Friday, February 11, 2022

Is the Fed really clairvoyant?

 Fed Pick Raskin Tries to Mollify GOP Critics on Climate Stance is the Bloomberg.com headline. 

I previously praised Raskin for the clarity of her statements. Unlike most others in this game, she straightforwardly advocated the Fed starve fossil fuel companies of money in the name of climate. For example  

“We must rebuild with an economy where the values of sustainability are explicitly embedded in market valuation,” she wrote. This will require “our financial regulatory bodies to do all they can—which turns out to be a lot—to bring about the adoption of practices and policies that will allocate capital and align portfolios toward sustainable investments that do not depend on carbon and fossil fuels.”

Good. Let's stop pretending there is some "climate risk" and talk honestly. 

As Bloomberg reports, she is furiously backpedaling 

“The Federal Reserve does not engage in credit allocation and does not choose the borrowers to whom banks extend credit,” she wrote.

But she did see some potential for the Fed to act, particularly in analyzing the climate risks facing supervised institutions. 

Those financial risks “might include disorderly price adjustments in various asset classes; potential disruptions in proper functioning of financial markets; and rapid changes in policy, technology, and consumer preferences that markets have not anticipated.”

This seems like more climate-risk boilerplate. 

But the last paragraph here caught my eye, and is the point of this blog post. Read it closely. This is supposed to reassure us? Forget climate. The future head banking regulator thinks the Fed actually has the capacity and mandate to try to foresee and do something about "disorderly price adjustments" in "various asset classes" -- that means all over the financial system including stocks -- "potential disruptions" and best of all  "rapid changes in policy, technology, and consumer preferences that markets have not anticipated"

Really? This is, remember, the same institution that was completely surprised by inflation, completely surprised by a pandemic (we've never had those before, have we?) and completely surprised that mortgages and mortgage backed securities might melt down. 

The gap between aspiring technocrats' view of their all-seeing knowledge, control,  and reality seems pretty large! If the stability of the financial system depends on Fed appointees clairvoyantly foreseeing "rapid changes in policy, technology, and consumer preferences" that banks don't even consider as risk-management possibilities... heaven help us. 

Meanwhile Green Stocks Stumble reports WSJ

Electric-vehicle startups and other green tech companies soared early last year. Now a wave of investigations, outside allegations and growing investor skepticism have sent shares down 75% or more for many of them.

If we were going to be honest about "asset classes" that might have "disorderly price adjustments" due to "rapid changes in policy" (subsidies end, midterm elections,) and consumer preferences, should we just maybe look at vastly over-priced, no revenue in sight, heavily subsidized, ESG labeled, regulator-approved green stocks, bonds, venture, and bank lending? Are we not even possibly heading towards another Fannie and Freddy, only this time subsidized green boondoggles? If "markets" aren't "valuing" green investments correctly, isn't it remotely possible that they are valuing them too much?

Update: 

I should have added: there is no such thing as an "orderly" price adjustment. If you know prices are going down tomorrow, you sell today. One of the most classic policy fallacies is the idea that we can have a slow steady price decline. 

11 comments:

  1. I am concerned about pollution and possibly global warming, and I am fine with a big federal gasoline or fossil fuels tax. Indeed, a great place to raise taxes, while cutting taxes on productive behavior, such as working or investing.

    Using the Fed to strong-arm banks or other lenders...a bad, bad idea.

    Not their job. And where could such Fed strong-arm tactics end?

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  2. “The Federal Reserve does not engage in credit allocation” Sarah Bloom Raskin
    Wrong!
    The risk weights of the risk weighted bank capital requirements are to access to credit, what protectionist tariffs are to trade, only more pernicious.
    https://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

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  3. “We must rebuild with an economy... ." A false premise on which to build an argument.

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  4. It's interesting to watch pretzel logic contort itself into the Fed's dual mandate. Disorderly price adjustments a fancy way of saying price instability? It's creative on the surface, and while I agree that maintaining the environment is a good thing for long term basic needs stability, the Fed just doesn't have the right tools for this.

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  5. Best question of the day: "If 'markets' aren't 'valuing' green investments correctly, isn't it remotely possible that they are valuing them too much?"

    But "central planners of the economy" do not understand their own limited knowledge horizon, and their power assures us their guessing-mistakes will hurt the evolving economy much more severely.

    The Social Cost becomes gigantic from the illusion of "planning." Why not just boost the capital requirements of the coddled bankers (with access to the Fed).

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  6. It's strange how people do not realize how ironic this affirmation is, as you did. How can one not sarcastically propose that the fed is better at evaluating risk than the whole of the financial sector? And if you believe this how can you be against revolving doors? We need those fed magicians working at the banks!

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  7. Given the point of the Fed is to disrupt the proper functioning of financial markets, perhaps they are best positioned to foresee such risks?

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  8. One of the ways the Fed adds money into the economy is by losing alpha.

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  9. John,

    "I should have added: there is no such thing as an orderly price adjustment. If you know prices are going down tomorrow, you sell today. One of the most classic policy fallacies is the idea that we can have a slow steady price decline."

    That's funny. You made the opposite argument here during the Obama Administration.

    Remember your comments here:

    https://johnhcochrane.blogspot.com/2014/11/the-neo-fisherian-question.html

    "Keynesian deflationary spirals. Just as much as monetarists worried about hyperinflation, Keyensians' forecast of a deflationary spiral just didn't happen."

    I think that salt water on the California coast is messing with your head.

    LONG time reader.

    ReplyDelete
  10. John,

    "I should have added: there is no such thing as an "orderly" price adjustment. If you know prices are going down tomorrow, you sell today. One of the most classic policy fallacies is the idea that we can have a slow steady price decline."

    Funny. You make the opposite argument here:

    https://johnhcochrane.blogspot.com/2014/11/the-neo-fisherian-question.html

    "Keynesian deflationary spirals. Just as much as monetarists worried about hyperinflation, Keynesians' forecast of a deflationary spiral just didn't happen."

    So now Keynesian deflationary spirals can happen?

    LONG time reader.

    ReplyDelete

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