What’s Good for Finance Is What’s Good for the Country. Right?
Question: Do you believe that what’s good for finance is what’s good for the country?
Chrystia Freeland: I think that it's important to be a little bit more specific in terms of what we mean when we're talking about finance. Finance is a really big area. There are a lot of people who work in finance, there are lots of different companies who work in finance, and the interests of every single financial services firm are not perfectly aligned, nor are the interests of the people working within a single financial service firm perfectly aligned, nor, as we have discovered with this crisis, are the interests of management and shareholders always perfectly aligned. So, I think there are lots of very different interests involved.
Having said that, I think that what we have seen in the past decade or so is a real growth of the financial services industry as a proportion of the economy and I think with hindsight, it's probably fair to say that it's not that safe and not that stable for the national economy to have finance be quite that big. I think though, one of the things that it's easy to forget in the cry over the crisis is one of the things it did teach us is, how essential financial services are to the economy. The reason for that $700 billion bailout was because the rest of the economy would not have survived. We would have all gone down with Wall Street.
So, I think we are in this paradoxical moment where we've now understood collectively more than ever how essential financial services are to the healthy running of everything else. But at the same time, I think there is a dawning understanding that maybe having an economy which is over reliant on financial services is not that terrific. And I do think that there is another really contentious issue at the moment, which is to what extent is the collective good served by really, really high profits being made by financial services firms and by people working in financial services firms? And I think it is obvious why that should be such a politically contentious point right now because taxpayers, who in America, are suffering from 10% unemployment, realize that they rescued Wall Street with their money, they're maybe unemployed or certainly afraid of becoming unemployed and yet they are seeing the return of really hefty salaries and bonuses on Wall Street. So, there sort of feels like there's a certain cognitive dissonance there.
I think the best way to think about those questions though is not through the prism of compensation, but through the prism of what does the system need? What benefits the system overall, and also, through the prism of, who now benefits from an implicit, or even explicit state guarantee. And I think that we need to be thoughtful about those firms, those parts of the business which now effectively have a taxpayer insurance policy, because that's what happened in the fall of 2008. And I think it is quite legitimate and indeed essential for governments and regulators to step in and say, "Okay, you are too big to fail, you're lucky in a way that you are too big to fail because it meant that we bailed you out, but what that means is, in the future, we have to rein in your activities in some lengths to at least minimize the possibility that this happens again." Even as thoughtful legislators, thoughtful regulators, thoughtful economists go through that sort of a process, I think that it is important also to bear in mind that even in that kind of a more rigorous analysis, you could have players on the outside who explicitly do not benefit from a government guarantee. And who therefore are free to take on the riskiest possible bets, free potentially to make the greatest possible returns, but also free to go broke.
And one of the really interesting stories in this whole crisis is the dog that didn't bark as it were; which is the hedge fund industry. I would say, ahead of the crisis, a lot of the Cassandra voices were talking about how hedge funds were posing a huge systemic risk to the economy, to the financial system. And that wasn't a crazy thing to say. In fact, we had seen the example of the LTCM in the 1990's. As it turned out, hedge funds did not pose a tremendous systemic risk. And what we saw was a really healthy operations of market mechanisms where a lot of hedge funds went broke, a very few made a great deal of money and industry is now coming back.
Question: Why do you think we should or should not let big banks fail?
Chrystia Freeland: The question of whether banks should be allowed to fail or not, really ultimately has to be about is this bank too big, or too connected to be allowed to fail. And regulators need to be very, very thoughtful at that moment of crisis about, if we let this institution go will everybody else suffer, or will it just be the institution that suffers?
For markets to function properly, we should allow institutions to fail and we should be certain that the shareholders and the bondholders and the employees in those institutions that fail suffer. That's how a market economy works. People who make the right decisions prosper, but to enforce that discipline you have to make the people who make the wrong decisions go out of business.
