The Case Against Global-Warming Skepticism

The Case Against Global-Warming Skepticism. By Richard A Muller
There were good reasons for doubt, until now.
http://online.wsj.com/article/SB10001424052970204422404576594872796327348.html
WSJ, Oct 21, 2011

Are you a global warming skeptic? There are plenty of good reasons why you might be.

As many as 757 stations in the United States recorded net surface-temperature cooling over the past century. Many are concentrated in the southeast, where some people attribute tornadoes and hurricanes to warming.

The temperature-station quality is largely awful. The most important stations in the U.S. are included in the Department of Energy's Historical Climatology Network. A careful survey of these stations by a team led by meteorologist Anthony Watts showed that 70% of these stations have such poor siting that, by the U.S. government's own measure, they result in temperature uncertainties of between two and five degrees Celsius or more. We do not know how much worse are the stations in the developing world.

Using data from all these poor stations, the U.N.'s Intergovernmental Panel on Climate Change estimates an average global 0.64ºC temperature rise in the past 50 years, "most" of which the IPCC says is due to humans. Yet the margin of error for the stations is at least three times larger than the estimated warming.

We know that cities show anomalous warming, caused by energy use and building materials; asphalt, for instance, absorbs more sunlight than do trees. Tokyo's temperature rose about 2ºC in the last 50 years. Could that rise, and increases in other urban areas, have been unreasonably included in the global estimates? That warming may be real, but it has nothing to do with the greenhouse effect and can't be addressed by carbon dioxide reduction.

Moreover, the three major temperature analysis groups (the U.S.'s NASA and National Oceanic and Atmospheric Administration, and the U.K.'s Met Office and Climatic Research Unit) analyze only a small fraction of the available data, primarily from stations that have long records. There's a logic to that practice, but it could lead to selection bias. For instance, older stations were often built outside of cities but today are surrounded by buildings. These groups today use data from about 2,000 stations, down from roughly 6,000 in 1970, raising even more questions about their selections.

On top of that, stations have moved, instruments have changed and local environments have evolved. Analysis groups try to compensate for all this by homogenizing the data, though there are plenty of arguments to be had over how best to homogenize long-running data taken from around the world in varying conditions. These adjustments often result in corrections of several tenths of one degree Celsius, significant fractions of the warming attributed to humans.

And that's just the surface-temperature record. What about the rest? The number of named hurricanes has been on the rise for years, but that's in part a result of better detection technologies (satellites and buoys) that find storms in remote regions. The number of hurricanes hitting the U.S., even more intense Category 4 and 5 storms, has been gradually decreasing since 1850. The number of detected tornadoes has been increasing, possibly because radar technology has improved, but the number that touch down and cause damage has been decreasing. Meanwhile, the short-term variability in U.S. surface temperatures has been decreasing since 1800, suggesting a more stable climate.

Without good answers to all these complaints, global-warming skepticism seems sensible. But now let me explain why you should not be a skeptic, at least not any longer.

Over the last two years, the Berkeley Earth Surface Temperature Project has looked deeply at all the issues raised above. I chaired our group, which just submitted four detailed papers on our results to peer-reviewed journals. We have now posted these papers online at www.BerkeleyEarth.org to solicit even more scrutiny.

Our work covers only land temperature—not the oceans—but that's where warming appears to be the greatest. Robert Rohde, our chief scientist, obtained more than 1.6 billion measurements from more than 39,000 temperature stations around the world. Many of the records were short in duration, and to use them Mr. Rohde and a team of esteemed scientists and statisticians developed a new analytical approach that let us incorporate fragments of records. By using data from virtually all the available stations, we avoided data-selection bias. Rather than try to correct for the discontinuities in the records, we simply sliced the records where the data cut off, thereby creating two records from one.

We discovered that about one-third of the world's temperature stations have recorded cooling temperatures, and about two-thirds have recorded warming. The two-to-one ratio reflects global warming. The changes at the locations that showed warming were typically between 1-2ºC, much greater than the IPCC's average of 0.64ºC.

