Quantitative finance traces its roots to modern portfolio theory. Despite the deficiencies of modern portfolio theory, mean-variance optimization nevertheless continues to form the basis for contemporary finance. The term "postmodern portfolio theory" expresses many of the theoretical advances in financial learning since the original articulation of modern portfolio theory. Any complete overview of financial risk management must address all aspects of portfolio theory, from the beautiful symmetries of modern portfolio theory to the disturbing behavioral insights and the vastly expanded mathematical arsenal of the postmodern critique. This article surveys portfolio theory, from its modern origins through more sophisticated, “postmodern” incarnations, according to the first four moments of any statistical distribution: mean, variance, skewness, and excess kurtosis. Mastery of these quantitative tools and associated behavioral insights holds the key to the efficient frontier of risk management.
Saturday, April 20, 2013
Wednesday, April 17, 2013
Each of the most recent accords of the Basel Committee on Banking Regulation, known as Basel II, 2.5, and II, has embraced a different primary measure of market risk in global banking regulation: traditional value-at-risk (VaR), stressed VaR, and expected shortfall. After introducing the mathematics of VaR and expected shortfall, this note will evaluate how well the reforms embraced by Basel 2.5 and III — stressed VaR and expected shortfall — have addressed longstanding regulatory concerns with traditional VaR.
Part I describes the calculation of VaR in its conventional form. For illustrative purposes, Part I will describe parametric VaR on a Gaussian distribution. Part II summarizes known weaknesses in VaR, from inherent model and estimation risk to VaR’s failure to perform under extreme economic stress and VaR’s failure to satisfy the theoretical constraints on “coherent” measurements of risk. Part III describes how to calculate expected shortfall as an extension of conditional VaR. It further describes how expected shortfall, but not VaR, provides a coherent measure of risk. Part III then reverses field. It explains how VaR, but not expected shortfall (or, for that matter, nearly every other general spectral measure of risk), satisfies the mathematical requirement of “elicitability.” Mathematical limitations on measures of risk therefore force regulators and bankers to choose between coherence and elicitability, between theoretically sound consolidation of diverse risks (on one hand) and reliable backtesting of risk forecasts against historical observations.
Monday, January 07, 2013
The Ganges River begins at the foot of the Gangotri Glacier in the Himalayas and culminates at the Sundarbans Delta, a massive sprawl of swamps, lakes, and scores of islands. (Find an earlier post on the Ganges here.) It’s the largest river delta in the world—home to endangered Bengal tigers, miles of mangroves, and nearly 12 million people (4.5 million on the Indian side and 7.5 million on the Bangladeshi side).
A student of the Mississippi River Delta, I had long wanted to visit the Sundarban Islands. So after giving a series of lectures in Kolkata, I accepted an invitation to visit some of the islands on a medical boat, operated by the Southern Health Improvement Samity, an organization in West Bengal that delivers health-care services to island villagers.
The experience was one of the high points of my semester sabbatical, which has now drawn to a close. The people were lovely. I chatted with a group of young girls about their new school building, which doubles as a safe house in times of flood. I learned about off-the-grid power from a farmer who had recently installed solar panels on the thatch of his mud hut. A local activist taught me about a program that employs women to grow mangrove saplings and replant them on fragile shores. And the lush forests were idyllic (once you looked past the plastic netting designed to keep the tigers in).
Still, it was hard to ignore that these wonderful people and beautiful surroundings are slowly being swallowed by rising seas—just one of the many casualties of climate change. Some islands have already slipped below the water line. In the last decade thousands of villagers have been displaced. The consequences will unfold over decades.
It will be a long goodbye.
And not the only one. So many places, from Micronesia to Miami, are at risk. Part of letting go will involve complex logistics: identifying the places and species to abandon, orchestrating our retreats, planning the resettlement. The other part will be the heartbreak.
How will we deal with the pain of saying goodbye? Will we behave like the orphaned children in psychological studies, the ones who refuse to attach to anyone nice for fear of being abandoned again? Will we stop caring about our favorite coastlines, our storied cities, the world’s cultures, because the possibility of losing them (and knowing we’re to blame) is just too much for us to stomach?
I hope not. If we give up now, we’ll lose what we might have saved with reasonable efforts. And we will have surrendered the reward of knowing and loving the things that matter.
In times like these, we need a shot of Rabindranath Tagore, the Bengali poet and Nobel laureate:
Let me not pray to be sheltered from dangers,
but to be fearless in facing them.
Let me not beg for the stilling of my pain, but
for the heart to conquer it.
Robert Verchick, Gauthier-St. Martin Chair in Environmental Law, Loyola University, New Orleans. Bio.
Thursday, December 20, 2012
Cross-posted from CPRBlog.
In October, I wrote about the city of Surat, the diamond-polishing capital of India, and its battle against climate change. Recently I had the chance to visit another municipality working on adaptation, a place known more for its postage stamp farms and wandering livestock than jewelry and textiles. It’s called Gorakhpur, and is located in the flood-prone state of Uttar Pradesh, near the India-Nepal border.
I first visited Gorakhpur nearly 25 years ago--when I was a long-haired backpacker and Gorakhpur was a muddy stop on the way to Kathmandu. Some things there haven’t changed. The streets are still muddy. Tea stalls and tarpaulin tents still line the streets, illuminated by the blue flames of cook stoves. At my business hotel, electricity was as unreliable as ever, and the telephones still crackled and hissed. Each morning, I would greet a dozen or so cows grazing on a hillock of garbage outside the hotel gate. (The city still has no regular solid waste collection).
But Gorakhpur has also changed in important ways. The city has over four hundred thousand people, with millions more in the surrounding district. There are malls, cineplexes, fast-food joints, and pizzerias! What began as a small urban core has spread erratically, encroaching upon lakes, marshes, and scores of farm villages—all held together by a hectic flow of traffic and a mighty, tea-stained dome of hydrocarbons.