What was really problematic about this crisis was we collectively were not in a situation where that could be allowed to happen and collectively it became apparent as the crisis went on, and we do need to remember that Lehman was allowed to fail with really painful and instant implications. So, at that moment, and it really was a post-Lehman moment, there was a belief, which I think was right, that you couldn't let the whole system fail.
The consequences of that should be that regulators and lawmakers act now, in this lull after the storm, to limit the number of institutions and the size of institutions which are too big to fail. And if there is a decision, which may be the case, that's it’s good to have really big banks that a national economy or a global economy is best served by the existence of big universal banks. I think that's a legitimate outcome, but those banks then need to be subject to much stricter regulation than before so that it's much less likely that they should fail. I think the right outcome is going to be some sort of a greater move towards intellectually separating the utility function of the banking industry from the casino function and we do need banks to perform the utility function. Those banks should be really, really strictly regulated and very careful thoughtful policies should be in placed about how to handle the failure of those banks as we have in the example of the FDIC and the way it regulates and resolves the failures of commercial lending banks.
On the other side of the divide, we should allow the continued existence of speculators. I don't think speculation is a dirty word. I think speculation is a really essential part of capitalism. But we need to be sure that speculation, the casino function of finance, exists in a space where, if it fails because speculation by nature will fail a lot, it doesn't imperil the collective.
Recorded on December 10, 2009
Secretary of Defense nominee Charlie Wilson famously remarked in his 1953 confirmation hearing that he couldn't imagine something in GM's interests that ran contrary to the interests of the country. Chrystia Freeland, the Financial Times’ U.S. Managing Editor, answers the question as it relates to finance.
It's just the current cycle that involves opiates, but methamphetamine, cocaine, and others have caused the trajectory of overdoses to head the same direction
- It appears that overdoses are increasing exponentially, no matter the drug itself
- If the study bears out, it means that even reducing opiates will not slow the trajectory.
- The causes of these trends remain obscure, but near the end of the write-up about the study, a hint might be apparent
Through computationally intensive computer simulations, researchers have discovered that "nuclear pasta," found in the crusts of neutron stars, is the strongest material in the universe.
- The strongest material in the universe may be the whimsically named "nuclear pasta."
- You can find this substance in the crust of neutron stars.
- This amazing material is super-dense, and is 10 billion times harder to break than steel.
Superman is known as the "Man of Steel" for his strength and indestructibility. But the discovery of a new material that's 10 billion times harder to break than steel begs the question—is it time for a new superhero known as "Nuclear Pasta"? That's the name of the substance that a team of researchers thinks is the strongest known material in the universe.
Unlike humans, when stars reach a certain age, they do not just wither and die, but they explode, collapsing into a mass of neurons. The resulting space entity, known as a neutron star, is incredibly dense. So much so that previous research showed that the surface of a such a star would feature amazingly strong material. The new research, which involved the largest-ever computer simulations of a neutron star's crust, proposes that "nuclear pasta," the material just under the surface, is actually stronger.
The competition between forces from protons and neutrons inside a neutron star create super-dense shapes that look like long cylinders or flat planes, referred to as "spaghetti" and "lasagna," respectively. That's also where we get the overall name of nuclear pasta.
Caplan & Horowitz/arXiv
Diagrams illustrating the different types of so-called nuclear pasta.
The researchers' computer simulations needed 2 million hours of processor time before completion, which would be, according to a press release from McGill University, "the equivalent of 250 years on a laptop with a single good GPU." Fortunately, the researchers had access to a supercomputer, although it still took a couple of years. The scientists' simulations consisted of stretching and deforming the nuclear pasta to see how it behaved and what it would take to break it.
While they were able to discover just how strong nuclear pasta seems to be, no one is holding their breath that we'll be sending out missions to mine this substance any time soon. Instead, the discovery has other significant applications.
One of the study's co-authors, Matthew Caplan, a postdoctoral research fellow at McGill University, said the neutron stars would be "a hundred trillion times denser than anything on earth." Understanding what's inside them would be valuable for astronomers because now only the outer layer of such starts can be observed.
