What's in the reconciliation bill? A conversation with Casey Mulligan.

 A podcast discussion with Casey Mulligan. What's in the reconciliation bill? How will it work? 

Link to the podcast page, with lots of other formats. 

Yesterday Casey tweeted that he had read the entire 2,400 page bill. Casey does this sort of thing, as explained in his book "Your'e hired." I have been trying to figure out what's in it for a while. The media coverage is basically absent. (See this great Marginal Revolution post and Bloomberg column (gated, sadly) by Tyler Cowen.) I tried downloading the actual bill too, but promptly fell asleep. (Casey has some good hints on how to read it.) 

But here we are, about to embark on a huge set of new federal programs, really larger than anything since the Johnson Administration, and there is essentially no description of what they are, no debate on how they will work, and especially (my hobby horse) what incentives and disincentives they provide. Many of the previous welfare-state programs were disastrous for the supposed beneficiaries. How are we going to avoid that again? At most we talk about top line numbers. I'm a debt hawk, but if we could heal the planet, end all inequity, bring full social racial and gender justice, wipe out poverty, give every American a life of dignity, prosperity, and opportunity for a mere $3.5 trillion, I'm in. Double it. The real question is whether any of this will happen. 

Well, Casey read the bill and knows what's in it! Tune in to find out.. 

PS, I hope to get the podcast going more regularly this fall,

Update: 

A summary and review from David Henderson. 

Casey writes a detailed blog post on BBB disincentives. 

Adumbrations of FDA

Scott Alexander's Adumbrations Of Aducanumab is a great review of FDA snafus -- with deeper lessons about regulation in general. Yes the outcome is dumb, but incentives are to blame. That's important to understand if we are ever to fix this mess. 

Scott has some great ideas for fixing the FDA's incentives. The one I like best is to reduce its power. FDA approval currently means that insurance companies and the government must pay for drugs. Break that link. The FDA now either decides safe&effective vs. not-yet-proven, and makes taking any not-yet-proven drug illegal. Reduce the FDA to simply providing information about what's known about drugs. Finally, give the FDA budgetary rewards for approving drugs. Bemoaning regulatory idiocy is fun but gets us nowhere. Anything persistently busted is not the result of stupidity, it is the result of bad incentives. 

FDA, CDC and Covid

The story of the FDA in covid is a good place to start. It's well known by now, but we are now in the era of forgetting, and it is to nobody's interest to keep this memory alive. 

The countries that got through COVID the best (eg South Korea and Taiwan) controlled it through test-and-trace. This allowed them to scrape by with minimal lockdown and almost no deaths. But it only worked because they started testing and tracing really quickly - almost the moment they learned that the coronavirus existed. Could the US have done equally well?

I think yes. A bunch of laboratories, universities, and health care groups came up with COVID tests before the virus was even in the US, and were 100% ready to deploy them. 

As with vaccines, which took a weekend to create, the state of medical science is such that really there is no reason to have pandemics any more. Public policy? Well, that's stuck in the 1700s.  

But when the US declared that the coronavirus was a “public health emergency”, the FDA announced that the emergency was so grave that they were banning all coronavirus testing, so that nobody could take advantage of the emergency to peddle shoddy tests. Perhaps you might feel like this is exactly the opposite of what you should do during an emergency? This is a sure sign that you will never work for the FDA.

Climate risk to the financial system

I wrote a piece for Project Syndicate, here,  on climate financial risk.  (This resulted from a presentation on a panel at the NBER summer institute risks of financial institutions meeting, program here. There should be a video version on YouTube but I can't find it. The panel discussion was excellent. You will recognize ideas from my earlier climate finance testimony. I recycle and refine. ) I titled it "an answer in search of a question," but PS didn't like that so we have the "fallacy" title. 

The essay: 

In the United States, the Federal Reserve, the Securities and Exchange Commission, and the Department of the Treasury are gearing up to incorporate climate policy into US financial regulation, following even more audacious steps in Europe. The justification is that “climate risk” poses a danger to the financial system. But that statement is absurd. Financial regulation is being used to smuggle in climate policies that otherwise would be rejected as unpopular or ineffective.  

