Tuesday, January 10, 2023

Cheers for Powell

 Jay Powell's Stockholm speech lays it out with Gettysburg address clarity and brevity. Relative to usual central-bankerese it's soaring rhetoric too. 

...Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public's will as expressed through elections.

... without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We are not, and will not be, a "climate policymaker."

So much for "all of government" approach announced by the administration. Would that the SEC and other regulators would listen.  

Powell carefully and correctly links this path to the US institutional structure. The Fed has independence, in return for sticking to its mandate. 

In a well-functioning democracy, important public policy decisions should be made, in almost all cases, by the elected branches of government. Grants of independence to agencies should be exceedingly rare, explicit, tightly circumscribed, and limited to those issues that clearly warrant protection from short-term political considerations.

Footnote 7 is important. 

While U.S. monetary policy has the dual mandate of maximum employment and price stability, some other central banks have somewhat more expansive mandates. The Bank of England and the European Central Bank both have a primary mandate to maintain price stability but a secondary mandate to support the economic policies of the U.K. government and the European Union, respectively..

My emphasis. Now, not even in the EU and UK do central banks have the freedom to create their own climate policies in advance of governments. And governments come and go and change their minds. Now that Europe is full-bore trying to invest in natural gas as fast as possible, and even bringing back coal, it will be interesting to see if ECB and BoE regard their roles as supporting the new economic policies of their governments, or whether they will decide to act independently to pursue an anti-carbon policy different from those of their governments. 

OK, he waffles a bit: 

Today, some analysts ask whether incorporating into bank supervision the perceived risks associated with climate change is appropriate, wise, and consistent with our existing mandates.... 

These responsibilities are tightly linked to our responsibilities for bank supervision..

..  The public reasonably expects supervisors to require that banks understand, and appropriately manage, their material risks, including the financial risks of climate change.

But read closely. "perceived." "material." I would have said "it's perfectly obvious that 'climate financial risk' is BS." But I'm not Fed chair. "Perceived" is darn close! And advocates will have to show that climate is "material" to banks, not just how important climate policy is, and how the Fed must act because legislature does not. 

As Lincoln cast the civil war in the context of the Declaration of Independence, so Powell  casts the climate policy in the context of Fed independence. Only by hewing tightly to the mandate can the Fed preserve the independence it will soon need: 

The case for monetary policy independence lies in the benefits of insulating monetary policy decisions from short-term political considerations. Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.

The Fed's anti inflationary tool is precisely to cool the economy. Great political displeasure is heading the Fed's way, and only by eschewing the temptation to be the great "policy-maker" that solves all problems can the Fed do its  central job. 

It is essential that we stick to our statutory goals and authorities, and that we resist the temptation to broaden our scope to address other important social issues of the day. Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence.

 I wish I could ever write something with such clarity and brevity. 

26 comments:

  1. "It's perfectly obvious that 'climate financial risk' is BS"

    I'll disagree on that one. The problem is that climate financial risk is a somewhat dishonest misnomer. The real financial risk in the foreseeable future isn't climate change, but policies aimed to mitigate climate change.

    I'm not sure what it would take to threaten financial stability, but you can imagine a radical policy turn costing many large companies several billion dollars. Even the threat of that maybe happening could stall investment projects for years. If you have a tight enough majority in either house, everyone in the majority essentially has a veto and a handful of loonies is all you need to force concessions.

    I agree it's not changes in the incidence or gravity of natural disasters that constitute a problem. The change operates way too slowly for that to be sensible. However, climate policy can change in matter of days and that can have severe consequences for many large corporations.

    I've seen one company disclose exposure to climate risks recently. The whole statement was about climate policy risk. I think it was an oil company or something like that and they essentially said they feared they might not be able to keep up with radical policy changes. That sounds reasonable to me in the current political climate.

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    1. Nice store you got there, it would be a shame if anything were to happen to it.... Yes, but this crowd just got the sign wrong. What will climate policy (restrictions on fossil fuel development before alternatives are available at scale) do to fossil fuel profits? That shouldn't have been hard to answer! See the environment tab, lots of previous posts take up this issue that I didn't think I had to delve in to "transition risk" here.

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    2. Canada is a case in point. Canada's federal cabinet is moving aggressively to reduce GHG emissions from industry, agriculture, transportation, and real estate, in order to earn bragging rights at international fora dedicated to forcing the curtailment of petroleum and natural gas production globally by the year 2050. Threatened industries are located in the western provinces which taken together produce crude petroleum and agricultural products that contribute a significant share of Canada's hard foreign currency income-producing exports. Canadian federal regulations that call for aggressive curtailment of GHG emissions ahead of industry's ability to develop and deploy the technology necessary for compliance with those regulations will force industry to curtail investment and production output. Given the capital intensity of the affected industries, aggressive regulatory moves threaten the major commercial banks that have significant exposure to borrowers in those industries. As this is not a theory possibility, or an academic 'what-if' scenario play, but a current development in Canadian federal government regulatory moves, Mr. Surprenant's observations are germaine to the topic under discussion.

