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Rethinking Equity

Some years ago I was in the Middle East, at a time when Islamic Finance bonds were being heavily promoted and London sought to become a hub in their authorship and distribution to meet the demand of sharia compliant investors. The essential feature of the opposition to usury embodied in Islamic finance is that participations in business should be risk sharing equity participations rather than interest bearing debt. In practice, Islamic banks are no more venture funds than are non Islamic banks, and most Islamic finance products replicate the risk profile of traditional debt by structuring sale and buyback at a higher price deals whereby the lender gets its “interest” and security in the detailed mechanics, timing and pricing of the sale and buy back.
The artificiality of these schemes is considerable, and there is a niche of professional practice that is dedicated to finding the particular legal structure a sharia scholar blessing in order to unlock access to devout or religiously demonstrative investor pools.
As a Western banking lawyer, with a bit of finance theory in my mental furniture, I was always inclined to finding the artificiality and hypocrisy of these schemes somewhat absurd. They ended up being complicated ways of establishing packages of rights and obligation to duplicate secured or unsecured interest bearing debt structures, but with extra complicated drafting.
Indeed I remember getting quite vociferous in my defence of the clarity and internal coherence of the traditional Western values of differentiation of ownership and the lending relationship.
What could be clearer, more elegant, and conducive to clarity of relationship than to draw clear water between the ownership relation and the debt relation? Any asset owner has a clear choice. By virtue of limited liability wrapping, he can give some of it away, allowing his financier to share proportionately in the (limited) risks and rewards of ownership or he can agree a price for the finance, pay the price for the finance, repay the principal and maintain full ownership and (usually) control (debt covenants sometimes muddy this).
In any event, this all takes place against the background of well developed personal bankruptcy and corporate insolvency laws, designed to share losses amongst creditors – codifying pari passu treatment of creditors, enforcing security rights, and regulating the sale of assets and the division amongst creditors and, finally if there is a remainder, creditors.
Clear and consistently applied insolvency laws allow the entire apparatus of capital markets theory to construct models of pricing that allow construction of discount rates from riskless sovereign debt in self-issued currency where longer term liabilities are issued at a risk-free interest rate in the form of sovereign bonds, to riskier bonds with a premium for corporate risk, to equity personal and project debt with its own price of money, and a metric of “riskiness” often derived from past data and market prices to determine relationships between different securities.
This all rather justified the often somewhat snitty high handedness of the neo liberal project – risk takers took risks; lenders lent on known terms and lost their money if they lent imprudently; managers who mismanaged lost their ability to borrow; moral hazard backstopped it all and created a hard, but fair world, allowing the talented to demonstrate not only economic acumen, but a rather admirable moral courage in successfully navigating the shoals of hazard, and justifying sometimes outsize reward. It may not have been hard, or taken much effort, but it really was risky.
Then came the banking crisis.
The insolvency waterfall was turned upside down; in an enormous entrenchment of the assets of the old against the young, savers were protected from the insolvency of their banks worldwide, in the UK far in excess of the statutory guarantee afforded them; the government acted as lender and buyer of last resort, replacing a defunct interbank market. The chaotic and far reaching collapse that would have seen an enormous asset transfer to the young on the back of the forced sale of assets was forestalled, at the cost of the collapse of the entire assumption set that preceded it. Prices became political constructs; not only banks were saved, but automakers were rescued from their insolvency. The logic of the risky market was replaced by one of patronage – your firm would be saved from bad decisions of economic tragedy if it had the necessary political importance. The price of money became cheaper and cheaper in an effort to boost lending. Asset prices were duly inflated and remain so. Credit availability took the place of wages growth.
Of course this has led to some peculiar consequences with no very obvious solutions. Indebted nations are more and more required to conform to orthodoxies driven by the very set of assumptions that was overturned by the bail out; uniform understandings of bankruptcy codes blithely ignored pretty important differences between them – for example US home owners are able to give the keys back to their lenders and release themselves from debt not satisfied by the sale on foreclosure – quite different from the UK homeowner, who remains encumbered by the unsatisfied debt after the realisation of the security.
Politicians find themselves hamstrung – unable to lower interest rates/raise asset prices anymore, and with swathes of the population teetering on the brink of insolvency as credit has substituted wages and paltry yielding savings have migrated to rent yielding property bought with loose credit, they can no longer raise interest rates without triggering all the change and upset that inflation would induce.
Yet inflation is nothing more than a transfer of wealth to the young – it equitises the debt by reducing its real value. The older generations were handed their wealth by inflation, but fear to allow their children to benefit from the same mechanism – the longer lifetimes expected by the generation living their retirement have made them fearful of inflation for fear of a long old age with devalued savings unprotected by a strong social net. Yet in politically using their demographic weight to maintain their own living standards, they – without malice or awareness – deny their children the opportunity to buy houses and raise children of their own.
Perhaps a bit more risk sharing in the shape of a dose of inflation might gradually eliminate some of the intergenerational inequity that the generation that encouraged their children to borrow have unwittingly imposed on their progeny. And perhaps the risk sharing approach to finance rather than the cold hand of a low inflation debt contract might have a place outside the arcane world of sukuk bonds.
As the legitimacy of the banking industry has been serially eroded by conduct going to the heart of debt pricing such as the manipulation of benchmark interest rates, and even the simplicity of the risk free nature of sovereign bonds has been clouded by novel currencies, where euros unbacked by a consistent fiscus inadvertently make debt forgiveness a mechanism for opaque fiscal transfers in negotiations that push to the limit the political legitimacy of the political constructs backing the currency, it is clear that politics will prevail over the simple charm of finance theory for many years to come.