“Climate” means the probability distribution of the weather – the range of potential weather conditions and events, together with their associated probabilities. “Risk” means the unexpected, not changes that everyone knows are underway. And “systemic financial risk” means the possibility that the entire financial system will melt down, as nearly happened in 2008. It does not mean that someone somewhere might lose money because some asset price falls, though central bankers are swiftly enlarging their purview in that direction. 

In plain language, then, a “climate risk to the financial system” means a sudden, unexpected, large, and widespread change in the probability distribution of the weather, sufficient to cause losses that blow through equity and long-term debt cushions, provoking a system-wide run on short-term debt. This means the five- or at most ten-year horizon over which regulators can begin to assess the risks on financial institutions’ balance sheets. Loans for 2100 have not been made yet.

Such an event lies outside any climate science. Hurricanes, heat waves, droughts, and fires have never come close to causing systemic financial crises, and there is no scientifically validated possibility that their frequency and severity will change so drastically to alter this fact in the next ten years. Our modern, diversified, industrialized, service-oriented economy is not that affected by weather – even by headline-making events. Businesses and people are still moving from the cold Rust Belt to hot and hurricane-prone Texas and Florida. 

If regulators are worried even-handedly about out-of-the-box risks that endanger the financial system, the list should include wars, pandemics, cyberattacks, sovereign-debt crises, political meltdowns, and even asteroid strikes. All but the latter are more likely than climate risk. And if we are worried about flood and fire costs, perhaps we should stop subsidizing building and rebuilding in flood and fire-prone areas. 

Climate regulatory risk is slightly more plausible. Environmental regulators could turn out to be so incompetent that they damage the economy to the point of creating a systemic run. But that scenario seems far-fetched even to me. Again though, if the question is regulatory risk, then even-handed regulators should demand a wider recognition of all political and regulatory risks. Between the Biden administration’s novel interpretations of antitrust law, the previous administration’s trade policies, and the pervasive political desire to “break up big tech,” there is no shortage of regulatory danger.

To be sure, it is not impossible that some terrible climate-related event in the next ten years can provoke a systemic run, though nothing in current science or economics describes such an event. But if that is the fear, the only logical way to protect the financial system is by dramatically raising the amount of equity capital, which protects the financial system against any kind of risk. Risk measurement and technocratic regulation of climate investments, by definition, cannot protect against unknown unknowns or un-modeled “tipping points.” 

What about “transition risks” and “stranded assets?” Won’t oil and coal companies lose value in the shift to low-carbon energy? Indeed they will. But everyone already knows that. Oil and gas companies will lose more value only if the transition comes faster than expected. And legacy fossil-fuel assets are not funded by short-term debt, as mortgages were in 2008, so losses by their stockholders and bondholders do not imperil the financial system. “Financial stability” does not mean that no investor ever loses money.

Moreover, fossil fuels have always been risky. Oil prices turned negative last year, with no broader financial consequences. Coal and its stockholders have already been hammered by climate regulation, with not a hint of financial crisis.  

More broadly, in the history of technological transitions, financial problems have never come from declining industries. The stock-market crash of 2000 was not caused by losses in the typewriter, film, telegraph, and slide-rule industries. It was the slightly-ahead-of-their-time tech companies that went bust. Similarly, the stock-market crash of 1929 was not caused by plummeting demand for horse-drawn carriages. It was the new radio, movie, automobile, and electric appliance industries that collapsed.

If one is worried about the financial risks associated with the energy transition, new astronomically-valued darlings such as Tesla are the danger. The biggest financial danger is a green bubble, fueled as previous booms by government subsidies and central-bank encouragement. Today’s high-fliers are vulnerable to changing political whims and new and better technologies. If regulatory credits dry up or if hydrogen fuel cells displace batteries, Tesla is in trouble. Yet our regulators wish only to encourage investors to pile on. 

Climate financial regulation is an answer in search of a question. The point is to impose a specific set of policies that cannot pass via regular democratic lawmaking or regular environmental rulemaking, which requires at least a pretense of cost-benefit analysis.