Like many communities in these arid plains, Gorakhpur suffers from flash floods in the rainy season which lead to “water logging,” a saturation of poorly drained soil that can ruin a season of farming. Faulty drainage channels and unmanaged garbage increase water logging as well as the related incidence of disease. Residents—who have always battled malaria and dysentery—are now seeing a rise in diarrhea, hepatitis, and Japanese encephalitis. These trends will increase as population and development grow. In addition, the rising temperatures and stronger rains associated with climate change will intensify these effects in dangerous but unpredictable ways.
To learn more, I met with a long-time community organization called the Gorakhpur Environmental Action Group (GEAG) that is now helping farmers in the urban fringe to prepare for these growing risks. (GEAG released a preliminary report, “Toward a Resilient Gorakhpur,” in 2010.) Like the climate initiative in Surat, GEAG’s work is supported by the Asian Cities Climate Change Resilience Network (ACCCRN) and funded by the Rockefeller Foundation.
GEAG knows that Gorakhpur presents a spider’s web of institutional, environmental, and technical challenges, of which climate change is just a part. So the group wisely focuses on issues that, while related to climate, immediately and tangibly affect the lives of village residents. GEAG also emphasizes community activism and government accountability.
Accompanied by GEAG members Monojeet Ghoshal and Pragya Tiwari, I toured a couple of villages were progress is being made. I spoke with farmers about changes they have noticed in rain patterns and I saw an array of compact innovations designed to deliver high benefit at affordable cost. Residents here are learning to sweat the small stuff.
For instance, stone-and-brick storm drains now line most pedestrian roads and alleys; and, unbelievably, nearly all appear to be functioning. New buildings are elevated and built to standards suggested by GEAG engineers. The hand pump at the neighborhood well had been reset on concrete steps many inches above the flood line to insure that drinking water is available even after harsh rains. Many vegetable farmers have begun growing two sets of crops—one on the ground, which is still prone to flood, and another on a frame of overhead “lofts” to support plants that grow on climbing vines. (One popular crop looked something like okra.)
But this is a story about much more than technology. Even the smallest changes to public space, from repaired drains to elevated pumps, require consistent pressure on the municipal government that too often avoids “village issues.” With the help of GEAG staffers, villagers I met had learned to organize efficiently, monitor their village infrastructure, and hold officials responsible. When plastic bags and other waste clogged their storm drains, the community appointed members to patrol the roads each week and record every instance of a blocked gutter or malfunctioning well; they would then deliver the information in a binder to the official in charge—repeatedly—until action was taken.
To be sure, India needs big ideas too. Some, like environmentally sensitive irrigation techniques and improved seed varieties could yield large benefits. Others seem misguided. (Investors, for instance, have encouraged the Indian Parliament to open financial markets to weather derivatives, an idea I mentioned in an earlier post. Some economists believe derivatives trading could help village farmers hedge against poor harvests due to bad weather. But the financial and agricultural experts I’ve talked with in India are doubtful. Making good financial “bets” requires access to meteorological data and statistical skills that village farmers just don’t have, and such markets might invite corruption.)
But climate adaptation is coming to India—to rich cities like Surat and poor transitional cities like Gorakhpur. The key, as with many important ideas, will be sound implementation and improved governance.
Robert Verchick is the author of Facing Catastrophe: Environmental Action for a Post-Katrina World.
Wednesday, November 21, 2012
Wednesday, November 14, 2012
Cross-posted from CPRBlog.
Last weekend my son took part in a set of Boy Scout activities with his local Delhi scout troop. On the grounds of the former residence of the U.S. ambassador, the boys prepared a kabob lunch, practiced fire making, and even built a Medieval-style trebuchet. But all I could think about were the little striped mosquitoes that seemed to follow the kids everywhere—Asian Tiger mosquitoes, to be exact, the kind that carry dengue fever.
In New Delhi, dengue (DEN-gay) has reached epidemic proportions. The scouts, I’m happy to say, completed their tour without infection, thanks to lots of lotion, spray, and smoky coils. But not everyone was so lucky. I know at least five people who have been confined to bed for two weeks of fever, headaches, and joint pain. (My medical traveler’s guide says it feels as if “knitting needles have been driven into every joint of [your] body.”) The New York Times reported last week that Delhi hospitals “are overrun and feverish patients are sharing beds and languishing in hallways.” The illness, which in extreme forms can require blood transfusions and even kill, is breaking out all over the country. Official reports say that this year 30,002 people in India have fallen ill with dengue through October. But experts believe the real number is around 37 million.
And last week, we had what I call the “Monster Smog,” a week-long haze of smoke and diesel fumes that the Financial Times described as “the worst occurrence of air pollution in a city long accustomed to dirty air, with the density of dust particles in some places reaching 30 times the guidelines set by the World Health Organisation.” City hospitals were once again overrun. Three Supreme Court Justices pledged to investigate the affair. The cause of the Monster Smog apparently involved some mix of tailpipe emissions, field burning in neighboring states, a lack of wind, and an unusual amount of moisture in the air.
Now with events like these, my “climate” radar goes up. I think of the mounting concern among health experts that warmer temperatures could broaden the reach and lengthen the season of mosquito-borne illnesses in some parts of India. Or the possibility that changes in air temperature and wind patterns will thicken India’s urban smog. (For examples of both, see this report.) And I think of how cities like New Delhi must begin to adapt to a changing climate.
I know such thinking just adds to the moral and logistical complexity of modern life. In this way, I am only slightly less annoying than that guy at the seafood restaurant who consults his “Seafood Watch” phone app at the table and warns his guests about the Chilean Seabass. (O.K., I did that once, but never again.)
Causing annoyance is one thing. But in my conversations on climate policy in India, I have sometimes felt that climate adaptation strikes people as tedious and boring. For instance, at a recent gathering of development experts here in New Delhi, I asked one of the speakers how global development strategies in Asia might change as interest in climate adaptation grows.
