Monthly Archives: October 2009

Obama's Inspector General Gives Bailout an F

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How’s the Wall Street bailout going? If you’re on Wall Street, it’s going really well. For the rest of us? Here’s the assessment of Neil Barofsky, the special inspector general managing the Troubled Asset Relief Program:

“These banks that were too big to fail are now bigger,” Barofsky said. “Government has sponsored and supported several mergers that made them larger and that guarantee, that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail, which was implicit a year ago, is now explicit, we’ve said it. So if anything, not only have there not been any meaningful regulatory reform to make it less likely, in a lot of ways, the government has made such problems more likely.

“Potentially we could be in more danger now than we were a year ago,” he added.

This is what happens when you don’t create checks and balances in the economy.

For more infuriatingly depressing details, see the Inspector General’s latest quarterly report.

Priming the Pump: the Solar Decathlon

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A few weeks ago, I checked out the Solar Decathlon on the National Mall. It’s a competition sponsored every two years by the Department of Energy in which 20 college teams — mostly from the US, but with a few contenders from other countries — build a small house that runs entirely on solar energy. It’s a small but interesting example of what Schindler called priming the pump.

The teams don’t compete just on how efficiently you solar power. Aesthetics and affordability also matter a lot — and it showed. I was really impressed at the quality of a lot of the architectural and design work. In fact, there were so many great houses that the lines to get into a lot of them were quite long, so I only managed to see a handful of them.
What was striking about the houses was how many nice little touches the teams incorporated. For example, the Penn State “Natural Fusion” house did a delightful job of placing green plants throughout the house — the kitchen even included one for growing spices on a wall (unfortunately, my snapshot of it didn’t come out).

Team Ontario/BC, which created a gorgeous, open-space Scandinavian style loft, had my favorite feature — a bed that, with the flick of a switch, could be retracted into the ceiling to open up more space.
I’m not sure how practical that is — I could see you having lots of fun getting a building inspector to sign off. But it was very cool and showed a lot of creativity.

Teams weren’t just responsible for the inside of the house. They also had to develop an attractive patio and landscape. Team California had by far my favorite landscaping.
Penn State created fun, funky, lightweight, modular outdoor furniture that can be easily moved around.

And Team Ontario/BC created a great space for barbecues and parties, including a gorgeous long outdoor counter for setting up and serving that featured a nice little outdoor sink.

Some teams also put real thought into parts of the house where you wouldn’t expect it. My favorite was Penn State’s utility access door. It was so nicely designed it actually improve the aesthetics of the house.

Overall, it was an incredibly impressive display of engineering talent and architectural creativity — an interesting window into what going Green could mean if it’s done with a little style.

Getting Green Done: the Role of Government

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[Part 4 of the Getting Green Done book review]

Unlike a lot of other books on the business of going green, Getting Green Done argues that government has to be a big part of the solution.

business is only one key to addressing climate change. Businesses are nimble, motivated (by profit), and powerful enough to drive large-scale change…. But even businesses are not going to drive enough change, at least not voluntarily. We can’t count on them to ride up on a white horse because, at best, most corporations will hit maybe the top 30 percentage points of efficiency, at a relatively good profit, declare success (and it will in fact have been significant success), and then get on with making money. And that’s assuming every corporation cares about climate change, which not all of them do…

Relying solely on corporate, or individual, voluntary emission reduction measures to start this revolution is like asking everyone on a becalmed boat to blow toward the sail. (p.21)

Businesses still have a crucial role to play. For starters, we can’t wait for government to take action — global warming is too much of a threat to our survival.

And for government to do its job, it needs businesses and other organizations to play a vital role: figuring out what actually works.

Government needs examples of how to be environmentally progressive and case studies from which to build policy. Every individual and business matters because we need labs for determining what’s worth pursuing and how best to do it. Although this work is very difficult, the good news is that it only gets easier from here. It only resembles trench warfare now because we don’t yet have the policies in place to make it effortless. (p.21)

To put it another way, the only way to develop a Practitioners Perspective on the nitty-gritty of what it’ll take to go green is to get in there and start trying.

But even at this stage of the game — before we know enough to write smart regulations — government still has a role to play. Schendler’s first success at the Aspen Skiing Company finally happened because he was able to get a grant to fund his pilot project. Early on in the process, it’s hard for enviros inside organizations to get traction — there are too many unknowns. So government can “prime the pump” by funding these experiments.

For some regulations, there’s no reason to wait; Schendler’s a strong proponent of some kind of regulation of carbon emissions. But for others, where it’s a lot less clear what we need to do, from Schendler’s examples you can see a model emerging:

  1. A handful of organizations start to experiment with making changes
  2. Government “primes the pump” by funding more experiments
  3. Many more organizations do the difficult work of figuring out the best way to do it
  4. Advocates and organizations put pressure on other organizations to start making the change
  5. Now that there’s enough experience, we fight to pass regulations that level the playing field so organizations aren’t comparatively disadvantaged by making the change (e.g., green building codes)

Obviously the path to change is rarely this straightforward, and often several steps happen in parallel or happen a little at a time, taking several rounds before the job is done.