Thoughts on Rewilding

Escher

M.C. Escher, Mosaic II, 1957

Rewilding as a Grand Projet – Reconsidering Navarro and Pereira
The article “Rewilding Abandoned Landscapes in Europe” (Navarro and Pereira (2012)) is a romantic and bold article, but is short on specifics and fails to engage with key issues. Monbiot, in Feral (2014), brings these ideas vividly to a wider audience.
It is romantic because the overarching vision of a unproductive and poor yielding farmland, abandoned by a younger generation, turned into thoughtfully reforested and biodiverse landscapes, is attractive to conservationists.
It also segues in with the views of Edward Wilson that we need to institute an age of restoration (Wilson, 1992), rather than restrict ourselves to salvaging what is left. This conservationist assertiveness is good – to make progress, optimism is required (Beever, 2000). Endlessly cataloguing the decline of the natural environment is not calculated to achieve the step change in human behaviour that is required to reverse the depredations of the 20th Century and return to the abundance of the 18th and 19th centuries.
However assertion is one thing, persuasion another. I would prefer to list the problems as shortly as possible and then discuss how I believe rewilding could be re-imagined as a grand projet for the 21st Century, and create an era where new ecological engineering (Jones, 2012) creates as many jobs, technologies and possibilities as the computer and oil economy did in the 20th.
Key issues I would argue the authors neglect are: (a) that while suggesting a continent wide initiative of enormous scope, it fails to address directly the issue of potential export of deforestation to other, possibly presently more biodiverse, areas (Day-Rubenstein et al, (2000)) (b) exporting agricultural production rather than reintroducing the principles of localism and locally sourced produce locks in high transport modes of life with high energy costs; (c) it is now established that conservation initiatives that do not address the economic needs of the local community will be politically unacceptable – this is no less true for failing European agricultural communities than for Amerindian tribes; (d) the vision of what is to be achieved is unclear – the subject article acknowledges that some agriculture can increase biodiversity (p902) and acknowledges the ongoing debate between land sharing and land sparing strategies (p909), but begs the question of the decision rule.
I do not argue for the status quo but to urge more imaginative solutions which can capture the hearts and minds of and create livelihoods for generations, and use Europe for empirically testing conservation strategies that could then be exported as a post industrial aspirational model for the rest of the world. The North cannot urge preservation on the rest of the world without reversing its own biological poverty – how can Europe tell Asia and Africa to retain top level predators as things stand?
Accordingly, any plan for rewilding Europe should be seen not as a return to any prelapsarian past, but an actively imagined biologically and culturally rich future. For example, rather than isolated national parks on watersheds and areas of low agricultural productivity, imagine a continent-wide ecosystem services and agriculture “infrastructure grid”, with equal tessellated human dominant and ecologically engineered areas – the “white squares” for humans, the “black” for a guided nature engineered for variety, with areas of cross over at the margin to ensure no human population is ever far from a wild they can interact with, and some that is structurally inaccessible.

Populations could migrate at the corners, rather than being hemmed in. In the black “squares”, roads and manmade structures would be buried and the landscape cultivated for maximal biodiversity. In the white, intensive agriculture and the urban and suburban would prevail. At the margin, the opportunities for interaction, some “grey” areas, would create the cultural biophilia without which conservation efforts are doomed. Protected areas would be linked, wildlife corridors created across the continent, and imagination and technology applied to the project. As with the enclosures, the building of the railways or sewage systems, it would be a difficult, transformative, common project. However, such a re-imagination of the landscape, accommodating agricultural requirements and ensuring that the wild was woven into the warp and weft of policy would supply millions of jobs in the creation and maintenance of such a grid and address the conservation difficulties of our time.
In trying to imagine how a new landscape could look, we should start to think creatively about features we take for granted – in particular familiar infrastructural constants that have become invisible with ubiquity – roads, railways and boundary features seem candidates for reimagination.
As a part of any project along the lines conceived above, imagine game stock free to roam across vast contiguous landscapes naturally channeled and contained to the “black” squares, roads and railways tunneled to permit free migrations of fauna – imagine the work entailed, and consequent positive economic impact of the geoengineering and infrastructure rebuild, and the cultural revival, to achieve such a new relationship between such radical new patterns of land usage and its stewards.
The containment of stock which drove the building of fences is hardly required when stock can be electronically tracked – the potential for a reconception of wild food is extraordinary, but would entail quite different frameworks for control of disease risk.
To rewild a tamed landscape a complete cultural shift in risk appetite and a drawing of the circle of care beyond the human to a wider definition of biological community is almost essential – perhaps a project of this scope is required to draw us into a bold and vivid future, and wean us off a constant yearning for a past we can never really grasp and where the desire for return bespeaks a misunderstanding of the enormous human drive to keep building futures and the potential that could be unleashed by trying to forge new understandings of what might be possible with a courageous imagination.

Reference List

1. Beever, E. (2000). The roles of optimism in conservation biology. Conservation Biology, 14(3).

2. Day-Rubenstein, K., Stuart, M. and Frisvold, G. (2000). Agricultural Land use in Tropical Countries: Patterns, Determinants, and Implications for Biodiversity Loss. Global Warming International Center Monograph Series. Woodridge; Po Box 5275, Woodridge, Il 60517-0275 USA: Supcon International.

3. Jones, C. G. (2012). Grand challenges for the future of ecological engineering. Ecological Engineering, 45, 80-84.

4. Monbiot, G. (2014) Feral. London. Penguin Books Limited.

5. Navarro, L. M. and Pereira, H. M. (2012). Rewilding Abandoned Landscapes in Europe. Ecosystems, 15(6), 900-912.

6. Wilson, E.O. (1992). The Diversity of Life. London: Penguin Books Ltd.

Bibliography
West, P., Igoe, J. and Brockington, D. (2006). Parks and peoples: The social impact of protected areas. Annual Review of Anthropology, 35, 251-277.