Wishful thinking

Please see update/correction in the comments

Two economic crises face the world today: the credit crunch resulting from the subprime mortgage crisis, and the food prices crisis precipitated by the demand for biofuels. Both are problems we should have identified and solved years ago, but didn’t. Why did we ignore the warning signs and allow ourselves to be hoodwinked into this mess? I believe they both relate to our tendency for wishful thinking.

Money for nothing

First, the subprime mortgage crisis. I remember first becoming aware of the problem in 2005 when I read an article by Whiskey Bar. I can’t find the specific article, but I remember Billmon calling subprime mortgages “future foreclosure loans.” I also remember my boss at the time being completely dumbfounded at how banks could possibly be making loans at the rates they were. It just didn’t make sense – there was no way this was a sustainable lending practice, and someone was gonna get burned.

Still, in 2006 I considered buying a home. After all, I was steeped in pro-boom media, and friends and co-workers were singing the praises of home ownership and encouraging me to buy in before prices got any hirer and interest rates went up. Bubble deniers were suggesting that those of us concerned about a bubble were just jealous of owners. So I spent more time looking into it, and was almost convinced to buy for a while. But in the end, I still came to the conclusion that variable rate and no money down mortgages were a bad deal compared to renting (the only types of mortgages I would qualify for), and that these lending practices were unsustainable.

By the time I started seriously looking at the situation the crash was already in progress, it was actually all too late. The damage had been done. “The new road to serfdom”, but people still balked. By summer of 2007 the whole house of cards was crashing down, just like we’d been warned. The Nation has a lucid retrospective of what happened.

So who to blame? Much blame is to be laid at the feet of realtors and lenders – in fact the whole “FIRE” (finance, insurance, and real estate) sector. They made severely bad business choices, and now the entire economy is suffering for it. Why did they do this? Was it the short term gain? Not looking beyond this quarter’s profits? Or was it the promise of a bail-out? I’m not sure.

However, no one made anyone take out a subprime loan. Certainly borrowers were misled by slick realtors and lenders into believing they were getting a good deal. But all the numbers were right there in front of them: the interest rates, the interest rate hikes, the cost of the principal… why couldn’t people look at the numbers and realize they were getting screwed?

Some blame should be laid at the feet of the mass media. Danny Schechter asked for Editor and Publisher:

There is more to this very sad failure. Many newspapers and TV outlets were complicit. They accepted and made tons of money carrying slick and often deceptive advertising for shady mortgage lenders and credit card companies encouraging readers and viewers to accept more debt. Some major newspaper are tied into local real estate syndicates and get kickbacks from sales tied to their extensive advertising of homes for sale.

Was there a conflict of interest perceived in taking these ads—which were important sources of revenue in a soft ad market—and producing watchdog journalism warning of the dangers of buying into subprime loans and other injurious products?

The media certainly could have helped prevent a crisis, if they hadn’t been too busy dismissing skeptics as Chicken Littles. They may also have contributed to the problem by failing to report accurately on the economy. During the same period as the housing bubble, the media, complacent with the Bush Administration, were pushing the line that the economy was strong and growing. However, at the time the value of US dollar was dropping against foreign currencies. Wages were not increasing as quickly as inflation. The US The US imported more than it exported. Job growth didn’t keep up with population growth. In other words, despite the housing boom, the US economy was poor.

So perhaps all these home buyers were convinced the economy was doing great, housing prices would soar forever, and they’d be making plenty of money to make their increased mortgages payments by the time the rates went up.

But lack of information in the mainstream media is only so much of an excuse. Better media coverage may have been able to prevent some of the problems, but it certainly didn’t cause them.

And what did? As far as I can tell, wishful thinking. Millions of people who just really really wanted to believe that they could actually afford to own a home. They didn’t want to believe that they would probably not be making significantly more money in a few short years. They didn’t want to believe that they should really have a 20% down payment. They didn’t want to believe that they had to WAIT and SAVE in order to own a home. They wanted to believe they could have one NOW.

Side effects may include deforestation, mass starvation, and global warming

So what does this have to do with biofuels? Last summer I started thinking about buying a biodiesel car. I wanted the convenience of a car, without feeling guilty about supporting repressive regimes in the middle east and polluting the environment. But after some research I concluded that biodiesel was actually worse than petroleum based fuels. Increasing the demand for crops for fuel raised food prices, and there was simply no way we could even knock a dent in our foreign dependence on oil. Also, increased crop production would cut into wildlife preserves and contribute to deforestation. I knew before I started seriously thinking about it that biofuel wouldn’t solve our energy problems, but I thought every little bit counted. Until I realized that since it wouldn’t solve our existing problems and would create an additional ones. More recently I’ve seen articles reporting that have determined that it takes more carbon to grow the damn fuel than is saved in burning it. So it’s actually WORSE for the environment, contributes to new social problems, and does little ease existing ones.

Yet, as Michael Grunwald wrote for Time Magazine “It was as if the science world assumed biofuels would be grown in parking lots.” There was little coverage of these problems until, apparently, recently. And it’s only now that we’re reaching crisis mode that the problems are getting serious attention. There were, of course, people warning about it years ago. Again, much of the blame here lies not with consumers for buying biofuel cars, but with those nebulous “powers that be”: the farm lobby, the energy industry, and politicians dolling out pork.

But what about the people who bought biofuel cars? I’m unable to determine the exact number sold (likely very difficult since they are easily converted from regular diesel engines), there must be someone buying all this subsidized fuel. I see an awful lot of those “powered by biodiesel” stickers on the backs of Benzs and Volvos around Portland. Why didn’t these people do their research? I suspect it’s again a case of wishful thinking. Like me, they wanted a guilt free car.

