2008 Global Financial Crisis

The anatomy of the GFC (2008)

From Thomas L. Friedman (Hot, flat and crowded) p 9 to 24. This is a summary of him. I've part quoted and part re-stated, (although not made it clear which is which!)

It all started with dodgy mortgages; they seem to come in two breeds:

Subprime (which is also used generically to describe both sorts)

The borrower has a blemished credit history and low scores on tests used to estimate credit quality.

Alt-A Loans

Mortgages that have low initial interest rates, but then go to higher rates in a year or two. They require no or low down payments. The borrower does not have to state their income or their stated income is not verified (wow!); hence they are sometimes called "liar loans". That said the borrower could have a good credit history...it seems these loans were used by "speculators" thus:

A speculator buys a house with an, initially, cheap Alt-A loan and then sells it on when the higher rate kicks in and takes the capital gain as profit. Of course, this only works when the housing market is good (rising prices and high demand).

Subprime (and Alt-A) mortgages historically represented only a small part of the mortgage market; they had always existed alongside the lower risk "Prime" mortgages (where the borrower has good credit history and proven, stable income to meet mortgage repayments). 

Default on prime mortgages was historically less than 4% in the US; during the crisis defaults on "subprime" loans was around 30%.

The growth in subprime mortgages was driven by several factors:

1. A key factor was the American governments desire to encourage home ownership. The government encouraged entities like Fannie Mae and Freddie Mac to make mortgages more available, speciaifally by using "flexible underwriting standards" (Friedman's quotes, he doesn't state his source though).

How widespread was it:

In September 2008 there were roughly twenty-five million of subprime and Alt-A  mortgages with unpaid principal totaling around $4.5 trillion (that would make the average unpaid principal $180,000). That's almost 45% of all single-family mortgages in the US in 2009.

How dodgy were the borrowers?

"people with incomes of $15,000 to $20,000, with no credit ratings, or in some cases without even a steady job or citisenship papers were granted mortgages to buy $300,00 and $400,000 homes"

How these mortgages were sold on

A bank or mortgage broker sold the mortgage to a borrower. The institution then sold the loan on to bigger financial firms (think Citibank, Merrill Lynch and the government sponsored bodies Fannie Mae and Freddie Mac). 

The big financial firms bundled the mortgages together and sold them as bonds. The idea being that the mortgage repayments could be used to pay interest and capital to the bond holders. The bonds appear to be asset-backed (meaning that they are guaranteed by the bricks and mortar of the house the original mortgage is on).

The bonds were popular; they were well rated by the ratings agencies and historically Americans had been good at repaying loans. Hence, the bonds were bought by fund managers all over the world.

What happened next...

The housing market collapsed. Prices went down and presumably demand did too. This meant people who were speculating with Alt-A mortgages couldn't repay the loans by selling. They also couldn't meet the higher interest payments that kick in after a year or two. Similarly, sub-prime borrowes

Greenhouse gasses

A way to visualise CO2 emmssions from your car

From Thomas L. Friedman, Hot, flat and crowded, p 71

A typical car emits 1 pound (they're Americans, that's about 450g to the rest of the world, about half a bag of flour) of carbon dioxide every mile (1.6 km). This is pollution. To help visualise it Freidman suggests thinking of it as a bag of rubbish (you know those McDonald's bags that mysteriously appear overnight); every time you drive a mile, imagine throwing a bag out of the window...now imagine every other driver on the road doing the same (if it's a SUV they get to throw out two bags). 

Hmmm...does that help?

Lighting the Way IAC report

Their conclusions are:


CONCLUSION 1. Meeting the basic energy needs of the poorest people on this planet is a moral and social imperative that can and must be pursued in concert with sustainability objectives.


CONCLUSION 2. Concerted efforts must be made to improve energy efficiency and reduce the carbon intensity of the world economy

CONCLUSION 3. Technologies for capturing and sequestering carbon from fossil fuels, particularly coal, can play a major role in the cost-effective 

management of global carbon dioxide emissions.


CONCLUSION 4. Competition for oil and natural gas supplies has the potential to become a source of growing geopolitical tension and economic vulnerability for many nations in the decades ahead. 


CONCLUSION 5. As a low-carbon resource, nuclear power can continue to make a significant contribution to the world’s energy portfolio in the future, but only if major concerns related to capital cost, safety, and weapons proliferation are addressed.


CONCLUSION 6. Renewable energy in its many forms offers immense opportunities for technological progress and innovation.


CONCLUSION 7. Biofuels hold great promise for simultaneously addressing climate-change and energy-security concerns.


CONCLUSION 8. The development of cost-effective energy storage technologies, new energy carriers, and improved transmission infrastructure could substantially reduce costs and expand the contribution from a variety of energy supply options.


CONCLUSION 9. The S&T community—together with the general public—has a critical role to play in advancing sustainable energy solutions and must be 
effectively engaged.

