Willravel

That book's been on my list. I can't wait to finish what I'm reading now so I can jump into it.
I like Rifkin a lot, but I've been following the economic crisis almost obsessively and I haven't found any indication that peak oil was critical to the crisis.

Just briefly, as I don't want to jack Baraka's thread, I'll try and explain what I interpret is the problem:

Let's say you have two mortgages (or any loans, really) of equal value and risk. There's a 90% chance that the loans will be paid in full, and the loans are each for $1,000. Anyone familiar with financing will know that a 10% chance is quite risky. Because these are two different homes in different states in different income areas, it's safe for me to consider them independent. And, of course, the odds are the same for both mortgages. I, a bank, own these and have priced them at $900. Not a very attractive investment, right? Too much risk for not a lot of reward.

Aha! Securitization... I put my two mortgages into a portfolio and apply delicious mathematical statistics. There's an 81% chance that all $2,000 will be paid, an 18% chance that $1,000 will be paid, and there's a 1% chance that nothing will be paid. Using my portfolio as a backing, I can—via securitization—create two new bonds, which are claims on the portfolio. The first bond pays the holder $1000 based on the original portfolio. The second bond pays $1,000 if the first bond pays off completely and there is still $1,000 more. I've created two different securities, a very attractive security and a rather ugly security. You see the probability of the beautiful bond being paid is 99%, whereas the ugly bond has a 19% chance of defaulting. Ouch.

These beautiful bonds will undoubtedly be rated AAA (or the highest rating; a very, very, very low default rate). On top of this, I can buy insurance on these 1% AAA bonds, which means that, in the event of default, the insurance will pay. Who am I using? A big, stable insurance company like AIG (what are the odds AIG goes under?!). The ugly bonds, on the other hand, would probably be something like BA, or below investment grade. It's actually illegal for entities like pensions, insurance companies, and money market funds to purchase these BA rated bonds.

So from two unattractive bonds I've created a truly gorgeous bond which will make me rich, and I've made ugly bonds which will be bought up by hedge fund managers that are hungry for rolling the dice. Hedge fund managers can get a 20% rate of return if they get lucky, which is like getting a straight flush.

What could possibly go wrong? One of my assumptions was a mistake. You see, there are correlations between these two mortgages even though they're separated by thousands of miles and in basically every way distinct. When the national housing market starts heading downward, suddenly there are nearly direct correlations between otherwise independent mortgages. That means the AAA bonds and the BA bonds have the same odds of failure, around 10%. Hedge fund managers are doing GREAT, but those who jumped on the AAA bandwagon—banks, insurance companies, hedge funds—are screwed. AIG, unable to back all the securities, is screwed. The market breaks down.

Why did the housing market drop? The bubble that started 20 years ago inevitably popped (something which I doubt was caused by gas prices).

Sorry, that was a bit longer than I anticipated. If you want more info, google Dr. Andrew W. Lo of MIT.

• What do you think of all this?

I think globalization is a massive risk, but I'm not convinced that it's as big a threat as simple growing population vs. our ability to deal with the consequences. That, above all else, is our greatest threat. We have met the enemy, and he is us.

• Do you believe globalization is at risk?

Certainly. Until we are a well-established interstellar community, globalization seems premature.

• Do you think we, as a species, are capable of mass change to accommodate these predicted challenges?

Capable? Yes. Will we? Almost certainly not. As capable as we are, we also have a magnificent talent for self-deception and cowardice.

• What out of all of this strikes you the most?

I need to get to work on my garden and rainwater reclamation a bit sooner than I'd planned.

• Are they as interconnected as they seem?

No, but I still think they're both very important.

• Do you see the end of our current industrial age and the ushering in of the Third Industrial Revolution (Rifkin)?

Not without collapse.