The week of November 15: regulatory creep, inflation, taxation, and much, much more.
I was going to write this week about the president’s, uh, ambitious claim that some sort of conspiracy was behind the increase in the oil price, but numerous NR types got there first.
As Charlie Cooke noted, there is something somewhat contradictory about the administration’s energy policy at the moment:
Simultaneously Biden has taken to arguing (a) that the United States should reduce the production of fossil fuels, curb the number of new pipelines on American soil, limit the amount of federal land on which oil and gas can be drilled, and, as CNN puts it, break sharply “from the Trump administration’s mission to maximize fossil fuels production”; (b) that other countries must produce more fossil fuels for American use at once — and, indeed, that at this “critical moment in the global recovery,” their refusal to do so is irresponsible; and (c) that, actually, this isn’t a supply issue at all, but a dastardly gouging issue that the FTC must investigate post-haste. I’ve heard of an “all of the above” energy policy, but this one seems a touch ridiculous.
Well, yes.
And at the heart of that ridiculousness is a growing awareness that, once it moves much beyond rhetoric, pursuing the sort of climate policies that this administration seems set on doing will prove very expensive (see the shambles in Europe for a preview) and that is not going to play well with voters. To be fair, as Charlie notes, the current surge in the oil price has little to do with Biden, but as an exercise in test marketing the political effects of higher energy prices, it is proving instructive. That this is taking place during a painfully prolonged “transitory” inflationary surge is only making it more educational still.
The president has not confined himself to angry words. He has called on regulators, in this case the FTC, to consider whether illegal conduct is costing families at the pump. He is asking the agency to look into this “immediately.” The FTC is notionally an independent agency, but I suspect that, under its current activist leadership, it will be happy to oblige, however nonsensical the president’s allegations.
Any such investigation, however, would be a sideshow compared with the more aggressive stance that the FTC will be taking against Big Tech. This stance may owe more to an aversion to the independence of Big Tech (for reasons mainly revolving around ideology and power) and less to the law than it should. If the rules governing Big Tech are to be changed, and several pieces of legislation are, whatever one might think of them (spoiler: not much) at various stages of evolution, then Congress is the place to do it. The FTC’s job is to enforce the law, not to make it, but it does seem that, whatever Congress may do, the agency will attempt to use the pressure that even ultimately unsuccessful enforcement action can bring to discourage (legal) corporate behavior of which it disapproves, and it will do so at the expense of the taxpayers who fund the FTC and the shareholders of the companies who have to go through the expense of defending themselves against meritless action.
The FTC, of course, is by no means alone. The reason that the proposed nomination of Saule Omarova as comptroller of the currency has attracted so much controversy has little to do with an essentially unexceptional and long-distant Soviet past and almost everything to do with fears of what she might do with the power that comes with that job. That, as a young woman, she went to an elite university in the USSR, and won a Lenin scholarship is neither here nor there (I wrote about this here). What matters is what she thinks now, and, particularly, in the Biden era, a time when regulators seem unwilling to stick to their lanes, that is a legitimate concern. To accept the appointment of someone with what looks like a disturbing affinity for central planning to an important role in the oversight of the country’s banks would not be wise at any time, but to do so now looks a lot like quite staggering recklessness. This is not to claim that Omarova would be able to remake the American economy from her office, but the likely direction her approach would take could still cause a lot of harm, not least when it comes to the pursuit of the administration’s climate agenda.
Fox:
Members of both parties grilled Omarova [during her confirmation hearing on Thursday] over her positions on issues including fossil fuel industries and federal authority. One particular quote about the coal, oil, and gas industries was repeated several times throughout the hearing.
“A lot of the smaller players in that industry are going to probably go bankrupt in short order – at least we want them to go bankrupt if we want to tackle climate change,” Omarova said at a virtual event earlier this year.
Sen. Jon Tester, D-Mont., asked Omarova about this, and she claimed people misunderstood what she meant.
“That particular statement about oil and gas companies going bankrupt, as I said, that was taken out of context and I actually misspoke, it was not well framed,” she said. “My intention was actually to say, exactly the opposite, that we need to help those companies to get restructured.”
