The Freakonomics blog offers up a long-ish but lucid discussion of the ongoing financial crisis. I recommend the whole thing, but in a nutshell:
Financial institutions borrow money all the time to fund their investments. When the real estate bubble burst, a lot of those investments lost value rapidly, leaving banks such as Bear Stearns and Lehman Brothers unable to borrow new money and unable to repay their existing debt. This situation can lead to a domino effect — “contagious failures” — in which borrowers are unable to repay lenders, who are then themselves sucked into the financial crisis.
The issue isn’t that all these banks are suddenly worthless. By all accounts, most of AIG’s business is quite healthy. Rather, the banks fail because they don’t have enough cash to cover their near-term debts, in much the same way that you can starve to death in your $3 million house if you don’t have cash to buy bread. So the federal government stepped in with bridge loans. By effectively guaranteeing that these companies will be able to repay their debt, the government hopes to stave off the contagion. But even if the intervention works, very few institutions want to loan out more money in this environment.
This credit crunch affects everyone who needs to borrow money: clean energy developers, homeowners, business owners, etc. The effects will be far-reaching:
We have not seen this much stress in the financial system since the Great Depression, so we do not have any recent history to rely upon in quantifying the magnitude of the slowdown. A recent educated guess by Jan Hatzius of Goldman Sachs suggests that G.D.P. growth will be just about 2 percentage points lower in 2008 and 2009.
This reminds me of another broad trend that I forgot to include on my list:
5) The economy. Although it is very difficult to make predictions about the direction of the economy, it appears likely the current downturn will continue for some time. Which is bad for the climate, mainly because of the way that a weak economy interacts with the other items on the list.
For example, slow growth saps the political will for dramatic action on climate change. Some legislative efforts, such as California’s AB 32, are probably too far along to be at major risk for derailment. RGGI in the northeast is also pretty far along, but not so far along that New York Gov. David Paterson wouldn’t consider bolting from the agreement. And, of course, federal legislation continues to lurch zombie-like around the halls of congress. The next president will have to expend a lot of political capital to pass a national carbon cap even under the best of circumstances. These are not the best of circumstances.
Also, as Sean notes, a weak economy could at least temporarily bring fossil fuel prices down. I continue to believe that the long-term trend in fossil fuel prices is up, up, up, but, as mentioned, volatility will muddy the investment picture for clean energy.
