How monoculture is like triple-A CDOs

By Felix Salmon
March 3, 2010
Beyond Green, writes asking for a bit more detail about this bit of my locavorism article:

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Tom Laskawy, of Beyond Green, writes asking for a bit more detail about this bit of my locavorism article:

If you only grow one crop, the downside of losing it all to an outbreak is catastrophe. In rural Iowa it might mean financial ruin; in Niger, it could mean starvation.

Big agriculture companies like DuPont and Archer Daniels Midland (ADM), of course, have an answer to this problem: genetically engineered crops that are resistant to disease. But that answer is the agricultural equivalent of creating triple-A-rated mortgage bonds, fabricated precisely to prevent the problem of credit risk. It doesn’t make the problem go away: It just makes the problem rarer and much more dangerous when it does occur because no one is — or even can be — prepared for such a high-impact, low-probability event.

The point here is that a disease-resistant crop is a lot like a triple-A-rated structured bond: they’re both artificially engineered to be as safe as possible. That would be a wonderfully good thing if no one knew that they were so safe. But if you’re aware of a safety improvement, that often just has the effect of increasing the amount of risk you take: people drive faster when they’re wearing seatbelts, and they take on a lot more leverage when they’re buying AAA-rated bonds.

The agricultural equivalent is the move to industrial-scale monoculture, “safe” in the knowledge that lots of clever engineers in the US have made the crop into the agribusiness version of a bankruptcy-remote special-purpose entity.

But the problem is that bankruptcy-remote doesn’t mean that bankruptcy is impossible: just ask the people running Citigroup’s AAA-rated SIVs. If and when the unlikely event eventually happens, the amount of devastation caused is directly proportional to the degree to which people thought they were protected. When something like that goes wrong, it goes very wrong indeed: artificial safety improvements have the effect of turning outcomes binary.

Essentially, you’re trading a large number of small problems for a small probability that at some point you’re going to have an absolutely enormous problem.

And on a long enough time line, even a small probability is bound to happen sooner or later. Which is something that the likes of Bob Rubin would do well to remember.

10 comments

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I don’t see the analogy. Genetically engineered crops are an answer to a different problem: how to get more food from less resources. With the extra resources we could buy corn and store it against a shock. It is an innovation in cost reduction. The problem is that nobody takes the profits and uses them to save against the risks posed by these crops. That is, people are short-sighted and do not worry about certain small catastrophic risks (by worry I mean actually do something costly about it).

Moreover, the innovation that leads to higher crop yields allows you to buy insurance against risk by investing in other assets that you can use to insure against the risk to the agriculture. It seems that the problem you are really worried about is not accounting for the risk. But the problem is not the innovation, it is the failure of imagination, or just a free rider problem.

Posted by bwickes | Report as abusive

I’ll see your analogy and raise you twenty, Felix.

Genetically engineered crops are the manifestation of corporate efforts to monopolize the world’s food supply, prematurely declared safe by paid spokespeople and mercenary greenwashers, titrated into trade agreements by venal politicos. At best, they’re an answer to problems that don’t exist.

There would be food – probably better food – without them, but the longer the GE PR squad hammers away at things full force, the more we’re meant to forget real food and obediently chow down like Cool Hand Luke. Meanwhile, epidemic obesity and Type2 Diabetes have blighted the Western World – next stop, every other place on Earth stupid enough to let the ghouls of GE in.

Investment bankers, without whom there would still be money – probably much cleaner money – act like they invented entrepreneurship itself. Their financial products manifestly contaminate and stifle human ingenuity, real products and meaningful services wherever they go, like GE zombie weeds, so what’s left but to deal with them at face value? It’s illegal to do to them what they really deserve, after all.

These unreserved bankers, not content with having made a mockery of American industry and capitalism itself, are on a world tour now, ruining whatever they can’t acquire by honest means (i.e. everything). Fleets of politicians, lawyers and former journalists bustle away daily trying to imbue their shenanigans with the appearance of sanity, innocence and well-being.

What’s not to like about a bunch of empty financial calories? Bon appetit!

Posted by HBC | Report as abusive

As bankers got millions of Americans into the wrong mortgages and then packaged them into various derivative instruments, Wall Street got rich. Have you seen Dupont’s stock the last few years? What a dog. They didn’t get rich, and neither did 99% of America who is now paying for Wall Street’s greed. I work for http://storyburn.com and the mess that lands on our doorstep is crazy bad. We have the most read home foreclosure story on the web as well as several job hunting stories. Check out our new Rant forum

Posted by stud95 | Report as abusive

monoculture may work for grasses, but most other crops need insect pollination for either fruit or seed, and monoculture is not conducive to insect survival….

Posted by rjs0 | Report as abusive

Interesting analogy, but like any analogy, it is limited.

Financial bubbles are bound to collapse – It is not a matter of probability but of absolute certainty.
Furthermore, the more successful a bubble, I.E. the faster and bigger it grows, the more its very success shortens its own life span, and increases the damage its collapse would cause.
This is because success draws new investors, and at the same time makes the bubble an easier and more profitable target for those who will bet on its collapse.
The ratio is not linear, but exponential.

BTW, have you ever been hungry?
Genetically modified crops have contributed a lot to feeding starving people. It’s a technology that needs to be developed with caution, but it has a big beneficial potential.

Posted by yr2009 | Report as abusive

The trouble with locavorism is the assumption that it’s more natural to eat foods that can be grown locally. It completely ignores the migration of people from one location to another. If people developed in Africa, then using locavore logic, a diet of foods found in Africa would be the healthiest. Telling a Canaidan he should only eat food he can grow in permafrost is foolish.

Posted by drewbie | Report as abusive

Drewbie,

What, you don’t like the idea of caribou for breakfast, lunch, supper?

Posted by MaggiesFarmboy | Report as abusive

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