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Supply Chain Risk

The Capital Note: Legislation by Regulation (Soon) — The Fed is Entering the Climate Wars

Outside the Federal Reserve building in Washington, D.C. (Larry Downing/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: the Fed enters the climate wars, lockdown update, thank you, Big Pharma, non merci, Amazon, and missing flying cars.

Climate Change at the Fed

I’ve written a bit before about the danger posed by the “greening” of the Fed, which is to say that it might start to see combating climate change as part of its mandate. For the Fed to do this would be to slide down a slippery slope down which other central banks are sliding very fast.

Up until now it has resisted. Up until now.

In August, the Wall Street Journal reported:

While the Fed has left the broader response to a warming planet to elected officials, it has taken on the issue of how severe weather events will affect banks, pressing them to be prepared to deal with those types of shocks.

That seemed an entirely reasonable response, but it is also worth re-reading something else that I quoted from the Journal:

[Fed chairman] Powell in January said climate change is “a very important issue, but it’s essentially assigned to many other agencies in the federal government and state governments for leadership on that.” But he added, “The public has every right to expect and will expect that we will assure that the financial system is resilient and robust against the risks from climate change” and that “we are in the very early stages, as are other central banks, in understanding just what that means.”

Powell’s understanding was, as people say, evolving. And it has evolved some more.

From Politico, last week:

The Federal Reserve on Monday for the first time formally highlighted climate change as a potential threat to the stability of the financial system and said it is working to better understand that danger.

In its semiannual report on financial stability, the Fed said it would be helpful for financial firms to provide more information about how their investments could be affected by frequent and severe weather and could improve the pricing of climate risks, “thereby reducing the probability of sudden changes in asset prices.”

However, the central bank stopped short of outright calling on banks to do so, in what is probably a reflection of the fact that the Fed is in the early stages of formulating its approach to climate change.

“The Federal Reserve is evaluating and investing in ways to deepen its understanding of the full scope of implications of climate change for markets, financial exposures, and interconnections between markets and financial institutions,” according to the report, adding that it will look at these issues through the lens of financial stability.

It also said it expects banks “to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.”

Fed Chair Jerome Powell said last week that the “science and art” of incorporating climate change into financial regulation is new but that the Fed is “very actively in the early stages” of getting up to speed and working with officials around the world.

Perhaps the most ominous of all the ominous words contained in those passages is that the Fed is “working [on this] with officials around the world,” officials who will, inevitably, be much deeper into the groupthink surrounding climate change, and what do about it. (I suppose I should say, as I always feel that I have to say when writing something like this, that I am a climate “lukewarmer” myself.)

Now look at some comments from the Hoover Institution’s John Cochrane. No apologies for the fact that I will quote from them at length. What Cochrane (who does not claim that “climate change is fake or unimportant”) has to say matters, and it concerns more than climate change. Equally, although his remarks are focused on the European Central Bank (he was addressing an ECB conference — I hope for his sake, remotely), they should, in my view, be clearly seen also as a warning to the Fed.

Cochrane (my emphasis added):

The question is whether the European Central Bank (ECB), other central banks, or international institutions such as the International Monetary Fund, the Bank for International Settlements, and the Organization for Economic Co-operation and Development should appoint themselves to take on climate policy—or other important social, environmental, or political causes—without a clear mandate to do so from politically accountable leaders.

The Western world faces a crisis of trust in our institutions, a crisis fed by a not-inaccurate perception that the elites who run such institutions don’t know what they are doing, are politicized, and are going beyond the authority granted by accountable representatives.

Trust and independence must be earned by evident competence and institutional restraint. Yet central banks, not obviously competent to target inflation with interest rates; floundering to stop financial crisis by means other than wanton bailouts; and still not addressing obvious risks lying ahead; now want to be trusted to determine and implement their own climate change policy? (And next, likely, taking on inequality and social justice?)

We don’t want the agency that delivers drinking water to make a list of socially and environmentally favored businesses and start turning off the water to disfavored companies. Nor should central banks. They should provide liquidity, period.

Quite.

Cochrane was specifically discussing the role of central banks and certain international organizations, but he could also have been talking about the mission creep now detectable in so many institutions, especially in the field of finance, where the intertwined ideologies of “socially responsible” investing and stakeholder capitalism have led to the situation where decisions that should be left to elected governments are now being taken by investment managers playing politics with other people’s savings.

Some of those investment managers, like increasing numbers of central banks, try to justify what they are doing by talking about risk. This, on any basis that excludes the (non-negligible) risk of command-and-control climate regulation, is absurd. Yes, it’s prudent to see how resilient a company might be in the event, say, of a hurricane or, for that matter, a terrorist attack, or any number of other potentially catastrophic risks, but to include “climate change” in that list is to replace prudence with paranoia (and there are many ruder words that I could use).

Cochrane:

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.

Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.

That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.)

Next, we contemplate a pervasive regime essentially of shame, boycott, divest, and sanction

“[to] link the eligibility of securities . . . as collateral in our refinancing operations to the disclosure regime of the issuing firms.” [Cochrane is quoting an ECB executive board member]

We know where “disclosure” leads. Now all companies that issue debt will be pressured to cut off disparaged investments and make whatever “green” investments the ECB is blessing . . .

Read the whole thing, really.