There are lots more interesting insights and great stories in Getting Green Done. I’d blog more of them, but then you wouldn’t have a good reason to buy the book. It’s a fun, smart read, and you should definitely check it out.

Getting Green Done: The Movement Perspective

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[Part 3 of the Getting Green Done book review]

In Getting Green Done, Schendler makes a confession: a lot of enviros drive him batshit.

As Aspen Skiing Company’s Executive Director of Sustainability, Schendler sometimes gets calls like this:

“I wanted to talk with you about your season passes. Is there a way to recycle those?”

We’re talking about pieces of plastic the size of a credit card here. Or sometimes the caller will say: “Can you make them out of corn?” (p.33)

Folks like this probably believe they’re thinking globally, acting locally, but they’re missing the point. Here’s what he tells them:

“If you are focusing on season passes, you are missing the bigger picture. In fact, by focusing on the small and irrelevant, you’re not just taking your eye off the ball, you’re doing active harm to the environmental movement. Because you’ve become distracted from what really matters.” (p.33)

What these folks lack is what I call a Movement Perspective. They don’t think strategically. They aren’t asking, given that we only have so many brain cells and resources available at any one time, how do we get the best Green bang for our attention/action buck?

They also aren’t thinking about the scale it takes to win.

Meaningful action recognizes the scale of the climate problem and response at scale. We’re simply not going to solve climate change by asking motivated individuals to drive Priuses, install solar panels, or replace their old refrigerators… The actions they’re capable of are ultimately insignificant, even if every single one maxes out their opportunities…

What matters less is what you personally do to cut emissions; what matters more is ensuring that everyone on the planet is also doing what you do. Both actions are meaningful, but the bigger picture is more important and should be our primary focus… Unfortunately, many of us see personal measures as an endpoint. (p.35)

The other problem with season pass enviros is that they’re often so smug and self-righteous that they “may very well be turning off more people than [they are] converting.” Take the anti-SUV sticker campaign. It drives Schendler nuts, because where he lives,

most people who drive an SUV, even in the city, probably consider themselves to be outdoors people. And outdoors people are often environmentalists… You may not like driving behind the guy in the Land Cruiser on I-80, but he’s probably voting for open space in his community, supporting wilderness bills, and contributing to the Sierra Club. With a little prodding, he might support even more radical environmental measures. Same with the woman in the Winnebago. But slap a stealth climate change sticker on the bumper, and you’ve radicalized them. Now they hate “environmentalists” and begin to define themselves as something else. (pp. 37-38)

Turning down your thermostat so you’re a bit colder but you reduce greenhouse gas emissions is one thing. But giving up the self-righteous pleasure that comes with it? For some folks, that’s a much bigger sacrifice.

A Movement Perspective acts as a counterweight to those feelings. It reminds us is that people power requires lots of people. If you don’t win over enough people, you don’t win. And for some strange reason, most people don’t like being told, I am better than you, you should be like me (unless you are really hot, in which case you may get a pass).

A Movement Perspective doesn’t require that you give up the small pleasures of feeling superior that come with making change. Change is hard, and if we all had to just feel virtuous feelings when we were doing good things, nothing would ever get better. But wearing those feelings on your sleeve is not a recipe for success.

Stepping back, looking at the bigger picture, and forcing yourself to ask not what the most personally satisfying or most comfortable act we can take but what’s the most effective action — that’s what the Movement Perspective is all about.

Up next: business, government, and going green

Innovative like iPhones vs Innovative like Viruses

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One last point from Cassidy’s article. Any time we start talking about regulating finance, Wall Street says, your rules will stifle our innovation! Cassidy’s reply:

That’s precisely the point. “The goal is not to have the most advanced financial system, but a financial system that is reasonably advanced but robust,” Viral V. Acharya and Matthew Richardson, two economists at N.Y.U.’s Stern School of Business, wrote in a recent paper. “That’s no different from what we seek in other areas of human activity. We don’t use the most advanced aircraft to move millions of people around the world. We use reasonably advanced aircrafts whose designs have proved to be reliable.”

When the Crowd Isn't so Wise

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A great piece by John Cassidy in the New Yorker on one major reason why Wall Street crashed.

According to a common narrative, we have lived through a textbook instance of the madness of crowds. If this were all there was to it, we could rest more comfortably: greed can be controlled, with some difficulty, admittedly; overconfidence gets punctured; even stupid people can be educated. Unfortunately, the real causes of the crisis are much scarier and less amenable to reform: they have to do with the inner logic of an economy like ours. The root problem is what might be termed “rational irrationality”—behavior that, on the individual level, is perfectly reasonable but that, when aggregated in the marketplace, produces calamity.

