Tuesday, April 6, 2021

A letter to Yellen

Secretary of the Treasury, and ex Federal Reserve Chair Janet Yellen recently hosted an important meeting of the Financial Stability Oversight Council.  This is the highest level body overseeing financial regulation in the US. It matters. 

Her remarks start smoothly but critically, as one expects of a habitually well-prepared pro. A lot went wrong last year, from the treasury markets to another mutual fund bailout, and so forth. Bravo, it is time to get past celebrating how another bailout blowout saved the world and see if we can avoid another one. 

And then, 

We must also look ahead, at emerging risks. [To the financial system, the FSOC's purview.] Climate change is obviously the big one.

It is an existential threat to our environment, and it poses a tremendous risk to our country’s financial stability. We know that storms will hit us with more frequency, and more intensity. We know warming temperatures might disrupt food and water supplies, leading to unrest around the world. Our financial system must be prepared for the market and credit risks of these climate-related events. But it must also be prepared for the best-possible case scenario: that we begin a rapid transition to a net-zero carbon economy, which also creates potential challenges for financial institutions and markets. On all these fronts, the Council has an important role to play, helping to coordinate regulators’ collective efforts to improve the measurement and management of climate-related risks in the financial system.

Dear.. May I still call you Janet? I have known you for 40 years, since you were kind to a young brash graduate student. In all that time you have always worked for sensible well-reasoned, quantitatively evaluated policy. I don't always agree, but you always have clear, careful and conservative (in the move-carefully sense, not the political sense) thinking behind your recommendations. 

What the heck is going on? Surely you know this is nonsense? 

"Climate change is obviously the big one." The biggest risk? To the financial system? More than sovereign debt crisis, another run, another pandemic, war, revolution, pestilence, crop failure, another Great Depression, civil unrest, cyberattack ... I could go on. You have a much better imagination than that. So does your staff. 

Climate change "is an existential threat... poses a tremendous risk to our country’s financial stability." You don't really believe this oft-repeated trope do you? 

We do not, in fact "know" that storms will hit more frequently and more intensely. But even if they do, when was the last time a storm had more than a tiny effect on GDP, and threatened financial stability, a contagious run on the nation's debt-laden financial institutions? Weather has never, in all history, caused a financial panic. 

We do not, in fact "know" that slowly warming temperatures will "disrupt" food and water supplies. But even if they do, it is utterly absurd to imagine that you or your bank regulators can measure or control a causal chain from bank regulation to carbon emissions to warming temperature to food and water disruption to unrest around the world to financial stability (whew) which, let us remember, is the FSOC's only task. Do you really think that the most important way to prevent, say, a war in Syria in 2075 is for California to build a high speed train? This is beyond absurd. And even then, what does "unrest" abroad over food have to do with a coordinated US bank failure? Famines have come and gone, and Goldman Sachs remains unscathed. 

Why is the Janet Yellen I know and respect giving voice to such nonsense? 

I can tell you don't really believe it.  I note your choice to pass on tropes as they come rather than put your own views or analysis on them, cite sources, quantify effects, or speak as you always do when you believe something. I read you telegraphing that these are just empty words we all have to say now. But you don't. 

I know Washington is political, and a Treasury Secretary must go along with her President's agenda. But that does not mean you have to say such silly things in public. It will cost us all dearly, including yourself and the institutions you care about.  

How do financial institutions react when they hear the Treasury Secretary repeating such obvious balderdash?  They get the message: The FSOC is not looking for honesty, they're looking for political accommodation. Repeat the credo on climate, thereby signal your partisan support, and perhaps when we're discussing just why we bailed out your money market fund, the regulators will go easy on you. What other message could you expect regulated financial companies to get? 

When the American people, likely in two years, wake up to the fact that the institutions of government are spouting obvious nonsense, how will they react? Four years ago was a rebellion against the impression that the technocratic elite was incompetent. That impression is not allayed by these kinds of statements. That will hurt the important cause of climate.

It will also hurt the cause of financial regulation, which, as the first part of your remarks noted, we desperately need. Why should institutions pay any attention to your great thoughts on treasury market illiquidity, money market fund bailouts, and more, if the analytical thinking behind it can say in public that the way to stop civil unrest in the mideast in 50 years is to subsidize electric cars? 

You did not have to do it. You could have said, "The FSOC should study implementation of the Administration's executive orders on climate." You could even have said "The FSOC will continue to research the possibility of climate related risks to the financial system, " knowing full well what any honest quantitative research will find. You did not have to assert things that are so blatantly preposterous. 