To study urban-heating bias in temperature records, we used satellite determinations that subdivided the world into urban and rural areas. We then conducted a temperature analysis based solely on "very rural" locations, distant from urban ones. The result showed a temperature increase similar to that found by other groups. Only 0.5% of the globe is urbanized, so it makes sense that even a 2ºC rise in urban regions would contribute negligibly to the global average.

What about poor station quality? Again, our statistical methods allowed us to analyze the U.S. temperature record separately for stations with good or acceptable rankings, and those with poor rankings (the U.S. is the only place in the world that ranks its temperature stations). Remarkably, the poorly ranked stations showed no greater temperature increases than the better ones. The mostly likely explanation is that while low-quality stations may give incorrect absolute temperatures, they still accurately track temperature changes.

When we began our study, we felt that skeptics had raised legitimate issues, and we didn't know what we'd find. Our results turned out to be close to those published by prior groups. We think that means that those groups had truly been very careful in their work, despite their inability to convince some skeptics of that. They managed to avoid bias in their data selection, homogenization and other corrections.

Global warming is real. Perhaps our results will help cool this portion of the climate debate. How much of the warming is due to humans and what will be the likely effects? We made no independent assessment of that.

Mr. Muller is a professor of physics at the University of California, Berkeley, and the author of "Physics for Future Presidents" (W.W. Norton & Co., 2008).

BCBS: Basel III definition of capital - Frequently asked questions

BCBS: Basel III definition of capital - Frequently asked questions
Oct 20, 2011

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability. To help ensure a consistent global implementation of Basel III, the Committee will continue to review frequently asked questions and to periodically publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.

The frequently asked questions (FAQs) published in this document correspond to the definition of capital sections of the Basel III rules text. These FAQs are in addition to the first set of FAQs published in July 2011. The questions and answers are grouped according to the relevant paragraphs of the rules text. FAQs that have been added since the publication of the first version of this document are shaded yellow; the earlier July 2011 FAQs that have been revised are shaded red.


Contents

Paragraphs 52-53 (Criteria for Common Equity Tier 1)
Paragraphs 54-56 (Criteria for Additional Tier 1 capital)
Paragraphs 60-61 (Provisions)
Paragraphs 62-65 (Minority interest and other capital that is issued out of consolidated subsidiaries that is held by third parties)
Paragraphs 67-68 (Goodwill and other intangibles)
Paragraphs 69-70 (Deferred tax assets)
Paragraphs 76-77 (Defined benefit pension fund assets and liabilities)
Paragraphs 79-85 (Investments in the capital of banking financial and insurance entities)
Paragraphs 94-96 (Transitional arrangements)
Press release 13 January 2011 (Loss absorbency at the point of non-viability)
General questions

http://www.bis.org/publ/bcbs204.htm

Rapid Credit Growth: Boon or Boom-Bust?

Rapid Credit Growth: Boon or Boom-Bust? By Selim Elekdag & Yiqun Wu
IMF Working Paper No. 11/241
October 01, 2011 
http://www.imfbookstore.org/IMFORG/WPIEA2011241

Summary: Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises. This paper presents the findings of a comprehensive event study focusing on 99 credit booms. Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies. In particular, domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity) are virtually flat during these periods. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies. 


Executive Summary

This paper is motivated by rapid credit growth across many emerging economies, particularly those in Asia. It presents the results of a comprehensive event study which identifies 99 credit booms, of which 39 and 60 originated in advanced and emerging economies, respectively. Episodes of excessive credit growth—credit booms—lead to growing financial imbalances, and tend to end abruptly, often in the form of financial crises. In particular, relative to booms in other emerging economies, credit booms in emerging Asia were associated with a higher incidence of crises historically.

Three other main conclusions include the following:

• First, as credit booms build, they are jointly associated with deteriorating bank and corporate balance sheet soundness, and symptoms of overheating including: large capital inflows (including less stable bank flows), widening current account deficits, buoyant asset prices, and strong domestic demand.

• Second, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity), are virtually flat during these periods, which suggests the important role of domestic factors in driving credit growth across emerging economies. This may reflect, in part, that capital inflows are being channeled into other asset classes including real estate, equity, and corporate bonds, for example.