Later on, Tester’s fellow Montana senator, Republican Steve Daines, did not accept that response from Omarova.
“You said at least we want them to go bankrupt if we want to tackle climate change,” he said.
“I am sorry that I misspoke,” Omarova explained. “It was not a well-phrased sentence.”
Translation: She said aloud what she thought.
Fox:
Daines also brought up a remark Omarova made about fossil fuel companies in March of this year that he found “chilling.”
“The way we basically get rid of these carbon financiers is we starve them of their source of capital,” Omarova said.
Omarova’s phrasing is melodramatic, but it’s worth recalling that it is merely a more hard-line version of the position to which the Fed and, more rapidly, various large banks and investment firms appear to be advancing. The underlying idea is to discourage new — or under certain circumstances, existing — production by fossil-fuel companies by, among other methods, increasing their funding costs. The consequences will prove costly to industry and to consumers, as Europeans may already be discovering, even if such initiatives are only one cause of their current energy woes.
For banks and investment companies to go down this route raises serious issues about the fiduciary duty they owe their shareholders (if lending to fossil-fuel companies or buying their debt generates a good return, it is not a business opportunity to be rejected as a matter of dubious principle). But that is generally a private matter. That is not the case when a regulator, in this case, the central bank, gets involved.
Speaking to the European Central Bank in 2020 (the ECB has been ahead — if that’s the word — of the Fed in this respect), economist John Cochrane explained how the emerging regulatory regime being developed by central bankers with regard to climate change is designed to work. It is a regime he describes as one “essentially of shame, boycott, divest, and sanction.” Its starting point is “disclosure” of the supposed risk that banks may run from their exposure to fossil-fuel companies, with a view to discouraging their lending to that sector.
For central banks to assume such a role is, on any reasonable interpretation of their function, way beyond their remit, which tends, not least in the case of the Fed, to have been narrowly defined. Writing in Capital Matters this week, Joshua Kleinfeld and Christina Parajon Skinner explain why:
The Fed enjoys substantial independence from political control. No one — not the Department of Treasury, not the president, not Congress — can tell it to raise or lower interest rates. . . . The Fed enjoys this level of independence precisely because it is supposed to be limited to technocratic, economic issues.
So for the Fed to join other central banks in climate-related regulation (something that it is headed toward doing), it has to find a reason supposedly lodged within its existing jurisdiction that enables it to act. And that reason, it turns out, is the alleged risk that a changing climate poses to the financial system — a notion that, despite Cochrane’s earlier demolitionsof the arguments behind it, will not die. It’s not easy to put a stake through an idea that offers power, career advancement, and other rewards to those that throw their support behind it. Undaunted, Cochrane returned to the fray with an article for Capital Matters this week (clearly it was Fed week around here).
The whole thing is a must-read, but here’s an extract:
A “risk to the financial system” does not mean that someone, somewhere, someday, might lose money on an unwise investment. A risk to the financial system means an event like 2008: a shock so big, so pervasive, and so fueled by short-term debt that it sparks a widespread run, a wave of defaults, and threatens the ability of the whole system to function. “Financial regulation” means looking at the assets and liabilities of financial institutions to mitigate such a risk. It can at best look a few years in the future.
So, if we use plain English, a “climate risk to the financial system” that “financial regulators” can contain must mean the climate might change so drastically, so abruptly, and so unexpectedly, in the next five years, that the economy tanks so terribly that financial institutions blow through the cushions of equity and long-term debt, to spark a widespread systemic crisis like 2008 or worse.
The trouble is, there is absolutely nothing in even the most extreme scientific speculations to support that possibility. Climate is the probability distribution of weather: the chance of heat and cold waves, floods, fires, and so forth. We know with great precision what the climate will be for the next five years. Nobody writing insurance in Florida is unaware of the chance of hurricanes. The chances of extreme weather are not going to change unexpectedly in even ten years. The sea level is rising. It will continue to rise, about 4 millimeters per year – 2 cm in the next five years – slowly and predictably. Risk is the unknown. This is known.
