The Credit Crunch and how to solve it

We are told that the there is a crisis in the world economic system because credit is drying up in the USA. This is only a crisis if we let it happen because it has a simple cause and an equally simple solution.

The symptom of the problem is that banks are unwilling to loan to other banks, and organisations are unwilling to loan to other organisations, because they may not get repaid. That is, the banks have “gone on strike”. Why is that? It is because many banks have been lending money to people who said they had assets but didn’t. Lenders are worried that a lot of the loans they have already made may not be repaid so they are unwilling to lend any more just in case their new loans default along with some of the old ones. The underlying problem is that a lot of bad loans have been made but because of the way the financial system is structured banks and others have no idea who is holding bad loans. This sounds incredible but it has happened because regulators have allowed complex restructuring of loans and allowed people to make new loans backed by bad loans – and because governments have an inflation target.

An estimate of how much money is being lent can be found by the increase in the money supply. In Australia for the past 30 years the money supply has increased at a yearly compound rate of around 11%. Money is meant to reflect an asset of some sort. When we lend money we expect it to be repaid and if there is no money to repay we expect to get an asset in return. The fundamental problem is that too much money has been created and we now have money that is not backed by assets.

How can this be? We have allowed banks to make loans backed by loans. This is a sensible idea as a risk mitigation strategy or insurance but it falls down when the loans on loans are treated like a commodity in their own right. That is, as soon as we start to treat money as a commodity with intrinsic value independent of the asset backing it then it is almost inevitable for the system to run out of control. It is not bankers being greedy, or governments being incompetent, it is a system with an inbuilt flaw.

The inbuilt flaw is that we treat ALL money as though it were the same and as soon as we create some money we expect it to pay interest. That is we treat all money as though it had value independent of the asset backing it. We allow money to be created without an asset backing it and we immediately charge interest on it. Each day the government and the major banks create about $500M new dollars in Australia as measured by the increase in the money supply. Increasingly they have been creating more money than the increase in our total wealth. Not only are they creating more money than needed we are paying interest on more money before it is earning anything. If our productive assets do not generate more wealth to cover this interest we have to pay it by creating more money which in turn creates interest which in turn requires more money to be created to pay the interest ….. In effect we have created a classic Ponzi scheme where the losers are the whole community through the device called target inflation. The government by encouraging this approach is sanctioning a broad tax equivalent to the inflation rate. Of course governments like this because it is not seen as a tax and it is rationalised away by saying it helps the economy adjust as different asset classes change relative value. This rationalisation is true but there are other ways of adjusting without taxing us through inflation.

We can solve the problem immediately and overnight by a simple rule change. Allow new money to be created but do not pay interest on it until it is turned into a productive asset. This is not a radical idea. It is done every day of every week as people invest in new ventures. When you invest you do not expect a return on your money until it is earning something.

The idea of only issuing money that is backed by real assets is not a new one. The new idea is the way the system now issues money without an asset backing it. Requiring money to be backed by an asset is the reason why so many people call for a return to money backed by gold. That unfortunately is impractical because we need a lot more gold than exists but we are suggesting the same principle. Do not create interest bearing money unless it is backed by an asset.

There are various ways for a community to turn into an investing community instead of a spending community. That is, we do not allow interest on new money until it is earning its keep. Here are a couple of ideas.

  1. Create some interest free money, give it to first home buyers, but require the money to spent on building a new house. Until it has been turned into a new house the money earns no interest. The money can be used to buy a used house but it cannot earn interest until it has been spent building a new house and so increasing the asset base. As a side benefit this policy will make houses affordable for those who do not have one.
  2. Create some interest free money, give it to people who consume little energy (and incidentally few greenhouse gas emissions) as a Reward. The people get the interest free money as a Reward for being frugal. Require those people to invest their Rewards in infrastructure that will reduce emissions – such as windfarms, solar thermal energy production, solar cells, geothermal energy plants, insulation etc. As a side benefit this removes the need for emissions permits trading and if we create enough Rewards we will have zero emissions within a few years as we invest billions in renewable energy infrastructure with money with zero interest.

This approach is not inflationary as the special money does not accrue interest until it is invested in a productive asset that will in time return more money than it costs to build.

The credit crisis will be averted because the government creates some new money which is invested to create true value and real wealth in areas of obvious need. The Reserve Bank can control the issuing of special money and can use it to maintain an inflation rate of zero. The rest of the economy can continue in its own way secure in the knowledge that the value of the money in the system will not be eroded by inflation.

Paul Pollard CT Letters

Paul Pollard CT Letters 24th Sep calculations on the cost of electricity from wind farms assumes that the interest charges on the money used to build the wind farms is 10%. If we removed the interest charge then the cost of electricity from the wind farms is way below the average price of 6 cents per kwh average cost of wholesale electricity and the wind farm will generate not only energy but profits.  The Reserve Bank has the power to issue a loan for $370M at zero interest to the people of Canberra to build a wind farm. There is no reason why this cannot be done. This is exactly what happens when companies seek investor money. Investors buy shares in new companies but do not ask for interest on the money. They ask for dividends on the returns. The government through the Reserve Bank can do exactly the same. This is not inflationary because money is spent building a new asset that is worth more than the money invested. The ownership of the wind farm is a political decision but my preference would be to divide the shares up between the citizens of Canberra in inverse proportion to the amount of electricity they consume. The same funding mechanism can be used for a solar thermal farm or even solar panels on our rooftops. This approach of reducing the capital cost of renewable energy is a simpler, cheaper approach to encouraging renewable energy infrastructure than emissions trading.