After expressing skepticism toward the international adaptation agenda (“code,” he said, for relieving rich nations of their duty to curb emissions), he explained that in developing countries increasing climate resilience was not that different from ordinary development. It was important, yes, but not conceptually challenging. As a policy, adaption was “just not that interesting.”
I can appreciate the point. Development has always been about insulating society from the vagaries of nature. That’s what air conditioning and insurance polices are for. Why burden basic development efforts with extra tweaking? It’s one thing for New York City to wonder how to protect its subways from higher seas in 2050. But many cities in India don’t even have public transportation. Or sewage treatment plants, or sufficient air quality monitoring, or available hospital beds, or any number of basic services Americans taken for granted. Isn’t any improvement in water management or air quality or health care also, at this stage in the game, a step toward climate resilience?
Yes, but it’s not nearly enough. In order to cope with climatic change, developing nations need to some idea of what the vulnerabilities are and what regions are more at risk. That requires huge investments in regional climate modeling, ecosystem evaluation, and public health monitoring. Few countries in the developing world have adequate resources in these areas. Understanding the possible effects of climate change on the spread of dengue in India, to take one example, would require regionalized information about trends in temperature, humidity, rain patterns, land surface hydrology, insect life-cycles, and human behavior. Experts now studying the issue are still in only the beginning stages.
In addition to assessing vulnerability, developing countries will also require decision-making tools that allow citizens and their representatives to manage climate-based risk in the face of uncertainty. They will need strategies, appropriate to their regions and cultures, for evaluating performance and revising their plans when new information arises.
My fear is that many in the halls of power and finance will see fancy computer models and special decision-making tools as “luxuries” that only cities like New York and London can afford. That would be a shame. Remember the motto: Be Prepared.
Robert Verchick is the author of Facing Catastrophe: Environmental Action for a Post-Katrina World
Friday, November 09, 2012
It was not on any ballot, but one of the biggest election contests this week pitted pundits against pollsters. It was a pitched battle between two self-assured rivals: those who relied on an unscientific mixture of experience, anecdotal details and “Spidey sense,” and those who stuck to cold, hard numbers.
When the results were tabulated, it became clear that data had bested divination.
The election results that delivered a second term to President Obama on Tuesday left some well-known pundits, many of whom have a partisan bent, eating crow on Wednesday morning — including analysts like Karl Rove, Dick Morris and Michael Barone, all of whom had confidently predicted a victory by Mitt Romney.
The results were much kinder to pollsters and the data devotees who aggregate and average polls, or who use mathematical models to make projections.
The triumph of polling over punditry was staggering in its scale. Nate Silver, author of 538 and The Signal and the Noise: Why So Many Predictions Fail — But Some Don't, ruled supreme. The following comparison of Silver's "538" model and actual vote tallies shows how the "king of the quants" nailed 50 states out of 50:
Those interested in winning future presidential elections — I'll even give the benefit of the doubt to a Republican Party that otherwise seems determined to commit demographic political suicide — might consider treating the Electoral College as a strategic game demanding simple combinatoric theory with detailed political data:
If this election settles just one thing, it should be the end of Karl Rove's political credibility. Alas, like the mirage of grand transformation in the Grand Old Party, not all that glitters in this quantitative age of Silver … is gold.
Thursday, November 08, 2012
Casino magnate Sheldon Adelson bankrolled Republican candidates and causes in the 2012 election and rolled snake eyes. Recent legal developments may give this megadonor of the super-PAC era additional reason to worry: newfound competition from online gambling.
The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), 31 U.S.C. §§ 5361-5366, has been widely regarded as a legal firewall against online gambling. If banks can't process payments for games of chance, that business would face a formidable legal barrier. Moreover, as Judge Thomas Shadrick of Portsmouth, Va., has reasoned, games such as poker are games of chance notwithstanding the element of skill, because each hand's success depends on an irreducible random element.
The first crack in this legal edifice appeared in December 2011. Reversing its previous position, the Department of Justice issued a new opinion that the Interstate Wire Act of 1961, 18 U.S.C. § 1084, applies only to sports betting.
In August 2012, Judge Jack Weinstein of the U.S. District Court delivered an even more serious blow to the UIGEA/Wire Act edifice. Judge Weinstein reasoned that poker is a game of skill and therefore falls outside the scope of the UIGEA. Judge Weinstein cited Rogier Potter van Loon et al., Beyond Chance? The Persistence of Performance in Online Poker. That paper's central finding, based on a deep database of poker hands, is as follows:
A major issue in the widespread controversy about the legality of poker and the appropriate taxation of winnings is whether poker should be considered a game of skill or a game of chance. To inform this debate we present an analysis into the role of skill in the performance of online poker players, using a large database with hundreds of millions of player-hand observations from real money ring games at three different stakes levels. . . . Our results suggest that skill is an important factor in online poker.
If John Boehner fulfills his pledge to bring America back from the brink of the fiscal cliff, the lame duck Congress may turn its attention to the proposed Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act of 2012. By offering individual states the ability to opt into permitting the processing of payments for online gambling, this bill may assign responsibility for resolving the legality of online gambling to individual states.
As if Sheldon Adelson and Karl Rove haven't already had a wretched month of November, Mr. Adelson's casino business faces a new phantom menace from online gambling and the big data that might tip the legal balance of power in the gaming industry.
Monday, November 05, 2012
Cross-posted from CPRBlog.
The most solemn commitment borne by an elected official is to promote the public welfare and keep the citizenry safe. As New York City struggles to rebound from one of the fiercest storms in memory, Mayor Michael R. Bloomberg rose to that occasion with an urgent call for government at all levels to forcefully address climate change.
Yes, folks, Gotham gets it.
