How the Fed Should Fight Climate Change - The Atlantic - 0 views
www.theatlantic.com/...595084
climate change monetary federal reserve banking financial politics history
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Mark Carney, a former Goldman Sachs director who now leads the Bank of England, sounded a warning. Global warming, he said, could send the world economy spiraling into another 2008-like crisis
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He called for central banks to act aggressively and immediately to reduce the risk of climate-related catastrophe
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the U.S. Federal Reserve was the pivotal American institution in stopping a second Great Depression. Its actions were “historically unprecedented, spectacular in scale,” he writes, and widely understood by experts to be the “decisive innovation of the crisis.”
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“If the world is to cope with climate change, policymakers will need to pull every lever at their disposal,” he writes. “Faced with this threat, to indulge in the idea that central banks, as key agencies of the state, can limit themselves to worrying about financial stability … is its own form of denial.”
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In England, by contrast, Carney has convened 33 central banks to investigate how to “green the financial system.” According to Axios, every powerful central bank is working with him—except for Banco do Brasil and the Fed.
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Mark Carney, the governor of the Bank of England, in 2015, in a speech which has subsequently received massive coverage—and he is a man, after all, absolutely of the global financial establishment—coined the idea of a climate Minsky moment. [Editor’s note: A Minsky moment is when an asset’s price suddenly collapses after a long period of growth.]
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We would need [fossil-fuel assets] to be on the balance sheet of actors who were under huge pressure in a fire-sale situation and who couldn’t deal with a sudden revaluation. We would need an entire network of causation to be there, which is what produced the unique crisis of 2007 to 2008.
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So imagine that we stay on our current path, and we’re headed toward 3 or 4 degrees’ [Celsius] temperature change. And then imagine some of the nonlinearities kick in, which the climate scientists tell us about, and we face a Fukushima-style event.
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What happens next? You then get nervous democratic politicians—and not necessarily those who are known for their populism, but just nervous democratic politicians—suddenly deciding that we have to stop doing one or another part of our carbon-based economy. It has to stop, and it has to stop immediately. And then you get big shocks. Then you get sudden revaluations.
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In other words, the success of the delaying tactics of the carbon lobby create a situation in which we’re then faced with the possibility of a sudden regulatory shock
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“One-third of equity and fixed income assets issued in global financial markets can be classified as belonging to the natural resource and extraction sectors, as well as carbon-intensive power utilities, chemicals, construction, and industrial goods firms.”
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Whether that will, in fact, ease the formation of majorities in Congress is another question. Because, after all, it does somehow have to get through the Senate, you know.
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Germany is far, far more exposed. A huge slice of their economy is basically all about internal combustion engines, and so that number includes all of those stocks, for sure.
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If we saw a huge shock to, say, European equity [exchange-traded funds], which were heavily in German automotive, that’s the sort of trigger that we might be looking at.
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This is not simply a zero-sum game; this is a structural transformation that has many very attractive properties. There’s loads of excellent jobs that could be created in this kind of transition.There’s no reason why, even by conventional GDP-type metrics, it need even be associated with the kind of feel-bad factor of slow GDP growth. Then [you could] also link it to a revival of social democracy for the United States. From a progressive political point of view, that’s obviously extremely attractive.
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there’s also a deeper view: that climate change is the situation within which all other politics will happen for the next several generations, at least.
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When you look at a third of securities tied up in the carbon economy and the evidence for decoupling GDP growth from carbon emissions maybe not being as strong as we’d like, do you think the change that needs to happen is realistic?
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Tooze: Realistic? No. I mean, depends what you mean by realism. The scale of the challenge requires a boldness of action for which there is no precedent. That’s the only good purpose that the war analogies serve
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Meyer: In your piece, you write: “Those in the United States who call for a Green New Deal or a Green Marshall Plan are, if anything, understating the scale of what is needed.”
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Tooze: Well, less large in absolute terms. Because even the U.S. was spending almost 40 percent of GDP on World War II. And if you’re the Soviet Union, you’re spending 55 to 60 percent in 1940. We don’t need to do anything like that. It needs to be much bigger than the New Deal, which in fiscal-policy terms was really quite trivial.
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Crucially, what makes it totally unlike the war is that there’s no happy end. There’s no moment where you win and then everything goes back to the way it was before, but just better. That’s a misunderstanding
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This isn’t crash dieting; this is a permanent change in lifestyle, and we need to love that and we need to live it and we need to own it and we need to reconcile ourselves to the fact that this is for us and for all subsequent generations of humans.