Financing Renewables and Solving the Financial Crisis

Emissions Permits Trading, Carbon Credits, Renewable Energy Targets, Feed In Tariffs and other financial structures are all mechanisms to encourage investment in renewable energy infrastructure. They achieve this by manipulating the market in fossil fuel energy to encourage investment in renewable energy.

Why do we do this as a way to reduce emissions?

We do it because the initial cost of producing energy from the sun, hot rocks or from windmills is more expensive than from burning fossil fuels. However, this cost is overwhelmingly one of construction capital. As there is no ongoing charge for fuel, the running cost of most renewable energy plants is less than half that of any fossil fuel energy plant.

The interest charge on money needed for investment in renewables dominates the cost equation. If we had zero interest money available for investment in renewables it would be possible to generate endless amounts of such energy. It would require a significant investment up front but it could be done.

Is there enough renewable energy available?

Australia alone has renewable energy sources either from the sun or from the hot underground rocks to provide the whole world’s population with thousands of times their current energy consumption so yes, there is more than enough renewable energy available.

How much will it cost?

When we double the capacity of renewable energy infrastructure the cost decreases by about 20 percent. By the time we have replaced all our energy needs with renewable energy the cost per installed megawatt will be less than one million dollars. If we assume an average cost of $1.6 million then we will need about $15,000 per person to meet ALL the energy needs of the average Australian. If we average this over ten years then it is $30 billion per year for Australia to achieve zero emissions within ten years. At the end of this time the cost of producing wholesale electricity will be more than halved.

Isn’t this a lot of money?

Each month Australians borrow $20 Billion dollars to buy houses. $30 billion in the scale of national expenditure it is not a large amount of money and is affordable.

How could we efficiently invest this amount of money?

We know that the most efficient way to spend money is to spend it through a market where there are many buyers and there are many potential sellers. We have sellers in such a market in Australia today and it is called the renewable energy and saving energy infrastructure market. There are many sellers of solar energy plants, solar energy photovoltaic panels, windmills, geothermal projects, insulating our houses, etc. The problem is that there are not enough people with enough money who want to purchase their goods.

How can we find the money?

In the year to July 2008 the Australian supply of money increased by $240 billion. Somehow eight times $30 billion of Australian dollars was created that did not previously exist. The government could suggest to the Reserve Bank to create $30 billion dollars of the new money we need and issue it at zero interest and require it to be spent on renewable energy infrastructure.

But do how we do it?

Each day the Reserve Bank creates money. If necessary it creates several billions of dollars per day. There is no reason for the Reserve Bank not to create $30 billion dollars of money with special conditions attached to it. That is, the Reserve Bank can create special dollars on which it charges no interest. Those dollars can only be spent on renewable energy infrastructure and on ways of saving energy. The Reserve Bank can supervise and control such an organisation and the Reserve Bank can hire private organisations to establish and run the system.

Wouldn’t the involvement of private organisations place yet another layer of cost on energy?

The Reserve Bank currently uses private institutions – banks – to provide money and to distribute money throughout the economy. While the banks could handle Rewards it is desirable to separate the distribution and control of Rewards from the distribution of regular currency as the functionality required is different and it would be less confusing for the population.

How would the $30 billion be distributed

Who gets this special money is a political decision and would be determined by the Federal Government as they are the ones who asked the Reserve Bank to create Rewards. It is suggested that Rewards be given to any resident of Australia who volunteers to take it. It could be allocated once a year in inverse proportion to the amount of mains electricity per head consumed in the previous year. Or perhaps each person on their birthday could receive on average $1,500 in what we might call Energy Rewards. The exact amount will be calculated from the mains electricity consumption at their places of residence. Limits could decree that the top 20 percent of energy consumers receive zero of these Energy Rewards, while people (including new born babies) who can prove that they consumed no mains electricity in the previous year would be eligible for $5,000 in Energy Rewards.

How would the people spend the money?

Many – possibly most people would sell the Energy Rewards money to someone better able to invest it. Others would buy shares in investment vehicles that would in turn invest the money. Many would spend the money on household improvements to save energy – such as better insulation or solar panels. Some may spend the money converting their vehicles to run on renewable energy sources. The mechanism for establishing what would be eligible would be determined by the sellers of infrastructure who would have to specify in their sales contracts how the money used by them would create emissions free energy or would save energy. If their claims proved to be false they would be excluded from being able to accept Energy Rewards as payment.

Wouldn’t this be inflationary?

No, because Energy Rewards attract no interest while they are unspent. Energy Rewards are ONLY spent on productive assets and we know that if we invest in new ways to increase income, the result will not be inflationary. When Energy Rewards are spent they produce productive assets that have value and can be sold.

If too many Energy Rewards were issued then the Rewards themselves may become devalued but that is of no concern to the rest of the economy. Wholesale electricity energy prices are about five cents per kilowatt hour. The operating cost of most large scale renewable energy is one cent per kilowatt hour. Rather than being inflationary, renewable energy plants will decrease prices because renewable energy will be cheaper than fossil fuel energy.