In an editorial for Bloomberg View, the mayor wrote:
The devastation that Hurricane Sandy brought to New York City and much of the Northeast -- in lost lives, lost homes and lost business -- brought the stakes of Tuesday’s presidential election into sharp relief.
The floods and fires that swept through our city left a path of destruction that will require years of recovery and rebuilding work. . . . In just 14 months, two hurricanes have forced us to evacuate neighborhoods -- something our city government had never done before. If this is a trend, it is simply not sustainable.
Our climate is changing. And while the increase in extreme weather we have experienced in New York City and around the world may or may not be the result of it, the risk that it might be -- given this week’s devastation -- should compel all elected leaders to take immediate action.
He described New York City’s own efforts to fight climate change by reducing carbon emissions “by 16 percent in just five years.” He could also have noted his city’s impressive planning efforts to adapt to those climate effects that can no longer be avoided.
Then comes the kicker, which you’ve probably already heard about: the mayor called for the reelection of President Obama. Local governments “can’t do it alone,” he said.
We need leadership from the White House -- and over the past four years, President Barack Obama has taken major steps to reduce our carbon consumption, including setting higher fuel-efficiency standards for cars and trucks. His administration also has adopted tighter controls on mercury emissions, which will help to close the dirtiest coal power plants (an effort I have supported through my philanthropy), which are estimated to kill 13,000 Americans a year.
Is this the beginning of a tipping point? History shows that extreme events have the potential to focus people’s attention and energy in ways previously thought impossible. In the eighteenth century, the Lisbon Earthquake forced a dramatic rethinking across of Europe of the government’s role in hazard management. Portugal’s prime minister launched one of the first scientific inquiries into earthquake mechanics. The government imposed stricter zoning laws and Europe’s first seismic building codes.
Northeast governors whose states are receiving federal assistance after Hurricane Sandy have Herbert Hoover to thank. After the Great Mississippi River Flood of 1927, Hoover, then the Secretary of Commerce, helped establish the national role for disaster recovery in the United States. Less than a decade later, the federal government boosted hazard protection across the nation by taking charge of all flood control projects on all federal waterways.
Even Hurricane Katrina, for all the dysfunction that ensued, can be credited with impelling the federal government to strengthen and re-energize FEMA and forcing the city of New Orleans to seriously confront long-standing problems with crime, education, and political accountability.
For a brief moment Hurricane Sandy has seized the attention of citizens across the nation and around the globe. In a twist unimaginable even a few days ago, it’s possible that global warming could even influence next week’s knife-edge presidential election.
As followers of this blog know, I’m living in New Delhi this semester. On Halloween morning I awoke to an article in the India Times, titled, “Frankenstorms Can Get Worse as Global Warming Intensifies” (it’s not a subtle publication). “Hurricane Sandy,” the writer speculated, “could be an answer to many who've wondered when America would smell the climate change.” Global warming is a bitter brew. But it must be acknowledged, planned for, and minimized. Mayor Bloomberg, a successful businessman and an effective politician, has announced he’s ready to face the day as it really is. Who’s next?
Robert Verchick is the author of Facing Catastrophe: Environmental Action for a Post-Katrina World.
Wednesday, October 31, 2012
The wind came back with triple fury, and put out the light for the last time. They sat in company with the others in other shanties, their eyes straining against crude walls and their souls asking if He meant to measure their puny might against His. They seemed to be staring at the dark, but their eyes were watching God.— Zora Neale Houston, Their Eyes Were Watching God (1937)
I have always been fond of this passage from Zora Neale Houston's classic, Their Eyes Were Watching God, so much so that the first edition of the book now called Disaster Law and Policy opened its chapter on social injustice with this quote. The trouble has always lain in the empathetic limits of the law. Disaster law continually lingers among the ruins, so to speak, because the architects of disaster policy rarely understand the perspective of vulnerable individuals like Janie and Tea Cake.
Into this void steps an essay by Walter Russell Mead, Nature and Nature's God, on the occasion of Hurricane Sandy:
Manhattan is one of those places where nature seems mostly held at bay. Except for the parks, oases of carefully preserved nature deliberately shaped by the hand of man, every inch of the city’s surface has been covered by something manmade. The valleys have been exalted, the mountains laid low and the rough places plain.
Those who live and do their business there pay very little attention to the natural world most of the time. It can be hard to get a taxi in the rain, and the occasional winter snowstorm forces a brief halt to the city’s routine, but the average New Yorker’s attention is on the social world, not the world of nature. . . .
Into this busy, self involved world Hurricane Sandy has burst. Sharks have been photographed (or at least photo shopped) swimming in the streets of New Jersey towns; waves sweep across the Lower East Side; transformers explode on both sides of the Hudson as salt water surges into the tunnels and subways. For a little while at least, New Yorkers are reminded that we live in a world shaped by forces that are bigger than we are . . . .
Tuesday, October 30, 2012
If you like sparkling diamonds and saffron saris, you will love Surat, India’s bustling, no-nonsense city, some 250 kilometers north of Mumbai, near the Arabian Sea. If you’re wearing a new diamond, there’s an 80% chance its was shaped by Surati hands (and laser beams too). And nearly every Indian has something in the closet from Surat—which is what you’d expect from a city whose clattering looms churn out 30 million meters of raw fabric a day.
But Surat, with a population of 4.5 million, faces big challenges too. Its proximity to the Tapti River delta—a strategic advantage in trade—also makes Surat a flood magnet. In the last 20 years, the city has been drowned by three major floods caused by emergency releases from an upstream dam. Lesser floods, caused by hard rains, occur more frequently, interrupting local business and displacing families living in flood plains. In 1994, a flood like that led to an outbreak of the plague. In addition, tidal surges moving up the mouth of the Tapti River threaten the city from the opposite direction. Even on calm days, high tides push salt water into parts of the river needed for drinking. All of these problems will be made considerably worse by climate change, whose effects include stronger downpours and rising seas.
