Think you miss an important part of the policy demands here: forcing climate risk considerations into financial stability tests enables climate policy by government.
John Cochrane has had a couple of posts on how ridiculous it is for climate change considerations to be part of financial stability concerns. And on physical risk, he's probably right, on any time horizon that current policymakers should be concerned with. But he's very wrong on transition risk.
Transition risk is policy that makes formerly profitable businesses bust. The Fed forcing banks to conduct climate stress tests will mean that businesses exposed to transition risk will not get loans. So monetary policy authorities implement some climate policy in this way. And it also means the banks don't go bust when transition risk is realised. Which makes climate policy by the government easier to implement (as they won't be killing the financial sector when they do so).
So I understand entirely the Squad's insistence that climate change be part of the Fed's remit.
If banks aren't assessing the risk to their balance sheets posed by lending to an industry that _has to die_ in order for the rest of the economy to survive, they are being wildly irresponsible. And it is entirely within the Fed's scope to make sure that doesn't happen. This isn't some weird new request, it's fully within the prudential regulation role that has been assigned to the Fed since its founding.
That's exactly the point. They shouldn't. Right now, many banks _are_ just blithely extending credit to various fossil fuel companies, financing new exploration projects and new fossil power plants, using risk models for those types of projects from 30+ years ago. The Fed should make them _stop doing that_.
I don't think the Squad's actually making that an explicit or even implicit part of their argument, though. They're just pushing the maximally left-wing view because they're maximalist leftists - leave no stone unturned. Which is fine, on its own terms. But just don't mistake your own headcanon for their actual politics.
"Think you miss an important part of the economics here: forcing climate risk...
...
So insistence that climate change be part of the Fed's remit is a perfectly legitimate demand on financial stability grounds, which is a normal part of the Fed's remit."
Agreed. Although, I think the demand can still be argued against without going full climate heel. For instance, I'd point out that we don't direct the Fed to help mitigate asteroid risk or AI revolt risk, or even automation risk. We expect that those areas will sort themselves out or be sorted out by Congress. Ditto climate change... there are certainly helpful things the Fed can do, but without a clear Congressional climate policy, it's all just tinkering at the margins.
Of course, but not explicitly. The point was, there’s a difference between giving the Fed a mandate based on a KPI, and one based on a vague conception of some macroeconomic trend. We didn’t give the late 70’s Fed a new mandate to end supply shocks, we just figured out how to help it achieve its existing dual mandate.
I'm kind of confused by this piece. The Squad is _obviously_ not interested in criticizing Powell about _monetary policy_, they're interested in criticizing him on issues of prudential regulation, which are a related area but not the same thing.
The American Prospect has had a drumbeat of stories criticizing Powell on regulation issues. Not specifically the "climate is a risk factor" angle (which various people have been discussing for like twenty years), but just generally. I think it absolutely is fair to say that if your bank is extending a bunch of credit to coal-burning power companies, that you are risking massive losses, because the coal industry is dying just from being undercut by newly-cheap solar and wind, and the same thing is eventually going to happen to basically all fossil power generators. If the Fed is not requiring banks to assess those risks, then the Fed is failing in its mission to keep the financial system stable.
the US is headed the way of most other countries, where a few big banks are heavily politicized and the industry is non competitive. helping middle tier banks is a good attempt to keep it dynamic.
I don't think this has anything to do with interest rates or unemployment, but more to do with the direction of where the easy money is targeted. Instead of pumping money into large banks and buying corporate debt, why can't the Fed finance the transition of our economy from one built on fossil fuels to alternative energy infrastructures, buying student loan debt, etc.
I believe there is a huge emphasis on breaking up the big banks and moving toward a public banking system. In addition, stop providing easy money to banks that have large portfolios of fossil-fuel loans.
If capitalism is stalling the transition desperately needed to move this country from the status quo to a faster rate of change, why not seek a forward-thinking Fed Chairman.
Our educational system is on the brink of getting flattened by knowledge services and decentralized money is moving global transactions as people shift from traditional banking. We now have the beginning of a metaverse that is supporting completely decentralized companies which will redefine work completely. It will redefine capital and the corporation.
Meanwhile, at the Fed, we have this 90's status quo mindset where "big banks must be fed easy money to support the stock market" minus the $1 quadrillion derivatives market.
I think the Squad is seeking a leader with a sense of urgency and a spark of innovation.
>Instead of pumping money into large banks and buying corporate debt, why can't the Fed finance the transition of our economy from one built on fossil fuels to alternative energy infrastructures, buying student loan debt, etc.
jfc I honestly don't know how someone could be this idiotic. Most student debt is held by the DoE, and the fed doesn't have the authority to forgive it.