But wouldn’t it create too much demand for Renewable Energy Infrastructure?

There are many ways to spend Energy Rewards and the market will determine where it is spent. It is thought that initially most money will go towards companies that have large plans for renewable energy plants such as solar thermal, geothermal and wind power. People will buy shares in those companies and those companies will spend the money efficiently. If too many Energy Rewards are created that cannot be spent wisely the owners of Rewards will most likely hold onto them, waiting until the price of infrastructure comes down and they can obtain a better deal for their investment.

Wouldn’t it require parliamentary legislation?

The Reserve Bank has power over the issuing of the currency and provided it works to maintain and protect the currency it could do whatever it wishes. There is no legislation required. The Reserve Bank may well consult with the Federal Government and if the Reserve Bank did not wish to follow this path the Federal Government could pass legislation to require the Bank to issue currency via Energy Rewards.

There must be something wrong with this idea otherwise some country would have implemented it?

This idea has probably been around for a long time in the archives of many governments or universities. However, until we get a crisis that demands some action then initiatives such as this tend to be forgotten because the current system appears to be working well. The recent turmoil in the global financial markets and the worry over climate change are now drawing attention to the way our financial system works and have created a need to consider different ways of encouraging investment in renewable energy. The benefit of Energy Rewards is that they can solve the Emissions problem while helping ease the money supply problem in non-inflationary ways. If operated worldwide this approach would give a non-inflationary method of increasing the money supply and it would break the current runaway increase in debt and money supply.

Wouldn’t it be too expensive to implement and run such a system?

The other reason it has not been suggested is that until the Internet was in place it was impractical to implement. With today’s information technologies this is a relatively simple system to implement as we have efficient ways to identify people and we have many electronic market places that operate with millions of buyers and sellers. The cost of running the system would be born by the sellers of infrastructure and they currently have much higher selling fees than the 1% or less fees required of this system.

What do most economists say about this system?

Most economists appear to believe that money is like any other commodity; it can be brought and sold, and this will ensure that the best price is obtained for the money. The best price is the most money the money will earn in the shortest time.

However money is not like bread or buttons. It is a measure of value and not a store of value. Money does not obey the laws of supply and demand because the supply can always be increased and the demand is insatiable. It is a bit like saying we can buy and sell volume rather than the space the volume represents. If we allow the measure of volume to be of value in itself and we can invent volume in a virtual space, and if we allow the virtual volume to be exchanged the same way real volume is, then we have a problem. Privileged people who are allowed to create virtual space will do so and then exchange it for real space with houses in it.

The point is that money should not be bought and sold like a commodity unless it has a real asset backing it. Unfortunately this is not what most economists believe – including those in charge of money. Economists seem to believe that all money is “equal” and should be treated the same and they see nothing wrong in charging interest for money that is not backed by an asset. Until they recognise that money is different from wheat or houses or labour we will continue to face financial crises every few years.

Most economic models are variations on the idea of General Equilibrium. That is, an economic system is a stable system and if you push it in one direction then it will come back into equilibrium. Unfortunately economies do not work this way and something like this proposal does not fit these models because it embodies a positive feedback loop that means the more money you put into the system the more value it generates. The system as proposed will cause runaway increase in value as opposed to our current system which causes runaway increase in debt.

How does tagging money – or Rewards – overcome the problem?

The Energy Rewards system described here overcomes the problem of money creation. That is, we create some money but do not charge interest on it while it is only money and while it does not yet represent an asset.

When we spend the Rewards we know that we have created an asset because we require it to be spent on infrastructure of some form. This asset will typically be worth more than the money used to create it because the people spending Rewards will seek out the best value for the Rewards. This means the untagged money that is released into the economic system is typically backed by more assets than it represents.

If the Reserve Bank is called upon to create more money because there is not enough available in the system, it can create a Reward of some sort whose expenditure requires the generation of an asset. How much is created and how quickly it is spent do not matter because if we create too many Rewards any inflationary impact will be isolated to the particular Rewards asset class. In other words, we will still get inflation but it will be isolated to the particular Rewards currency and it will not impact other money. This problem will also correct itself once enough assets become available in that asset class.

Energy Rewards is just one example of the application of tagged money. It is a political decision to decide on other potential applications, but some of the strongest candidates are those areas where we have potential “tragedy of the commons” situations. The most obvious of these include water, health, education, land for housing, food production and energy.

Energy Rewards to reduce emissions

Putting a price on carbon is one strategy to reduce emissions. Another is to use zero interest loans to construct emissions reducing infrastructure.

Let the Reserve Bank create some money called Energy Rewards that must be used to build renewable energy plants or reduce energy consumption through things like insulation. Let us give this money to people as Rewards in inverse proportion to the amount of energy they purchase so they have an incentive not to use energy. 

The money created would not increase inflation because the money will be used to produce a productive asset and that means that over time the loan will be paid off and return more money to society. Inflation occurs when we create money which is spent for consumption without gain in productive output from the expenditure. 

Rewards will encourage behavioural change to reduce energy consumption which in turn will increase the efficiency of our energy infrastructure which will reduce inflation because we will get the same value from a lower amount of energy consumed or put another way we get an increase in energy productivity.