For these reasons, Surat has developed a “City Resilience Strategy” focused on adapting to climatic change. The initiative is supported by the Asian Cities Climate Change Resilience Network (ACCCRN), an organization launched in 2008 and funded by the Rockefeller Foundation. ACCCRN supports adaptation work in ten cities, including three in India. (I’ll tell you about another, Gorakhpur, in a future post).
Because Surat is seen as a leader among ACCCRN projects, I was eager to see what the city was doing and how its work might be replicated. I spoke with city officials, business leaders, and public health experts. I perused the aeration basins of a water treatment plant, climbed the floodgates of a major river embankment, and threaded my way through a township built to replace a flood-prone slum. I even toured a state-of-the-art diamond-polishing facility because—well—when would I get to do that again?
In just a few years, Surat has accomplished quite a bit. With the help of outside experts, the city has assessed the climatic risks in flood management, energy, and public health. It has even mapped the social vulnerability of neighborhoods in terms of social cohesion, education, and class. The city is implementing a new early warning system for major floods and designing an inflatable dam to protect the river from saltwater intrusion.
Almost all of this work has been accomplished through a flexible and relatively loose network of public officials, business people, and community members organized around one compelling environmental goal. (I’ve written about the promise and pitfalls of such networks in the context of adaptation here.)
It’s impossible to know at this early stage how effective this experiment with “green governance” will be. Surat, one of the fastest growing cities in the world, suffers from a shortage of affordable housing, rampant sprawl in flood zones, and the complete absence of public transportation.
And I wonder how easily its resilience strategies can be duplicated elsewhere in the country. Before you get to green governance you need good governance, and that, in some quarters, is as elusive as a Bengal tiger. And note that Surat is a comparatively wealthy city. Its reliance on foreign trade and investment is one reason the business community has been such a strong supporter of expensive infrastructure.
Still, I admire the speed and efficiency with which Surat has marshaled its resources. And the commitment of city officials and other advocates I met can only be described as diamond-hard.
Friday, October 26, 2012
The River Ganges Meets Climate Change
VARANASI -- We slip into the river at night, and with an easy stroke, our oarsman moves our boat across the chestnut waters of “Mother Ganga,” India’s Ganges River.
Spiritual life in Varanasi (also called Benares) is a passion. Hindus all over India save their money for the chance to visit this holy city and bathe in Ganga’s purifying waters. At sunrise, along the string of bathing steps called “ghats,” you’ll see hundreds of people of all shapes and sizes soaping up in the water, praying, laughing and chatting, or just bobbing along. At the so-called “burning ghats,” open-air cremations take place twenty-four hours a day in quiet ceremonies attended by family and curious onlookers. But this evening, my family and another, visiting from Maharashtra, are on our way to watch the Ganga Aarti, a Hindu ceremony of music and prayer devoted to Mother Ganga. The ceremony is ancient. But it takes on new power when you consider that today the Ganges is all but an environmental disaster—a septic river, riddled with industrial poisons and now threatened by climate change. If Mother Ganga were human, she would be in the I.C.U.
From the boat, we watch the temple priests lined up on the ghat, swinging brass lamps with smoky incense. A chorus sings while bells and tabla drums repeat in a kind of lazy, Brian-Eno-style sound loop. I ask one of the family members from Maharashtra (an adult son) what’s going on. “They are giving praise to Saraswati,” he says, “the goddess of knowledge.”
On the subject of knowledge, we do know what goes into river Ganges, and we know that much of it, from organic matter to toxins, is not good. The river, of course, has absorbed the remains of the dead for centuries. The boatman tells me this and more, gesturing toward the water with just a hint of rehearsal: “Ashes from cremation, they go there. Bodies of animal, cow and buffalo, they go there. Bodies of special persons, they are tied to rock with string, and they go there, sadu holy man, leper, child under two years old, pregnant lady, man bitten by cobra, all are there.”
But the more potent, though less romantic, organic pollutant is raw sewage, which flows down miles of tributaries and canals, sending Mother Ganga’s fecal coliform levels through the roof. In a country where 80% of health problems are related to water-borne illness, that’s devastating. Then there are industrial pollutants like mercury, lead, and PCBs, which are routinely discharged from the thousands of small factories along the riverbanks. Abutting croplands leak pesticides and toxic fertilizers too.
These water quality problems are now amplified by a severe decline in water quantity. Mechanical diversions of water for irrigation, drinking water, and power generation limit stream flow and thus increase the concentration of water-borne pollution. And the headwater glaciers that feed the Ganges river network are retreating rapidly because of climate change. The full effect of global warming on the Ganges is crucial but little understood. It will be the wild card in all future river management efforts.
The Indian government, spurred by citizen activists, has been fighting the river’s problems for years. But the resulting initiative, known as the Ganga Action Plan (GAP), is too expensive and depressingly ineffective. GAP promised an array of new sewage plants, tough water quality standards, and hard-nosed enforcement. But many treatment facilities were never built; and those that were suffered from shoddy construction, poor maintenance, and inadequate power supplies. Pesticides and industrial toxins were never addressed. And restricting diversions to maintain water flow has become political poison.
Here at the aarti ceremony, the clouds of smoke have transformed into small balls of fire and (my boat mate tells me) the singers are now praising Shiva, the Destroyer. I dip my hand into the water. It really is pleasant—warm and soft with a light slippery feel. I ask the boatman whether he thinks the water is clean. Yes, yes, he insists. It’s brown, like chai tea, but that is the mud. And after the monsoon the silt settles down. In fact, he insists, the mud actually neutralizes the river’s harmful impurities. He reminds me of the human ashes, the expired livestock, the anchored bodies of lost children. “Smell,” he says, “just smell.” He draws a deep breath. “You see? No smell is there. That is Mother Ganga.”