Maybe they could try to push down rates on securitized student debt, though I am not sure if such an industry exists.
I didn't say, forgive student loans, I said to pay them off. Huge difference. If they can pay casino bets (derivatives) to save the criminal banking enterprises, surely they can find some electronic money to buy the DOE assets thus relinquishing students from their debt.
All the banksters walking around the halls of the Fed could figure out which T-account they need to sluice.
Buying the DoE assets does nothing. The fed doesn't just not collect it.
> If they can pay casino bets (derivatives) to save the criminal banking enterprises, surely they can find some electronic money to buy the DOE assets thus relinquishing students from their debt.
lmao
Derivatives aren't casino bets because they help hedge risk.
I love the heart, but that’s not at all how it works. I mean, come on, this is capitalism, man. The banks are set up to help the capitalists, not the people. Every self respecting leftist should be aware of that.
I get angry whenever people talk about monetary policy as if it were some magic tool for anything (eg Jill Stein thinking QE could be used for literally anything)
I ignored you because the Fed creates capital with a date entry. And during a self-inflicted crisis in 2008, our POTUS allowed banksters from Citigroup (his highest donor) to sluice up Wall Street and any company they deemed deserving. They've been doing the same thing every month since then.
>>Instead of pumping money into large banks and buying corporate debt, why can't the Fed finance the transition of our economy from one built on fossil fuels to alternative energy infrastructures, buying student loan debt, etc.
Ummm... Because the FFR is for overnight interbank lending?
The Fed can't just go investing in companies willy-nilly. Perhaps if they offered better rates to climate-responsible banks, then great, OK, but basically your entire wishlist are only things Congress can do.
Sometimes it is hard to mobilize support for very specific minor improvements, so using some infamous buzzwords is a good way to say "you choose the concessions to make us happy, our staffing budgets aren't really high enough for us to know what we want". Maybe Biden offers more dovish appointments, maybe Powell says bonds of semiconductor firms building plants in the US may count toward increased capital requirements. Who knows?
I'm convinced that AOC is leading the charge on this and that she is just trying to move the needle on the Fed's perceived responsibility for climate investment. It's no accident this occurred just after the Jackson Hole conference, the time when the most attention is paid to the duties of the Fed chair. If you pay close attention to her various opinions, she is obviously most vocal about climate change but she is particularly interested in federal monetary policy, which makes sense considering her background in economics and international relations.
She undoubtedly believes that Powell is going to be reappointed, and I think she isn't as opposed to him as the Squad's statement makes it out to be. She knows that he is surprisingly the most engaged, progressive Fed chair in a long time, so she must think that by doing this she and the Squad will be able to put extra pressure on Powell to more actively engage with this issue.
Of course, this is all conjecture, but that's the strategy I see that makes the most sense.
But do you *really* think they're couching their actual critique in nonsense as a way to avoid the "regime change" pitfall? Not only would that be an uncharacteristically public-spirited move for a politician, but also if they're MMT:ers they presumably already don't believe the "regime change" pitfall to even be a real problem.
The problem with regime change is that it's just as nebulous as debt fearmongering. There's not even remotely a consensus about where it starts, it's just "higher inflation than we have now, and that's a good thing sonny, don't'cha know, because I PAID 19% ON MY FIRST MORTGAGE IN 1973 AND IT WAS HELL!".
That's because you're describing systems with multiple equilibria and it's really hard to tell what exact disturbance will push you from one equilibrium to another. If the Fed announced it doesn't care about inflation, that would shift us to a new equilibrium. If the Fed announced it will slightly lower interest rates, that would not. The line is not clear because that line is where the system becomes chaotic and we would need a lot of data to understand how the system behaves in those regions.
Precisely. They’re concepts, not KPIs. It’s impossible to legislate for an entity like the Fed to have a mandate to address a concept. It’s quite easy to simply have them deal with a KPI.
First of all, I generally like powell. But I do see a role of the Fed in green new deal, etc. I think this is less of an issue of industrial development, and more of an issue of city planning. Creating local planning that is cost sustainable for cities and municipalities, whereas suburbs are typically not cost effective.
The fed can potentially save municipalities millions in their planning and development, just based on a reduced cost of interest. If the fed evaluates municipalities which are moving to a more financially and ecologically sustainable model, it should buy those bonds like crazy...
I'm tired of people making this political warfare, who aren't offering new ideas.