For what it’s worth, not everyone in the Fed is on board with this not so curiously convenient notion of risk. Blogging earlier in the week, Cochrane had noted a report by Kristian S. Blickle, Sarah N. Hamerling, and Donald P. Morgan of the New York Fed asking How Bad Are Weather Disasters for Banks?
From the abstract:
Not very. We find that weather disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts.
And, as Cochrane notes, the report contains a useful review of other work on this topic:
Our main findings are generally consistent with the few papers that study the bank stability effects of disaster. Looking across countries, Klomp (2014) finds that disasters do not affect default risk of banks in developed countries. Brei et al. (2019) find that hurricanes (the most destructive weather disaster) do not significantly weaken Caribbean banks. Koetter et al. (2019) finds increased lending and profits at German banks exposed to flooding along the Elbe River. The study closest to ours by Noth and Schuewer (2018) finds default risk increases at U.S. banks following disasters but the effects are small and short-lived. Barth et al. (2019) find higher profits and interest spreads at U.S. banks after disasters but did not look at bank risk. Based on four case studies of extreme disasters and small banks, FDIC (2005) concluded that . . . “historically, natural disasters did not appear to have a significant negative I impact on bank performance.”
Oh.
But regulatory creep will not be confined to the Fed, or the FTC, or (perhaps) the Office of the Comptroller of the Currency. As Cochrane reports, in late October, Treasury secretary Yellen had something of some relevance to say. Yellen is also head of the Financial Stability Oversight Council (FSOC), the umbrella group that unites all U.S. financial regulators, and her opening remarks included the following:
Today is an important day for FSOC. We are publishing our report on climate-related financial risk, and, for the first time, FSOC is recognizing that climate change is an emerging and increasing threat to U.S. financial stability. This report puts climate change squarely at the forefront of the agenda of its member agencies and is a critical first step forward in addressing the threat of climate change. It will by no means be the end of this work.
Cochrane asks:
Of all the threats posed by a slowly warming climate, why is Ms. Yellen talking about financial stability? The answer is simple: Financial regulators are not supposed to implement each administration’s policies on non-financial matters. Financial regulators may only act if they think financial stability is at risk.
It really is not hard to connect the dots, which, by the way, do not only extend to financial regulation (please take a look at Benjamin Zycher’s examination, also in Capital Matters this week) of what is going on at the Federal Energy Regulatory Commission):
We now observe growing favoritism on the part of FERC’s majority toward unconventional energy, wind and solar power in particular. However unsurprising — FERC commissioners are subjected to strong political pressures and have incentives to yield to them as they contemplate their future careers — this shift is deeply inappropriate and will have perverse consequences for years to come.
But back to financial regulators and, inevitably, the SEC. Its chairman, Gary Gensler, a Biden appointee, seems set on using — and abusing — his agency’s regulatory authority in the interests of a wide ranging political agenda of which “climate” forms an important part. As a reminder, the SEC is supposed to be dedicated to investor protection and the maintenance of orderly markets, so it’s no surprise to read that it is talking about, wait for it, “risk.”
The SEC is considering phasing in its anticipated requirements for companies to report their greenhouse gas emissions and climate change risk management plans, agency Chair Gary Gensler said.
The Securities and Exchange Commission is looking at tiered compliance for small and large companies and the different types of climate disclosures that may be required, Gensler told the House Financial Services Committee Tuesday.
“Some reporting will be easier to do sooner,” he told House lawmakers.
The SEC is expected to propose rules as early as this fall that could have companies report their climate risk in their annual 10-Ks or other public filings.
The agency may require quantitative reporting by companies that includes greenhouse gas emissions and the financial impacts of climate change, Gensler has said. Some qualitative disclosures under consideration would cover how executives manage climate risks and opportunities, and how climate change factors into a company’s business strategy.
