Easy debt and the environment.

• Author: Dodson, Edward J.
• Position: FROM READERS - Letter to the editor

Jim Cochran ("Carbon on Credit," May/June, p. 14) points us to a corner of the global economy not well understood by most of its participants and a good many of its analysts. Few economists are able to accurately forecast changes in any economy, for one main reason: neoclassical economic theory has evolved to describe almost everything as a form of capital. The environment is described as natural capital, just one more category of assets brought to the market by the price mechanism. But nature is more accurately described as the first factor of production. Economists ignore the fact that as price increases, those who control locations on the Earth tend strongly to hoard them and their resources in anticipation that curtailment of supply will drive up price (and profits) even higher.

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Global financial instability is intimately linked to speculation in land and in natural resources. Bankers periodically forget about the repeating nature of the business cycle and the bank failures of the last downturn. They repeatedly provide the credit that adds fuel to the speculative fires. For example, disruption of food production during the First and Second World Wars drove up prices for food crops, and farmers competed for additional acreage to expand production. Agricultural land prices skyrocketed during the war years, and banks made loans based on these inflated values. When peace returned and farmers got back to business, global commodity prices fell. Many farmers then found themselves highly leveraged, unable to generate sufficient revenue to service their debt, and thousands of individuals lost their farms. After several cycles, the world is solidly under the control of corporate agribusiness.

Another example: in the mid-1970s, bankers were absorbed by the prospect of double-digit returns on loans made to resource-rich nations, such as Mexico and Brazil. When oil was discovered under the North Sea, the supply-side of the equation stabilized. Developing nations could no longer service their debt and the banks were faced with huge losses. The banks that survived called for deregulation so they could achieve maximum diversification and thereby reduce the risk of market failures (and their own poor judgment).

Some time was required for the financial services industry to recover from meltdowns, such as that of the savings and loan collapse in the United States, a crisis caused...