Rewards must be spent in the infrastructure market place so it will be spent efficiently.

The price of energy can remain the same – or decrease if we want to cause fossil fuel power stations to close down because they will become uneconomic.

The running costs of renewable energy plants is 1 cent per kwh which is half or less than the cost of fossil burning plants. A renewable solar thermal or hot rock geothermal energy plant should have a life of at least 100 years and will produce enough energy within a few years to pay back the money loaned. We know that there are enough renewable energy sites to produce several thousand times current energy consumption and we know that no matter how much energy we produce it will always find a market if the running costs are low.

How fast we can do it depends on how quickly we can physically construct renewable energy plants. As most of the equipment and material can be purchased and manufactured overseas in China or India we can have the productive capacity to build the plants quickly. 

Limits of Computer Modeling: Implicat…

Limits of Computer Modeling:  Implications for Government Decisionmaking.
“Those who conflate the science and policy roles of prediction and modeling trade short-term political or public gain with a substantial risk of a more lasting loss of legitimacy and political effectiveness” (Roger A. Pielke Jr / The Role of Models in Prediction for Decision  – Cary Conference IX: 28 February 2001)
Governments around the world have been responding to computer-generated models of climate change and global warming by commissioning economic models designed to support policy to address both the causes of the problems and likely human responses, in ways calculated to minimise adverse impacts in their respective societies.
While arguments over the realities of global warming have largely abated, others regarding its causes and what to do about it continue apace – when it gets down to confronting the costs of possible solutions, there are too many vested interests in play for consensus on action to be easily or swiftly attained. In the meantime a sense of urgency at ground-level resonates with the fear that “we sit around modelling while the planet burns.”  This edition of WWWTools for Education presents a webliography for readers who want to know more about the pros and cons of computer modeling as a tool for government policy-makers, with special reference to environmental and economic modeling.
The next edition of WWWTools for Education will consist of a webliography supporting understanding of the range of mitigation and adaptation strategies being proposed, with special reference to Emissions Trading Schemes.
Climate Change.
The problem begins here. This selection of resources is not comprehensive, but provides ample background:
Alaska: Climate-change Frontier  (Moises Velasquez-Manoff / The Christian Science Monitor: August 28, 2008)
Antarctica: Ice Under Fire  (World View of Global Warming, 2008)
Climate Change   (Bureau of Meteorology, Commonwealth of Australia: 2008)
Climate Change   (U.S. Environmental Protection Agency)
Climate Change   (BBC Weather Centre)
Climate Change and Energy   (Department for Environment, Food and Rural Affairs: UK)
Intergovernmental Panel on Climate Change   (World Meteorological Organization / United Nations Environment Programme)
Terminology and Ready Reference.
A few references to help fill the gaps:
Economics   (Wikipedia) – the social science that studies the production, distribution, and consumption of goods and services. 
Neoclassical economics   (Wikipedia) – focuses on the determination of prices, outputs, and income distributions in markets through supply and demand. See among Criticisms, a key assumption that individuals act rationally.
General equilibrium   (Wikipedia) –  a branch of theoretical microeconomics seeking to explain the behavior of supply, demand and prices in an economy with several or many markets.
Computable General Equilibrium   (Wikipedia) – CGE models are a class of economic model that use actual economic data to estimate how an economy might react to changes in policy, technology or other external factors.
Pareto Optimality   (Economy Professor) – a situation which exists when economic resources and output have been allocated in such a way that no-one can be made better off without sacrificing the well-being of at least one person. See also Pareto Efficiency   (Wikipedia)
Econometrics   ( – the application of mathematical and statistical techniques to economics in the study of problems, the analysis of data, and the development and testing of theories and models.
Model – a small copy or imitation of an existing object (Webster’s New World Dictionary). Cited in The Promise and Limits of Computer Modeling  (Charles Blilie). From the same source: “a preliminary representation of something, serving as a plan from which the final, usually larger, object is to be constructed” or “a hypothetical or stylized representation
Mathematical Model  (Wikipedia) uses mathematical language to describe a system.
Model (economics)   (Wikipedia) – a theoretical construct that represents economic processes by a set of variables and a set of logical and quantitative relationships between them. See also Bill Parke’s caveat   , that “this process inherently ignores important aspects of real-world behavior, making the modeling process an art as well as a mathematical exercise.”
Stochastic   (The Free Dictionary):
1.  Involving or containing a random variable or variables.
2. Involving chance or probability.
Probability Distribution Function   (Jones Kalunga) – a mathematical function used to model the frequencies and probabilities of occurrences over time.
Environmental Economics Glossary   (sponsored by Environmental Damage Valuation & Cost Benefit News, The Cost Benefit Group & Damage Valuation Associates)
Glossary   (Climate Change North, 2005)
Stern Review Abbreviations & Acronyms   (Stern Review: The Economics of Climate Change / HM Treasury, UK)
Mitigation: reducing emissions to reduce future climate change,  and Adaptation: reacting to current changes and preparing society for both predictable and unforeseen changes (Mitigate and Adapt­—but Don’t Forget the Science!  (Richard Anthes / University Corporation for Atmospheric Science Quarterly: Spring 2008)
The Limits To Growth – the Iconic Modeling Exercise.
World3   (Wikipedia) – the computer simulation used by the Club of Rome study that produced Limits to Growth.