• Third, loose macroeconomic policy stances seem to have contributed to the build-up of credit booms. In particular, this seems to be the case for monetary policy across both advanced and emerging economies. For emerging economies, while international interest rates were essentially flat, domestic policy rates were below trend during the pre-peak phase of credit booms. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies including those in Asia.

Chellaney: Hydro-control turning China into dreaded hydra?

THE WATER HEGEMON

Hydro-control turning China into dreaded hydra? By Brahma Chellaney
Bangkok Post, Oct 18, 2011 at 12:00 AM
With Beijing controlling the sources of Asia's most important rivers, water has increasingly become a new political divide in China's relations with neighbours like India, Russia, Kazakhstan, Nepal and the Mekong River countries.

http://www.bangkokpost.com/opinion/opinion/261849/hydro-control-turning-china-into-dreaded-hydra

International discussion about China's rise has focused on its increasing trade muscle, growing maritime ambitions, and expanding capacity to project military power. One critical issue, however, usually escapes attention: China's rise as a hydro-hegemon with no modern historical parallel.

The Mekong River, whose water level last March dropped to only 33 centimetres, the lowest in 50 years. People living downriver in Thailand, Laos and Cambodia attributed the fall in water level to newly constructed dams in China.

No other country has ever managed to assume such unchallenged riparian pre-eminence on a continent by controlling the headwaters of multiple international rivers and manipulating their cross-border flows. China, the world's biggest dam builder _ with slightly more than half of the approximately 50,000 large dams on the planet _ is rapidly accumulating leverage against its neighbours by undertaking massive hydro-engineering projects on transnational rivers.

Asia's water map fundamentally changed after the 1949 Communist victory in China. Most of Asia's important international rivers originate in territories that were forcibly annexed to the People's Republic of China. The Tibetan Plateau, for example, is the world's largest freshwater repository and the source of Asia's greatest rivers, including those that are the lifeblood for mainland China and South and Southeast Asia. Other such Chinese territories contain the headwaters of rivers like the Irtysh, Illy and Amur, which flow to Russia and Central Asia.

This makes China the source of cross-border water flows to the largest number of countries in the world. Yet China rejects the very notion of water sharing or institutionalised cooperation with downriver countries. Whereas riparian neighbours in Southeast and South Asia are bound by water pacts that they have negotiated between themselves, China does not have a single water treaty with any co-riparian country. Indeed, having its cake and eating it, China is a dialogue partner but not a member of the Mekong River Commission, underscoring its intent not to abide by the Mekong basin community's rules or take on any legal obligations.

Worse, while promoting multilateralism on the world stage, China has given the cold shoulder to multilateral cooperation among river-basin states. The lower-Mekong countries, for example, view China's strategy as an attempt to "divide and conquer". Although China publicly favours bilateral initiatives over multilateral institutions in addressing water issues, it has not shown any real enthusiasm for meaningful bilateral action. As a result, water has increasingly become a new political divide in the country's relations with neighbours like India, Russia, Kazakhstan, and Nepal.

China deflects attention from its refusal to share water, or to enter into institutionalised cooperation to manage common rivers sustainably, by flaunting the accords that it has signed on sharing flow statistics with riparian neighbours. These are not agreements to cooperate on shared resources, but rather commercial accords to sell hydrological data that other upstream countries provide free to downriver states.

In fact, by shifting its frenzied dam building from internal rivers to international rivers, China is now locked in water disputes with almost all co-riparian states. Those disputes are bound to worsen, given China's new focus on erecting mega-dams, best symbolised by its latest addition on the Mekong _ the 4,200-megawatt Xiaowan Dam, which dwarfs Paris's Eiffel Tower in height _ and a 38,000-megawatt dam planned on the Brahmaputra at Metog, close to the disputed border with India. The Metog Dam will be twice as large as the 18,300-megawatt Three Gorges Dam, currently the world's largest, construction of which uprooted at least 1.7 million Chinese.

In addition, China has identified another mega-dam site on the Brahmaputra at Daduqia, which, like Metog, is to harness the force of a nearly 3,000-metre drop in the river's height as it takes a sharp southerly turn from the Himalayan range into India, forming the world's longest and steepest canyon. The Brahmaputra Canyon _ twice as deep as the Grand Canyon in the United States _ holds Asia's greatest untapped water reserves.

