The Corner

Monetary Policy

Central Bankers – The (Latest) Unacknowledged Legislators of the World

A tourist walks on a sunny autumn day in a forest outside Almaty, Kazakhstan, October 13, 2020. (Pavel Mikheyev/Reuters)

I’ve written a bit about how central bankers have been entering the climate wars (and how, regrettably, the the Fed has now enlisted alongside them).

Here’s another example of a central bank going down this route, via Bloomberg Green:

Bank of Canada Governor Tiff Macklem called on the country’s banks and businesses to act more quickly on disclosing their exposure to the risks posed by global warming.

In remarks on a panel organized by the Public Policy Forum, Macklem said it’s a competitive imperative for the country to do a better job at accelerating capital flows to areas that reduce climate risks and minimize potential destabilization from the transition to a low-carbon economy. The governor didn’t comment on current monetary policy.

“Information and disclosure are essential for the financial system to be able to do its job,” Macklem said in prepared remarks via video conference. “Companies need to assess, price and manage their climate risks, and they need to disclose these risks for markets to function well.”

So far as those “risks” are concerned, here’s an extract from a must-read paper written by the Hoover Institution’s John Cochrane, to which I have referred to before, and fully expect to refer to again:

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.)

And as Cochrane makes clear, the insistence on disclosure is not designed to give investors or regulators information on which they can act — not really — but rather as part of a regime  “essentially of shame, boycott, divest, and sanction.”

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 [the European Central Bank] is blessing.

(Cochrane was addressing a conference arranged by the ECB.)

And if anyone believes that the Fed will not (in the end) go down that route, I have an environmentally dodgy and thoroughly unreliable wind turbine to sell them.

Cochrane’s conclusion:

Working for a central bank is a bit boring. One may feel a longing to do something that feels more important, that helps the world in its big causes. One may feel longing for the approval of the Davos smart set. Why does Greta Thunberg get all the attention? But a central bank is not the Gates Foundation, which can spend its money any way it likes. This is taxpayers’ money, and regulations use force to transfer wealth between very unwilling people. A central bank is a government agency, and central bankers are public servants, just like the people who run the DMV.

Central banks must be competent, trusted, narrow, independent, and boring. A good strategy review will refocus central banks on their core narrow mission and let the other institutions of society address big political causes. Boring as that may be.

The use by central banks of an almost entirely bogus excuse (“risk”) for getting involved in the climate wars debases and degrades institutions that ought to be largely above the political fray. Instead, they are allowing themselves to be used as a device to push forward policies that, in a properly functioning democracy, ought to be debated and approved in the legislature.

As I noted when previously discussing Cochrane’s arguments:

 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).

Back to Cochrane:

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.

But a popular movement wants all institutions of society to jump into the social and political goals of the moment, regardless of boring legalities. Those constraints, of course, are essential for a functioning democratic society, for functioning independent technocratic institutions, and incidentally for making durable progress on those same important social and political goals.

Quite.

The interesting question, of course, is the extent to which some climate warriors even care whether democracy is functioning or not. There’s a reason that they have again relabeled global warming, this time to a climate ‘emergency.’

After all, neither democracy nor basic freedoms fare too well in emergencies. They get in the way, you see.

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