Quick fixes for Capitalism: Part 1

Is capitalism broken?

It certainly seems like it. Global trade and economic growth is slowing in real terms and standards of living for many are either stagnant or declining. Despite aggressive tax cuts and imposed austerity, it just doesn't seem possible to reverse the current trend. Even if we consider that wages in the developing world are slightly higher today than they were 30 years ago, it has come at the cost of terrible ecological damage.

Our future?

In fact, if we want any kind of future at all, we may have to consider cutting our levels of consumption in half. Earth Overshoot day now falls in August. This is the day when we can consider our economies to have used 100% of the non-renewable resources of the Earth, or to have degraded the renewable sources such as clean water and fish stocks to the point where they can't recover. We are using 200% of the Earth's capacity already...

50-20/50-80

But as many people might already know, much of that consumption, and the waste that is a bi-product is concentrated in a small part of the economy, and a small number of hyper consumers.
Also, exploitation and degradation of our resources is not uniform.

Wasted resources

While we produce much too much CO2, and throw away too much food uneaten, there is a lot of potential farmland which is underutilized, because the produce can't be profitably distributed, or local people can't afford to eat. And our human resources are terribly underutilized. Billions of people are under-educated and under-employed. They could be doing the work which is currently being done by dirty machines or is not being done at all.

So what's the solution?

Wait a minute! Please don't jump to the obvious conclusion.

Capitalism is bad, so if we get rid of capitalism, whatever we get instead must be better.

Maybe not.
The other options sound great in theory, but have always had their own problems when executed in reality. For example, the Aral Sea is often used to illustrate how Capitalism is destroying our environment, but the sea was already greatly reduced by bad farming practices during the Soviet era.

Bad vs Bad.

The centrally managed Soviet economy often didn't attach any more value to environmental assets than the Capitalists do. I suggest that it isn't a matter of who owns the resources, and is responsible for managing them, but how the owners define their value.

Creating balance.

Could Capitalism be reworked to provide a better valuation of our resources, so that we use less of what is really scarce and use more of what is underutilized?

(I hope to address the issue of non-ownership, a commons or trustee economy  separately in future).

Quick fixes.

For now, I will try to suggest some little fixes that could be made to our current system so that it could be better directed towards sustainable development. These are not things that require us to roll out the guillotines, or establish world socialism, but modest changes to how capitalism already works. Today I address asset risk weighting.

Where does new money come from? 

That's a question I don't want to delve too deeply in to here, but suffice to say, new money is created when private banks loan money to the public. This money didn't exist before it was loaned, and when is paid off, it will go back to not existing. The economy grows by debt inflation.

What stops banks from lending infinite money?

Commercial banks have to balance their loans and other assets against the capital that they hold. They can only lend our more money if they have something on the other side of the balance sheet to support it. These loans are risk weighted, which means that some are more risky than others, so the banks can't lend as much of one kind of loan as another. As an example, commercial real estate has 100% risk. So a bank needs $1 of capital to balance every $1 of loans in that sector. Housing loans (mortgages) have $50 risk weighting, so they need $0.50 for every $1 of household mortgages. Credit cards have up to %120 risk weighting, so they are only profitable if they come with very high interest rates to offset their risk.

This has had a predictable effect on our economies. Lending for mortgages far outstrips all other kinds of loans. This is because the amount you can borrow to buy an asset, ends up defining the cost of that asset. If you can sustain the debt burden on a $200,000 house, that's the house you are going to go out and buy. As average mortgage limits increase, property prices rise too.

How can we use this to our advantage?

Many people think that the economy is essentially "free" and unregulated, and that the rise of house prices is a result of the "natural" property market. But there's nothing natural about it. Someone decided the levels of risk weighting to apply to different classes of assets. It happened as part of an international government regulation effort. Mortgages are low risk because they are perceived to be low risk, since they are secured with the house as collateral.
Business loans are high risk because they are not secured with expensive assets.
But the value of those assets ends up being set by the very measure that is supposed to reflect it.

We can set the value of assets by setting the risk weighting of those assets. 

We should take in to account not just the individual risk of the loan, but the systemic risk of an overheated housing market, high cost of living and stagnant business growth. These are the problems which led to the 2008 financial crisis. We should also factor in environmental risk which promises an even bigger danger in the long term.

Things which are bad for the environment should have a very high risk factor to discourage lending in those sectors. Fossil fuel companies should have a hard time getting credit to carry out their business, because their business represents a clear systemic risk. Banks which lend to fossil fuel companies are accelerating the point at which ecological degradation can cause inevitable economic collapse. When climate change causes massive flooding, it often destroys property, making mortgages worthless overnight.

Rewarding future security.