At a wild guess, the business that claims that it has few concerns about climate risk will not be well treated by the SEC. (Equally, the Fed is unlikely to look too fondly on any bank that takes a similar approach.) It will also find itself exposed to the risk of litigation by investors claiming that they were “misled” about the extent of a company’s exposure to climate change, however ill-founded that claim may be. Imagine, for example, that a business suffers loss because of a hurricane. A plaintiff might then argue that climate change increases the danger of severe hurricanes, and that, by failing to “disclose” that climate change increased the risk that its facilities, say, in certain parts of the country would be wrecked by a hurricane, a company had behaved in a misleading fashion. Damages please!
Even if such a case were thrown out, it would probably have been an expensive fight and one that dragged the company into political controversy. Process is punishment. Company managements tend to err on the safe side when it comes to regulatory or litigation risk, and, given the “incentives” to do so can be expected to play along with the SEC’s agenda. This will have two key consequences. Firstly, as company after company discloses the climate risks to which it is allegedly vulnerable, it will reinforce the narrative that these risks are indeed real.
To be clear about this: These are not risks in the relatively distant future but risks that are allegedly relevant to a reasonable investor’s time horizon, and most investors simply do not look that far ahead. Secondly, disclosures (however unjustified) of current or reasonably imminent climate risk will open the door to activist (whether acknowledged or not) investment firms (of which, unluckily for many of their clients, there are more and more) to ask their portfolio companies what they are doing about it. Once again, the easiest course for a company’s managers will be to go along, rearranging their business in the interests of the fight against climate change. Moreover, in an era of ascendant stakeholder capitalism (the notion that companies should be run for the benefit of a set of “stakeholders”), some managers will be pleased to do so, their pleasure quite possibly amplified by the rewards that can come with it, rewards handed out for delivering “results” that, sadly for shareholders, have nothing to do with the bottom line.
For now absolute numbers of companies using climate targets to calculate chief executives’ bonuses and long-term incentives remain low: just 24 companies in the FTSE 100, and only 20 in the S&P 500, according to ISS ESG, the responsible investment arm of proxy adviser Institutional Shareholder Services. But from a low base, the number of companies using climate pay targets more than doubled between 2019 and 2020. A survey by Deloitte in September suggested a further 24 per cent of companies polled expected to link their long-term incentive plans for executives to net zero or climate measures over the next two years . . .
And then there was this (via Bloomberg, my emphasis added):
Total SE will partly tie executive bonuses to the company’s success in reducing the greenhouse gas emissions of its customers, the latest in a series of climate-focused changes by the French oil and gas giant.
The Financial Times:
Studies have also suggested executives receive more generous payouts on non-financial targets than they do when judged on precise financial achievements, perhaps because they are often harder to measure and more subjective.
Could this help account for their growing popularity?
Yes, that was a rhetorical question.
Such pay schemes, which are not confined to climate-related matters, can also include the “S” in ESG (a form of “socially responsible” investing that measures how a potential or actual portfolio company compares with various environmental, social, and governance guidelines).
In January, Starbucks Corp. said it would give top executives more shares if the coffee chain’s managerial ranks grow more diverse over three years. McDonald’s Corp. in February gave executives annual incentives to increase the share of women and racial minorities in leadership roles by 2025. In March, Nike Inc. said it would for the first time tie some executive pay to five-year goals for improving racial and gender diversity in its workforce and leadership positions.
“Metrics like these seem to be new, a kind of new evolution in what’s expected of executives,” said Rick Hernandez, the chairman of McDonald’s board, who was involved in the fast-food chain’s compensation changes. “It’s really a growth, a maturation of thinking about what’s really good for a company and what a company’s role is in society, how you serve your customers and at the same time serving your investors.”
The comments from Hernandez are classic examples of stakeholder-capitalist happy talk. And as so often with stakeholder capitalists, shareholders seem to end up at the end of the list — although Hernandez offers them a scrap of comfort with that “at the same time.”
Meanwhile, the question of how the SEC will determine the adequacy of climate disclosure is an interesting one. The agency is not known for the ranks of scientists it has enrolled within its own. Cochrane wonders much the same thing when it comes to the Fed:
Financial regulators have a competence deficit. Environmental regulators are not doing a great job of scientific, technocratic, cost-benefit-metered climate policy. Climate policy is not a great certainty, waiting only for more activism. That central bankers will figure out what to deny, what to subsidize, and how to rate banks on their climate investments is a fantasy. The same crew that missed mortgages, pandemic, and inflation is going to figure out what businesses to subsidize, what to freeze, all to change global temperatures 100 years from now?
