Was the just-concluded Copenhagen summit on climate change really an initiative to save the world, as some expected?  Probably not, for reasons I enumerate below. Nevertheless, Copenhagen mattered – not to stave off the impending disaster of global warming, but simply as a test case for humankind’s ability to solve complex problems thru cooperation.
   
First, let me list the reasons why I believe COP15 (the Copenhagen summit on climate change held from Dec 7-18, 2009) should never have been expected to deliver the world from a death-by-warming fate.  

1. Humanly-induced climate change is hardly the cast-iron certainty it is frequently made out to be. The climate is a humongously complex creature, determined by the intersection of phenomena as diverse as solar variations, earth orbital perturbations, variations in the behavior of oceans, the atmosphere, tectonic plates, etc. Each of these – let alone the interactions between them – is too poorly understood, and it will take several years before climate modeling becomes sophisticated enough to begin to definitively answer questions relating to climate change*. For some very thought-provoking arguments as to why human-induced climate change should not be taken as a given see here, here, here, here and here.

2. Even if global warming is assumed to be a reality, it is hopelessly optimistic to believe that placing national emission caps will work to curb it. Such quotas are fiendishly difficult to monitor – countries fiercely resist monitoring attempts as an infringement on their sovereignty. In addition, each country believes some other country / countries should bear a greater load in terms of curbing emissions. Thus, the developed countries believe the emerging economies should do more and vice-versa. Countries that are seen as most affected (e.g. the Pacific Islands) believe everyone else should do much more. Such intractability is typical of a tragedy of the commons situation, of which this is a classic example.

For me - as a consumer, a movie buff and a Netflix customer it's an absolute "no-brainer" that watching movies through online streaming is the most natural evolutionary step in this business. It needs no market research or complex back office mathematical models to arrive at this simple evolution. But then most "no brainers" seem to be beyond the reach of large corporations who invariably cosy up to their early success where change becomes a challenge. How much research did Motorola need after their market leadership on mobile phones to reinvent themselves and stay relevant in the marketplace? Palm was a Xerox in the PDA world in late 90s but then squandered away their leadership simply because they could neither see ahead nor reinvent on their early success.

Given this backdrop, it is incredibly refreshing to see Netflix predict doom if they don't reinvent themselves, especially on the back of success in a recessionary economy. I wish the GMs and the Nortels of the world had such paranoia and their CEOs could see the future unfold. After all, the executive pays they command is precisely for that, figure ways to stay relevant and constantly reinvent for the future. Frankly if they did just that, who really cares whether they get paid in millions or billions as long as they deliver on what their firm has to deliver and not get paid for visiting Washington to receive taxpayer money.

Note: This piece was written on April 16th, 2009. Subsequent developments in the world economy have substanitally borne out the assertion made here that "there will be concrete signs of recovery as early as July". See details in the July 19th update at bottom of this piece.

How soon should we expect the world economy to be back on a growth trajectory? I've been following statements from a varied set of economic gurus and masters of world destiny, and have found the overall sense of pessimism quite remarkable.
Jan 13th, 2009: President Bush said in a press conference that his economic advisors believed that the economic situation could be worse than the Great Depression.
Jan 23^rd, 2009: Steve Ballmer, Microsoft CEO said, “The economy could remain in the doldrums for "a year, two years..”.
Feb 14^th, 2009: the G7 meeting of the Finance Ministers of the world’s most powerful countries in Rome declared that "the severe downturn will persist through 2009".
Feb 18^th, 2009: The US Federal Reserve warned that “the crippled U.S. economy is even worse than thought, and would deteriorate throughout 2009”.
Mar 16^th, 2009: Federal Reserve Chairman Dr. Ben Bernanke, in carefully hedged remarks on CBS 60 Minutes, said the recession will “probably” end in 2009, provided the US government’s efforts to stabilize the financial markets bore fruit.
Mar 19^th, 2009:  the IMF said the world economy will shrink by 1 percent in 2009, lowering its own forecast of 0.5 percent decline made in January 2009.  It said recovery would begin only in 2010. 

The US Treasury and Federal Reserve (along with the FDIC) have made multiple attempts at resuscitating the credit markets. After the TARP approach of investing in Banks’ preferred stock and (subsequently) using the back-stop guarantee mechanism, the latest thinking among US Government bureaucrats is to segregate the “bad” assets on Banks’ balance sheet from the good ones or what is popularly being termed the "Good Bank – Bad Bank" model.

Sheila Bair, Chairperson of the US FDIC , has mooted the idea of a “Bad Bank”, which would aggregate and consolidate the toxic assets on all US Banks’ balance sheets (read here) - an idea that was earlier espoused by US Federal Reserve Chairman, Ben Bernanke and is also gaining support among President-elect Obama’s economic advisors. Across the Pond, the UK Treasury Chief, Alistair Darling and his team of policy makers have been discussing a similar option, in the face of Bank stocks getting hammered on the London Stock Exchange.  UBS actually put the concept to test in November 2008, when it spun off about $ 60 Bn in toxic assets into a separate entity with $ 6 Bn in equity (the jury is still out on the efficacy of such a move – write back to me if you have more insights).

Is creating a Bad Bank the solution to the crisis? Will this help focus Government recovery efforts like the Resolution Trust Corporation (RTC), which helped tackle the US Savings and Loans (SnL)  crisis in the late ‘80s? The Washington Post has a very interesting article on the subject and suggests adopting the Swedish Bank rescue model of 1991.

Personally, I am not a very enthusiastic supporter of the Bad Bank proposition. The Swedish Bank crisis or even the US SnL disasters were events of much lesser magnitude. The US ultimately lost only about $ 150 Bn in the RTC led SnL rescue. As of today, about $ 350 Bn of TARP funds have already been deployed in battling the credit crisis, not counting the Citi and Bank of America asset guarantees of almost $ 400 Bn!

Nobel Prize winner and Economics professor at Princeton University, Paul Krugman, who is also a noted columnist for the New York Times, has made a good point about the lack of clarity around the proposition (read here). 

I am keen to hear your views, as this debate livens up next week, even as the US is preparing for a historic Presidential inauguration amidst an even more historic and unprecedented economic crisis!    

Many question whether this deluge of losses is actually necessary.  Bankers are pressuring regulators and lawmakers to make adjustments to FAS 157, the mark-to-market accounting rule in the US.  Put in place in response to the Enron crisis (Enron overvalued its assets to the point of bankruptcy) mark-to-market accounting requires corporations to value assets at their "fair value"; the price the asset would command on the open market.