Does the fed have the expertise to evaluate municipal policies in that way though? I'm sure they have some people who could do that, but probably not at any reasonable scale.
I mean they're a bank, they evaluate interest and credit. That's what we're talking about here. The municipal bond market in the U.S. has a total value of $4 trillion, vs $10 trillion for corporate bonds.
The biggest impact on the fiscal viability of a municipality is their development plans. Now obviously the fed might shy away from this, because there's a lot of political issues inherent in buying municipal bonds and development issues. Such a program could be wildly unpopular or wildly controversial.
Nevertheless, planning is one of the areas where a lot of cost reduction, for normal living can be done, with proper transit, mixed development, mixed densities, etc. Even just indicating a willingness to back green development programs could lead a lot of cities and states.
It's not like the fed would be operating with a unique set of information here either. Most of the information is already a public matter, in the scope of local politics.
If one of the fed banks had to hire a few people to spearhead this, not a huge deal. This is completely in the scope of what bankers do, they may just need more expertise or staff.
I'm glad you wrote about this because I thought it was strange that they don't like Powell. They didn't really say any specifics. It may be just pure politics, ie they want a dem socialist in the job because...that is what they are. I think it is the general hate America thing you were talking about in that post on the intersection in Penn.
It could also be a cover for the bog standard, the republicans never put a democrat in important places so why should democrats. Which has the benefit of being true.
You quite literally showed me the textbook on MMT. There are like 0 MMTers outside of that one uni in Missouri...
Also, why not just be a normal PK?
Seriously, I hate how much time the media spends on something that has like maybe 4 adherents in the United States (not even sure if they have a peer-reviewed journal!)
Tyler Cowen just recommended Scott Sumner's new book on market monetarism. Can we get a future post about your take on that philosophy?
Yep!
Co-signed! Looking forward to that.
Think you miss an important part of the policy demands here: forcing climate risk considerations into financial stability tests enables climate policy by government.
John Cochrane has had a couple of posts on how ridiculous it is for climate change considerations to be part of financial stability concerns. And on physical risk, he's probably right, on any time horizon that current policymakers should be concerned with. But he's very wrong on transition risk.
Transition risk is policy that makes formerly profitable businesses bust. The Fed forcing banks to conduct climate stress tests will mean that businesses exposed to transition risk will not get loans. So monetary policy authorities implement some climate policy in this way. And it also means the banks don't go bust when transition risk is realised. Which makes climate policy by the government easier to implement (as they won't be killing the financial sector when they do so).
So I understand entirely the Squad's insistence that climate change be part of the Fed's remit.
There used to be an ETF tracking the coal industry. It was doing so badly that it folded: https://www.barrons.com/articles/the-only-coal-etf-is-closing-what-it-means-for-investors-51608225200
If banks aren't assessing the risk to their balance sheets posed by lending to an industry that _has to die_ in order for the rest of the economy to survive, they are being wildly irresponsible. And it is entirely within the Fed's scope to make sure that doesn't happen. This isn't some weird new request, it's fully within the prudential regulation role that has been assigned to the Fed since its founding.
Why would banks need to treat that any differently than they do for other industries with an uncertain future though?
That's exactly the point. They shouldn't. Right now, many banks _are_ just blithely extending credit to various fossil fuel companies, financing new exploration projects and new fossil power plants, using risk models for those types of projects from 30+ years ago. The Fed should make them _stop doing that_.
I don't think the Squad's actually making that an explicit or even implicit part of their argument, though. They're just pushing the maximally left-wing view because they're maximalist leftists - leave no stone unturned. Which is fine, on its own terms. But just don't mistake your own headcanon for their actual politics.
Yeah OK. Fair enough...
I should have written:
"Think you miss an important part of the economics here: forcing climate risk...
...
So insistence that climate change be part of the Fed's remit is a perfectly legitimate demand on financial stability grounds, which is a normal part of the Fed's remit."
Agreed. Although, I think the demand can still be argued against without going full climate heel. For instance, I'd point out that we don't direct the Fed to help mitigate asteroid risk or AI revolt risk, or even automation risk. We expect that those areas will sort themselves out or be sorted out by Congress. Ditto climate change... there are certainly helpful things the Fed can do, but without a clear Congressional climate policy, it's all just tinkering at the margins.
Full employment mandate is kinda about mitigating automation risk, right?
Of course, but not explicitly. The point was, there’s a difference between giving the Fed a mandate based on a KPI, and one based on a vague conception of some macroeconomic trend. We didn’t give the late 70’s Fed a new mandate to end supply shocks, we just figured out how to help it achieve its existing dual mandate.
