. Here, I explore its deeper psychological underpinnings in hopes that our leaders might better understand its causes and cures. In particular, I’m going to use the Triune Brain[1] understanding of human nature to explain why this neo-fascist upsurge is a classic consequence of the breakdown of the bonds of love, strength, and intelligence that hold a society together and why rebuilding these bonds is critical to our survival.

    Brain research suggests the behavior patterns of love, strength and intelligence are hardwired into the human brain because they support three critical social functions: community, power, and learning, respectively. Love supports community, allowing diverse individuals to work together for common-cause, be it a family, a business, or a nation. Strength is central to authority, the social power used to coordinate communities and maintain order and defense in large groups. Intelligence enhances learning of course, but thinking is swayed by the two lower brains because they get information first, and pass it along with distinct emotional hues.

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    While all three brain functions operate in most every individual, one or the other of them often dominates in particular individuals and groups – a situation that can be seen in today’s Right-Left divide. The Right emphasizes strength: rugged individualism, self-reliance, and traditional order. The Left emphasizes caring: partnership, community, and openness to non-traditional alternatives.

    While such emphases help unify groups, love, strength, and intelligence actually only work well when they work together for the good of the whole. For example, intelligence without love is evil, and love without strength of character is impotent. Most importantly, in healthy societies, power and authority are positions of responsibility, which are only honorable and functional when they serve community.

    The catch is that the golden three only work when they are connected, but the bonds holding them together tend to fray as social groups grow larger and power becomes more concentrated. So, where leaders in small, well-knit societies (e.g., Native Americans or early Scottish clans) tend to honor their responsibilities to serve community, the bigger a society becomes the more elites grow apart from their people, and the less feedback mechanisms such as shame, religion, and even law serve to check abuse.

    As distance and unaccountability grow, community leaders become unresponsive “elites,” and power is increasingly turned toward elite self-service, with less and less regard to harm done to society as a whole. Soon the striving for superiority and winning, which are natural ambitions of strength, becomes the pathological pursuit of power. Today’s pathological power systems include: bankers who crash economies with predatory loans and toxic financial instruments; tobacco companies that hide the evidence that their product is killing people; a military-industrial complex that promotes endless war for corporate gain; and a whole raft of corporations that poison people and planet – all to make more money for elites.

    So, where public servants like President Eisenhower once warned us of a corrupt military-industrial complex, today’s isolated and uncaring elites are blithely destroying civilization by killing the planet, eviscerating economies, and corrupting political systems. Think water systems in Flint, Michigan. Like the proverbial frog in boiling water, much of the public has been slow to see the problem because they: 1) trust authority; 2) are hyped up on fear and xenophobia; and 3) are constantly told the current system is natural, necessary, and/or best. Concerned reformers raise red flags, but the mainstream public has been taught to see reformers as dangerous radicals and crazy conspiracy theorists – and the behavior of some extremists confirm these fears.

    Elite dysfunction eventually becomes so blatant that bonds of trust and belief disintegrate. As trust crumbles, the society Balkanizes into smaller, polarized, power groups, each defending some cherished cause from conservative community to environmental preservation. As faith in establishment systems dissolves, a power vacuum opens, and regressive and progressive leaders like Trump and Sanders spring up to answer the public’s call for change. Certain individuals and groups gravitate toward neo-fascists like Trump because:

    • Fear and frustration drive them towards strength, regardless of intelligence, and Trump exudes “in-your-face” muscle; and
    • Establishment elites have so corrupted politics, economics, and the media that few people trust them and trustworthy information is hard to find.

    Today’s power systems have become so sociopathic that our survival is now in question. How do we reverse this suicidal trend? There are no pat answers, but understanding how the brain works suggests one thing we need to do is reintegrate love, strength, and intelligence in service to the health of the whole community.

    The first step in this reintegration is to re-empower the public. This is where grassroots reform movements come in; they create a countervailing community force that pathological power must reckon with. At the same time, contrary to Occupy-Wall-Street assumptions, countervailing movements need leadership, power, and authority as much as they need grassroots reformers.