Fair Warning; the Club of Rome Revisited   (Keith Suter) – the warning from “Limits to Growth” remains valid.
Beyond The Limits to Growth (Donella H. Meadows, Dennis L. Meadows, and Jørgen Randers / Adapted from IN CONTEXT #32, Summer 1992) – an update. Is  sustainability still achievable?
Limits to Growth: Book Review to Mark the 35th Anniversary of Publication (rev. Michael H. Smith and ed. Karlson Hargroves / The Natural Edge Project:  September 2007) – considers three principal misunderstandings about the original Limits to Growth and how these were addressed in updates.
Computer Simulation in the Controversy over Limits to Growth   (Peter Imhof / Technische Universität Hamburg-Harburg: August 2000) – uses the Limits to Growth  debate to consider: 
  • whether human assumptions or computed calculations are responsible for simulation results
  • how much data is necessary to make a computer simulation a meaningful representation of reality.
The Nature, Purposes, Processes and Limitations of Modeling: Basic Readings. 
The Promise and Limits of Computer Modeling  (Charles Blilie / World Scientific Publishing Company,  2007) – an interesting and far-ranging overview defining “the model“, explaining aims and objectives, exploring the nature of modeling, processes, inherent limitations, and the role of models in creating knowledge. From the book:
Comprehensive understanding or prediction of global climate would be utterly impossible without computer models.
The model reduces a system to some idealized or abstract form. Although the model can and will represent details, it usually does not (or cannot) model things in their complete particularity
Models as actually implemented will always have limitations and take time to build 
Models …  are always based on imperfect data, and are thus in some way doubtful.
  Our necessary ignorance of all conditions affecting an actual system mean that any model… will necessarily fall short of complete accuracy and truth
The chapter Climates of Fact discusses approaches to global climate modeling, as well as the verification and limits of existing climate models.
The Role of Models in Prediction for Decision   (Roger A. Pielke Jr / Cary Conference IX: February 28, 2001) – explores the dangers inherent in confusing prediction in science with prediction for policy, and recommends strategies for overcoming them in environmental decisionmaking processes. Emphasises the importance of understanding  uncertainty and predictability. Lists attributes of a good model.
… alternatives to prediction have become increasingly visible. The prediction process can be judged successful if the goal of climate policy — to reduce the impacts of future climate changes on environment and society — is addressed, independent of whether century-scale climate forecasts prove to be accurate”
“The lesson for decisionmakers is that one is in most cases more likely to reduce uncertainties about the future through decision making rather than through prediction”
On Modeling and Interpreting the Economics of Catastrophic Climate Change  (Martin Weitzman / REStat: July 07, 2008) – addresses “deep structural uncertainty in the science coupled with an economic inability to evaluate meaningfully the catastrophic losses from disastrous temperature changes”.
Insights Not Numbers: The Appropriate Use of Economic Models   (Janet Peace and John Weyant / Pew Center on Global Climate Change, April 2008). Important points from the Executive Summary
  • the importance given Economic Modeling in the climate-change policy debate
  • the value of Models as tools for exploring policy choices and developing understandings of how economies may respond to different sorts of regulation.
  • the limits of Models as tools for precise prediction – results depend on a model’s unique set of assumptions, definitions, structure and data.
About using economic models:
  • forecasting the future remains inherently uncertain. The longer the time horizon, the larger the uncertainties.
  • model results depend on input assumptions and on the structure of the model itself. Critical assumptions and structural biases are not always apparent.
  • what is left out of a model can be as important as what goes in.
Categories of assumptions important in driving model results: 
(1) specific features of policies being analyzed (including the degree of flexibility allowed in meeting the emissions constraints)
(2) baseline assumptions about how the economy and environment are likely to perform in the absence of the policy
(3) the ease with which consumers/producers can adapt to emissions limits
(4) pace and magnitude of technological change/innovation
(5) what benefits from climate-change mitigation are included, and how.
Examples used are CGE models that simulate the effects of policies on all sectors of economies. Uncertainty is a recurrent theme.
  • results dependent on underlying assumptions and model structure
  • results must be seen as approximations only
  • mitigation cost estimates are valuable – flexible mitigation options yield lower program costs
  • announcing a policy well in advance of implementation reduces overall costs
  • allowance allocation reduces costs for stakeholders
  • assumptions and limitations must be clearly identified and prominently stated in any report
As the climate policy debate evolves, it is increasingly important that stakeholders understand the strengths and limitations of economic models and look to them for broad insights, not absolute answers.”
Some of the References cited for this White Paper are also online:
Carbon Abatement Costs: Why the Wide Range of Estimates?  (Carolyn Fischer and Richard Morgenstern / Resources for the Future, 2005) – examines the importance of structural modeling choices in explaining differences in estimates.
Induced Technological Change and Climate Policy   (Lawrence H. Goulder / Pew Center on Global Climate Change, 2000) – explores how climate policy may influence the rate and direction of technological change, examines the implications of “Induced Technological Change” (ITC) for climate policy design. Main findings include:
1) ITC lowers the costs of reducing emissions.
2) ITC justifies more extensive emission reductions than would otherwise be called for.
3) ITC alters the optimal timing of emissions abatement.
4) In the presence of ITC, announcing climate policies in advance can reduce costs.
5) Economic analysis justifies the implementation of public policies to induce technological change.
