Tuesday, February 2, 2010

The Myth of Carbon Credits Part 2; The Derivatives Market

As I mentioned in my last article, The Myth Of Carbon Credits , the whole idea behind Man Made Climate Change is to create a new financial market for Cap and Trade; to trade Carbon Credit Derivatives (CCD). There is no way to discuss Man Made Climate Change without mentioning Al Gore and the United Nations, Intergovernmental Panel on Climate Change (IPCC). Since it's inception the United Nations stated purpose was to regulate the industrial countries of the world and redistribute their wealth to poorer countries. This can not be done, unless an organization, such as the IPCC, has regulatory authority that overrides sovereignty; this has already been accomplished by EU directives, which have the authority of law over EU member nations. In essence the United Nations intent is to use the discredited concept of Man Made Global Warming to create a world regulatory authority using carbon credits as a Global currency. The idea of carbon credits is simple enough, if you are a big oil company, like Shell Oil, you simply need to shut down a couple of poorly producing oil fields and you will be flush with carbon credits. If you are a big industry polluter, you will buy these credits and simply pass the cost on to the consumer; referred to as "pay to pollute". What is hoped is there will be companies investing in low C02 producing technology, that will be offset by the resulting carbon credits (low C02 producing technology has been referred to as “Green Technology”, however there is nothing “Green” about reducing C02, since C02 is what is used by plants for photosynthesis, which makes them green; the theory of Man Made Climate Change and carbon credits, will have no effect on reducing any pollution, as it is again, a method for the re-distribution of wealth).

The CCD market will, by definition become as complicated as the Sub-prime financial market of old. As investors in CCD market, speculators have no need for carbon credits, they are simply buying CCD, to drive up the price and make a profit; that's what speculators do. Further there is another derivative called a Credit Default Swap (CDS), which is an unregulated insurance policy on investments. A CDS is unregulated because 1) the insurer does not have to hold funds in reserve in the event the insured investment losses money, and 2) anyone can buy one of these insurance policies, regardless if they own the insured investment; this has been compared to going into a retirement home and buying life insurance on the residents. What eventually happened with the sub-prime meltdown was, the banks sold 10 times more CDS insurance policies than Mortgage Derivatives, and when housing tanked and the mortgage securities value was suspect (i.e. toxic), the banks could not pay the the CDS and had to be propped up by the US Tax Payers. This is how a bubble forms and explodes and there is no reason why this will not happen again. If the CCD tank, as the well intentioned company is converting to low C02 technology, the CCD will be worthless and the company will have no compensation.

The use of Credit Default Swaps and other derivatives has a negative effect far worse that the occasional bubble. The real problem is the Fed gave an “implicit guarantee” with these banks, that they are too big to fail. Even after TARP expires Oct, 2010, the government will still guarantee the banks to the tune of over $23 trillion (that's trillion with a “t”). This means the banks can continue to keep the casino going, gambling with these financial instruments, rather than investing in American businesses. It is a recipe for national failure; and if they create another bubble and it blows up, the Fed will continue to pay. But it doesn't have to be this way. With the stroke of a pin, Congress can regulate Credit Default Swaps, and restrict derivatives to individual contracts, based on articulated needs, such as commodities and Interest Swaps; not just profit for profit sake. The message to the banks should have been, “You gambled all your money away, now you need to get back to the work of investing in America”; the casino is CLOSED.



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