Aug 10, 2021
A Financial Hail Mary for the Climate: An Argument for Bitcoin
Part 1: Introduction / Financialization: A backdrop for understanding inaction on climate change and Bitcoin’s role
This is an essay that in its first part, covers how the financial sector strongly influences our political leaders; what financialization is, how it stagnates innovation and stops us from taking action on climate change. In the second part, it addresses why Bitcoin has value and is not a pump-and-dump scheme, and how it can disrupt the financial sector, giving us a chance to act on climate change and create a newly transformed world (one which exists with or without Bitcoin). The third part addresses environmental concerns regarding Bitcoin’s proof-of-work approach to securing the network, contextualizing the problem and providing some solutions through both external and internal pressures. Finally, the essay concludes with a call to end financialization if we want to maintain a habitable planet.
A contents section is below to make it easier for the reader to jump between sections. There’s a lot to cover, but this was the only way to make the case so please, take breaks when needed, but do read to the end.
Contents
- Introduction / Financialization: A backdrop for understanding inaction on climate change and Bitcoin’s role
- Bitcoin as a vehicle for system change
- Bitcoin’s environmental impact
- For a habitable future, we must stop financialization
Introduction
We need a major system disruption in order to make the transformative societal change that is necessary to stop the planet from warming humans into extinction. Bitcoin, the decentralized digital currency, may be the very disruption that we need. Bitcoin is transferred over a peer-to-peer network and its’ transactions are verified using network nodes that must solve cryptographic puzzles. Satoshi Nakamoto released the Bitcoin white paper in 2008, and the currency was first used in 2009. Bitcoin has the potential to upend the existing and entrenched financial system which has stymied climate change action, thus giving us an opening for transformative change.
Within certain circles, claiming that Bitcoin can save us from climate catastrophe is controversial. It is especially so to those who are keenly tuned into the issues that we face with respect to the unfolding climate crisis. After all, Bitcoin mining is a critical component of the coin’s network, and its process of mining (proof-of-work) is designed to consume energy to secure the network. It is likely that if you dislike Bitcoin because of the energy concerns, it is because this use of energy sounds extraordinarily wasteful and therefore is only an added burden on our already carbon-overloaded atmosphere and ocean. It is only a negative if we assume that Bitcoin has no purpose, is merely another useless speculative product and which is an institution that cannot adapt to a net-negative emissions landscape. In fact, Bitcoin serves a very valuable purpose and already has significant experiments ongoing. Moreover, Bitcoin is not an institution that cannot adapt to external pressures.
I argue that Bitcoin, as designed, serves as a catalyst for system change because it aims to destroy the very central villain that is stopping us from preventing the planet from warming us into extinction. This villain is the financial system and its stranglehold on the entire globe through the financialization of our national economies and nature. In order to understand Bitcoin’s role in this, we must first understand how our financial system and economy work.
Financialization: A backdrop for understanding inaction on climate change and Bitcoin’s role
Financialization Is Wealth Transfer from the Many to the Few
Our financial system is run by a network of Wall Street players who move through a revolving door, from private to public, within the global banking system. Thanks to the 2007–08 financial crisis, many of these banks and their practices are well known to us. Banks like Wells Fargo, HSBC, Goldman Sachs and JP Morgan Chase, along with hedge funds and other major institutional players on Wall Street, are responsible for destroying millions of lives due to risky and reckless practices. Instead of their bad behavior putting them out of business, they were rewarded with bailouts and very little changes in the rules that govern their harmful practices. As a result, they continue to put our economies at risk and ergo, put nearly everyone at risk of financial ruin.
Not just banks, but the people who run them are part of this revolving door system. President Obama’s own economic team during the 2008 crisis included many members of the banking system, here’s just a handful: Mark Patterson, treasury secretary’s chief of staff, a former Goldman Sach’s lobbyist. Larry Summers, Obama’s chief economic adviser, made $5 million as managing director of a hedge fund. Gary Gensler, Chairman of Commodity Futures Trading Commission, spent 18 years at Goldman Sachs where he was made partner. Gensler is now President Biden’s SEC Chairman. Ben Bernanke, Chair of the Federal Reserve during the financial crisis, went on to work for Citadel, the hedge fund beleaguered by the GameStop short controversy and also joined Pimco, an investment firm, as an advisor. President Biden’s Secretary of the Treasury, Janet Yellen, while seeming to be little more than a public servant, received over $7 million in speaking fees from banks like Barclays, Citigroup, Goldman Sachs and Citadel, after she left the Federal Reserve in 2016. Many of Biden’s aides, as revealed in a 2020 CNBC investigation, have “deep ties to the business world”. Republicans are no different, but Democrats are particularly hypocritical in this area.