Ouch.
And the regulatory mission creep at the SEC (and, in all probability, the Fed) will not stop with climate. Where there is E, there will be S. What there won’t be is democracy. I have written (frequently) before about how the hijacking of corporate power and money represented by stakeholder capitalism can — especially when interlinked with ESG — be used to bypass the polling booth. Companies can effectively implement a wide ranging social and political agenda without the bother of asking for voters’ approval. Once their leaderships have decided to take a more extensive view of their powers, the same is true of regulators, and when private and regulatory agencies are, one way or another, pushing for the same thing, well . . .
“In a democracy,” writes Cochrane “independent agencies have broad but limited powers.” An important reason those powers are limited (or meant to be limited) is that they are so broad. But if those limitations are swept away in the name of achieving political objectives for which it is impossible to secure popular consent (and that is the case for much of the climate and social agendas) how much of that democracy will be left?
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 44th episode David is joined by Judy Shelton, who was famously (and tragically) one vote away from being approved for a seat on the Federal Reserve Board of Governors. Judy and David talk about the Fed’s legitimate function, where it has exceeded that function, and what the repercussions have been for all of us. The “moral contract” that the government’s “legal monopoly” on legal tender implies means we are doing a lot of things wrong, and Judy Shelton is the person to walk us though this.
Palm Beach: Book Event
NR Institute is holding an event on December 7 to mark the publication of a new book, There’s No Free Lunch: 250 Economic Truths, by NRI trustee David Bahnsen.
In the book, Bahnsen pulls from the masters — the great economic voices of the past and the present — to remind readers of the basic economic truths that must serve as our foundation in understanding the challenges of today. In 250 vital points, he combines pearls of wisdom from economic legends with his own careful commentary to provide readers the perspective, information, and reaffirmation they need in order to see economics for what it is. It will empower you and equip you with the truth — 250 truths — that are crucially needed to keep the lights on in civilization and advance the cause of human flourishing.
The event will be held at the Colony Hotel in Palm Beach on Tuesday, December 7 — registration will begin at 5.30 p.m.; the event at 6 p.m.; and a reception and book-signing at 7 p.m. Complimentary books will be provided to all attendees.
RSVP here.
The Capital Matters week that was . . .
Taxation
Mazen Saleh and Pritika Kumar:
In a move expected to generate an estimated $96 billion in funding for the president’s Build Back Better Act (BBB) agenda, lawmakers are considering a tax on nicotine that would increase the cost of reduced-risk tobacco products such as e-cigarettes and vaping liquids. This is not a particularly novel idea, and it is also not a particularly good one.
The primary goals of taxing nicotine products are to generate large amounts of revenue and reduce nicotine consumption. But pursuing these two objectives simultaneously puts them inherently at odds with each other. Consumers must purchase nicotine products to generate the desired tax revenue, and by making such products more expensive, the taxes increase the likelihood that consumption will decrease. Ultimately, neither public health nor the state’s coffers benefit . . .
While Democrats are aiming to pass President Biden’s giant Build Back Better plan in the House, their efforts will likely meet significant resistance in the Senate. Indeed, they’ve already been forced to scale back their proposal for Internal Revenue Service snooping on personal bank accounts after that provision’s rollout went less favorably than expected. That feature, however, was only part of their $80 billion IRS-expansion plan — one that threatens to raise taxpayer compliance costs and undermine civil liberties.
Under the plan, the IRS would be built back bigger. It would double the IRS workforce, with three-quarters of the expansion directed toward increasing enforcement. Supporters contend that more enforcement is justified because it would raise government revenue, but they ignore the costs that this would doubtless impose on the private sector. More aggressive IRS enforcement would mean more paperwork, more lawyer fees, and more anguish for many law-abiding taxpayers. It could also threaten our financial privacy and security . . .