The countries likely to bear the brunt of such massive diversion of waters are those located farthest downstream on rivers like the Brahmaputra and Mekong _ Bangladesh, whose very future is threatened by climate and environmental change, and Vietnam, a rice bowl of Asia. China's water appropriations from the Illy River threaten to turn Kazakhstan's Lake Balkhash into another Aral Sea, which has shrunk to less than half its original size.

In addition, China has planned the "Great Western Route", the proposed third leg of the Great South-North Water Diversion Project _ the most ambitious inter-river and inter-basin transfer programme ever conceived _ whose first two legs, involving internal rivers in China's ethnic Han heartland, are scheduled to be completed within three years.

The Great Western Route, centred on the Tibetan Plateau, is designed to divert waters, including from international rivers, to the Yellow River, the main river of water-stressed northern China, which also originates in Tibet.

With its industry now dominating the global hydropower-equipment market, China has also emerged as the largest dam builder overseas. From Pakistani-held Kashmir to Burma's troubled Kachin and Shan states, China has widened its dam building to disputed or insurgency-torn areas, despite local backlashes.

For example, units of the People's Liberation Army are engaged in dam and other strategic projects in the restive, Shia-majority region of Gilgit-Baltistan in Pakistan-held Kashmir. And China's dam building inside Burma to generate power for export to Chinese provinces has contributed to renewed bloody fighting recently, ending a 17-year ceasefire between the Kachin Independence Army and the Burmese government.

As with its territorial and maritime disputes with India, Vietnam, Japan and others, China is seeking to disrupt the status quo on international river flows. Persuading it to halt further unilateral appropriation of shared waters has thus become pivotal to Asian peace and stability. Otherwise, China is likely to emerge as the master of Asia's water taps, thereby acquiring tremendous leverage over its neighbours' behaviour.

Brahma Chellaney is Professor of Strategic Studies at the Centre for Policy Research and the author of "Water: Asia's New Battleground." Project Syndicate, 2011.

Making Banks Safer: Can Volcker and Vickers Do It?

Making Banks Safer: Can Volcker and Vickers Do It?
Authors: Chow, Julian T.S. ; Surti, Jay 
IMF Working Paper
October 01, 2011

Summary: This paper assesses proposals to redefine the scope of activities of systemically important financial institutions. Alongside reform of prudential regulation and oversight, these have been offered as solutions to the too-important-to-fail problem. It is argued that while the more radical of these proposals such as narrow utility banking do not adequately address key policy objectives, two concrete policy measures - the Volcker Rule in the United States and retail ring-fencing in the United Kingdom - are more promising while still entailing significant implementation challenges. A risk factor common to all the measures is the potential for activities identified as too risky for retail banks to migrate to the unregulated parts of the financial system. Since this could lead to accumulation of systemic risk if left unchecked, it appears unlikely that any structural engineering will lessen the policing burden on prudential authorities and on the banks.


Section I, Why redefine scope?

The business of banking involves leveraged intermediation managed by people subject to limited liability and, typically, to profit sharing contracts. This combination is well-known to generate incentives for risk-taking that may be excessive from the perspective of bank creditors. Creditor guarantees such as deposit insurance are known to exacerbate this incentive problem because they weaken creditors’ incentive to monitor and discipline management.

These issues are magnified in the case of systemically important financial institutions (SIFIs). Owing to their size, interconnectedness, or complexity, the negative externalities emanating from financial distress at SIFIs makes them a source of systemic risk, leading to them being perceived to be too-important-to-fail (TITF). Consequently, the market implicitly—and often correctly—assumes that apart from explicit deposit insurance, creditor guarantees of a much wider nature would be extended when such firms are threatened by imminent failure.