These policies include defunding fossil fuels before replacements are in place, and subsidizing battery-powered electric cars, trains, windmills, and photovoltaics – but not nuclear, carbon capture, hydrogen, natural gas, geoengineering, or other promising technologies. But, because financial regulators are not allowed to decide where investment should go and what should be starved of funds, “climate risk to the financial system” is dreamed up and repeated until people believe it, in order to shoehorn these climate policies into financial regulators’ limited legal mandates.

Climate change and financial stability are pressing problems. They require coherent, intelligent, scientifically valid policy responses, and promptly. But climate financial regulation will not help the climate, will further politicize central banks, and will destroy their precious independence, while forcing financial companies to devise absurdly fictitious climate-risk assessments will ruin financial regulation. The next crisis will come from some other source. And our climate-obsessed regulators will once again fail utterly to anticipate it – just as a decade’s worth of stress testers never considered the possibility of a pandemic.

*****

In retrospect I should have emphasized one point more strongly. Suppose you do believe that there is a "climate risk" to the financial system, a "tipping point" that can happen in the next 5-10 years. Suppose you believe that all our forest fires and floods are the result only of climate change, and might engulf the economy in the next decades.  If so, none of the currently advocated policies will do anything about it, especially those implemented by financial regulation.  The best the most aggressive climate policies hope to do is to limit the further increase in temperature by 2100.  Cutting fossil fuels out of debt markets, printing money to buy windmill and electric car bonds, a full on ESG effort in money management ... none of this will lower carbon dioxide to pre-industrial levels in the next 10 years. None of this will stop wildfires and floods in your great-grandchildren's lifetimes. 

It follows, that if financial regulators accept even the most climate-alarmist position, and for the goal of protecting the financial system, the policy must be one of rapid adaptation. Spend billions to clear the brush that burns, to build dikes, and certainly not to rebuild crumbling condos on the sea shore.  The mantra (I listen to NPR) that each disaster is the result of climate change does not mean that any currently envisioned climate policy is the best, or even vaguely effective, way to combat the chance of such disasters in our lifetimes. Or those of our great-grandchildren. 

That simple fact does not mean we should ignore the climate, but it does mean that if you truly believe these scenarios, an immense adaptation effort must be undertaken right now. If you don't follow to that conclusion, perhaps you don't really believe that there is a climate financial risk, and this is just a subterfuge to pass policies actually aimed at year 2100 temperatures and having nothing to do with climate risks, by radically un-democratic means. Which is my point. 

Whither the Fed

I gave the UCSD economic roundtable lecture Friday June 11 on inflation and the future of the Fed. It summarizes quickly a number of themes from previous Grumpy writings, and if you enjoy videos you might find it fun. Youtube link in case the above embed does not work. 

I happened on the New York Fed website, proclaiming on its landing page that it is now

"...dedicated to understanding and finding solutions to the numerous forms of inequality that communities of color experience and working with communities in our District to address deep-seated inequities," 

in case you want documentation that the Federal Reserve is taking on inequality and racial issues. 

Slides available here. 

Why won't banks take your money?

 Banks to Companies: No More Deposits, Please, says the puzzling headline at WSJ. 

Why would bankers not want to take any amount of deposits, park them in reserves at the Fed or short term Treasury bills, charge fees and a slight interest spread, and sign up for an early tee-time at the local golf club? Sure "net interest margin" or other metrics might not look good, but money is money and more money is more money. 

The answer: 

Top of mind for many big banks is a rule requiring them to hold [sic] capital equivalent to at least 3% of all assets. Worried about the rule’s impact during the pandemic, the Fed changed the calculation in 2020 to ignore deposits the banks held at the central bank, but ended that break this March. Since then, some banks have warned the growing deposits could force them to raise more capital, or say no to deposits.

This is a fascinating little insight into the crazy world of our Fed's risk regulation. 

Cruz on crony capitalism

Senator Ted Cruz wrote a blistering Wall Street Journal Op-Ed decrying CEOs who pander to Democrats by making profoundly uninformed public statements. He announced that he will no longer take money from their corporate political action committees. And, he states

This time, we won’t look the other way on Coca-Cola’s $12 billion in back taxes owed. This time, when Major League Baseball lobbies to preserve its multibillion-dollar antitrust exception, we’ll say no thank you. This time, when Boeing asks for billions in corporate welfare, we’ll simply let the Export-Import Bank expire.