These financial players do not care about the people they hurt, let alone the planet. They care only about short-term profit. Worst of all, as noted above, the same bankers who carelessly play God with our welfare are the same bankers who end up running our governments’ financial institutions. In particular, they manage the central banks that nearly every country has and uses to control currency and interest rates. This sounds innocent and detached from the average person’s day-to-day lives, but in reality, the actions of the central banks play a bigger role in our pedestrian lives than even our local governments do. The US Federal Reserve sets goals for employment, for inflation, and for interest rates which affect your ability to take out a loan to buy a car or a home, for example. Through certain monetary policies and actions, the Federal Reserve can destabilize markets, causing market crashes and recessions. In fact, in late June of this year, Boston Fed President Eric Rosengren warned that the “long periods of very low interest rates [which the Fed introduced in response to the pandemic] do encourage people to take risk” and that the Federal Reserve needed to watch for financial stability risk and rising home prices as a result of its own monetary policies.
In post-industrial societies like the United States, financialization has entrenched the grip and power of the banking system. The history of financialization can be traced back to the fall of the Bretton Woods agreement and Nixon taking the US dollar off the gold standard in 1971. Other factors come from the rise of neoliberalism in response to failing Keynesian policies. Neoliberalism promotes a free-market and anti-democratic agenda under the guise of “human dignity and individual freedom” (sounds a lot like right-wing libertarianism, doesn’t it?). According to David Harvey, writing in A Brief History of Neoliberialism, “The freedoms [the neoliberal state] embodies reflect the interests of private property owners, businesses, multinational corporations, and financial capital.” Ultimately, its ideology claims to be against the state, but really it relies on state violence to open markets for the free-flow of capital. Financialization is a process in which the financial sector becomes the dominate factor in an economy. It is a process in which income is transferred from the real sector to the financial sector, leading to wage stagnation and income inequality. According to Thomas I Palley of the Political Economy Research Institute, “there are reasons to believe that financialization may render the economy prone to risk of debt-deflation and prolonged recession.” John R. Balder, a global strategist who has investigated the links between financialization and rising income and wealth inequality, noted in an article that the result of 40-years of financialization of the US economy has been wage stagnation for the bottom 90% of U.S. households, rising debt loads and overall economic insecurity. He argues that “the role of speculative finance (financialization) and the complicity of the central bank” is driving this growing inequality. Since the 1980s, financialization caused a divestment from factories and production coupled with an increase in investment in financial tools that would increase profit from securitization.
Clarifying the central bank’s role in the development of financialization, Walter and Wensleben 2020 article (published in Socio-Economic Review) concluded:
[C]entral banks have not only — recursively — supported the rise of finance through particular policy decisions, but also have become constitutively entangled with, and thus part of, its institutional foundations.
Indeed, during the pandemic, we saw a type of recovery known as a K-shaped recovery, in which one group saw the crisis dissipate much faster than the other. The wealthier you were, the more disconnected you were from the plight of the average worker because your recovery was likely dependent on the stock market’s recovery and thus the recovery of various financial assets. The stock market’s COVID-recovery was the fastest recovery ever seen (thanks to the central bank’s use of quantitative easing). This was great for the banks, corporations, investors and hedge funds. For everyone else who isn’t in the higher income brackets, especially those who were labeled “frontline workers” (farm workers, grocery store workers, etc.), the recovery may only be a distant dream.
The point must be well understood that financialization is bad for 99% of the global population. While my examples are mainly focused on what has happened in the United States, similar is happening across the globe under the economic ideology of neoliberalism, which came into being in the 1980s. Moreover, US monetary policy has historically set the stage for international monetary policy. Financialization and the public and private banking systems as they operate today not only harm people but also our planet, the only habitable world that we have. No matter what Elon Musk and Jeff Bezos think, there is no planet that we can move to that will serve as a second Earth; a feudalistic and franksteined Mars is not the dystopian reality that we should want for future generations.
Financialization Harms the Environment and Prevents Climate Change Related Solutions
According to the Institute for Policy Studies, banks are the largest investors in fossil fuels. Not only this, but central banks who adopted quantitative easing (QE) in response to the 2008 financial crisis pumped $6 trillion globally, but this additional liquidity did nothing for “green” investment. Instead, according to the Institute, QE funneled money toward polluters. During the first year of the COVID-19 pandemic, the Federal Reserve purchased nearly 100 million dollars worth of fossil fuel corporate bonds as part of their bond purchasing program. As of March 2021, the Federal Reserve’s Secondary Market Corporate Credit Facility holds $469.9 million worth of oil and gas bonds, or 9.2% of the Facility’s bond portfolio. Buying up the debt of failing fossil fuel corporations allows them to emit more carbon dioxide and pollutants in the atmosphere than they would have, if they had been allowed to fail.