Infrastructure
Despite all the promises about how the bipartisan infrastructure bill will transform American transportation and solve the supply-chain crisis, the law’s most immediate effect is to massively increase the size of government.
Most infrastructure, including the entire Interstate Highway System, is owned and operated by state governments, not the federal government. But the bipartisan infrastructure bill does not give money to state governments. It gives money to the federal Department of Transportation, which will then distribute the money to states through grant programs.
This is not the most obvious way to fund infrastructure, but it has two effects that Democrats, the party of government, will enjoy . . .
Climate
Modernity poses little threat to the status of royals who accept the modest role they are expected to play in a constitutional monarchy. But that role has not been enough to satisfy the vanity of Charles, William, and Harry. More completely than he probably originally intended, Harry has cut himself off from the entitlements of royalty if not of celebrity, and that will eventually reduce what clout he still has; Charles and William, on the other hand, still seem to hope of finding a way of using their royal station for political ends without going through the bother of getting elected. (The latter, incidentally, has also been spotted at Davos.)
That’s where “climate” comes in. Not only is the essentially pre-modern message of harder-line climate campaigners in sync with the dreams of the heir to the British throne and his sons but the post-democratic methods of many of those shaping climate policy — corporatism is only a part of it — have created a space in which princes can make themselves heard. Charles was invited to speak at the recent G20 summit in Rome; he gave a key address at COP26 in Glasgow; and he even got to meet with Jeff Bezos “to discuss climate change.”
In a rare misstep, even the queen decided to enter the fray . . .
As was the case for Shakespeare’s Macbeth, COP26 in Glasgow was a tragedy of ambition. Officially, the “Glasgow Climate Change Conference of the UNFCCC COP26” produced a unanimous “Glasgow Climate Pact.” According to conventional wisdom, the pact provides a useful update to the landmark Paris agreement in 2015. Unofficially, there was a lot of strutting and an overwhelming amount of fretting. Indeed, the tale of the conference is that it may ultimately signify nothing.
The pact urges wealthy nations to double financial commitments by 2025 to the nations’ most vulnerable to climate change and to return next year — three years ahead of schedule — with more aggressive plans to curb greenhouse emissions. The technical meetings produced new rules, including for measurement and oversight, for carbon-offset markets. Though the conference officially ended on Friday, a final agreement wasn’t reached until late Saturday.
The conference president, Britain’s Ashok Sharma, choked up during the final session as he apologized for the lack of transparency and last-minute changes to the consensus text that transformed the draft text’s “phase out” of coal as a fuel for electric power to a “phase down” in the final pact. The formal objection, and hardball refusal to budge from its position, came from India. Yet, other nations that had primarily focused on growth — such as China — quietly supported the change . . .
We now observe growing favoritism on the part of FERC’s majority toward unconventional energy, wind and solar power in particular. However unsurprising — FERC commissioners are subjected to strong political pressures and have incentives to yield to them as they contemplate their future careers — this shift is deeply inappropriate and will have perverse consequences for years to come.
Consider, for example, the FERC review of its long-standing policy statement on the certification of new interstate natural-gas facilities — pipelines in particular — that began earlier this year. FERC has asked for “new information and additional perspectives that would assist the Commission in moving forward with its review.” The review notice continues:
To guide the process and focus on adding to the existing record, the Commission seeks comments on new questions, . . . for example, . . . on how it identifies and addresses potential health or environmental effects of its pipeline certification programs, policies and activities on environmental justice communities.
Translation: Mandate, schmandate. Forget about the legal requirement that FERC focus on efficiency, safety, reliability, and security. Notwithstanding the authority of the Environmental Protection Agency and other bureaus to address the “potential health or environmental effects” of proposed pipeline projects, FERC now is soliciting comments — that is, thinly disguised rationales — with which it can justify its new penchant for sticking its nose into matters that heretofore were none of its business. And the new focus on “environmental justice communities” — three words the definitions of which are infinitely elastic — is so amorphous and so open-ended that FERC will be able to pick any constraints it chooses on applications for gas-pipeline approvals, in a manner essentially independent of the actual legal mandate that Congress has promulgated.