    Bernie Sanders shows how strong leadership can mobilize a deeply concerned public toward much needed political change funded from the bottom up, but the Koch brothers and Donald Trump show that the devil is in the leadership details. Many people were also afraid to elect Sanders because one guy is not enough. We actually need legions of responsible power-players to develop strong, intelligent, community-serving systems capable of both halting socio-economic destruction, and mobilizing resources to build a truly healthy civilization for all. We need to cultivate such leaders from the bottom up with empowering education. We also need to encourage existing leaders to reclaim their traditional role in service to civilization. We need to organize these power-mobilizers with consciousness-raising and community-building for leaders such as that emerging around socially-responsible business.

    Restoring our shattered communities also requires we restore civil discourse by building a conservative-progressive alliance around the values that bind us together – justice, fairness, integrity, community commitment, intelligence, and honorable strength. Societal learning requires both diversity of opinion and the ability to come to agreements about how to proceed for the health of the whole. Our ability to come together has been curtailed by oligarchs spending billions to divide us, but polls show unity is still lurking within, with huge majorities of Americans agreeing on many of the core problems and cures, particularly those relating to abusive power. For example, both sides agree on the need for effective constraints on abusive power including:

    • Anti-corruption constraints in government: e.g., get the money out of politics; require conflict of interest recusal in all sectors of government and judiciary; eliminate revolving doors between public and private service.
    • Legal constraints on private power, e.g., expand and enforce antitrust laws, especially in media and politics; make violating health, safety, and fraud laws too expensive to continue.

    I believe reintegration will also require a clear vision of a positive future, one that reconnects power, community, and learning in pursuit of well-being for all. We must learn to build strong individuals, strong bonds, and freely flowing intelligence by investing in our human and social capital as well as our material and financial systems. We must find a way to build a vibrant civilization with ample opportunities for everyone to live full and meaningful lives, safe from the depredations of uncaring power.

    This is what I see as regenerative civilization. It is not as impossible as one might think.

    [1] Maclean, Paul D. (1969). The Triune Brain. New York: Plenum.

  • To Break ‘Em Up, or Not to Break ‘Em Up, That Is the (Wrong) Question

    May 23rd, 2016 by ewalsh
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    Image Courtesy of Flickr (DonkeyHotey)

     

     

     

     

     

     

     

    Over the coming months, I will be finalizing a white paper whose working title is “Fixing Finance: System Design in Service of the Regenerative Economy.” I will be drawing on the eight principles of Regenerative Economics[1] to explore an aspirational framework for the redesign of global finance. This is the first in a series of articles, previewing ideas from the paper. I will be grateful for all constructive input from our readers.

     

    Bernie says the banks are too powerful so we need to break them up and reinstitute Glass-Steagall, the depression era legislation that separates high-risk investment banking from staid commercial banking. Hillary says we need to strengthen Dodd-Frank, the comprehensive banking reform passed in the wake of the 2008 financial crisis, and extend financial reform to the shadow-banking sector, which includes hedge funds and private equity. Trump just sent chocolates to Wall Street (self-funding is so “Primaries”) by announcing he would largely “dismantle Dodd-Frank.”

    All three have a point.

    Bernie’s right. The big banks remain too powerful and are more concentrated than before the crisis (although they are individually much less risky). Hillary is justified in saying that Dodd-Frank needs more work if it is to do the job it was designed to do. (Trouble is Dodd-Frank, at 2,300 pages—plus an incomprehensible 22,000 pages of regulatory content written by the numerous agencies charged with implementing the rules—is impossibly cumbersome already, and hard, if not impossible, to enforce. Glass-Steagall was an elegant 37 pages by comparison.) And we agree with what Trump might be suggesting – but who really knows what that is- that Dodd-Frank has created numerous unintended consequences beyond the cumulative brain damage of reading and understanding the legislation. Importantly, Dodd-Frank has harmed the sound community banks doing the kind of banking we need, and together with new capital and liquidity rules, discourages big banks from doing the long-term project-finance lending needed to finance the transition to alternative energy systems. But none of the remaining presidential candidates appear to be even contemplating the financial reform we truly need in service of a Regenerative Economy.

    Comprehensive financial reform must not only rein in Wall Street recklessness and predatory behavior, essentially what Dodd-Frank was designed to do, but it must also promote the kind of finance we need. It is a design challenge, not just a police action. And like any intelligent and practical redesign, it must be driven by a clear purpose—it must be a means to a particular end—and, it must reflect the current particular context (from banking culture to climate change) rather than abstract, ideological beliefs.

