A Distressed Asset

Week in Review / by Lee Billings /

Volatility prompts rapid regulatory reform on Wall Street, while biodiversity crashes and a climate change bill flounders. What if we treated Earth like a company?

Photo by Chris Kleponis/National Wildlife Federation

On May 6th, something strange happened to the American stock market. In an unsettling display of the efficiency of automated high-frequency trading, the Dow Jones Industrial Average plummeted almost 1,000 points in less than half an hour. Nearly 600 of those points were shed in a five-minute period. In mere moments, more than $1 trillion in US equities was effectively erased. And though much of that value was restored as the Dow rebounded that same day, such systemic volatility has most everyone spooked.

This Tuesday, the head of the Securities and Exchange Commission, Mary Schapiro, appeared at a hastily organized congressional hearing to explain the calamity’s origins. Yet despite (or, more aptly, because of) data surrounding the event that constitutes millions of trades on billions of shares, the actual cause of the stock-market plunge is still hazy. Early reports, now discounted, suggested the origin was a single trader’s faulty sell order for 16 billion—rather than 16 million—Procter & Gamble shares. Another theory blamed the iconoclastic trader Nassim Taleb, whose 2007 bestselling book The Black Swan popularized the historical importance of rare, high-impact, difficult-to-predict events. On the afternoon of May 6th, a Taleb-advised hedge fund, Universa, placed an influentially hefty bet that stocks would continue to decline. Shortly afterward, the Dow plunged. Still other explanations pointed to Greece’s debt crisis, uncertain UK elections, or even cyberwarfare as the origin of the “flash crash.”

Whatever the cause, a rapid response is already emerging. The day before Schapiro testified, she gave US stock exchanges a 24-hour deadline to assemble a unified framework for halting or slowing trades in rapidly declining stocks. The following day, the SEC and the Commodity Futures Trading Commission announced a joint task force for regulatory reform of the increasingly fragmented and fast-paced financial system.

It seems inevitable that tighter regulations will soon rein in new and emerging stock exchanges. Restrictions of some sort may be placed on high-frequency trading firms, outfits that make money by using computer algorithms, low-latency communications networks, and lightning-speed trades to exploit small variations in stock prices that human cognition is far too slow to act upon. At the very least, the activities of such firms exacerbated last week’s stock declines. More regulation may yield a slightly less fluid and responsive market, and result in less short-term growth, but the arbiters of the global financial system apparently believe this is a pragmatic trade-off for greater long-term resiliency.

There is something comforting in the realization that the very same breakneck pace of today’s markets that promoted last week’s crisis is what allows and compels regulators to react so swiftly and decisively. It suggests a gentle, generous reality where the most dangerous problems inevitably and directly give rise to their own solutions.

But most of the material world functions quite unlike our modern financial system. Calamities typically strike more quickly in silico than in inertia-laden atmospheres, oceans, continents, ecosystems, and organisms, and we detect and act upon those calamities sooner. Any regulatory fixes and adjustments we devise presently propagate much faster through fiber-optic cables and altered lines of code than they do through societies and ecologies. For better or worse, our existence hinges on a portfolio far messier and unwieldy than stocks and bonds, and we’re still quite poor at managing it.

For proof of this, one needs look no further than another major event this week, Wednesday’s unveiling of the American Power Act (APA) by Senators John Kerry and Joe Lieberman. The bill is meant to combat climate change, create lots of new jobs, and increase US security through less reliance on foreign oil. It builds on a climate-and-energy bill already passed by the House of Representatives as well as past proposals of the Obama administration. Filled with bipartisan compromises designed to garner votes from both sides of the aisle, the APA is widely seen as the last, best hope for getting climate-change legislation through the Senate and to the President’s desk this year. Given the possibility of Democrats losing seats in midterm elections this November, the APA may well be the only chance for robust US action on climate change during the Obama presidency.

Yet many pundits and politicians have already declared the APA dead on arrival, a victim of splintered coalitions and poor timing. So far mainstream media seems to have written it off as a non-story, its defeat a foregone conclusion. The bill’s Republican sponsor, Senator Lindsey Graham, withdrew much of his support after Democrats chose to prioritize immigration reform over climate change. And though it seems indefensibly irrational to vote against a clean-energy bill because of an oil spill, the worsening BP oil disaster in the Gulf of Mexico is also a potential blight on the APA; the bill originally included major expansion of offshore domestic drilling as a compromise to woo Republicans. Tellingly, no other Senators besides Kerry and Lieberman attended the APA’s announcement, and Obama has yet to throw his weight behind it. This despite the fact that the middle-of-the-road bill’s only vocal opponents seem to be extremists on the far left and far right.

Two days before the APA’s debut, the UN released the third edition of its Global Biodiversity Outlook, which grimly stated that the world’s nations hadn’t met any of the more than twenty targets set in 2002 for stemming biodiversity loss by 2010. The report also said that, far from being in stasis, the status of many of the planet’s key habitats has markedly worsened. Rainforests laid waste for farmland, coral reefs atrophied by warming and acidifying oceans, and other delicate ecosystems appear to be fast approaching their tipping points. These are distressed assets we should be very concerned with.

Biodiversity seems set for a flash crash: If a price were placed upon what may be lost, the value would far exceed $1 trillion. But unlike in the virtual world of finance, once that value vanishes, no last-minute market rally can restore it in a single afternoon. In nature, such recovery takes tens, even hundreds of millions of years—if it occurs at all. This information isn’t really new, of course. For decades, the climatologists and ecologists who are essentially our planet’s bookkeepers have been delivering data point after data point and study after study telling us that the way we live now is placing nature increasingly in the red. But many of us are too busy checking the price of our shares of GE, Apple, and Google to pay much attention.

Perhaps the most pragmatic way around this apathetic impasse is to change how we talk about the Earth. In this new view, the Earth won’t be a boring old planet; instead it’s a high-tech startup that’s just hitting its stride. As far as we can tell, its new flagship product, intelligent life, exists nowhere else in the universe. That’s right—Earth’s got the market cornered, and its growth potential is literally astronomical. The best part is, everyone is automatically a shareholder. But Earth’s market value is dropping fast, and it’s not a limited-liability company—if it goes bust, we’ll all be ruined. Fortunately, we have all the tools we need to manage our investment. It’s time to get started.

Lee Billings is a staff editor for Seed. He likes space.

Originally published May 14, 2010

Tags climate policy politics

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