Legal
The trial court assigned public-nuisance liability to J&J for the harms done by all the prescription opioids in Oklahoma, not just the small fraction that J&J sold, and awarded the state $465 million.
On appeal, the Oklahoma supreme court found that the trial court had expanded public-nuisance law “too far.” Nuisance statutes cannot be applied to manufacturers of lawful products such as prescription opioids because they do not control the product or how it is used once it is sold. J&J did not have the ability or duty to police its own or other manufacturers’ products or the people who use them . . .
Cryptocurrency
Helen Hodler and Sam Saver meet, fall in love, and start planning their future. Sam opens a savings account and gets 0.06 percent APY (interest rate). The more adventurous Hellen buys a stablecoin — a digital currency redeemable 1:1 with a U.S. dollar — and deposits (or “hodls”) it with an exchange. She gets 8.88 percent APY. Our well-heeled financial-policy setters Federal Reserve chairman Jerome Powell (net worth $55 million), Treasury secretary Janet Yellen (net worth $16 million), SEC chairman Gary Gensler (net worth $119 million) side-eye Helen.
A recent report on stablecoins by the President’s Working Group on Financial Markets outlines official concerns. They think she is too unsophisticated for her choice. They think she and the exchange may pose a systemic risk to the entire U.S. financial system. The report asks Congress to solve these apparent issues but suggests that federal agencies will act alone if necessary . . .
Inflation
Strange as it may seem, inflation can generate winners as well as losers (to generalize wildly, these can include certain categories of debtor, and owners of the right class of asset), but the losers tend to outnumber the winners, and they typically feel very strongly about it. This means that efforts to explain away the difficulties that today’s inflation might be causing some people (or, indeed, to dismiss surging prices as no more than a passing storm) may be very poorly received. I’m old enough to remember the milk wars from back in (checks notes) early November, a controversy further enlivened by the unmistakable class tensions that ran through it.
Now there’s Stephanie Ruhle on NBC (here via Real Clear Politics) . . .
“The federal government is about to back mortgages of nearly $1 million for the first time.
The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac are expected to jump sharply in 2022, a reflection of the rapid appreciation in home prices nationally over the past year.
The increase may make it easier and cheaper for some borrowers to buy a home, particularly in more expensive areas of the country, but the higher limits are also likely to elevate debate about how big of a mortgage is too big to be backed by the government.”
It’s easy enough to understand why the increase has happened. As the WSJ explains, the limits are “updated annually using a formula that factors in average housing-price increases nationwide.” In certain parts of the country where housing is expensive, that updating will take the limit up to close to $1 million. We will know the exact numbers at the end of the month.
At the same time, we are living at a time of substantial house-price inflation (existing-home prices rose by 16 percent in the third quarter compared with last year, the fastest rate in more than half a century). At least arguably, this increase will add more fuel to a fire burning merrily away, for the most part because of underbuilding and, somewhat ironically under the circumstances, ultra-low interest rates (mortgages that fall below the limit will, thanks to Fannie and Freddie’s backing, typically be cheaper) . . .
The Fed and Regulatory Mission Creep
In an October 21 press release, Janet Yellen — Treasury secretary and head of the Financial Stability Oversight Council (FSOC), the umbrella group that unites all U.S. financial regulators — eloquently summarized a vast program to implement climate policy via financial regulation:
FSOC is recognizing that climate change is an emerging and increasing threat to U.S. financial stability. This report puts climate change squarely at the forefront of the agenda of its member agencies and is a critical first step forward in addressing the threat of climate change.
You do not have to disagree with one iota of climate science — and I will not do so in this essay — to find this program outrageous, an affront to effective financial regulation, to effective climate policy, and to our system of government . . .
