Why the Financial Crisis is like Energy Inefficiency
Tom Konrad, Ph.D.
I have a regular column called Greener Money in Smart Energy Living Magazine. The Spring issue just printed, and I'd like to highlight this column, because it discusses ideas I have not written about elsewhere. The column begins:
As people become more aware of how we use energy, many become amazed and appalled at the sheer waste of it. Why are homes built without attention to insulation and sealing that would not only make them more comfortable, but also mean they cost less to live in, even with the slightly larger mortgage payments? Why do most microwaves use more electricity running the integrated clock than they do heating food?
The financial crisis can inspire similar emotions. Why did so many institutional investors buy collateralized debt obligations which they knew they did not understand? Why did regulators assume that these investors understood the risks they were taking? Why did lenders make loans to people without first verifying their ability to pay?
The answers to both sets of questions are surprisingly similar: both are manifestations of market barriers. In the realm of energy, these barriers lead to purchases which might be slightly cheaper in terms of first cost, but come with large ongoing energy costs, far higher than the lower initial cost can justify. In the case of the financial system, these barriers caused the build up of risks which were much greater than could be justified by the potential gains investors might have achieved by taking them on.What are these barriers?
You can read the rest of the article here.