Take new, potentially dangerous types of securities:

If Merrill Lynch sets up a hedge fund to invest in collateralized debt obligations, or some other shiny new kind of security, Morgan Stanley will feel obliged to launch a similar fund to keep its wealthy clients from defecting. A hedge fund that eschews an overinflated sector can lag behind its rivals, and lose its major clients. So you can go bust by avoiding a bubble. As [Citigroup's CEO] Charles Prince and others discovered, there’s no good way out of this dilemma. Attempts to act responsibly and achieve a coöperative solution cannot be sustained, because they leave you vulnerable to exploitation by others. If Citigroup had sat out the credit boom while its rivals made huge profits, Prince would probably have been out of a job earlier.

In fact, Prince essentially said so at the height of the bubble:

Prince conceded that a collapse in the credit markets could leave Citigroup and other banks exposed to the prospect of large losses. Despite the danger, he insisted that he had no intention of pulling back. “When the music stops, in terms of liquidity, things will be complicated,” Prince said. “But as long as the music is playing, you’ve got to get up and dance.”

This is hardly a new insight; Keynes pointed it out many decades ago.

Whatever the asset class may be—stocks, bonds, real estate, or commodities—the market will seize up if everybody tries to sell at the same time. Financiers were accordingly obliged to keep a close eye on the “mass psychology of the market,” which could change at any moment. Keynes wrote, “It is, so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”

But it’s one of those lessons that we have a hard time learning — largely because a) it’s a really lucrative game for many players on Wall Street and b) we keep bailing them out with no strings attached.

What do we do about it? For starters, says Cassidy, we need to rein in executive pay. Continue reading →

Getting Green Done: the Practitioner's Perspective

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[Part 2 of the Getting Green Done book review]

As we saw last week , in Getting Green Done Auden Schendler says the Enviro movement has to get comfortable talking about their mistakes as well as their successes. Here’s one of his.

When Schendler first started at Aspen Skiing Co., he told Eric Calderon, manager of the luxury resort The Little Nell, that they could cut energy use by 75% if they switched to compact fluorescent light bulbs. They’d save so much money that switching would pay for itself in less than a year. Eric told him no. Schendler was “baffled” — the project had a great return on investment.

The problem was that while I thought I was proposing a money-saving opportunity, for Eric it was a money-losing opportunity, because it threatened the tools he used to generate income — his stylish rooms (P.51)

Eric told Schendler he was worried about how their high-end clients would perceive the compact fluorescent light bulbs even if the light produced by the bulbs created the right ambience. He was even more worried about the reaction of ExxonMobil and AAA auditors.

“If that auditor sees compact fluorescent bulbs in our rooms, he might downgrade us to 4 stars.” In the 5-star hotel world, that’s not just a bad thing — that’s the apocalypse.

Again, we can’t blame Eric for this concern. But most environmentalists do. In turn, they lose a potential ally, and they alienate a good person from their cause. (P.51)

So, Schendler called Exxon Mobil and AAA. Both said fluorescent light bulbs wouldn’t reduce their rating.

But that doesn’t matter. The chance that an auditor is even subconsciously affected by a perceived lack of quality is too great a risk to take. Paying a few extra bucks on the energy bill is unfortunate. Losing your 5-star rating is your career.

My solution was something you’ll never hear from the nonprofits or the sustainability consultants trying to make a buck on the great green vision. I gave up in defeat. (P.52)

Schendler ultimately had plenty of wins at Aspen — enough so that being Green became part of their branding. But it was a long, tough slog.

What Schendler’s describing here is the difference between Econ 101 – where People and Organizations are Calculators — and reality.

Return on investment matters in the real world, but it’s only one piece of the puzzle. If you’re trying to go Green or make any fundamental change in an organization, you need to figure out the hidden rules and the complex relationships that govern how that organization actually make its decisions. As Schendler succeeded at making Aspen more Green, he discovered, for example, that:

  • Sometimes even if you know you’re going to save money, some savings are hard to show. Retrofitting a garage’s lighting may save a bunch of money, but to actually prove it an electrician would need to put the lights on a separate electrical circuit, which would eat up a lot of the savings.
  • Mental models matter. “Hotel managers don’t believe they make money by saving — they make money by selling” even though a huge amount of profit gets eaten up by overhead.
  • Opportunity costs, a.k.a. the availability of capital. If a mid-level manager only has so much money available, they may decide that spending it on another project is a better deal — especially if their mental model says they make money by selling, not saving.

Understanding the rules that govern a particular organization’s world and figuring out how to either make progress within these rules or organize to change them — that’s what I’m calling The Practitioner’s Perspective. As you’ll see in the next few weeks, it’s a critical piece of the Rethinking the Economy model.

Up next week: Getting Green Done’s Department of Strategery.