Financialization has weakened the so-called free market and the ability of private firms to successfully develop competitive low-carbon or zero-carbon technologies. According to the Bank for International Settlements, financialization harms innovation. Max Jerneck, at the Mistra Center for Sustainable Markets, wrote in a study that this happens because innovative firms “operate by creating intangible future assets that are difficult to collateralize”.
Tamra L Gilbertson notes in a 2020 paper, that the rise in finance in the role of climate change mitigation parallels the rise in financialization. She writes that “the role of powerful states and their capitalist allies are central to the process of expanding capital accumulation through financialization” and that this is also true for the financialization of climate change policies. In her paper, “Financialization of nature and climate change policy: implications for mining-impacted Afro-Colombian communities”, she writes that the marketization of nature is a result of documents produced at the 1992 United Nations Conference on Environment and Development. Here, the partnership between public and private sector “satisfied the interest of states and extractive corporations under the rhetoric of sustainable development” and that the resulting new nature-derived financial instruments were “often written, guided, lobbied for, and organized by representatives of fossil fuel corporations and northern-based conservation NGOs.” The most apparent example of a climate mitigation instrument is carbon trading, which allows “polluting corporations to buy their way out of reducing pollution.”
Both Gilbertson and Jerneck give practical examples of how financialization has stymied and hurt our ability to stop climate change. Gilbertson highlights the effect of carbon trading in Colombia where a carbon tax with a provision for using carbon emission offsets allows polluters to claim carbon neutrality and avoid taxation. As a result, polluting companies like coal mines in the region can continue to pollute the local Afro-Colombian communities and release CO2 emissions into the atmosphere. Furthermore, these coal companies are involved in commodifying local forests to be sold as units of credit on a carbon market. The polluters understand that through creating these financial assets, they can also generate wealth without having to shift their mining practices because they are “carbon neutral”. This of course, is a fallacy, because there is a limit to what forests can sequester, forests are not an infinite carbon sink. As temperatures rise, the ability of forests to sequester carbon diminishes, thus, creating a carbon positive output.
Jerneck highlights how during the 1970–80s, financialization stymied the development of the solar industry in the United States. Because venture capitalists lacked interest in investing in innovation that would not provide short-term profit gains, there was little money available for entrepreneurs to develop the technology. The entrepreneurs who understood the technology best, were locked out of the financial sphere and eventually were forced to become part of financial conglomerates, which were highly centralized and did not understand the technology. This gave Japanese photovoltaic entrepreneurs an advantage and ultimately the conglomerates failed to make photovoltaics economically viable. In Japan, production and financial capital were not as disconnected as they are in the United States. Jerneck argues that in the United States there exists an “inherent tension between entrepreneurial and financial components of innovation. Recognizing this tension is crucial to understand the challenge of industrial transformation required to avoid catastrophic climate change.” So long as it is easier to make money from speculation, investments in innovation will be avoided. Today, China generally dominates the photovoltaics industry.
The combination of the dominance of speculation over enterprise and the increasing role of the stock market in corporate control undermines our society’s ability to innovate its way out of a crisis like climate change. When the main goal of a corporation is for short-term enrichment of investors, what money is left for improving long-term technological research and development? Jerneck makes it clear, “Instead of serving industrial development, finance had come to serve itself.”
As a result, we are on a high-speed train that is about to take 8 billion people off a climate catastrophe cliff. Financialization has created a system that is no longer attached to the real world. It is strictly based on increasing one’s wealth without actually creating new wealth (also known as rent-seeking) rather than through production and innovative technologies. This likely explains why Bill Gates bought up a large amount of farmland and why Americans are being outbid on single family homes, when giant investors move-in and buy up blocks of houses for the sole purpose of renting them to the very people they out-bid. If we are feeling like our future is being stolen from us because of inaction from political leaders on climate change, then there is one obvious reason for this, and that is the stranglehold of the financial sector on our society. Keeping the planet from warming us into near-term extinction is irrelevant while you can still turn a quick profit and build a rich-person’s oasis on Mars. After all, the space race is now a dystopian one among the wealthiest men on the planet. First one off this hellscape wins the prize.