Energy research

Australian government energy pricing audit...possibly show that solar and wind outstrip coal as cheapest source by 2030...? http://www.bree.gov.au/publications/aeta.html

Energy use per person
From Thomas L. Friedman's Hot, flat and crowded, p 104

2000 to 3000 kcal/day - energy required simply be alive i.e. what our biology needs.

230,000 kcal/day - energy consumption of the average American, i.e. each person is consuming about 100 x what their body actually needs to live.

Apparently people in other developed nations use about half that, those in India and China 9 to 30 times less.

His source is a 2007 InterAcademy Council report "Lighting the Way". This report looks like a good source of info on energy...in 2007 anyway.

Effect of climate change on water

From the UN Global Compact.

Broadly speaking climate change will cause:

• Increased variability in climate with more "severe weather events". Hence, increased heavy rainfall, more flooding and longer droughts.
• Loss of snow and ice.
• Higher temperatures in the atmosphere and sea.

This will affect water quality, supply and demand. This post summarises a few general statements made in the UN report to business and provides an overview of what might happen, but not much in the way of detail.

This rather cheery picture shows how supplies of freshwater may change by the end of the century (it's from the IPCC...)

These changes will probably cause:

Supply

1. Water shortages due to changes in rainfall and hence the water table. Drier in the subtropics and mid-latitudes which are already poor.

2. Glaciers and snowcaps reduced. One-sixth of population live in river basins fed by glaciers and snow melt. Notably China, India, Pakistan and western USA.

3. Damaged ecosystems due to temp increases, changes in rainfall and longer droughts. Ecosystems filter water and buffer against floods, but not when they deteriorate.

4. Flooding, extreme weather and sea-level rise will mess with existing water infrastructure (treatment and distribution). e.g. The future climate is likely to be more variable with floods followed by drought. Capacity to store large volumes during flood to carry through a drought may not exist. E.g. sea level rise could compromise water treatement.

5. Non-consumptive activities may be affected by drought, flood or extreme events. E.g.

Tourism that depends on snow or water;

Freight by river (e.g. Rhine in Europe, Mississippi in US);

Freshwater fisheries.

Quality

1. Extreme rainfall and floods increase erosion and contaminate water. Also wash soil based pollutants and toxins into fresh water.

2. Sea level rise can contaminate coastal surface and groundwater supplies (rivers, deltas and aquifers)

3. Increased algal and bacterial blooms due to higher temperatures.

4. Greater health risks e.g. flooding mobilises pathogens and contaminants.

Demand

1. Prolonged dry spells and drought increase irrigation demand. e.g. estimate is 40% increase in land needing irrigation by 2080.

2. Higher temps mean farm animals need more to drink.

3. More cooling water needed in industrial applications due to higher atmospheric and water temps.

Disasters

1. There's likely to be flooding and inundation of coastal areas, flood plains etc. due to sea level rise and heavier rainfall in certain places.

Food crisis of 2007-2008

"The 2007 - 2008 food crisis was primarily one of supply and demand imbalance, although world food stocks did reach alarmingly low levels. While many people don't realise it, the are direct relationships between food crisis and water scarcity that were manifest initially through drought in various regions." (source)

<What is the anatomy of a food crisis?>

Agriculture uses 70% of the world's water...UN

Water research

Random stuff about water...

The World Water Council publications list.

Book: Out of Water
Includes a chart of water usage from 2005 which shows Australians were the world's second heaviest users of water. Assuming there's been no dramatic improvement since then (seems unlikely), it suggests that we have a lot of scope to adapt to probable water shortages in WA metropolitan areas by 2030. 

Selected quotes:
To feed the World's population in 2050 will require about twice as much water as was used for agriculture in 2000. p. xvii

"...a metric ton of rice requires upto 3780 ML (mega litres) of water for its growth. A kilo of grain fed beef requires about 10,000 litres (10,000 ML per ton)." In other words beef requires about 3 times as much water as rice. p 7

"On average, every calorie consumed in our food requires a litre of water for its production, and this does not count water used by food processing industries...Consequently, each person on the planet, if consuming a diet of 2500 calories per day, accounts for at least 2500 litres of water requirement....this totals 912,500 litres" per year. p7-8

"...global population growth...is predicted to climb from about 6.7 billion in 2008 to about 9 billion in 2050...the future water requirement...is approx. 14,000 km2..." To meet the needs of the extra 2 billion people will require "25-50 enourmous dams of the capacity of the High Aswan Dam on the River Nile...These vast amounts of water are not available...in the areas where we need them..." p 8-9

"half the world's population will be affected by water shortages in just 20 years' time (2030), with millions dying and increasing conflicts over dwindling resources"...and... "During the 20th century the world population increased fourfold, but the amount of freshwater that it used increased nine times over. "...and ..."water scarcity could cut world harvests by 30 per cent – equivalent to all the grain grown in the US and India (by 2030)". ..and... "(The UN expects)...water conflicts to break out in the Middle East, Haiti, Sri Lanka, Colombia and other countries." Independent

Other sources? The World Water Development Report, world water forum 2013, United Nations Food and Agriculture Organization

Good summary of the future of water by the UN Global Compact