For me, the Ganges experience encapsulates three points. First, in the developing world, climate adaptation will always be just a part of much more obvious and immediate environmental problems. Global warming is already shrinking the Ganges’ output and threatening future water supplies for millions living in the Ganges basin. But the lesser flow is already compromising the water quality for people who use it today. In adapting to climate change, policy makers are properly more concerned with addressing the immediate health and cultural needs of the public. But when they do that, they must consider climate.
Second, getting adaptation right requires top-notch climate projections and hydraulic modeling. The government’s Indian Institute of Tropical Meteorology is on the cutting edge of climate science, but its data are not always easily accessible to policy makers and in some cases unavailable to ordinary citizens. This needs to change.
Third, in a bureaucracy as big and unwieldy as India’s the government’s feet must be held to the fire. It takes an informed and impassioned citizenry to make sure that project money is not wasted and that health standards get enforced. It’s crucial that the everyday person understand not just what climate change or water pollution is, but what it does and how it harms..
Which brings me back to Saraswati, champion of knowledge. Always the favorite of exam-taking students, Saraswati is, herself, a former river goddess, often seen resting atop a paddling swan. But what I like most are her four strong arms, signifying intellect, sentience, alertness, and ego. Because, really, there is a lot of work to be done.
Sunday, October 21, 2012
Jim Chen, Bioprospect Theory, available at http://ssrn.com/abstract=2164848 or http://bit.ly/BioprospectTheory. To be presented at the University of Akron School of Law's sixth annual Intellectual Property Scholars Forum on October 26, 2012. Jeremy Cherfas and Bruce Arnold have kindly taken notice of Bioprospect Theory on their blogs.
Conventional wisdom treats biodiversity and biotechnology as rivalrous values. The global south is home to most of earth's vanishing species, while the global north holds the capital and technology needed to develop this natural wealth. The south argues that intellectual property laws enable the industrialized north to commit biopiracy. By contrast, the United States has characterized calls for profit-sharing as a threat to the global life sciences industry. Both sides magnify the dispute, on the apparent consensus that commercial exploitation of genetic resources holds the key to biodiversity conservation.
Both sides of this debate misunderstand the relationship between biodiversity and biotechnology. Both sides have overstated the significance of bioprospecting. It is misleading to frame the issue as whether intellectual property can coexist with the international legal framework for preserving biodiversity. Any lawyer can reconfigure intellectual property to embrace all of the intangible assets at stake, including raw genetic resources, advanced agricultural and pharmaceutical research, and ethnobiological knowledge.
The real challenge lies in directing biodiversity conservation and intellectual property toward appropriate preservation and exploitation of the biosphere. Commercial development aids biodiversity primarily by overcoming perverse economic incentives to consume scarce natural resources that may turn out to have greater global, long-term value. We continue to debate these issues not because we are rational, but precisely because we are not.
Indeed, legal approaches to biodiversity and to biotechnology are so twisted that they represent an extreme application of prospect theory. Losing supposedly hurts worse than winning feels good. The law of biodiversity and biotechnology appears to reverse this presumption. Biodiversity loss is staggering and undeniable. Humans are responsible for the sixth great extinction spasm of the Phanerozoic Eon. By contrast, gains from bioprospecting are highly speculative. Even if they are ever realized, they will be extremely concentrated. There is no defensible basis for treating ethnobiological knowledge as the foundation of a coherent approach to global economic development.
In spite of these realities, the global community continues to spend its extremely small and fragile storehouse of political capital on this contentious corner of international environmental law. Global economic diplomacy should be made of saner stuff. The fact that it is not invites us to treat the entire charade as a distinct branch of behavioral law and economics: bioprospect theory.
Saturday, October 20, 2012
Sunday, October 14, 2012
As a child of the Cold War, a time long ago when bedtime stories about the end of the world usually involved nuclear war between East and West, I have always thought of Australia as the probable last redoubt of civilization. I blame Neil Shute's On the Beach: The idea was that fallout from a nuclear war between the Soviet Union and the United States would reach Australia more slowly than any other place in the developed world.
Fast forward four decades, half a century, some other comparable stretch of time. Today, bedtime stories about the end of the world usually involve polar melting both north and south. And far from being civilization's last redoubt, "Australia is the canary in the coal mine" of global climate change, a harbinger of things "we can expect to see in other places in the future." From Jeff Goodell, Climate Change and the End of Australia:
Over the course of just a few weeks [in 2011], the continent [was] hit by a record heat wave, a crippling drought, bush fires, floods that swamped an area the size of France and Germany combined, even a plague of locusts. "In many ways, it is a disaster of biblical proportions" . . . . Australia — which maintains one of the highest per-capita carbon footprints on the planet — has summoned up the wrath of the climate gods . . . .
Australians [fear] that their country may be doomed by global warming. [That] year's disasters, in fact, [were] only the latest installment in an ongoing series of climate-related crises. In 2009, wildfires in Australia torched more than a million acres and killed 173 people. The Murray-Darling Basin, which serves as the country's breadbasket, has suffered a decades-long drought, and what water is left is becoming increasingly salty and unusable, raising the question of whether Australia, long a major food exporter, will be able to feed itself in the coming decades. The oceans are getting warmer and more acidic, leading to the all-but-certain death of the Great Barrier Reef within 40 years. Homes along the Gold Coast are being swept away, koala bears face extinction in the wild, and farmers, their crops shriveled by drought, are shooting themselves in despair.
Neil Shute really did fail to foresee the future. Perhaps time has come to rewrite his apocalyptic classic. The new title, though, might have to be On the Barbie.
Wednesday, October 03, 2012
A scant year after the collapse of its ill-fated merger with AT&T, T-Mobile has announced its intentions to acquire MetroPCS. This occasion is as good as any other for promoting my paper on one aspect of the failed AT&T/T-Mobile merger, Merger to Monopsony: AT&T, T-Mobile, and the Clayton Act. I am very grateful to Danny Sokol for promoting Merger to Monopsony in a recent post on the Antitrust and Competition Policy Blog.