Today’s lesson

As individuals, we often feel that we have little power over how our country is run. Voting machines appear rigged, protests are confined to “free speech zones.” What agency do we now have? “Consumer activism” has been a buzz word for several years, but is often cynically dismissed. But we could have said no to subprime mortgages. No to biofuel vehicles. Neither the government nor FIRE forced anyone to take a mortgage or max out a credit card. No one forced anyone to buy a biodiesel pickup truck. And we’re now collectively suffering an economic downturn and increased food prices.

Apparently, the old maxims “there’s no such thing as a free lunch” and “if it sounds too good to be true, it probably is” hold true.

What to do about it

So enough of the doom and gloom – what’s done is done. What can we do to improve our situation? The solutions are at least as old as the problems.

Alternative currencies helped Argentine through its economic collapse (see here [pdf]). There are a number of alternative currency systems available such as: HOURS and LETS. There’s even An Exchange Protocol for Alternative Currencies .

Ten tons of perfectly good food is thrown out each month. Food Not Bombs groups throughout the country liberate discarded food and redistribute it to those who need it.

Also of note: Food Not Lawns, an interesting way to possibly retrofit the suburbs and provide more food.

We can get rid of our biodiesel cars and switch to bikes or public transportation, or at least back to gasoline.

5 Comments

  1. WorldChanging has set me straight on some details from the recent studies on carbon emissions and biofuels:

    “It is important to specify that the Searchinger study does not say that current corn ethanol production increases greenhouse gases (GHGs). Its findings reflect land use changes tied to an increase in U.S. corn ethanol production approximately six times that of today.”

    It also says that biodiesel is more effecient than ethanol.

    See here: http://www.worldchanging.com/archives//007868.html

    Many problems are still applicable, but the situation is not as dire as I thought.

  2. To expand on that comment.. There’s an important distinction to be made between biodiesel and ethanol fuels. There’s a zillion articles out there about this, so I’ll leave it to you to educate yourself. Basically, whereas ethanol is produced by fermenting plant material like corn (and bear in mind that the corn grown en masse in the States is only tangentially a food crop, although obviously we could grow something else) you can make biodiesel out of food waste products (spent fryer oil). Biodiesel is close-ish in BTU output to petrol gasoline, just a bit lower. Ethanol gas is significantly lower. If I remember right, petroleum diesel tops the list. Biodiesel does burn cleaner, especially the more pure it is. I think a lot of the shit you see for sale here in town is 20% bio, 80% regular diesel. Maybe the other way around ;). You can put that right into any diesel motor and you’re good to go. The ‘modifications’ people sometimes cite boil down to: if hoses or fittings are made of real rubber, they need to be switched out to synthetic rubber.

    There’s some business about making biofuels out of algae, which I know nothing about. But expect to see laughably unthoughtful comments about this in a political stump speech near you.

  3. Yeah, biodiesel and ethanol are radically different.

    I believe the modifications to use spent fryer grease, as opposed to what you can buy at diesel filling stations, are far more expansive. Also, they’re not technically road legal. That’s not really what I was addressing in this article.

    The biodiesel you can buy at biodiesel stations I believe is made from soy, and it’s demand is probably does not create so severe a problem as corn ethanol, but forests in Indonesia are already being cut for its production.

    There are a number of possible future solutions that could create cleaner biofuels without the drawbacks. Algae and bacteria are a couple possible solutions. I know nothing about the bacteria solutions, but the algae ones are nowhere near economical yet – it costs something like $20-40 a gallon to produce the stuff.

    There’s a ton of VC being thrown at clean energy and biofuel. Hopefully someone will eventually figure something workable out and we’ll be able to distinguish it from the snake oil.

    More on the clean energy bubble:

    http://www.wired.com/science/planetearth/news/2008/03/cleantech_bubble

    http://www.harpers.org/archive/2008/02/0081908

  4. Clarification: Gavin tells me that fryer grease is used in commercial biodiesel production. What I’m referring to above is the use of pure fryer grease to power a car.

    There’s also the question of meat in the food crisis: http://www.worldchanging.com/archives/007940.html

    But the problem of meat has been around for decades, the problem of biofuels is a new problem.

  5. That’s one of the big things that drives me nuts when trying to talk to people about biofuels. So many of them seem to think that Ethanol is the same as Biodiesel. Um…is gasoline the same as diesel? Last I checked, they weren’t.

    That being said, both you and Gavin are right. Biodiesel, regardless of the source, is street legal. Straight vegetable oil, however, isn’t and is at a “use at your own risk” stage in development. Theoretically, it can be used in diesel engines with a few modifications, but it’s generally not advised.

    As for the whole “biofuels are worse for the environment than petro” thing, especially when talking about farmland and whatnot, it’s almost completely because they’re going about it all wrong. As Gavin mentioned, algae has been a consideration for oil production for a while. And for good reason. It produces something like 200 times more oil than corn does. In fact, corn and soy are the worst sources of oil. Algae can also grow pretty much anywhere and in large amounts without much effort or even space. Trying to use corn for oil production is about like trying to use trees as a water source. Keep in mind, too, that farmer’s bane isn’t lack of supply, it’s lack of demand. There are government subsidies in place to keep various crops at or above a certain price.

    You then also have the issue of using only one source for fuel. Bad idea. That’s what got us into this mess to begin with. We have to be able to use more than one source (in other words, the whole corn/soy thing would not only be disastrous on an environmental level, but also on an economic level).

    On a side note, flex-fuel hybrids do great on biofuels, coming in at an average of about 100 mpg, with some models getting upwards of 200 mpg.

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