6) To promote ITC and reduce GHG emissions most cost-effectively, policies to reduce emissions and incentives for technological innovation are both required
The Role of Substitution in Understanding the Costs of Climate Change Policy   (Dale W. Jorgenson et al / Pew Center on Global Climate Change, 2004) – with a wide range of substitution possibilities and low substitution costs, mitigation costs (damages to welfare, income and production) are likely to be low; narrow substitutability and high substitution costs will lead to higher mitigation costs.
  The Costs of Climate Protection: A Guide for the Perplexed   (Robert Repetto and Duncan Austin / World Resources Institute, 1997) explains why different economic models reach different conclusions; identifies key assumptions that account for over 80 percent of variations in predicted economic impacts; lists important questions to ask about assumptions underlying predictions.
Recent Examples of Modeling.
Kyoto Protocol   (Wikipedia) – adopted on December 11, 1997, entered into force on February 16, 2005: “A protocol to the International Framework Convention on Climate Change with the objective of reducing greenhouse gases in an effort to prevent anthropogenic climate change.”
What If We Burn Everything?  (Fraser Cain / Universe Today: November 02, 2005) – simulation results from Lawrence Livermore National Laboratory: if we use all available fossil fuels by 2300, the earth will warm by 8 degrees Celsius, with alarming consequences.
The MIT Integrated Global System Model: EPPA Component; Anthropogenic Emissions and Policy Analysis (EPPA) Model   – a computable general equilibrium model of economic growth, international trade, and greenhouse gas emissions from a set of trade-linked economic regions; used to analyse GHG-emitting processes, and to assess policy proposals for controlling emissions; provides estimates of the magnitude and distribution of the costs, and clarifies how changes are mediated through international trade. 
Other IGSM Components: Climate and Chemistry and Ecosystems & Natural Fluxes. See also Publications of the MIT Global Change Joint Program  e.g., A Forward Looking Version of the MIT Emissions Prediction and Policy Analysis (EPPA) Model (Mustafa Babiker, Angelo Gurgel, Sergey Paltsev and John Reilly /  Report No. 161 May 2008),  as well as Abstracts of MIT Global Change Joint Program Publications  
Climate Change 2007, the Fourth Assessment Report (AR4 )   (United Nations Intergovernmental Panel on Climate Change). See also Wikipedia‘s summary . 
The Copenhagen Consensus  project  (2008) proposes mixing adaptation and mitigation approaches with more research into greener technology. See for example the Copenhagen Consensus 2008 Challenge Paper: Global Warming   (Gary W. Yohe et al / April 03, 2008)
The Stern Review on the Economics of Climate Change  (HM Treasury, UK) – download chapter-by-chapter or in parts. The Executive Summary (short)   is recommended as a preliminary foray. Briefly, it estimates that no action will cost 5% – 20% of global GDP annually. Alternatively, the costs of action to reduce  emissions to avoid the worst impacts of climate change  can be about 1% of global GDP annually. See also Wikipedia‘s Stern Review  article.
In Insurance for Our Planet: Spending Money Now to Slow Global Warming Can Ensure That Ruinous Catastrophe Never Happens   (EcoEarth.Info News Archive / Source: Guardian: August 21, 2008), Oliver Tickell sees the Stern analysis as understating the case for action. 
A Question of Balance: Weighing the Options on Global Warming Policies (William Nordhaus / Yale University Press, 2008) – prepublication proof text. Describes the DICE Model; alternative policies for dealing with global warming; uncertainty analysis. Concludes that damages can be mitigated through good policy – favors gradual restraints on carbon emissions via internationally harmonised carbon taxes.
Climate Economic Modeling  (Environmental Protection Agency, USA) – types of models used by EPA: economy-wide models, mitigation models, integrated assessment models, and detailed sector models.
 (Margo Thorning / Before the U.S. Senate Committee on Commerce, Science and Transportation Subcommittee on Global Climate Change and Impacts: April 05, 2006) – pros and cons of mandatory approaches to GHG reduction.
The Economic Impacts of Climate Change and the Costs of Inaction   (Center for Integrative Environmental Research, University of Maryland) – series of reports, many state-by-state. See Also: Climate Change Report Also Offers Lessons  (Environmental Protection: August 01, 2008) 
The MEGABARE model   (Australian Bureau of Agricultural and Resource Economics, 1996) – a general equilibrium economic model to assess the economic impact of reductions in Australia’s greenhouse gas emissions, “developed at ABARE to provide such a global perspective on major Australian policy issues.”
The politicisation of the process was the subject of an inquiry – see Ombudsman Releases ABARE Investigation Report   (Commonwealth Ombudsman / February 04, 1998). 
Paul Henman’s Producing Hot Air: Computer Modeling and the Politics of Greenhouse Gas Policy in Australia   (Macquarie University) explores how computer modeling can be used in politics to construct a partisan point of view, with special reference to MEGABARE; provides analysis of the nature and limits of economic models as tools for developing policy.
The Garnaut Climate Change Review – in April 2007, the Australian Government commissioned an independent study by Professor Ross Garnaut, to examine the impacts of climate change on the Australian economy, and recommend policies to improve prospects for sustainable prosperity. A good place to start is probably the Interim Report Executive Summary  (February 2008), or maybe go straight to the Draft Report  (July 04, 2008); or the Supplementary Draft Report  (September 05, 2008). The Final Report is due by 30 September 2008.
See also:
Garnaut Climate Change Review   (Wikipedia) – a good chance to see how well Wikipedia can keep up.
Many Questions Unanswered by Garnaut  (Samantha Maiden Blog : July 04, 2008)
Middle of the Road … Towards a Cliff (David Spratt / climate code red: August 30, 2008) – we face a climate emergency which requires actions at emergency speed far beyond “business as usual” and “politics as usual” to bring a rapid transition to a post-carbon, safe-climate future.
Modeling and Policy.