    Let us begin with the current context. Given space limitations here, I will simply assert seemingly self-evident facts.

    Wall Street (broadly defined) is too powerful and undermines trust throughout society. It has too much influence on a political system whose job it is to legislate for its prudent and pro-social behavior. Repeatedly, powerful actors’ reckless and fraudulent behavior is rarely, if ever, held to account. And, what is most cruel and unfair, the catastrophic costs of this behavior get socialized across innocent and vulnerable citizens and, more generally, the public sector. While a majority of those working in finance are honest, the business as it is conducted today seems to enable and even elevate sociopathic behavior. Wall Street, with a long history of at times anti-social behavior, is simply not a trusted institution. And trust is the foundation of a functional financial system and society at large.

    Second, while private sector banking is run as a profit-maximizing enterprise, it is not “just” a business, like selling software or soap. Banking, and in particular the function of credit (money) creation and allocation, has a distinct public purpose—to serve and support the real economy. Even in free-enterprise-dominated economies like we have in the U.S., this reality is reflected in the unique regulatory framework, central banking architecture as lender of last resort, and federal government backstop programs such as deposit insurance that make finance distinct from other private sector industries.

    Third, the financial system is currently designed to finance what is most profitable to investors in the short-term, not what is needed in the real economy over the medium- and long-term. Misguided incentives and pervasive conflicts of interest further distort what gets financed. In other words, the “invisible hand” needs an upgrade, reflecting the urgent priorities of mitigating inequality and financing the energy transition off fossil fuels, and more generally, the desired end finance is designed to achieve. Finance, a subsystem of the broader economy, is not the end itself. A proper design must sort out means from ends.

    Finally, the financial system is a complex system. Our growing understanding of complexity teaches us that we cannot fully manage it, but we can influence how it unfolds. But this requires a plan and a decision-making framework, not merely a set of ideological belief systems that favor, on the one hand, free markets or, on the other, heavy-handed government intervention to limit risk and fraudulent behavior.

    To imagine the financial system we want, we first need a clear idea of what end we are trying to achieve and then we must design a system to achieve that end. This design approach is quite different than the rules and regulation approach that describes much (but not all) of the modern financial regulatory framework.   To effect this redesign, we must first challenge the assumption that underlies how advocates of both more and less government regulation view finance: that its purpose is to promote efficiency and thereby economic growth. The left and right may differ on the appeal of unfettered financial markets, and on how the spoils that arise from economic growth should be divvied up. But both sides agree that sustained economic growth is the “be all and end all” of a high-functioning financial system.

    Regenerative Economics on the other hand, defines economic health and therefore the purpose of finance in a more nuanced way. To quote urban economist and systems thinker Jane Jacobs, “It’s not how big you grow, it’s how you grow big” that matters.

    To answer this critical “how to grow” question, we must take a fresh approach rooted in hard science, which is also remarkably aligned with common sense and our many humanistic wisdom traditions.   The science is called energy flow network science, an integrated understanding drawn from modern physics, thermodynamics, biology, ecology, and complexity science.[2]

    While it is new to many, this science represents our latest understanding of how the universe actually works. Our premise is simple and logical, built on the assertion that human economies are in fact clear examples of these same energy flow networks. (Einstein taught us that everything is energy.) We must therefore look to real-world living systems that have sustained themselves for long periods of time to discern the proven patterns and design principles of how to grow a sustainable economy, rather than be guided by demonstrably flawed and ideologically driven beliefs and theories, and models based on simplifying but wrong assumptions. Modern Portfolio Theory, Shareholder Value, Value-at-Risk, Efficient Market Hypothesis all come to mind.

    Since finance properly understood is embedded in, and in service of, the economic system, the same science can help us design a framework for a financial system, and along with it, a banking system that supports the right kind of economic growth. And because it has nothing to do with the ideologies of the left or the right, it has the potential to transcend the tired political fight pitting free market champions against government interventionists.

    I will talk more about what integral science can teach us about financial and banking system redesign in the next edition of this new series on Regenerative Finance.