Cruz' statement is unintentionally devastating. So what about last time? 

So there it is in front of us, in writing, from a major politician. Political support, and campaign cash bought $12 billion tax breaks, antitrust exemptions, and Ex-Im subsidies. From Republicans. So much for any public policy pretense. And if those CEOs just figured out who has the power to hand out goodies now, and the Democrat's demands for public obeisance as well as cash, well, it's a lot harder to object that the CEOs fall in line.  

Vaccines and liability

I learned something from the New York Times lead editorial on Sunday. Why are we not shipping mega quantities of vaccines to countries like India? 

... as the vaccines came to market, some vaccine makers insisted on sweeping liability protections that further imperiled access for poorer countries. The United States, for example, is prohibited from selling or donating its unused doses, as Vanity Fair has reported, because the strong liability protections that drugmakers enjoy here don’t extend to other countries...

Pfizer has reportedly not only sought liability protection against all civil claims — even those that could result from the company’s own negligence — but has asked governments to put up sovereign assets, including their bank reserves, embassy buildings and military bases, as collateral against lawsuits. 

Well, you can sort of see the problem. You're a drug company. You sell a billion units of a brand new drug -- still on emergency use authorization in the US -- to, say, India. 10 people get a rare blood clot that may or may not be due to your vaccine. Local courts sue you for a gazillion dollars. Who wouldn't want liability protection? 

As the Europeans allowed trillions of GDP and quite a few lives to vanish while they haggled over a few billion in cost of vaccines, perhaps the onus on countries should be, to say, we want your vaccine, we understand it's brand new and there may be risks, we'll take them?  

The NYT is, predictably, full of bad ideas. 

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? 

San Francisco bans affordable housing

"San Francisco bans affordable housing," is the spot-on conclusion of a lovely post by Vadim Graboys (link to twitter). 

The post is titled "54% of San Francisco homes are in buildings that would be illegal to build today" with an interactive graph of those homes. 

Or, put another way, "To comply with today's [zoning] laws, 130,748 homes would have to be destroyed, evicting around 310,000 people."

The latter statistic is fun, but actually severely understates the damage of San Francisco's (and Palo Alto's!) zoning laws. The only reason current homes are illegal is that they were built under slightly less restrictive zoning laws. So that measures how much zoning laws have gotten stricter over time. It does not measure the much larger number of homes and apartments that were never built.

Testimony on financial regulation and climate change

Update: An expanded and improved version of this post is at city journal, or here (pdf on my webpage) 

I had the honor of testifying at the Senate Committee on Banking, Housing and Urban Affairs, on Protecting the Financial System from Risks Associated with Climate Change Full video at the link, I start at 48:30 with slightly abridged version of these remarks. 

Testimony of John H. Cochrane to US Senate Committee on Banking, Housing, and Urban Affairs 

Chairman Brown, Ranking Member Toomey and Members of the Committee: Thank you for the opportunity to testify today. 

I am John Cochrane. I am an economist, specializing in finance and monetary policy. My comments do not reflect the views of my employer or any institution with which I am affiliated. 

Climate change is an important challenge. But climate change poses no measurable risk to the financial system. This emperor has no  clothes. “Risk” means unforeseen events. We know exactly where the climate is going over the horizon that financial regulation can contemplate. Weather is risky, but even the biggest floods, hurricanes, and heat waves have essentially no impact on our financial system. 

Moreover, the financial system is only at risk when banks as a whole lose so much, and so suddenly, that they blow through their loan-loss reserves and capital, and a run on their short-term debt erupts. That climate may cause a sudden, unexpected and enormous economic effect, in the next decade, which could endanger the financial system, is an even more fantastic fantasy. 

Pay toilets and NYT: a free market microcosm

Nicholas Kristof in Sunday's New York Times asks a pressing -- often quite pressing -- question. Why are there no public toilets in America? He is right. He calls for a federal infrastructure plan to fix the problem: "Sure, we need investments to rebuild bridges, highways and, yes, electrical grids, but perhaps America’s most disgraceful infrastructure failing is its lack of public toilets."

Now, put on your economist hat. Or even put on your reporter hat. Ask the question why are there no public toilets in America? 