Jim Chen, Merger to Monopsony: AT&T, T-Mobile, and the Clayton Act, downloadable at http://ssrn.com/abstract=2130962:
In a pivotal antitrust decision, Cellular South, Inc. v. AT&T Inc., 821 F. Supp. 2d 308 (D.D.C. 2011), the United States District Court for the District of Columbia allowed Sprint and Cellular South to pursue their suits to enjoin AT&T's proposed acquisition of T-Mobile. These suits posed a significant barrier to the merger of AT&T and T-Mobile. The ability of Sprint and Cellular South to pursue their claims represented a modest but important victory against the domination of the American wireless industry by an emerging AT&T/Verizon duopoly.
Friday, September 28, 2012
I’ll forego reporting on India today to address a new development in the post-Hurricane Katrina litigation: Judge Jerry Smith’s breathless hairpin turn in the “Katrina Canal Breaches Litigation.” On Monday, Judge Smith, writing for a three-judge panel of the Fifth Circuit U.S. Court of Appeals, dismissed a lawsuit against the U.S. Army Corps of Engineers for flood damage during Hurricane Katrina, a case that could have exposed the federal government to billions of dollars in damages over the next several years. Judge Smith’s opinion reversed a decision he wrote just six months ago, representing the same three-judge panel, which had ruled the plaintiffs’ claims were legitimate and must move forward.
Why the switch? The new opinion suggests it is because the first time around all three judges somehow misunderstood the facts. But that’s unconvincing. A look at the court’s earlier opinion and the trial court’s original findings of fact show that the Fifth Circuit got it right the first time. What’s more, this sudden reversal could deny thousands of flood victims the means to build back their lives, while narrowing the chances that the government can be held accountable for even the most pedestrian mistakes. .I’ll return to these points in a moment, but first some background.
The Katrina Canal Breaches Litigation involves claims by residents of New Orleans and St. Bernard Parish for damages resulting from storm surge allegedly funneled through the Mississippi River Gulf Outlet (MR-GO), a navigation channel that has since been de-authorized and “plugged” for safety reasons. (I last blogged about this case here.) Plaintiffs argued that the Army Corps's negligence in design, construction, and maintenance of MR-GO increased Katrina’s storm surge and made the levee system more vulnerable than it otherwise would have been. Plaintiffs were particularly troubled by the Corps’s refusal to prevent erosion by armoring the banks at the time of construction and in the several years thereafter. The lack of armor—or “foreshoring,” as engineers call it—caused the channel’s width to expand considerably, leaving a perfect path for a bulldozing hurricane.
The Corps never refuted the factual claims and the trial court later characterized the agency’s actions as “negligent.” But the Corps argued its acts were shielded by two forms of government immunity, one based on the Flood Control Act of 1928 and the other based on the traditional doctrine of sovereign immunity. The first was correctly rejected by both the trial and appellate courts. The second is the focus of my analysis here.
Sovereign immunity generally bars suits against the government. The idea derives from the British fiction that “the King can do no wrong,” and thus cannot be hauled into his own court. Today that seems unfair, so a statute called the Federal Tort Claims Act waives the government’s sovereign immunity for personal injury claims caused by negligent acts as long as the act cannot be reasonably characterized as involving a balance of “policy” options.
In this case, the Corps tried to argue its failure to armor the channel was a policy choice that weighed public risk against construction cost. But neither the trial court nor the appellate court (the first time around) bought the argument. That’s because all of the trial testimony showed that Corps officials never believed the erosion posed a safety risk. They were tragically wrong about that; in fact, every scientific study available at the time said they were wrong about that. But the point is that the decision to let the channel erode happened not because someone thought the public risk was worth it, but because no one thought there was a public risk. It was as if the Corps were claiming that a crash caused by one of its truck drivers was caused not by the driver’s ignorance of worn-out brakes, but by her choice to balance the risk of worn-out brakes against the cost of replacing them.
But don’t take my word for it. Here’s the Fifth Circuit panel, in its original decision, describing the evidentiary record (italics mine):
The . . . plaintiffs and [friends of the court] point to ample record evidence indicating that policy played no role in the government's decision to delay armoring MRGO.
The district court found as a matter of fact that, in . . . maintaining . . . the MRGO, the Corps labored under the mistaken scientific belief that the MRGO would not increase storm-surge risks.
Even the Corps’s own lawyers are willing to concede:
At oral argument in the district court, the United States made the same admission: The Corps “determined that MRGO played no role in major hurricane events” and, “for that reason, the Corps saw no reason” to take any steps to remedy MRGO's dangers.
And when confronted by a single vague quotation intended by the Corps to suggest some policy dimension, the court casually bats it aside:
Against the considerable evidence amassed to suggest that the Corps's decisions were grounded on an erroneous scientific judgment, not policy considerations, the government offers little affirmative evidence: “[I]n the Corps' view, maintaining MR–GO through dredging and raising the levees through separate projects allowed the Corps to maximize its limited resources and to continue operating the MR–GO as a shipping channel as Congress charged it to do.” This quotation is the closest the government comes to arguing that it had policy reasons . . . for delaying MRGO's armoring. But the government's contention cannot stand where there is no record evidence that, because of budgetary constraints, the Corps failed to implement feasible remedial measures or that it ever performed a cost-benefit analysis.
So there it is: the Corps never approached safety as a policy issue because it never understood safety as an issue at all. Corps officials said that. Corps lawyers said that. And, according to the appellate court, the whole “ample record evidence” says that.