    [1] http://capitalinstitute.org/regenerative-capitalism

    [2] http://capitalinstitute.org/wp-content/uploads/2014/08/000-Goerner-Regenerative-Development-Sept-15-2015.pdf

  • Trump, Sanders, and the Collapse of the American Oligarchy

    April 26th, 2016 by ewalsh

     

    The following guest blog post is by Dr. Sally Goerner, Capital Institute’s Science Advisor.

    “The collapse of urban cultures is an event much more frequent than most observers realize. Often, collapse is well underway before societal elites become aware of it, leading to scenes of leaders responding retroactively and ineffectively as their society collapses around them.”

    – Sander Vander Leeuw, Archaeologist, 1997

    cartoon-of-the-decade

    The media has made a cottage industry out of analyzing the relationship between America’s crumbling infrastructure, outsourced jobs, stagnant wages, and evaporating middle class and the rise of anti-establishment presidential candidates Donald Trump and Bernie Sanders. Commentators are also tripping all over one another to expound daily on the ineffectual response of America’s political elite – characterized by either bewilderment or a dismissal of these anti-establishment candidates as minor hiccups in the otherwise smooth sailing of status-quo power arrangements. But the pundits are all missing the point: the Trump-Sanders phenomenon signals an American oligarchy on the brink of a civilization-threatening collapse.

    The tragedy is that, despite what you hear on TV or read in the paper or online, this collapse was completely predictable. Scientifically speaking, oligarchies always collapse because they are designed to extract wealth from the lower levels of society, concentrate it at the top, and block adaptation by concentrating oligarchic power as well. Though it may take some time, extraction eventually eviscerates the productive levels of society, and the system becomes increasingly brittle. Internal pressures and the sense of betrayal grow as desperation and despair multiply everywhere except at the top, but effective reform seems impossible because the system seems thoroughly rigged. In the final stages, a raft of upstart leaders emerge, some honest and some fascistic, all seeking to channel pent-up frustration towards their chosen ends. If we are lucky, the public will mobilize behind honest leaders and effective reforms. If we are unlucky, either the establishment will continue to “respond ineffectively” until our economy collapses, or a fascist will take over and create conditions too horrific to contemplate.

    Sound familiar? America has witnessed a similar cycle of oligarchic corruption[1] starting in the 1760s, 1850s, 1920s, and 2000s:

    • Economic Royalists infiltrate critical institutions and rig political and economic systems to favor elites. 1760s: Royal governors run roughshod over colonial farmers; The East India Company, whose investors were primarily wealthy aristocrats, is given monopoly trading rights in the colonies. (The Tea Act was basically a corporate tax break for it.) 2000s: Vice President Dick Cheney’s company Halliburton is given no-bid contracts to handle military services in Iraq; American taxpayers bail out failed banks; Billionaire Warren Buffet pays a lower tax rate than his secretary; America’s medical system is dominated by profit-maximizing, health-minimizing insurance companies.
    • Rigged systems erode the health of the larger society, and signs of crisis proliferate. Developed by British archaeologist Sir Colin Renfrew in 1979[2], the following “Signs of Failing Times” have played out across time in 26 distinct societies ranging from the collapse of the Roman Empire to the collapse of the Soviet Union:
      1. Elite power and well-being increase and is manifested in displays of wealth;
      2. Elites become heavily focused on maintaining a monopoly on power inside the society; Laws become more advantageous to elites, and penalties for the larger public become more Draconian;
      3. The middle class evaporates;
      4. The “misery index” mushrooms, witnessed by increasing rates of homicide, suicide, illness, homelessness, and drug/alcohol abuse;
      5. Ecological disasters increase as short-term focus pushes ravenous exploitation of resources;
      6. There’s a resurgence of conservatism and fundamentalist religion as once golden theories are brought back to counter decay, but these are usually in a corrupted form that accelerates decline.
    • The crisis reaches a breaking point, and seemingly small events trigger popular frustration into a transformative change. If the society enacts effective reforms, it enters a new stage of development. If it fails to enact reforms, crisis leads to regression and possibly collapse. 1776: Lexington and Concord’s “shot heard round the world”; the Declaration of Independence; America becomes unified nation aimed at liberty and justice for all. 1933: Under huge public pressure, FDR turns from a standard New York politician to a champion of social and economic reform; government work-programs revitalize the nation’s infrastructure, and reforms such as the Glass-Steagall Act reduce bankers’ ability to abuse the system; Post-FDR America witnesses the longest surge of cross-scale prosperity and the largest increase in the middle class in history.
    • Over time, transformed societies forget why they implemented reforms; Economic Royalists creep back and the cycle starts a new. 1980-2000s: Reagan removes the Fairness Doctrine and stops enforcing antitrust laws; Economic elites argue we need to modernize finance by getting rid of Glass-Steagall; Tax rates on the wealthy plummet while infrastructure crumbles; The Supreme Court supports Citizens United and guts the Voting Rights Act; Gerrymandering increases.