Cochrane made these remarks in late October. If you had asked me then what my test would have been to determine whether the Fed had finally succumbed to the mission creep that he described so well, it would have been the news that it had finally applied to join the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

Well, via Bloomberg Green (November 10):

The Federal Reserve expects in coming months to join the Network for Greening the Financial System, a group of 75 central banks set up to combat climate change by better understanding the risks it poses to economies.

“We have requested membership. I expect that it will be granted,” Fed Vice Chair for Supervision Randal Quarles told a hearing before the Senate Banking Committee Tuesday. He said the Fed could probably join before the NGFS’s annual meeting in April.

The NGFS requires its members be signed up to the Paris Climate Accord. President Donald Trump announced in 2017 that he was withdrawing the U.S. from the pact, but President-elect Joe Biden has pledged to rejoin as he makes fighting climate change a key focus for his administration when he takes office in January.

The fix is in.

Around the Web

In a Capital Note last week, I noted reports that Michael Osterholm, a Biden coronavirus adviser, had been calling for a four to six week national lockdown, an idea that struck me as . . . unwise.

So this was somewhat reassuring:

Bloomberg:

Vivek Murthy, a former U.S. surgeon general who’s one of Biden’s top three advisers on the virus, said that based on what the nation has learned about Covid-19 since the spring, the preferred approach to fighting it is “a dial that we turn up and down, depending on severity.”

“If we just lock down the entire country without targeting our efforts, then we are going to exacerbate the ‘pandemic fatigue’ people are feeling, you’re going to hurt jobs and the economy, you’re going to shut down schools and hurt the education of our children,” Murthy, who was appointed by former President Barack Obama, said on “Fox News Sunday.” . . .

Atul Gawande, the surgeon and author who’s a member of Biden’s wider group of virus advisers, also called for targeted measures. They should build on mask-wearing and testing to dial up and down capacity restrictions on a more localized basis, he said on ABC’s “This Week.”

“We are not in support of a nationwide lockdown,” Gawande said. “We can get this under control. The critical parts are understanding what we’ve learned since we did a nationwide lockdown in early April.”

The Spectator:

A novel vaccine for a new virus will have been developed, approved, and started rolling off production lines (and let’s remember that vaccines are not easy things to manufacture) in less than twelve months. Nothing like that has ever been done before. Many people doubted it was even possible.

The only organisation capable of achieving that is a mega corporation. It takes money and investment. It takes expertise. And it takes organisational and logistical skills on a huge scale. There are some other organisations that have one or two of those qualities. But only the private multi-national corporation has all three. No other institution does, nor could any other have delivered what appears to be a working vaccine so quickly.

We can criticise multinational companies all we want. We can blame them for creating half the world’s problems. But in a crisis it is worth remembering just how useful they are. Probably no one will say thank you, or keep that in mind next time they are blamed for something or other. But they should.

And that was written before the Moderna news.

Pfizer and Moderna may help us emerge from the COVID-19 crisis and Amazon may have helped many people weather it, but:

The Daily Telegraph:

Anne Hidalgo, the Socialist mayor of Paris, is among a host of Left-wing and Green figures, along with artists, who have signed an online petition calling for a #NoëlSansAmazon (Christmas without Amazon).

The signatories want “digital highwaymen” to be reined in via laws that “benefit our economy and not the crazy fortune of Jeff Bezos”.

“This is not a call not to order on Amazon but a positive petition for the benefit of local shopkeepers and for more sustainable e-commerce,” said Matthieu Orphelin, a former MP for President Emmanuel Macron’s LREM party who left the group because he felt it was not doing enough to protect the environment.

The petition was released after politicians and unions joined forces with booksellers and publishers to call for a one-off tax on Amazon sales to help them survive and to “stop the expansion of the e-commerce giant”.

Random Walk

This caught my eye from Jason Crawford’s review of Where Is My Flying Car? by J. Storrs Hall.

One of the culprits? The counterculture:

Through maybe the 1950s, visions of the future, although varied, were optimistic. People believed in progress and saw technology as taking us forward to a better world. In the span of a generation, that changed, with the shift becoming prominent by the late 1960s. A “counterculture” arose which did not believe in technology or progress: indeed, a major element of the counterculture was the environmentalist movement, much of which saw technology and industry as actively destroying the Earth.

In H. G. Wells’s The Time Machine, the “Eloi” were a weak, dissolute race of useless people who contribute nothing to society (a parody of the idle rich of 19th-century England). Hall calls the activists of the counterculture the “Eloi Agonistes”, and blames them for “ergophobia” and for excessive regulation:

“Unlike a century ago, today for everyone who is working on advancing technological progress, there is someone else who fervently believes that they are saving the planet by stopping them.”

It’s a generalization, but one of the characteristics of the Left from the mid 19th century was its essential Prometheanism. In time, man would be able to achieve anything.

Take this for example:

The present distribution of mountains and rivers, of fields, of meadows, of steppes, of forests, and of seashores, cannot be considered final. Man has already made changes in the map of nature that are not few nor insignificant. But they are mere pupils’ practice in comparison with what is coming. Faith merely promises to move mountains; but technology, which takes nothing “on faith”, is actually able to cut down mountains and move them. Up to now this was done for industrial purposes (mines) or for railways (tunnels); in the future this will be done on an immeasurably larger scale, according to a general industrial and artistic plan. Man will occupy himself with re-registering mountains and rivers, and will earnestly and repeatedly make improvements in nature…

The author? Trotsky.

A Green New Deal, that isn’t.

— A.S.

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