I'm kind of confused by this piece. The Squad is _obviously_ not interested in criticizing Powell about _monetary policy_, they're interested in criticizing him on issues of prudential regulation, which are a related area but not the same thing.
The American Prospect has had a drumbeat of stories criticizing Powell on regulation issues. Not specifically the "climate is a risk factor" angle (which various people have been discussing for like twenty years), but just generally. I think it absolutely is fair to say that if your bank is extending a bunch of credit to coal-burning power companies, that you are risking massive losses, because the coal industry is dying just from being undercut by newly-cheap solar and wind, and the same thing is eventually going to happen to basically all fossil power generators. If the Fed is not requiring banks to assess those risks, then the Fed is failing in its mission to keep the financial system stable.
can’t wait for the quintuple mandate!
the US is headed the way of most other countries, where a few big banks are heavily politicized and the industry is non competitive. helping middle tier banks is a good attempt to keep it dynamic.
Older, male, white, wealthy, former private equity executive. I think that captures most of the resistance.
Sad but true
I don't think this has anything to do with interest rates or unemployment, but more to do with the direction of where the easy money is targeted. Instead of pumping money into large banks and buying corporate debt, why can't the Fed finance the transition of our economy from one built on fossil fuels to alternative energy infrastructures, buying student loan debt, etc.
I believe there is a huge emphasis on breaking up the big banks and moving toward a public banking system. In addition, stop providing easy money to banks that have large portfolios of fossil-fuel loans.
If capitalism is stalling the transition desperately needed to move this country from the status quo to a faster rate of change, why not seek a forward-thinking Fed Chairman.
Our educational system is on the brink of getting flattened by knowledge services and decentralized money is moving global transactions as people shift from traditional banking. We now have the beginning of a metaverse that is supporting completely decentralized companies which will redefine work completely. It will redefine capital and the corporation.
Meanwhile, at the Fed, we have this 90's status quo mindset where "big banks must be fed easy money to support the stock market" minus the $1 quadrillion derivatives market.
I think the Squad is seeking a leader with a sense of urgency and a spark of innovation.
>Instead of pumping money into large banks and buying corporate debt, why can't the Fed finance the transition of our economy from one built on fossil fuels to alternative energy infrastructures, buying student loan debt, etc.
jfc I honestly don't know how someone could be this idiotic. Most student debt is held by the DoE, and the fed doesn't have the authority to forgive it.
Maybe they could try to push down rates on securitized student debt, though I am not sure if such an industry exists.
I didn't say, forgive student loans, I said to pay them off. Huge difference. If they can pay casino bets (derivatives) to save the criminal banking enterprises, surely they can find some electronic money to buy the DOE assets thus relinquishing students from their debt.
All the banksters walking around the halls of the Fed could figure out which T-account they need to sluice.
Buying the DoE assets does nothing. The fed doesn't just not collect it.
> If they can pay casino bets (derivatives) to save the criminal banking enterprises, surely they can find some electronic money to buy the DOE assets thus relinquishing students from their debt.
lmao
Derivatives aren't casino bets because they help hedge risk.
I love the heart, but that’s not at all how it works. I mean, come on, this is capitalism, man. The banks are set up to help the capitalists, not the people. Every self respecting leftist should be aware of that.
And here I was trying to be nice about it lol.
I get angry whenever people talk about monetary policy as if it were some magic tool for anything (eg Jill Stein thinking QE could be used for literally anything)
I ignored you because the Fed creates capital with a date entry. And during a self-inflicted crisis in 2008, our POTUS allowed banksters from Citigroup (his highest donor) to sluice up Wall Street and any company they deemed deserving. They've been doing the same thing every month since then.
Yeah okay.
>>Instead of pumping money into large banks and buying corporate debt, why can't the Fed finance the transition of our economy from one built on fossil fuels to alternative energy infrastructures, buying student loan debt, etc.
Ummm... Because the FFR is for overnight interbank lending?
The Fed can't just go investing in companies willy-nilly. Perhaps if they offered better rates to climate-responsible banks, then great, OK, but basically your entire wishlist are only things Congress can do.
Sometimes it is hard to mobilize support for very specific minor improvements, so using some infamous buzzwords is a good way to say "you choose the concessions to make us happy, our staffing budgets aren't really high enough for us to know what we want". Maybe Biden offers more dovish appointments, maybe Powell says bonds of semiconductor firms building plants in the US may count toward increased capital requirements. Who knows?