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It isn’t just the oil and gas majors, because they wouldn’t get you to 30 percent. Exxon isn’t big enough to get you to that kind of percentage. It’s Exxon, and [the major automakers] Daimler and BMW, and the entire carbon-exposed complex.
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all the really hard choices need to be made by people like China and India and Pakistan and Bangladesh and Indonesia
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You don’t have that very much in Germany. There isn’t anyone in Germany saying, “Which bit of mid-20th-century history is this most like?,” mercifully. The one analogy that has popped up in Germany is reunification, which I actually think is quite a good one, because that’s still an ongoing problem
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in the American case, it would be civil rights and Reconstruction, which isn’t a particularly optimistic comparison to draw. It’s an ongoing problem, it’s a deep historic problem, it only happened once, we still haven’t fixed it, and we’re not at peace.
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Meyer: There’s a kind of shallow view of climate change: that it is something we need to avert or stop. And that’s somewhat true
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furthermore—and much more fundamentally than any of those things—this isn’t really about America. I mean, America can be an obstacle and get in the way, but none of the really hard choices needs to be made by Americ
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like Reconstruction or the civil-rights movement, it needs to be something that people take on like a moral commitment, in the same way they take on genocide prevention as a moral commitment
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problems that we thought we’d fixed, like the Green Revolution and the feeding of the world population, for instance—totally not obvious that those fixes cope with the next 20 years of what’s ahead of us. The food problem that was such an oppressive issue globally in the 1970s may resurge in an absolutely dramatic way.
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Meyer: Given all that, if Jerome Powell decided that he wanted to intervene on the side of climate action, what could he do? What could the Fed do?
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Tooze: What I think the Fed should announce is that it enthusiastically supports the idea of a bipartisan infrastructure push focused on the American electrical network, first and foremost, so that we can actually hook up the renewable-generating capacity—which is now eminently, you know, realistic in economic terms. Setting a backstop to a a fiscal-side-led investment push is the obvious thing.
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It is indeed a highly appropriate response to an environment of extremely low interest rates, and [former Treasury Secretary] Larry Summers & Co. would argue that it might help, as it were, to suck us out of the state of secular stagnation that we’re in.
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another avenue to go down—for the Fed to take a role in helping develop a classification of green bonds, of green financing, with a view also to rolling out comprehensive demands for disclosure on the part of American firms, for climate risks to be fully declared on balance sheets, and for due recognition to be given to firms that are in the business of proactively preparing themselves for decarbonization.
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You could, for instance, declare that the Fed views with disfavor the role of several large American banks in continuing to fund coal investment. Some of the carbon-tracking NGOs have done very good work showing and exposing the way in which some of the largest, the most reputable American banks are still in the business of lending to Big Coal. Banking regulation could be tweaked in a way that would produce a tilt against that.
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the classic role of the Fed is to support government-issued debt. Insofar as the Green New Deal is a government-issued business, the Fed has just an absolutely historical warrant for supporting fiscal action.
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with regards to the broader economy, the entire federal-government apparatus essentially stood behind the spread of home ownership in the United States and the promotion of suburbanization through the credit system. And kind of what we need is a Fannie Mae and Freddie Mac for the energy transition.
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if the question is, Is there historical warrant for the financial agencies of government in the United States biasing the property structure in the economy in a certain way?, the answer is emphatically yes—all the way down to the grotesque role of the New Deal financial apparatus in enshrining the racial segregation of the American urban space, with massive effects from the 1930s onward.
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The idea of neutrality should not even be allowed in the room in this argument. It’s a question of where we want to be biased. If you look at QE, especially in the U.K. and the EU, it was effectively fossil-biased.
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monetary policy is not neutral with regards to the environment. There’s no safe space here. The only question is whether you’re going to lead in the right way
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Meyer: Last question. With any of this, is there a role for interested Americans to play if they are not particularly tied to the financial- or monetary-policy elite?
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Tooze: Support your congressperson in doing exactly what AOC did in the hearings with Powell a couple of weeks ago
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[Editor’s Note: Representative Alexandria Ocasio-Cortez asked Powell whether inflation and unemployment are still closely connected, as the Fed has long argued.]
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Applaud, follow with interest, raise questions. That’s exactly what needs to be happening. The politicization of monetary policy is a fact.
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If we don’t raise these questions, the de facto politics is, more often than not, conservative and status quo–oriented. So this, like any other area, is one where citizens—whether they’re educated and informed or not—need to wise up, get involved, and follow the arguments and develop positions.
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So applaud your congresspeople when they do exactly what AOC was doing in that situation. In many ways, I thought it was one of the most hopeful scenes I’ve seen in that kind of hearing in a long time.