Please, bring back sensible, fact-based, clear-thinking Janet Yellen. We need your gravitas, your steady hand on this ship. You don't have to join the woke putsch. 


(Note: Earlier comments on this issue here in an article at City Journal

Even if climate change somehow poses a risk to the financial system, surely it is a risk whose size, timing, location, and mechanism are impossible to monitor and guide from the top. So if anything it is one more argument for equity-financed banking. Just triple capital, reduce short-term debt financing, and the financial system can survive whatever happens. We know how to stop runs. It's not by monitoring fuzzy 50 year risks from the top. The regulators never noticed a pandemic might break out! ) 



  1. Sadly, I concur with this post. What are central bankers thinking?

    Central banks should stick to central banking, and to the maximum extent possible steer clear of approving, disapproving or helping other policies, regarding social programs, war programs, or environmental programs.

    If elected US policymakers decide to spend $6 trillion in Iraqistan, then the central bank must make policy considering that reality---not issue statements about the importance of Iraqistan, or try to force banks to alter lending policies to anticipate the ramifications of the war effort.

    What would people think if the Fed had issued a statement back after 9/11 that Islamic terrorism posed a existential threat to Western civilizations, unless countered early in the Mideast? Some people said as much, and still do.

    BTW, Bill Gates has a rather sensible and low-cost solution to "global warming." Moreover, paleoclimatologists can tell you the planet has been hotter and colder over various periods.

    An Ice Age is probably less appealing than a warm spell....

  2. To be fair to Yellen (and yes, I'm stretching), is there a central bank head anywhere in the western world not parroting this gibberish?

    1. So Ms. Yellen is still working for the US Federal Reserve (central bank)?
      I though she ditched that gig several years ago.

  3. It's not a political calculation, it's a religious one. She is reciting the woke creed. Whether she's a believer or not is another thing.

    What makes it utter nonsense is the fact that China is producing as much CO2 as America and Europe combined and their growth rate is very steep. There's no way the CCP is going to slow down on CO2 emissions, either. They only care about power and stability. If the temperature goes up a few degrees, it's all one to them.

    If Ms. Yellen is as smart as you say, then she and her staff know this.

    1. You're missing the point. Whether we require climate measures or not, it's not the FED's business either way.

      But what I really want to point out: Sad to see such China-bashing claims while esp. US (but also EU) has much higher per-capita emissions than China, and while there are quite some signs China is taking climate change more seriously than US so far overall.

    2. Anonymous...surely you can’t be serious?

    3. "quite some signs China is taking climate change more seriously than the US" LOL!

    4. I am serious, and don't call me Shirley...

    5. Quoting data is not China bashing. China is still building coal fired power plants. Lots of them.


  4. Thanks for your post. Here is an article from Man, an investment manager, about how efforts to counteract climate change are inflationary: "The Greenflation That Markets Should Learn to Love" https://www.man.com/maninstitute/greenflation-markets-should-love . I don't think publics around the world have been prepared for this.

  5. Dear John,

    I think you answered it quite well. This is virtue signaling. I don't think there's more to it than that. In that way, Janet's proclamations don't trouble me. She's not the first Fed chairman to throw a political bone.

    I thought your post would address her desire for a global minimum corporate tax. Leave aside the fact that a corporate tax is bad on economic grounds, calling for a global corporate tax is...a modern form of imperialism? What right does the US have for telling other countries what and how they should be taxing? This is the statement from her I found truly absurd.

    1. James,

      There is some merit to coordinating global economic policies in a day and age of large international corporations.

      I think the broader issues are these:

      1. No mention of a global maximum corporate tax is given, so 20% is too low on a world stage but 35 or 40% is not too high? If you want to level the playing field, that's fine, but make it truly level. Global minimum AND global maximum.

      2. No mention is given to individuals incorporating themselves and reclassifying personal income as corporate income. Deltas between personal and corporate tax rates are just as important as the corporate tax rates themselves.

      3. Ultimately the setting of tax rates is determined by the Congress (Legislative Branch of Government) not Treasury (Executive Branch of Government) and so Ms. Yellen (while entitled to her own opinions) is stepping into the policy making realm rather than the execution of policies enacted by Congress.

    2. Dear Frank,

      The corporate tax is one way a country can make itself attractive relative to others.

      Passing the global corporate minimum tax is akin to nation wide minimum wage.

