Cap-and-Trade's Bubble Trouble

By Elizabeth Palmberg 12-16-2009


There's a lot of debate, in Copenhagen and elsewhere, about whether cap-and-trade is a good way to fend off the impending global-warming catastrophe. What most of that debate ignores is that, unless we set some rules for Wall Street, cap-and-trade is a recipe not for avoiding disaster, but for bringing it on -- twice over.

It comes down to one word which is a lot scarier than it sounds: bubbles. Speculative bubbles caused last fall's catastrophic financial collapse, which sent the world into a deep recession. Bubbles in food futures were one big cause of last year's food crisis, which plunged 100 million people into hunger.

A bubble is when Wall Street greed makes markets fail. In a bubble, market prices for anything stop reflecting real-world supply and demand, and instead start reflecting the supply of hot money from the alternate-reality world of finance (what NPR has called "The Giant Pool of Money"). Stampeding investors bid prices up and up, all singing the Official Bubble Theme Song, "It's Different This Time," and all trying to surf the bubble's rapid rise and bail out before its even more sudden collapse.

All this leads to "volatility," which is a polite way of saying "Mr. Toad's Wild Ride, without seat belts, for the entire planet." Volatility leaves farmers in the dark about how much to plant, builders in the dark about how many houses to make, and -- coming soon, if we don't head it off, to a planet near you -- factory owners and energy users with no clear signals to tell them how much to cut emissions.

A good description of Wall Street's stampede behavior was given by Nobel-winning economist Robert Solow when humor columnist Gene Weingarten called him up in 2003:


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