This serves to weaken the mitigating force of market discipline. Prior to the crisis, the high likelihood of public support assumed in a distress situation contributed to the ability of SIFIs to carry thinner capital buffers at lower cost, acquire complex business models, and accumulate systemic risk. This trend was reinforced by the diversification premier attributed to universal banks by market participants and prudential authorities, enabling them to integrate the provision of retail, investment, and wholesale banking services without erecting the necessary firewalls there-between. These developments resulted in networks of financial interconnections within and across internationally active SIFIs that proved to be difficult, time consuming and costly to unravel. This made it seemingly less costly, during the crisis, to allocate tax payer resources to preventing SIFI failures than to allowing them, with subsequent resolution and restructuring of their businesses.

Diversification of business lines could serve to better protect a universal bank against idiosyncratic shocks that adversely impact individual lines of business. At the same time, the free flow of capital and liquidity and the associated growth in intra-group exposures would also increase the likelihood of intra-firm contagion in the event of an exogenous shock.  Unlike investment banking clients, retail banking customers typically have few options other than their banks for conducting vital financial transactions. Ensuring business continuity of services to such clients, therefore, serves a clear and important social welfare objective. But, complex business models and high levels of intra-group exposures present a barrier to quickly spinning off the retail parts of a universal bank which can ensure such business continuity.

Restricting the scope of a regulated bank’s business activities could, therefore, serve a number of important policy objectives. From a financial stability perspective, it could limit contagion within and across firms. From the perspective of consumer protection, it could ensure a more efficient provision of assurance of the continuity of retail banking services.  And, by more credibly restricting the ambit of tax-payer funded creditor guarantees to depositors it could furnish these benefits more efficiently and cheaply from a social cost perspective.

Accordingly, the official response to the crisis has, besides recognizing the need for strengthened regulation and oversight of SIFIs, also included complementary proposals to redesign and refocus their business activities. A number of concrete proposals have been made, including:

• Narrow Utility Banking—essentially a reversion of deposit-funded banks into traditional payment function outfits with lending (and investment banking) being carried out by independent finance companies funded by non-deposit means.  
• The Volcker Rule—prohibiting banks from carrying out certain types of investment banking activities if they are to continue to seek deposit funding and to retain banking licenses.  
• A Retail Ring-fence—that, while not prohibiting banking groups from providing both retail and wholesale banking services, mandates legal subsidiarization of certain retail activities, prohibits this subsidiary from undertaking other businesses and risks, and establishes minimum capital and liquidity standards for it on a solo basis. While not limiting capital and liquidity benefits to the retail subsidiary from other affiliates when necessary, the ring-fence limits capital and liquidity transfers in the opposite direction, to non-ring-fenced affiliates. Such functional subsidiarization could enable continuation of retail operations under distress or failure of a SIFI’s other businesses.

This paper focuses on the motivation, content, operational challenges, and potential costs of these proposals to narrow the scope of banking business. The more radical proposals discussed under the narrow banking umbrella involve strict limits on what retail banks’ permissible activities ought to be and could entail significant dead-weight costs if implemented as recommended. By contrast, the design and motivation for the Volcker rule and retail ring-fence are more precisely targeted at the problems arising from the integrated business models used by SIFIs before the crisis.

The challenge facing these latter proposals lies in the feasibility and cost of their implementation. In the case of the Volcker rule, for example, it will be challenging for prudential authorities to tell apart permissible activities (market making and underwriting) from prohibited ones (proprietary trading) when assessing banks’ exposures to securities markets. Similar difficulties will be faced by supervisors assessing the nature of and purpose of hedging tools and contracts utilized by ring-fenced banks. This presents policy makers with a dilemma. Should they invest the financial cost and time towards gathering more contemporaneous information in order to create better filters and limit loopholes? Or, if this is viewed as being too costly or simply inefficient, should they move to outright prohibition of all activities related to securities markets?

The danger with the second option lies in generating incentives to push risk taking beyond the borders of the regulated financial system. If there are indeed no direct financial linkages between retail financial firms and such shadow banking entities, such risk taking may cease being a problem of regulation. However, systemic risk will continue to accumulate in the shadow banks, and since the participants in the regulated and shadow systems are the same, or are, in general linked, a crisis in that sector will continue to exercise a contagion impact on the regulated banking sector.

http://www.imfbookstore.org/IMFORG/WPIEA2011236