  6. Isn't a good thing to use technology to:

    1. Reduce carbon footprints?
    2. Eliminate volatility in energy markets?
    3. Provide a stable source of energy that has little to no scarcity issues in the short term? (Short term meaning millions of years. The sun has got 5B years left of "life.") Plus there's wind and tide power generation. Storage and transmission are still problems to tackle of course.
    4. Exogenous benefits; political strife reduced due to resource acquisition. Do we want another 1970s oil crisis?
    5. Reduce factor input costs?
    6. Reduce pollution and pollution abatement costs?

    These all seem like good things to me. Why not try to build a better future? Yes, debt problems are bad but only if you're throwing money into a black hole. Remember the Fed is keeping zombies alive...

    The levers of power (no pun intended) have a vested interest in keeping the whole madness going with carbon based energy systems and the economies that generate ridiculous wealth. Of course they're going to cry crocodile tears and start screaming about debt problems as a distraction to the larger picture...

    Yellen is on the right path.

    1. It seems like serious mission creep for the Fed to be taking on climate change. And really, the tools it has at it's disposal are direct and indirect direction of financing to green energy sectors and away from traditional energy industry, unless they want to be using even more unconventional tools.

      Doing this severely hurts Fed independence and opens a pandora's box of potential abuses

    2. James,

      Ms. Yellen no longer works for the Federal Reserve system.

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  7. "You could have said, 'The FSOC will look towards implementation of the Administration's executive orders on climate.' You could even have said 'The FSOC will continue to research the possibility of climate related risks to the financial system,' knowing full well what any honest research will find."

    If you read carefully, that's EXACTLY what she's done. The only action Yellen has promised is "helping to coordinate."

    Look, for better or worse Yellen is holding a political office. She can't say things the way you'd like, because your quotes are dripping with an "I'm just saying this because I have to" tone. Yellen cannot realistically do that.

    So instead Yellen has wrapped the messaging you want in the appropriate buzzwords and tone (e.g., "existential threat"). She did such a masterful job even you missed that there is no promise of meaningful action anywhere in the text, beyond "coordinating." And as I'm sure you know, on the political left "coordinating" and "leading coalitions" and bringing all parties to the table" are the classic way of saying you're planning to do nothing (this is not unique to the left: the political right has their own versions of these, just different verbiage). So let's given Yellen a chance here.

  8. Friedman was saddened when his mentor Arthur Burns allowed himself to be bullied by Nixon. It seems in Secretary Yellen's case, a history of intellectual compromise is the price of power.

  9. Good article. I will, though, say that a sovereign debt crisis is not a risk. After all these years, John still doesn't understand the true nature of the national debt. It's just a large private sector savings account. Don't worry about a savings account!

    1. "Good article. I will, though, say that a sovereign debt crisis is not a risk. After all these years, John still doesn't understand the true nature of the national debt. It's just a large private sector savings account. Don't worry about a savings account!"

      If savings accounts were riskless, there would be no Federal Deposit Insurance.

      You sound like Summers / Rubin / Greenspan - don't worry about excess leverage, financial derivatives, and the like. Don't worry about combining commercial banking, investment banking, and insurance.

      "...say that a sovereign debt crisis is not a risk."

      Greece, Portugal, Spain, etc. probably thought the same thing - until it happened.

  10. John,

    "This is the highest level body overseeing financial regulation in the US. It matters."


    "As established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Council provides, for the first time, comprehensive monitoring of the stability of our nation's financial system."

    Notice, this council has no power to police behavior, levy fines, or enact laws. And so the hot air coming from this Council matters because?

    "So if anything it is one more argument for equity-financed banking."

    It is one more argument for equity financed government irregardless of how the banking system is structured.

  11. I agree. The cult of the so-called climate emergency is reaching absurd proportions now. We have continuously undershot IPCC projections, which have such high confidence intervals that they’re little better than weather forecasts. Moreover, whilst only a fool would deny that such high levels of greenhouse gas emissions in the last few centuries yields no effect on the climate, global temperatures are not extremely high in comparison to other local maxima throughout the entire time series for which data on this is available. Global temperatures fluctuate, we have to (as always) reason from counterfactuals.

  12. The climate alarmists keep flooding us with these unsupported threats it all reminds you of Mencken:

    "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary"

  13. I think the interpretation of Yellen's statement is a bit narrow here. A storm might not directly and immediately threaten financial stability, but despite the post's claim, weather has often had causal effect on states' economic well-being throughout history. The experience of Syria since 2011 being a relevant recent example, where the nation's most intense drought in its history led to (or at least exacerbated) social unrest and then civil war - the hyperinflation of the Syrian Pound over the last decade perhaps of secondary concern to the humanitarian tragedy there. So yes, Yellen's indulging in political rhetoric in lieu of a factually based argument, but this post seems guilty of the same.