-------------------------------

Grumpy economist podcast: free market tests, vaccines and more

The Grumpy Economist podcast is back, and we're going to aim for a once per two week schedule. This week we talk about vaccines, tests, masks, and how free markets would do better than the government, or at least can usefully complement the government. 

I wanted to get to the larger point, at least can we have a free market in toilet paper? Price controls in crises are one of those econ 101 questions that divide economists from everyone else. Don't transfer income by rationing toilet paper in a crisis. Let prices allocate it to who really has got to go, and give the natural disincentive against hoarding. Next time. 

 Link here if the embed above doesn't work. 

Sanity in CA housing?

As reported by the Sacramento Bee, its city council voted unanimously to allow four-plexes across the city overturning one-house-per lot zoning. 

It's couched somewhat in the language of diversity, 

City officials said the proposal would help the city alleviate its housing crisis, as well as achieve equity goals, by making neighborhoods with high-performing schools, pristine parks and other amenities accessible for families who cannot afford the rising price tags to buy homes there.

“Everybody should have the opportunity to not only play in Land Park but to live in Land Park,” Mayor Darrell Steinberg said. “That’s the Sacramento that we all uphold, that we love, that we value, and you better believe this drive for inclusion and equity is the driving force of our city and it is going to continue well beyond my tenure here.”

But I applaud that. Yes, the effect of highly restrictive zoning is exactly to drive "diverse" people away. Let's not be hypocrites. 

And ok, we're not waking up in property-rights nirvana either

“We’re going to insist on design quality and scale,” [Mayor] Steinberg said

 in response to comments.  And 

buildings would still have their current height restrictions. There would also be historical protections, limits on how much of a lot size a house could take up and on the amount of square footage.

Ok, baby steps.

Neighborhood association leaders in Land Park and Elmhurs... suggested the city only allow multi-unit houses in certain areas of the city, along commercial corridors and near transit stations.

“No one will have the ability to live in lower-density neighborhoods,” said Maggie Coulter, president of the Elmhurst Neighborhood Association. “The city needs to preserve existing neighborhoods in order to promote home ownership opportunities for everybody.”

Kudos to Sacramento city council for seeing through this complete incoherence, and the obvious flaws of segregating housing to undesirable parts of the city.

The lack of a whisper about "affordable housing" mandates is also refreshing. Maybe sanity can erupt in a one-party state, when discussions are not tinged with partisan derangement syndromes?

Minimum wages. People are not all the same.

The ancient argument over the minimum wage (WSJ) is heating up, another of economics' many perennial answers in search of a question. 

As in the linked article, I think it is a mistake to focus entirely on overall employment of low-skill workers. That is surely an issue. But the wage is one part of a detailed bargain between workers and employers. By putting its thumb on one part of the bargain, the government will ensure that other parts squish out. That's the larger issue. 

Does the job allow flexible hours? Does it provide other benefits -- transportation, employee parking, uniforms? How hard do you have to work? Which workers get the jobs, not how many get jobs overall? 

Vaccines at NR

I repackaged and rethought some of my earlier thoughts on vaccine allocation and markets vs. government for National Review here. Text here, without the lovely pop-up ads: 

Free Markets Beat Central Planning, Even for COVID-19 Tests and Vaccines January 12, 2021 

Surely, we can’t let there be a free market for COVID-19 tests and vaccines. Indeed, tests and vaccines encapsulate many of the “market failure” parables from introductory economics courses.

But the argument for free markets is not that they are perfect. The argument is that the known alternatives are much worse. And we have seen a catastrophic failure of government at all levels around the world to handle this pandemic, especially in delivering tests and vaccines.

The CDC delayed testing for about two months. While it dithered, it blocked private parties from testing. University labs, for example, were blocked from making and conducting their own tests. During those two months, someone could sell you a thermometer to detect a COVID-19 fever, but if someone tried to sell you anything more effective, the FDA would stop them. Once it finally approved paper-strip tests in November, the FDA insisted that $5 paper-strip tests require a prescription and be bundled with an app, driving the cost to $50. Rapid testing that lets people who are sick isolate, and lets businesses ensure that employees are healthy, is only just becoming widely available, held back for six months by the FDA.