Joshua Kleinfeld and Christina Parajon Skinner:
In a recent New York Times essay, Professor Annelise Riles urges President Biden to “Go Big and Bold at the Fed.” She exhorts the administration to appoint a new Federal Reserve chairman and new members of the Board of Governors who will be “flexible and forward-thinking,” considering or embracing theories such as “feminist economics” and “environmental economic theory,” as well as causes such as “climate change” and “financial citizenship.” Out of context, a plea for heterodox thinking and open-mindedness might seem benign. But in context, it is part of a larger, ongoing political effort to enlist the Fed in progressive causes by getting the president to pick activist Fed leaders.
Personnel is policy, as the saying goes. Pick activist leaders and the Fed will become yet another American institution bitterly divided along partisan lines. But there are three problems. It is democratically illegitimate for the Fed to engage in freelance activism. The Fed has no legal right to do so. And the consequences of this partisan football would damage America’s economy and culture . . .
Regulation
Is a semi-trailer a self-propelled motor vehicle? That is a question that the U.S. Court of Appeals for the D.C. Circuit was just forced to rule on because of environmental regulators going rogue.
In 2016, toward the end of the Obama administration, the Environmental Protection Agency and the National Highway Traffic Safety Administration published Phase 2 of a new federal regulation about greenhouse-gas emissions and fuel-efficiency standards for motor vehicles. It was no simple regulation. It added 797 pages to the Federal Register. The EPA and NHTSA put out a slideshow to explain the regulation, and it’s 100 slides long. For some visual depictions of how compliance is supposed to work, click here, here, or here. The slideshow says, “At all steps, we encourage you to work with your EPA certification representative to avoid surprises or delays in the process” — a pleasant experience, no doubt . . .
Energy Prices
President Biden has written a ham-handed and transparently politically letter to the Federal Trade Commission, attempting to shift blame for rising energy prices to the disreputable Big Oil cabal. In the letter, Biden speaks of “mounting evidence of anti-consumer behavior by oil and gas companies,” suggesting that the agency should “consider whether illegal conduct is costing families at the pump.” He believes “you should do so immediately.”
But when it comes to energy, no one has engaged in more anti-consumer behavior than the Democrats. Earlier this month — the same month that he went to COP26 to reaffirm the nation’s commitment to combatting climate change — Biden was blaming prices at the pump on the “refusal of Russia or the OPEC nations to pump more oil.” While Russia and OPEC may temporarily benefit from higher prices — though both were producing above pre-COVID levels; “it’s the US who’s lagging,” according to Bloomberg’s Javier Blas — all of this would be far less of a problem if the Biden administration hadn’t done everything in its power to undermine domestic production . . .
President Biden has put climate policy at the center of his agenda. On his first day in office, he canceled the permit for the Keystone XL pipeline, which would have carried more than 830,000 barrels of oil a day from Canada through the U.S. He also rejoined the Paris Agreement and has since dispatched regulatory agencies to cut off capital from the oil and gas sector.
The results have been predictable: declining domestic oil production and rising gasoline prices. And now that the chickens are coming home to roost, Biden is pointing the finger at oil companies, which he accuses of engaging in “anti-consumer behavior” to raises gas prices. In a November 17 letter to Federal Trade Commission chairwoman Lina Khan, the president claimed that “gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining.” He cited as evidence of declining costs a 5 percent decrease in the price of unfinished gasoline over the last month . . .
Build Back Better
The House of Representatives just passed President Joe Biden’s climate and social-welfare bill, the “Build Back Better Act.” While the text of the bill was not made public in advance of the vote, it reportedly closely resembles the president’s BBB Framework released on October 28 and the House’s previous version of the 2,466-page legislation, along with a 137-page “summary” published on November 4.
Regardless, you can be sure that no more than a handful of congressional representatives who voted for the massive spending bill have read it. The press has largely followed the administration’s talking points and its well-branded headlines on the program’s contents, with little critical inquiry or analysis. As a result, the American people — who Democrats and many major news outlets confidently claim “overwhelmingly support” this legislation (though recent polls suggest otherwise) — are virtually in the dark about what their tax dollars are going to pay for.
In short, it is a massive income-transfer program (stated as $1.75 trillion, but likely twice that amount) to liberal constituency groups — the climate-change lobby and powerful unions — drafted by only one party . . .
Please note that there will be no Capital Letter next weekend.