    We have forgotten the lessons of the 1760s, 1850s, and 1920s. We have let Economic Royalists hijack our democracy, and turn our economy into their money machine. Now the middle class is evaporating, infrastructure is crumbling, and pressure is reaching a breaking point. Anti-establishment candidates are on the rise, and no one knows how things will turn out.

    What then shall we do? The first step is to remember that our times also hold a positive possibility – a transformation akin to those which followed 1776, 1865, and 1945. Honest reformers from education and agriculture to energy and finance are already reinventing their fields. Regenerative, resilient “New Economy” experiments are bubbling up everywhere. Thanks to the Internet, communication is faster and more effective than at any other time in history – so word is getting out.

    The second step is to remember that the vast majority of people participating in today’s economic system are not corrupt, they just believe today’s dominant belief system is some combination of good, right, necessary, or inevitable. In today’s case, most of our political-economic elites – both Republican and Democrat, right and left – genuinely believe that today’s neo-liberal economic frame is the path to prosperity, a kind of “win-win” strategy of competitive markets that, in the end, will benefit both elite and global interests as a whole.

    So, for the most part, we are not dealing with evil people, but what sociologists call a “social construction of reality.” Over time, human beings construct their everyday systems and practices around a set of widely held beliefs. They do this by creating a matrix of rewards and punishments that keeps everyone in line with the society’s dominant beliefs, for example, incentives to compete, and rewards for maximizing profit. Unfortunately, this matrix holds even as people begin to realize that the system is not working. What we’re now facing is a combination of: 1) people who still believe; and 2) people who doubt, but: a) would have to sacrifice their livelihood to act on it; or, b) are willing to leave the system but don’t necessarily know what comes next.

    Today’s big challenge is twofold. First, we need to find a way to unite today’s many disjointed reform efforts into the coherent and effective reinvention we so desperately need. This unity will require solid science, compelling story, and positive dream. Secondly, since hierarchies are absolutely necessary for groups beyond a certain size, this time we must figure out how to create healthy hierarchical systems that effectively support the health and prosperity of the entire social, economic, and environmental system including everyone within. In short, our goal must be to figure out how to end oligarchy forever, not just create a new version of it. This is a topic I will take up in my next blog.

    The last step is to keep our eyes on the prize. As Peter Drucker explained in 1995[3]:

    “Every few hundred years in Western history there occurs a sharp transformation. Within a few short decades, society ─ its worldview, its basic values, its social and political structures, its key institutions ─ rearranges itself…Fifty years later, there is a new world, and people born then cannot even imagine the world in which their grandparents lived…We are currently living through such a time.”

    Ours is not a simple task, but we can take hope from the fact that our ancestors succeeded under much harsher conditions.

    [1] This cycle has occurred every 80 to 90 years throughout American and much of world history. It is detailed in books such as Strauss and Howe’s The Fourth Turning, and Thom Hartmann’s The Crash of 2016. See Strauss, W. & Howe, N., (1996). The Fourth Turning: What the cycles of history tell us about America’s next rendevouz with destiny.

    [2] Renfrew, Colin. 1979. Systems collapse as social transformation: Catastrophe and anastrophe in early state societies. In Renfrew C. and Cooke, K.L. (eds.), Transformations: Mathematical approaches to culture change. New York: Academic Press, 481-506.

    [3] Cited in Drucker, Peter. 2009. Managing in a Time of Great Change.