Let’s imagine that the government had not prohibited free-market activities. This is not anarchy, just a lightly regulated sensible market on top of whatever the government wants to do.

Private companies would have developed tests quickly and would have worked to make them faster, better, and cheaper. Why? To make money! Lots of people, businesses, schools, and universities are willing to pay for good, fast testing. Medical companies, knowing they could make a lot of money so long as they beat the competition, would have raced to develop and sell tests. We would have had $5 or less at-home paper-strip tests by late spring. And that would have enabled much of the economy to reopen.

FDA vs. Astra-Zeneca; bureaucracy vs. evolution and exponential growth

 From Alex Tabarrok at Marginal Revolution, quoting Marty Makary, M.D., a professor of surgery and health policy at the Johns Hopkins University School of Medicine:

... the FDA needs to stop playing games and authorize the Oxford-AstraZeneca vaccine.  It’s safe, cheap ($2-$3 a dose), and is the easiest vaccine to distribute. It does not require freezing and is already approved and being administered in the United Kingdom.

Sadly, the FDA is months away from authorizing this vaccine because FDA career staff members insisted on another clinical trial to be completed and are punishing the company for inadvertently giving a half-dose of the vaccine to some people in the trial.

It’s like the FDA is holding out, pontificating existing excellent data and being vindictive against a company for making a mistake while thousands of Americans die each day...

My emphasis. Alex:

See also my post The AstraZeneca Factory in Baltimore. Thousands of people are dying every day. We have a vaccine factory ready to go. The FDA should lifts its ban on the AstraZeneca vaccine.

Alex understates the case. It is not just that "thousands of people are dying every day." It is that we are in the phase of exponential growth, and a new more infectious variant has just arrived bumping up the growth rate further. Every hour of delay means tens of thousands more will die.  

We are in a fight of bureaucracy vs. exponential growth and evolution. Exponential growth and evolution are winning. Just how many thousands have to be on the left side of the trolley switch before the FDA stops allowing Astra-Zeneca to pull it? What's the risk aversion coefficient that justifies months of delay and another clinical trial?  

More deeply, can the FDA ever figure out that the point here is to stop a pandemic? The mentality is traditional: we must provide a perfect vaccine to protect individuals, taking the disease as given, and people who die while we do more studies are worth the cost. That is simply not what's going on right now. The point of the vaccine is to stop a pandemic. The disease is growing exponentially, and mutating and evolving. The externality is everything. I know, it's awfully hard for bureaucracies to innovate and change mindset. Well, sometimes you have to.  

For years the FDA was focused on, don't repeat thalidomide. Drugs must be safe. AIDS forced a hard reckoning. The people who are dying while you wait matter. But this is a third, even harder conceptual change. Stopping the spread of the disease matters. And the FDA does not have the years it took to make the AIDS change of mindset. 

OCC fights de-banking. Fed moves to climate.

Part 1: The OCC

The OCC issued a refreshing rule proposal, covered in a nice WSJ oped by Brian Brooks and Charles Calomiris. It is as interesting as a compendium of what's going on as it is for a rule to put an end to it, especially since enthusiasm for the rule is likely to change about Jan 20.  

...practices that amount to redlining whole parts of the economy that banks find politically unpalatable, including independent ATM operators, gun manufacturers, coal producers, private correctional facilities, and energy companies. Also under threat of interest-group pressure campaigns are gasoline-powered car manufacturing, large farms and ranches. Many of the targeted industries are those unpopular on the political left. But we’ve also heard allegations of banks being pressured to cut off programs and business disfavored on the right, such as Planned Parenthood.

Their summary of the rule

Banks may not exclude entire parts of the economy for reasons unrelated to objective, quantifiable risks specific to an individual customer. Banks ... cannot deny a service it provides except on the basis of an objective analysis of the riskiness of the client. Banks are not free to refuse credit simply because they don’t agree with a customer’s business.

I think the latter characterization is a bit wrong. Banks are not all doing this because they don't agree with a customer's business. Banks are doing this because they are afraid of pressure from both right and left. They are afraid of ESG pressure from their investors.  

I suspect banks would enjoy a clear rule, in which case they can say to protesters, shareholders, media and others, we'd love to de-fund your latest cause, but the mean old OCC won't let us do it. 