Models, Facts, and the Policy Process: The Political Ecology of Estimated Truth  (John Leslie King and Kenneth L. Kraeme, 1992) – a perspective on the role of modeling in policy making.
Computer-Based Model Validation Expectations  (Roland E. Smith / June 17, 2002) – to reduce the likelihood of erroneous model output or incorrect interpretation of results, implement a sound validation framework that includes a validation policy and independent review. 
 (Els van Daalen, Leen Dresenb and Marco A. Janssenc / Elsevier Science, 2002) – abstract only. 4 roles played by computer models in environmental policy-making: models as eye-openers, as arguments in dissent, as vehicles in creating consensus and as management tools.
Insights from Modeling Analyses of the Lieberman-Warner Climate Security Act (S. 2191)  (In Brief: Innovative Policy Solutions to Global Climate Change / May 2008) – importance of policies that provide flexibility and promote advanced low-carbon technologies and efficiency.
Serious Research Balances Costs and Environmental Benefits of Climate Policy  (Jeffrey Frankel / Seeking Alpha: August 24, 2008) – activities of the Energy Modeling Forum  
Wisdom on Catastrophic Risks — Benoit Mandelbrot, “The Misbehavior of Markets”  (Jim Peterson / Re:Balance — : August 13, 2008) – book review reiterates Benoit Mandelbrot’s contention that “the entire body of market learning, based on the concept of an efficient market, is elegant but fundamentally flawed”.
Problems With Modern Applied Economics, Applied Economic Analysis (History Of Economic Theory and Thought: July 2008) – is modern applied economics mostly data mining with some semblance of “scientific empirical testing” added to make it seem less ad hoc? “The simplicity of complex systems is to be found in the study of dynamics and iterative processes”
De Gustibus Non Computandum: Or, Economics Needs a Divorce (Mencius Moldbug / Unqualified Reservations: August 21, 2008) – is there something called “economics.” ?
Economics, The Inhuman Science?   (DarwinCatholic: August 18, 2008) – does economics assume that everyone is selfish?
Economics is Not a Value-Free Science (Oliver Tickell / Guardian: August 29, 2008) – economic methods systematically undervalue the priceless, and the future.
Thought Control In Economics (Tom Green / August 18, 2008) – is there too much conformity in academic institutions?
Dr. Doom   (Stephen Mihm / New York Times: August 15, 2008) – Nouriel Roubini doesn’t seem to rely on computer modeling for his largely accurate predictions.
The Limits of Economic Modeling in the FTAA Environmental Review  (Frank Ackerman, Kevin Gallagher and Alejandro Nadal / Global Development and Environment Institute Tufts University: January 2001) – methodology relies too heavily on complex economic models.
Myths of Murder and Multiple Regression   (Ted Goertzel / The Skeptical Inquirer: January/February 2002) – mathematical models with no predictive capability may be used to make policy decisions.
Forecast Uncertainty in Economic Modeling  (Neil R. Ericsson / 2001) – defines forecast uncertainty, considers measures of forecast uncertainty; analyses sources and consequences, with examples.
Probabilities in Economic Modeling  (Itzhak Gilboa, Andrew Postlewaite, and David Schmeidler / 2007) – “The Bayesian paradigm is an elegant and coherent way to deal with uncertainty. Yet, it is not always clear how should probabilistic beliefs be formed”.
Climate Models ‘Inadequate’ for Farmers  (Sydney Morning Herald: September 04, 2008) – uncertain climate projections frustrate the agricultural sector.
Economic and Energy Impact Analysis for the Proposed Utility MACT Rulemaking (EPA, Clean Air Markets Division: January 28, 2004) – identifies limitations of a particular modeling analysis.
Please Models, Just Die   (The Stalwart: August 17, 2008) – “in finance and economics there has been far too much modeling going on and far too little thinking.” Special reference to Nouriel Roubini’s subjective, nontechnical approach to economic analysis and prediction.
Task Force Ignores the Cost of Reductions  (JS Online: August 02, 2008) – economic analysis may be excluded from decisionmaking processes.
Should California’s ARB Trust Computable General Equilibrium Models for Judging AB 32’s Likely Economic Effects?  (Matthew E. Kahn / Environmental and Urban Economics: June 02, 2008) – the need to to take technological change into account.
ABARE Ignores Inconvenient Truths  (Bernard Keane / Crikey: June 04, 2008) – the Australian Bureau of Agricultural and Resource Economics accused of modeling implausibly optimistic scenarios reflecting a business-as-usual approach.
Light in the Fog   (John Garnaut / Sydney Morning Herald: July 19, 2008) – are mitigation efforts pointless unless the big emitters become part of the solution?
Ingredients for Another Failed Response (Guy Pearse / Crikey: July 04, 2008) – deplores the suggestion that deep cuts in Australian emissions should be conditional upon the actions of others.
Climate Change Will Probably Beat Us: Garnaut (Ross Garnaut’s HW Arndt Memorial Lecture at the Australian National University: June 05, 2008)
Mitigate and Adapt­—but Don’t Forget the Science! (Richard Anthes / University Corporation for Atmospheric Science Quarterly: Spring 2008) – the need to continue to extend knowledge about climate change.
Digging Up the Dirt on Arctic Carbon   (Peter N. Spotts / Bright Green Blog: August 25: 2008) – unexpected news presents new challenges.
Beyond Carbon: Scientists Worry about Nitrogen’s Effects  (Richard Morgan / IHT: September 02, 2008)
In Science, Ignorance is Not Bliss   (Walter Cunningham / Launch Magazine: July 24, 2008) – call for NASA to collect scientific evidence of Anthropogenic Global Warming.
A Question of Balance: Weighing the Options on Global Warming Policies   (William D. Nordhaus / Yale University Press: June 24, 2008)
Hardcover: $20.16
ISBN-10: 0300137486
ISBN-13: 978-0300137484
Hardcover: $109.00
# ISBN-10: 9051992327
# ISBN-13: 978-9051992328
The Promise and Limits of Computer Modeling   (Charles Blilie / World Scientific Publishing Company: July 26, 2007) 
Hardcover: $95.00
# ISBN-10: 9812707956
# ISBN-13: 978-9812707956
Economic Forecasting  (P. W. Abelson, Roselyne Joyeux / Allen & Unwin Academic:  September 28, 2000)
Paperback: $107.56
# ISBN-10: 186508171X
# ISBN-13: 978-1865081717
General Equilibrium Theory: An Introduction  (Ross M. Starr / Cambridge University Press: July 13, 1997)
# ISBN-10: 052156414X
# ISBN-13: 978-0521564144