    I appreciate the general point - I do think the appropriate response from a central bank to such a broad, long term threat like climate change is open for debate. The note at bottom seems to touch on this best, though it raises the question - wouldn't options like tripling capital, reducing short-term debt financing, be arguably as restrictive to short-term growth as say, anti-fossil fuel regulations?

  14. Your plea will fall on deaf ears. Dr. Yellen has assumed the mantle of a politician. Her words are written for her by others in the administration. Her rĂ´le is to lend gravitas to the political pitch being made, based on her prior leadership position at the head of the U.S. Federal Reserve. Don't expect too much in the way of objective economic analysis from her now.

    The linkage between climate and social unrest and financial losses is well established in economic studies of history. Usually, it is related to a cooling period of extended duration and low precipitation leading to drought and crop and livestock losses. Hurricanes and flooding are more likely to be local phenomenon with little spatial spill-over risks at a national level. As you say, Dr. Yellen should be familiar with this. But, today's politics is of a different nature to what we might have been accustomed to hearing in the past. The White House sets the tune that the ministers must dance to. Should we really be surprised at this? Sad, perhaps; not surprised.

  15. Cochrane: "I know Washington is political, and a Treasury Secretary must go along with her President's agenda. But that does not mean you have to say such silly things in public."

    For this innuendo to stick, it must be that Secretary Yellen, on assumption of very high office, is now promoting a position (on climate change policy) that she herself neither embraces nor believes.

    That's a very serious charge to make. I don't believe it is supported by the evidence. (Hint: check out Janet Yellen's prior year writings on climate change policy.)

  16. Tell her to blink four times rapidly if she is being held hostage.

  17. I don't think the part of the speech not dealing with global warming was all that intelligent, either.

  18. Governments everywhere think that tails wag dogs. She's now a politician and must toe the line. What's confusing John?

  19. This is the increasing weaponization of private entities to enforce government edicts by using financial regulations to make investments in fossil fuel producers and users more costly and difficult, if not to outright ban them.

    Fascism, straight up.

  20. There's a devastating article on Atlantic by Peter Brennen tilted "The Terrifying Warning Lurking in the Earth’s Ancient Rock Record" (March 2021). Even if just a fraction happens, we are in for a horrific decline. I hope finance -- the fundamental tools to allocate resources to sustain civilization -- will take up the mantle no matter how we define academic silos ...

  21. It is impossible she believes what she said. So why does she say them? To get the job? That seems pretty petty. Perhaps the best case scenario is she says something of that sort to keep the crazies off her back. Not sure a Treasury Secretary has any influence on climate policy. Although, perhaps the naive trust her statements and support what they otherwise would not.

    Regardless, she is either not as bright as we thought, or willing to be dishonest for some reason. Neither reflects well on her at all.

    1. Perhaps she is taking the Sydney Powell defense?


      "Sidney Powell, a lawyer who advised President Donald Trump’s campaign, asked a judge on Monday to throw out a $1.3 billion lawsuit accusing her of spreading false conspiracy theories about the November presidential election."

      "She said her claims about Dominion were meant to be hyperbolic, and that reasonable people would not accept such statements as fact but view them only as claims that await testing by the courts through the adversary process.”

  22. Lars Hansen has a (very recent) working paper on this topic. I found it to be thoughtful. I am wondering if you have read it and which points do you agree or disagree with ?

    1. Quote from Hansen

      i) attempts to take on a broader mission without formal and well defined mandates could compromise central bank independence in the longer run;

      ii) hastily devised policy rules unsupported by quantitative modeling could backfire if or when climate policy targets are missed, harming reputations of central banks and weakening their ability to act in the future on a variety of fronts;

      iii) climate change mitigation targets added to currently well defined mandates may generate excessive expectations and unwarranted confidence in the abilities of central banks to address this important social and economic problem while diverting the attention away from fiscal policy.

      Hansen writes with great scientific reserve. But translate into English, plus Grumpy's frothing at the mouth, and you have the same message.

      Contrast Hansen with the new executive order forbidding cost-benefit analysis, and you have even more disagreement.

  23. Good article. I will, though, say that a sovereign debt crisis is not a risk. After all these years, John still doesn't understand the true nature of the national debt. It's just a large private sector savings account. Don't worry about a savings account!


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