The proposed rule has a long preamble giving the legal and regulatory history. 

Consistent with the Dodd–Frank Act’s mandate of fair access to financial services and since at least 2014, the OCC has repeatedly stated that while banks are not obligated to offer any particular financial service to their customers, they must make the services they do offer available to all customers except to the extent that risk factors particular to an individual customer dictate otherwise. 

It is clearer about banks are often pressured, rather than choosing to discriminate on their own -- though the later is documented as well. (See the rule for footnotes documenting each case) 

banks are often reacting to pressure from advocates from across the political spectrum whose policy objectives are served when banks deny certain categories of customers access to financial services.

The pressure on banks has come from both the for-profit and nonprofit sectors of the economy and targeted a wide and varied range of individuals, companies, organizations, and industries. For example, there have been calls for boycotts of banks that support certain health care and social service providers, including family planning organizations, and some banks have reportedly denied financial services to customers in these industries. Some banks have reportedly ceased to provide financial services to owners of privately owned correctional facilities that operate under contracts with the Federal government and various state governments.

Makers of shotguns and hunting rifles have reportedly been debanked in recent years. Independent, nonbank automated teller machine operators that provide access to cash settlement and other operational accounts, particularly in low-income communities and thinly-populated rural areas, have been affected. Globally, there have been calls to de-bank large farming operations and other agricultural business...

They don't mention pot farmers, presumably because they are still illegal under federal law.  

In June 2020, the Alaska Congressional delegation sent a letter to the OCC discussing decisions by several of the nation’s largest banks to stop lending to new oil and gas projects in the Arctic....The letter also stated that, although the authors believed that the banks’ rationale was political in nature, the banks had ostensibly relied on claims of reputation risk to justify their decisions.

In response to this letter, the OCC requested information from several large banks to better understand their decisionmaking. The responses received indicate that, over the course of 2019 and 2020, these banks had decided to cease providing financial services to one or more major energy industry categories, including coal mining, coal-fired electricity generation, and/or oil exploration in the Arctic region. The terminated services were not limited to lending, where risk factors might justify not serving a particular client (e.g., when a bank lacked the expertise to evaluate the collateral value of mineral rights in a particular region or because of a bank’s concern about commodity price volatility). Instead, certain banks indicated that they were also terminating advisory and other services that are unconnected to credit or operational risk. In several instances, the banks indicated that they intend only to make exceptions when benchmarks unrelated to financial risk are met, such as whether the country in which a project is located has committed to international climate agreements and whether the project controls carbon emissions sufficiently.

My emphasis. 

The actual rule is mercifully short and clear. After definitions (including  that "person" includes "Any partnership, corporation, or other business or legal entity."

(b) To provide fair access to financial services, a covered bank shall:

(1) Make each financial service it offers available to all persons in the geographic market served by the covered bank on proportionally equal terms;

(2) Not deny any person a financial service the bank offers except to the extent justifiedby such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank;

(3) Not deny any person a financial service the bank offers when the effect of the denial is to prevent, limit, or otherwise disadvantage the person:

(i) From entering or competing in a market or business segment; or

(ii) In such a way that benefits another person or business activity in which the covered bank has a financial interest; and

(4) Not deny, in coordination with others, any person a financial service the bank offers.

Of course, the chance of this rule surviving and being implemented as it stands in the new administration is small. But not all de-banking comes from the left, and perhaps there is hope that keeping funding open to, say, planned parenthood, and seeing the danger that banks can also be pressured by right-wing groups  will encourage them to put climate-based squeezing of fossil fuel companies where it belongs in EPA or elsewhere rather than try to pressure banks to do it. 

***

Part 2: The Fed

The IMF, BIS, ECB, BoE, are embarking on just such de-funding of fossil fuels, this time mandated by regulators. (Previous posts here and here.) I had praised the Fed and its chair Gerome Powell in particular for eschewing this mounting pressure. 

It seems the Fed's resolve is weakening. As reported by Andrew Stuttaford, 

The Federal Reserve on Monday for the first time formally highlighted climate change as a potential threat to the stability of the financial system and said it is working to better understand that danger.