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    3. I am not sure they got the sign wrong. Most of the transition stress tests have looked at what happens if the price of carbon increases. All that the regulators can do (assuming they stock to risks) is increase the cost of capital. The error is conflating one with the other (and then further confusing things by introducing an oil price spike). One of the subtle changes between phase 1 and 2 of the NGFS climate scenarios was they moved from talking about a carbon tax to a shadow price. I am not sure many people understand the significance in that (other than it seems more realistic)?

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  2. Great news, courageous stance. Hopefully not ephemeral!

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  3. Climate risk with regard to the banking industry has only one aspect to it in my view: How does it affect the creditworthiness of a given borrower of a banking company, and in the aggregate the riskiness of a given bank's loan portfolio?

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  4. We shall see in 2023... I keep hoping that the Jay Powell of today is not the Jay of his youth, raping and pillaging industry by using excess liquidity provided by the Fed and turning the private sector into a debt ridden financialized bomb.
    If he can somehow wring out the trillions of excess liquidity that quantitative easing and an insane government has dumped into the system without completely train wrecking the economy and the world then he should be hailed as a hero.
    He sees climate change for what it is, a distraction from the Herculean task that faces him.

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  5. In the last five billion years CO2 has never been a lead indicator of warming, that despite the fact that several times it has been much higher than today. Additionally, over the past seventy years nearly 47 million weather balloons have been sent skyward and not one has encountered the greenhouse effect. Thus, in my view, the term "BS" is spot on.

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    1. I am curious about your claim of balloons not encountering the greenhouse effect. I’m not even sure what that means. Do you have any sources where I can learn more?

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  6. Right. I am green and I believe in taxing fossil fuel consumption. Central banks have no business in the climate policy arena.

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  7. It would be a better world if more civil servants had similar concern for the integrity of their exercise of power, as you note and I would broaden.

    Corruption is the use of power for ends based on personal preference. The eunuchs of Imperial Beijing or Byzantium have nothing on our servants.

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  8. If only Powell were also running Treasury.

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  9. Powell might want to add that some countries don’t even have a dual mandate. The charter of the Swiss National Bank has only price stability

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    1. I sometimes wonder if full employment is just superfluous. Prices reflect relative scarcity and when you throw in derived demand for labor demand, price stability might be enough. Sometimes I ponder and muse if the dual mandate is just a set of monetary handcuffs.

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  10. you actually believe his LIES? He said this to protect himself against the GOP in congress!

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  11. This was 100% a political speech...if Democrats had won the house...he would have said Climate Change was the main priority. We know the main priority...enrich wall street and the richest and protect Government! The FED hate Main Street...look at their ABJECT failure on inflation...their OUTRIGHT LIES!

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    1. Sigh! As usual no good deed goes unpunished. BTW, if I remember right, rates were being raised prior to the Midterms with Dems in "control". Fallible humans make mistakes, even if they are in high positions of responsibility. And when you get several fallible Feds in the same room trying to do the right thing, mistakes will be made. Seems they caught it and are trying to do it right this time.

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  12. Jay Powell is absolutely write. CBs have no mandate for pursuing climate policies. Now, if it is thought that they can be instrumental for that matter (and they can), the elected powers may give them such mandate.

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  13. The imperative to "stick to their knitting" would also seem to undermine purchasing mortgage-backed securities, corporate bonds, commercial paper, and a host of other credit market interventions which are, at the end of the day, quite tangential to monetary policy.

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  14. He needs to tell Congress to get rid of the Fed’s dual mandate. Congress’ fiscal and regulatory policy are the appropriate means of affecting growth and employment. Let the Fed focus on price stability.

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  15. "it's perfectly obvious that 'climate financial risk' is BS."
    Spot on. In the financial services corporate world, you can't imagine the gyrations and distortions people make to "fit" this notion in risk management policies. Wasted customer and shareholder value at the end of the day.

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  16. What can Powell do with a structural deficit of 4 percent, increasing to 10 percent anyway?
    Nothing.
    So tell us how we don't get 4 percent inflation on the horizon for a very long time..

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  17. Grumpy economist -- give yourself credit as your analyses are concise & cogent ( w.r.t.I wish I could ever write something with such clarity and brevity)

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  18. The risk horizon for bank regulation is one year. Do we really need any further discussion on this?

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  19. Don't discount yourself too much John. You have some of the best prose I've seen from academic economists. The profession would be far better off if everyone could write as well as you do.

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  20. John, thanks for posting about this. I'm aware that there has been discussion for some time on the left about using the Fed to enforce lefty policy. But why does he make this statement now? I agree, it's a forceful speech, but is it enough? Or is it a last ditch effort to hold the Fed to its mandate before the lefts makes it just another agency enforcing it's policy du jour (as it does with all agencies)?

    Remember, to the Mighty Climate Superheroes of the left, nothing can stand in the way of Saving Humanity from the Eternal Fiery Damnation that's Sure to Consume Us if We Continue to Eat Food and Build Houses!! Will a mere speech even scratch - much less blunt - their zealotry?

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