How to make homes affordable

The government can solve the home affordability problem through any or all bank lenders while at the same time increasing the lenders’ home loan margins and increase their number of accounts.


Ask one of the fractional reserve bank organisations to create a special home loan product with an interest rate of say 3% fixed forever. (Note if no bank can be found then the Reserve Bank can create the low cost loan money through a designated lender of whom their would be many put up their hands). The 3% is to cover the cost of default loans and the administration costs of looking after the accounts.
The loan money before being spent must be deposited in an account in the same bank and it must have an interest rate of zero while on deposit.
The loan money can ONLY be used to either purchase an existing house or to pay for the building of a new house.
If the loan money is used to buy an existing house then the money must still not attract interest – that is the seller receives constrained money which does not attract interest.
Interest free money in deposit accounts can be transferred to other zero interest accounts and can be sold for unconstrained money.
If the money is used to pay for the construction of a new house or a house extension it “loses” its restriction and can be deposited in any account. It does this because it has created an asset that has value.

What will happen.

Anyone wishing to purchase or build a house will take out a low interest loan.
The money created from the low interest loan will rapidly be used to pay for building a new house as it is of no use sitting in a bank account at zero interest.
People who want to pay for or build a new house will either get low interest loans or will purchase zero interest money. The discount on the price of the money will reflect how inflated the house prices are in relation to their rental value.
House prices overall will fall but banks are still protected because they still get their 3% margin.
The losers will be existing house speculators – that is people who purchased houses anticipating that the prices would rise relative to other prices.
Existing house owners are unlikely to sell their houses for constrained money unless they are going to build a new house in which case the constrained money does not matter.

Where can this system go wrong?

It will go wrong if house money becomes high interest bearing without increasing the value of the total asset pool. People, like builders architects etc, are all registered and if they or their companies do not use the money to build increase the asset pool size then they are banned from doing it as is the person who used the money inappropriately is banned from ever getting a low interest loan for housing.


A person purchases a new house with a low interest loan. If they later sell the house then they receive the unpaid loan part as house money. This money goes into a bank account that attracts zero interest and can only be used to buy or build another house. They cannot use the money they receive to pay off the loan. They can sell their zero interest money to someone who wants to buy or build a house or they can use it themselves on another house.

Who will pay for the system?

If it was announced that the government wanted such a system deployed then companies would soon offer to supply the system for no cost to the government.

The cost of the system would be covered by charges to suppliers who get paid for their services through the system.


The government could announce that they were going to implement the system as part of their strategy for producing low cost housing. It could be initially introduced through a group such as chc affordable housing who are likely to welcome the chance of offering their buyers fixed 3% low cost loans. If it proves successful there then the banks will soon extend the system themselves.

Why it works

It works because we create special money that while it is in bank accounts attracts zero interest. In other words the cost of money is just the cost of the risk of the loan and the administration of the loan or 3% or less. Interest rates on house loans are high because banks pay high interest on deposits. This special money is of no use when it is an account and so people will tend to quickly use it to build a house.