And yet, somehow after a few months, all this judicial confidence goes wobbly. I imagine one of the judges waking up in the middle of the night crying, “Caesar’s Ghost! All this time I have misunderstood the facts of that vexing case. I must call the others.” And something like that does indeed appear to have happened, for the next we read in the panel’s do-over opinion:
[T]here is ample record evidence indicating the public-policy character of the Corps's various decisions contributing to the delay in armoring. Although the Corps appears to have appreciated the benefit of foreshore protection as early as 1967, the record shows that it also had reason to consider alternatives (such as dredging and levee “lifts”) and feasibility before committing to an armoring strategy that, in hindsight, may well have been optimal.
We may never know what spirits swayed the jurists at this late date. That’s a shame, because if a federal court is going to backtrack on a case of such magnitude, it owes us some analysis, not a few conclusory statements. If willful ignorance constitutes a policy choice, is there any incompetence that does not?
I’m afraid some will say plaintiffs should never have expected more in the first place. Did anyone really expect a government agency to be held accountable in such an exceptional case? Sure, Katrina was an outlier. But disasters as a category are not; they are the rule, not the exception. If the King can be hauled into court when the stakes are low, the same must be true when the stakes are high.
Robert R.M. Verchick
Gauthier ~ St. Martin Chair in Environmental Law
Loyola University New Orleans
Wednesday, September 19, 2012
I am the consultant to the Administrative Conference of the United States (ACUS) on a project to study inflation-based adjustments in federal civil monetary penalties. The draft report for this project is now available on my SSRN page:
Jim Chen, Inflation-Based Adjustments in Federal Civil Monetary Penalties (Sept. 18, 2012), available at http://ssrn.com/abstract=2148650 or http://bit.ly/InflationAdjustmentAct —
Civil monetary penalties play a vital role in federal law. The Federal Civil Penalties Inflation Adjustment Act of 1990, Pub. L. No. 101-410, prescribes rules for the regular adjustment of federal civil monetary penalties in response to inflation. Three statutory defects have undermined the Inflation Adjustment Act. First, the Act's 10 percent cap on initial adjustments creates an inflation gap relative to the level that would properly reflect inflation. Second, the Act directs federal agencies to use Consumer Price Index data that are at least 7 months and as many as 18 months out of date. This creates CPI lag in the adjustment of civil monetary penalties. Third, the Act's rounding rules can force some agencies to wait 15 years or more between adjustments. This report for the Administrative Conference of the United States examines the Inflation Adjustment Act and recommends possible legislative remedies for the Act's defects.
Tuesday, September 18, 2012
I had been wondering what ordinary people in India think about climate change. So last week on my ride home from the office, I asked my auto-rickshaw driver. He was a talkative guy, bearded, with black spectacles and a navy blue turban. He had been keen on identifying for me the many troubles a man like him endures on the subcontinent. “Too many people!” he shouted, his voice competing with the cab’s rattling frame and the bleats of oncoming horns. “Too much traffic!”
We swung around a landscaped rotary. I gripped my seat. A copse of date palms swerved by, and then a billboard: “Enrich Delhi’s Green Legacy.” I took the bait. “So what do think about global warming?” I shouted.
We slowed to a stop behind a row of cars and two-wheelers waiting at the light. He cut the motor. A small boy pranced into the stalled traffic and began turning cartwheels in hopes of a small remuneration.
“Yes, I know about that,” the driver said. “Too much warming. Too much heat.”
“But do you worry about it?”
“Me — no.” He fired the engine and frowned slightly. “You know, India has too much noise!” he shouted. “And too many dogs! Too many everything.”
I continue to grill my Indian acquaintances on climate change, but I’ve now found a more scientific source of information. The Yale Project on Climate Change Communication released a report last month, “Climate Change in the Indian Mind,” that takes a broad look at climate change awareness and attitudes in modern India. Based on a survey of 4,035 Indians—both urban and rural, from a range of income and education levels—the report presents an encouraging view of the world’s biggest and most perplexing environmental challenge in the world’s biggest and most perplexing representative democracy.
Like the rickshaw wallah in Delhi, most Indians are aware of changing trends in the climate. According to the report:
Only 7 percent of respondents said they know “a lot” about global warming, while 41 percent had never heard of it or said, “I don’t know.” However, after hearing a short definition of global warming, 72 percent said they believe global warming is happening, 56 percent said it is caused mostly by human activities, 50 percent said they have already personally experienced the effects, and 61 percent said they are worried about it.
(Compare that to public opinion the United States. According to a recent Gallup poll, only 52% of Americans say the effects of climate change are now occurring. But ask about the cause, and one finds numbers similar to those in India: 53% percent of Americans, according to Gallup, attribute global warming to human activity.)
But, unlike the rickshaw wallah, most Indians are worried enough about global warming that they want their government to address the problem.
• Millions of Indians are observing changes in their local rainfall, temperatures, and weather, report more frequent droughts and floods, and a more unpredictable monsoon. A majority of respondents said their own household’s drinking water and food supply, health, and income are vulnerable to a severe drought or flood and that it would take them months to years to recover. • 54 percent said that India should be making a large or moderate-scale effort to reduce global warming, even if it has large or moderate economic costs. • Majorities favored a variety of policies to waste less fuel, water, and energy, even if this increased costs. • 70 percent favored a national program to teach Indians about global warming.
This glimpse into Indian minds must come with caveats. Like any survey, it captures only a moment in time. Plus, it’s easier to favor conservation policies when you don’t know exactly who would bear the cost. Even with a firm public commitment to action, the translation from public will to government policy is notoriously complicated in India. (Or, for that matter, in the United States.)
But the survey offers a ray of hope. India’s ambition of becoming a true global power will depend on its ability to harness green energy and cope with higher temperatures, bigger rains, and longer droughts. In a general way, Indians know this. But ambition means nothing without political leadership. And that is one thing in India that is not in oversupply.
Editor's note: Robert R.M. Verchick is a 2012-2013 Fulbright-Nehru Research Scholar and holds the Gauthier ~ St. Martin Chair in Environmental Law at Loyola University New Orleans.