I'm convinced that AOC is leading the charge on this and that she is just trying to move the needle on the Fed's perceived responsibility for climate investment. It's no accident this occurred just after the Jackson Hole conference, the time when the most attention is paid to the duties of the Fed chair. If you pay close attention to her various opinions, she is obviously most vocal about climate change but she is particularly interested in federal monetary policy, which makes sense considering her background in economics and international relations.
She undoubtedly believes that Powell is going to be reappointed, and I think she isn't as opposed to him as the Squad's statement makes it out to be. She knows that he is surprisingly the most engaged, progressive Fed chair in a long time, so she must think that by doing this she and the Squad will be able to put extra pressure on Powell to more actively engage with this issue.
Of course, this is all conjecture, but that's the strategy I see that makes the most sense.
Great write-up, Noah!
Should have a comedian instead
But do you *really* think they're couching their actual critique in nonsense as a way to avoid the "regime change" pitfall? Not only would that be an uncharacteristically public-spirited move for a politician, but also if they're MMT:ers they presumably already don't believe the "regime change" pitfall to even be a real problem.
The problem with regime change is that it's just as nebulous as debt fearmongering. There's not even remotely a consensus about where it starts, it's just "higher inflation than we have now, and that's a good thing sonny, don't'cha know, because I PAID 19% ON MY FIRST MORTGAGE IN 1973 AND IT WAS HELL!".
That's because you're describing systems with multiple equilibria and it's really hard to tell what exact disturbance will push you from one equilibrium to another. If the Fed announced it doesn't care about inflation, that would shift us to a new equilibrium. If the Fed announced it will slightly lower interest rates, that would not. The line is not clear because that line is where the system becomes chaotic and we would need a lot of data to understand how the system behaves in those regions.
Precisely. They’re concepts, not KPIs. It’s impossible to legislate for an entity like the Fed to have a mandate to address a concept. It’s quite easy to simply have them deal with a KPI.
First of all, I generally like powell. But I do see a role of the Fed in green new deal, etc. I think this is less of an issue of industrial development, and more of an issue of city planning. Creating local planning that is cost sustainable for cities and municipalities, whereas suburbs are typically not cost effective.
The fed can potentially save municipalities millions in their planning and development, just based on a reduced cost of interest. If the fed evaluates municipalities which are moving to a more financially and ecologically sustainable model, it should buy those bonds like crazy...
I'm tired of people making this political warfare, who aren't offering new ideas.
Does the fed have the expertise to evaluate municipal policies in that way though? I'm sure they have some people who could do that, but probably not at any reasonable scale.
I mean they're a bank, they evaluate interest and credit. That's what we're talking about here. The municipal bond market in the U.S. has a total value of $4 trillion, vs $10 trillion for corporate bonds.
The biggest impact on the fiscal viability of a municipality is their development plans. Now obviously the fed might shy away from this, because there's a lot of political issues inherent in buying municipal bonds and development issues. Such a program could be wildly unpopular or wildly controversial.
Nevertheless, planning is one of the areas where a lot of cost reduction, for normal living can be done, with proper transit, mixed development, mixed densities, etc. Even just indicating a willingness to back green development programs could lead a lot of cities and states.
It's not like the fed would be operating with a unique set of information here either. Most of the information is already a public matter, in the scope of local politics.
If one of the fed banks had to hire a few people to spearhead this, not a huge deal. This is completely in the scope of what bankers do, they may just need more expertise or staff.
Have you seen Brad's recent comment?
https://braddelong.substack.com/p/project-syndicate-draft-lael-brainard
I'm glad you wrote about this because I thought it was strange that they don't like Powell. They didn't really say any specifics. It may be just pure politics, ie they want a dem socialist in the job because...that is what they are. I think it is the general hate America thing you were talking about in that post on the intersection in Penn.
It could also be a cover for the bog standard, the republicans never put a democrat in important places so why should democrats. Which has the benefit of being true.
Okay?
You quite literally showed me the textbook on MMT. There are like 0 MMTers outside of that one uni in Missouri...
Also, why not just be a normal PK?
Seriously, I hate how much time the media spends on something that has like maybe 4 adherents in the United States (not even sure if they have a peer-reviewed journal!)
Uhh.
*lists list*
No. No. There is like nobody who actually supports MMT outside of a few people.
Why put all of this idiocy in. Instead, they could have been normal PKs.
Mankiw has a good rebuttal to MMT, not very technical either (by not very technical, I don't believe there is any math in it).
MMT holds that interest rates do nothing, which already is an insane proposition.
Well then youre not an MMTer