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11/15/2010

Commentary: Footprints and Foreclosure


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The global economy now uses 1.5 times the earth’s capacity to regenerate the natural capital we use every year, up from the 1.4 times of the prior year, according to a report of the well-respected Global Footprint Network. In their Living Planet Report 2010, released this week but based on 2007 data, the most recent available, WWF together with the Global Footprint Network and the Zoological Society of London record the most significant milestone since we crossed parity (an ecological footprint of one) back in 1975. This is not good news.

Last month also revealed the full debacle of improper home foreclosures in the United States by several major mortgage lenders, with JPMorgan Chase hiring so-called “Burger King kids” as “robo-signers”—inexperienced and not well-educated staff—to sign the thousands of legal documents, apparently fraudulently, required for lawful foreclosure. It’s a mess.

What is the connection?

With the financial crisis, we just experienced what happens when complex systems collapse. Risk management proves ineffective when we experience so-called Black Swan events, what risk managers call “tail risk.”  Bad things happen in the fat tails of what the statisticians call non-normal distributions of events (like the bursting of the housing bubble) or the proverbial 100-year storm that happens every few years.  

Our present financial system has willfully and systematically expanded and accelerated the gigantic cost externalization of tail risk upon society, while making its leading players obscenely rich in the process. Tail risk has a cost that is not born by those who profit from the activity that creates it. The entire too-big-to-fail banking system embodies this reality, benefiting management at the expense of society and even shareholders. 

The cost and likely physical impossibility of managing an explosion of foreclosures within a system whose complexity exploded to suit Wall Street interests does not come as a surprise to industry experts. Morgan stopped using the industry’s electronic mortgage tracking system, MERS, back in 2008 because it was such a mess. Some of the “efficiency” afforded by securitization has turned out to be illusory along with the profits it generated because the loan servicing cost structure (people and systems) was not built to be resilient in the event of a Black Swan event. This has left banks in the unfortunate position of probably knowingly breaking the law in an effort to expedite “paper work.”   

No doubt, the big banks will get sued, lawyers will churn fees, wrists will be slapped, a number of people will have to deal with the disaster of buying a house with a bad title or unable to sell a house because its title can’t be insured.  Some people may get improperly evicted from their homes. Bonuses will keep flowing. More injustice.  And par for the course with the too big to govern, manage, and fail banks.

Watching our ecological footprint click up to 1.5 and not pausing to seriously invest in the transition to a sustainable economic system is like bankers watching their mortgage securitization machines generate their bonuses and ignoring the looming disaster they knew would come when Chuck Prince's infamous music stopped. Only there’s no one to “externalize” the costs to in the case of our ecological footprint. The biosphere is one system, and our economy is a subsystem of it. The costs of our footprint are catching up with us; symptoms abound.

System collapse is not pretty. We quickly lose control, as interconnected feedback loops take over and generate affects we have failed to anticipate. Ecological system collapse is looming, as the 1.5 footprint number confirms.  Science tells us we are in a condition of “overshoot.”

Let us connect the dots between the foreclosure debacle and the footprint debacle. 

Let us have the intelligence and wisdom to do better than the bankers. 

Let us get serious about planning the transition to an economic system that operates within the safe operating space of the biosphere, and within the ethical boundaries of a humane civil society.  Let us transform the financial system to one that can fuel this transition.

–John Fullerton is the founder and president of the Capital Institute. He is also the principal of Level 3 Capital Advisors, LLC, an investment firm focused on high impact sustainable private investments. 


As an impartial, nonprofit forum for the finance and banking industries NYSSA encourages discussion and debate among its member and other professionals. Commentaries, however, should be taken as the sole opinion of the author(s) and not of NYSSA. If you would like to submit a commentary to the Finance Professional's Post, send your article to the editor.

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