We could go further than this and suggest zero risk factors. A bank which lends money on an energy efficient home is reducing the risk of systemic failure. They are taking steps to make their bank more secure in the long run. The house price will increase faster over time than a house which is not energy efficient because lower interest rates will be offered, allowing borrowers to service a bigger debt.

When we are not looking at assets but cash flows from business revenues, then high risk factors discourage lending and reduce availability of credit. We get the opposite effect. High risk weighting leads to slow business growth.

By giving green businesses access to cheap capital from low risk loans, we can encourage the growth of those companies which are ecologically friendly.

Regulations are bad?

Remember, these are not new regulations. We already have asset risk weighting. Without it, banks would be able to write infinite IOUs or simply cook their books to make it look like they were addressing risk. For any libertarians out there, they should be happy that this kind of guiding hand could be used to avoid more direct interference in the economy by government, such as big bank bailouts after a systemic crash.

Leaving Capitalism unguided and unregulated leads to the situation we are currently in. We need to get our hands on the steering wheel and drive to the future that we want. I hope to address other problems with Capitalism in future, and try to suggest small changes that could help to steer us in a better direction.

If Capitalism doesn't fix itself, there are plenty of people ready to polish up the guillotine and provide their own solutions. So it's now or never for saving Capitalism from itself.

Race, Income, Education and Property- In maps

This is the first blog in this series. Just interesting stuff that's too long or detailed or difficult to present on Facebook. I'll try to keep the commentary to a minimum and let the stats speak for themselves. Make your own mind up about what they mean.

After seeing a map that showed racial diversity in the USA and the shocking levels of segregation which still apply to the country, I wanted to see how they matched up with other heat maps, such as income poverty, property prices and college education.

The first one is New York and Philadelphia:

I think you can see some quite clear correlations.
A little explanation of each map:

The map of racial segregation uses colors to show race as reported by the census.

The income map uses blue dots to show incomes above $200,000 and yellow ones to show incomes below $25,000. This is map of extreme poverty and wealth.

The college degree map has been contrast enhanced to better display the extremes where less than 40% of people have college degrees and more than 80% have.

Property prices range from less than $75k to over $1.5m. Rent prices and crime figures are also available, but don't show enough contrast to be very useful (Maps here, scroll around and change the settings to see other demographics). The blue spots showing crime are hardly visible, even with enhanced contrast.

So some more maps. Next up is Richmond:

You can often see where inner city areas feature high levels of poverty and low levels of higher education. The hot spots on these heat maps are where people of color have ended up.

Next is an interesting area, Las Vegas:

Again, the division between rich and poor is obvious. You can also see where low population numbers can heavily influence some heat maps like education because the data is shifted by the small sample size.

Next up, L.A.:

I think Los Angeles shows the most striking correlations of all the maps so far. Maybe it's just because the higher levels of urbanization lead to less of a softening effect. The maps are less blurred.

By the time we get to San Fransisco, and the Bay Area you can see the racial mix is changed. The red dots show Asian families, and here there isn't such a strong relationship between race and poverty. Still, it's the white people with all the money:

Heading back to the east coast, Pittsburgh shows how away from the hot spots of the big cities, up in the rust belt, the effect is still there, but on a smaller scale.

Like many cities in the area, Pittsburgh has seen a 9% drop in population in the last 16 years.

During the same period, Detroit has seen a −29.3% drop in population. Around the great lakes, you can see the same depressing relationship; Racial segregation, concentration of poverty and reduced property value (a big problem when people rely on property as one of their only assets), as well as reduced access to education.

Here there's some overlap though, with poverty that crosses racial divides. The collapse of the North East has hit everyone hard, and even "white privilege" is not much of a defense.

When you look at these maps, and see the correlations, it's shocking. Poverty and race are so entwined, it's hard to separate them.

When I talk to some people on the Right of the political spectrum, they seem sure that race causes poverty. They imagine this is something that racial minorities do to themselves. That's not what I'm seeing here.

It's like someone has taken jigsaw puzzles of two completely different nations and stuck them together randomly in to one. One nation is poor, with low incomes, low access to higher education and low property values. The other is rich, with everything the poor nation lacks. You can see the inhabitants of the two nations by the color of their skin, and sometimes the only thing that separates them is a freeway or a river, or the fence of a gated community.

Some of those cities, you might as well put a wall up right through the middle, and set up passport checks on the border. The division is as stark as that between East and West Germany during the cold war. But as Germany shows, you don't need a wall, because Neo-Liberalism keeps everyone in their place. You can't just go live in a better area, and you can't make your own area better.

Without access to education you can't hope for a high income. And without a high income, you can't move to a better neighborhood, and that limits your access to a good education... People with high incomes won't come and live in the poor areas, and they won't bring their spending money with them. Small businesses are just as segregated as the schools and housing.

Poverty is entrenched along racial divides, and that's never going to change as long as the current system exists