  • Capital Institute Goes to Buffalo

    April 26th, 2016 by ewalsh
    IMG_3021

    (L to R) Ryan McPherson, John Fullerton & Amit Goyal visiting the 28-acre SolarCity facility

    I had the privilege of spending a full day in Buffalo last week before delivering a lecture on Regenerative Capitalism, at the invitation of Amit Goyal, Director of the State University of New York at Buffalo’s RENEW Institute. Regenerative thinking and action is what defines an emergent Buffalo. It is taking place across scales, and it is working at the edges of the private sector, the public sector, the non-profit sector, and the research university.

    RENEW is an impressive “university-wide, interdisciplinary research institute that focuses on complex environmental issues, as well as the social and economic issues with which they are connected.” The seven participating schools include the College of Arts and Sciences, the School of Management, the School Architecture and Planning, the School of Engineering and Applied Sciences, the Law School, the School of Public Health, and the School of Medicine. RENEW’s own vision calls for a regenerative economy, and even a one-day visit to Buffalo left me feeling the regeneration happening in real time. It was yet another example, together with our now 35 “Field Guide” stories, which gives me confidence that regenerative economies are indeed an emergent phenomenon happening everywhere on the ground, often in distressed cities and communities where the pressure for change is the greatest. This is as expected, in accordance with our understanding from the science of physics and how natural systems change in response to pressure.

    I experienced three distinct manifestations of regeneration during my Buffalo visit.

    The RENEW Institute, with an impressive $25 million budget, is certainly a shining example of higher education commitment to interdisciplinary (integrated) thinking and work, the future of higher education in this integral age. Amit likes to say they are looking for “T people” as opposed to “I people” to join the institute. An “I person” is the traditional academic expert, with deep knowledge within his or her field. A “T person” on the other hand, must demonstrate deep knowledge within a discipline, but also be a lateral thinker who can integrate ideas and discover new potential and solutions by working across silos. This is no easy feat as anyone familiar with the academy can attest. Listening to Amit during my visit, and to the Provost during the introduction to my lecture, I got the sense that the University is bound and determined to work at what we like to call the “edges” – the boundaries where different systems (or in this case disciplines) meet – leveraging its considerable domain expertise while at the same time forging relationships of exchange where the real regenerative potential lies.

    The second manifestation of regeneration happening on the ground is the People United for Sustainable Housing (PUSH) Buffalo initiative, under the leadership of the energetic Aaron Bartley.  Bartley is a Harvard Law grad who returned to his hometown to contribute to its regeneration after decades of decay from what was once one of America’s leading and wealthiest cities when it served as a vital trade hub.  Ten years young, PUSH and its partners have transformed neighborhoods one building at a time – inspiring work.  Walking block by block with Aaron and sharing brief greetings with local residents, the regeneration was palpable.

    Finally, there is the Buffalo Billion, a signature economic development project of Governor Cuomo, who has committed to invest $1 billion into the Buffalo economy. A central premise of regenerative economics is what we call “robust circulation.” This includes ample reinvestment in the economic system to ensure its vitality. Too often wealth is extracted from regions and reinvested elsewhere. Faced with decline often caused by external shocks, modern austerity ideology in the name of balanced budgets (see Europe post financial crisis) only furthers economic decline by starving a community of the vital reinvestment all healthy systems demand. After decades of disinvestment and decline, it is vitally important that the public sector engage in Buffalo’s regeneration in order for it to succeed. The city is very fortunate to have been selected by Governor Cuomo as the target for such large-scale investment.

    I was given a tour of the massive solar manufacturing facility being built for SolarCity. At an astonishing 28 acres under one roof, it will be one of the world’s largest and most sophisticated solar manufacturing facilities when it is complete. While the solar plant is but one aspect of the Buffalo Billion, it represents the majority of the funds being invested in an innovative public-private partnership under which the State will actually own the plant.

    Our regenerative framework favors a more diversified, risk-mitigating investment strategy, and greater focus on vital, enabling infrastructure and education than on individual enterprises. That said, if successful, the new solar facility will no doubt create a regional hub for innovation and employment, and generate tax revenue that will support the infrastructure improvements the city so sorely needs. The regenerative potential of a project of this scale, coupled with all the other positive things happening in town is truly impressive.

    Not to mention that Buffalo is nicely situated with respect to water and climate for the future.  We will be back this summer for the New Economy Coalition’s CommonBound (July 8-10).  Watch this space!