In its semiannual report on financial stability, the Fed said it would be helpful for financial firms to provide more information about how their investments could be affected by frequent and severe weather and could improve the pricing of climate risks, “thereby reducing the probability of sudden changes in asset prices.” 

which is, on account of weather, negligible, and the unknown probabilities of which, due to climate change, are precisely zero. 

It also said it expects banks “to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.”...

It always starts with "disclosure." Then the activists and ESG funds know where to go.   

Fed Chair Jerome Powell said last week that the “science and art” of incorporating climate change into financial regulation is new but that the Fed is “very actively in the early stages” of getting up to speed and working with officials around the world....

See previous posts for what those officials are up to.  

If you had asked me then what my test would have been to determine whether the Fed had finally succumbed to the mission creep that he described so well, it would have been the news that it had finally applied to join the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

"The Federal Reserve expects in coming months to join the Network for Greening the Financial System, a group of 75 central banks set up to combat climate change by better understanding the risks it poses to economies.

“We have requested membership. I expect that it will be granted,” Fed Vice Chair for Supervision Randal Quarles told a hearing before the Senate Banking Committee Tuesday. He said the Fed could probably join before the NGFS’s annual meeting in April."

Especially if you see the climate as a present crisis, and you wish to have a coherent, sustainable, cost-benefit tested policy that actually reduces carbon, I hope you recognize how nutty and absolutely dishonest it is to address climate by having bank regulators force banks to make up  imaginary "climate risks" to the financial system to justify near-term de-funding fossil fuel companies. A policy built on a lie will either require us to descend to Soviet style lie-repetition, or will blow up just as we need a coherent carbon policy. 

***

Part 3: Regulatory competition. 

If the OCC rule goes through, the OCC will forbid what the Fed requires. This will be fun. The OCC will lose, but at least it shines a bright light on what's going on. 

It is common to bemoan America's fractured and overlapping regulatory system, with an alphabet soup of agencies all trying to do the same thing. Centralization and uniformity always sound great. Here is a case where regulatory competition looks like a very good thing. At a minimum one regulator can shine a light on what the other is doing, and at best competing regulators can limit regulatory damage. 

Update: I am informed that the OCC rule may in fact be final before Jan 20, which would make it much harder to overturn. It doesn't have to be enforced, of course. 

Artistic representation of government waste

"...the man‐and‐horse statue outside the FTC, which signifies the government’s heroic battle to strangle trade. " 

Link from Chris Edwards proposed museum of government failures. (The actual title, "Man controlling trade," is almost as good in an unintentional, new-Deal sort of way, but I like Chris' better. )

I was chatting with Chris and nominated the California high speed railway, which will soon be a massive Christo-scale installation, dedicated to the same cause. Imagine arching viaducts looming over the freeways, connected to nothing, like the ruins of Roman aqueducts, but unlike those never used. Like this one.   

San Joaquin River Viaduct

All it needs is a great set of plaques, installed by the new Libertarian governor of the state of Jefferson after secession, and title. "Ruins of the progressive state?" The Pont du Gard it's not, but perhaps the brutalist functionality is better for my artistic purpose. 

(Yes, California really has built expensive overpasses and viaducts before building the roadbed to which they connect, which it will likely never build.  

Question of the day: If California is going to ban internal combustion cars and trucks, just what is the point of the train? It must now be a net carbon producer.)

 

Growth and regulation

Is economic growth inexorably slowing down? Such is the depressing conclusion of Nick Bloom, Chad Jones, John Van Reenen, and Michael Webb, who showed in a very important paper that it is taking more and more effort to find new ideas. It is also the conclusion of Robert Gordon's Rise and Fall of American Growth. They promised us flying cars, and all we get tweets. The marshaling of facts in these and related works is impressive and depressing. 

I'm attracted to the other much more hopeful (maybe) possibility: growth, really the continued betterment of the human condition, is possible, but it is just stymied by the ever-increasing web of law and regulation. 

Along today come two interesting posts courtesy Marginal Revolution (always must-read). The first is narrow, on nuclear power, the second much broader on how bad regulation spreads around the world. 

Good Fellows -- International Man of History

A new lively Good Fellows discussion video

and podcast





Direct links here if the above embed codes don't work.