"A lot of interesting physics is going on here under extreme conditions and so understanding the physical properties of a neutron star is a way for scientists to test their theories and models," Caplan added. "With this result, many problems need to be revisited. How large a mountain can you build on a neutron star before the crust breaks and it collapses? What will it look like? And most importantly, how can astronomers observe it?"
Another possibility worth studying is that, due to its instability, nuclear pasta might generate gravitational waves. It may be possible to observe them at some point here on Earth by utilizing very sensitive equipment.
The team of scientists also included A. S. Schneider from California Institute of Technology and C. J. Horowitz from Indiana University.
Check out the study "The elasticity of nuclear pasta," published in Physical Review Letters.
Scientists think constructing a miles-long wall along an ice shelf in Antarctica could help protect the world's largest glacier from melting.
- Rising ocean levels are a serious threat to coastal regions around the globe.
- Scientists have proposed large-scale geoengineering projects that would prevent ice shelves from melting.
- The most successful solution proposed would be a miles-long, incredibly tall underwater wall at the edge of the ice shelves.
The world's oceans will rise significantly over the next century if the massive ice shelves connected to Antarctica begin to fail as a result of global warming.
To prevent or hold off such a catastrophe, a team of scientists recently proposed a radical plan: build underwater walls that would either support the ice or protect it from warm waters.
In a paper published in The Cryosphere, Michael Wolovick and John Moore from Princeton and the Beijing Normal University, respectively, outlined several "targeted geoengineering" solutions that could help prevent the melting of western Antarctica's Florida-sized Thwaites Glacier, whose melting waters are projected to be the largest source of sea-level rise in the foreseeable future.
An "unthinkable" engineering project
"If [glacial geoengineering] works there then we would expect it to work on less challenging glaciers as well," the authors wrote in the study.
One approach involves using sand or gravel to build artificial mounds on the seafloor that would help support the glacier and hopefully allow it to regrow. In another strategy, an underwater wall would be built to prevent warm waters from eating away at the glacier's base.
The most effective design, according to the team's computer simulations, would be a miles-long and very tall wall, or "artificial sill," that serves as a "continuous barrier" across the length of the glacier, providing it both physical support and protection from warm waters. Although the study authors suggested this option is currently beyond any engineering feat humans have attempted, it was shown to be the most effective solution in preventing the glacier from collapsing.
Source: Wolovick et al.
An example of the proposed geoengineering project. By blocking off the warm water that would otherwise eat away at the glacier's base, further sea level rise might be preventable.
But other, more feasible options could also be effective. For example, building a smaller wall that blocks about 50% of warm water from reaching the glacier would have about a 70% chance of preventing a runaway collapse, while constructing a series of isolated, 1,000-foot-tall columns on the seafloor as supports had about a 30% chance of success.
Still, the authors note that the frigid waters of the Antarctica present unprecedently challenging conditions for such an ambitious geoengineering project. They were also sure to caution that their encouraging results shouldn't be seen as reasons to neglect other measures that would cut global emissions or otherwise combat climate change.
"There are dishonest elements of society that will try to use our research to argue against the necessity of emissions' reductions. Our research does not in any way support that interpretation," they wrote.
"The more carbon we emit, the less likely it becomes that the ice sheets will survive in the long term at anything close to their present volume."
A 2015 report from the National Academies of Sciences, Engineering, and Medicine illustrates the potentially devastating effects of ice-shelf melting in western Antarctica.
"As the oceans and atmosphere warm, melting of ice shelves in key areas around the edges of the Antarctic ice sheet could trigger a runaway collapse process known as Marine Ice Sheet Instability. If this were to occur, the collapse of the West Antarctic Ice Sheet (WAIS) could potentially contribute 2 to 4 meters (6.5 to 13 feet) of global sea level rise within just a few centuries."
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