March 24, 2021

If our pied-à-terre falls into the hands of a Climate Stability Board, we’re toast.

Climate change dangers require:
Spending fighting it, trying to hinder it 
Spending adapting to it, to avoid its worst consequences
Saving, in order to be able to mitigate its worst effects
How should we budget for that to best avoid ending up toast?

Sir, let me begin with a very brief take on the last three decades of bank regulations.

A ship in harbor is safe, but that is not what ships are for” John A. Shedd. 

And neither are the banks, but that was ignored.

Before Basel Committee’s risk weighted bank capital requirements, everyone, whether perceived as a risky or as a safe credit, paid risk adjusted interest rates. After these were introduced, bank credit is allocated based on risk adjusted returns on equity.

The “safe”, meaning e.g., governments (bureaucrats/politicians), assets with high credit ratings and residential mortgages, pay relatively lower rates, because banks can leverage their capital/equity many times more with the net margin they provide. The “risky”, meaning e.g., small businesses and entrepreneurs, must pay comparatively higher rates, in order to compensate for the fact that banks must leverage less capital/equity with their net margins.

That has caused banks to overpopulate the safe harbors of the past and present, and to explore the riskier oceans much less than the future of our children and grandchildren needed.

Of course, all for nothing, since those excessive exposures that can become dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

And since current bank capital requirements are mostly based on expected credit risks banks should clear on their own; not on misperceived credit risks, 2008’s AAA MBS, or the unexpected, COVID-19, banks now stand there naked, though few dares to call out the Emperor on that.

So, how did we end up with all this? There are many reasons but, if I must pick one, that would be, “mutual admiration clubs”.

Sir, in November 2004 you published a letter in which I wrote: “The Basel Committee is just a mutual admiration club of firefighters seeking to avoid bank crisis at any cost - even at the cost of growth. Unwittingly it controls the capital flows in the world, and I wonder when will it realize the damage they’re doing, by favoring so much bank lending to the public sector.”

In “A new dawn for globalization” FT, Life & Arts, March 20, Mark Carney is allowed to write: “As chairs of the Financial Stability Board, Mario Draghi and I were at the forefront of efforts to reform the global financial system. Our aim was a system that once again valued the future, financed innovation and was prepared to take action in the event of failure. As its performance during the Covid-19 crisis has demonstrated, although far from perfect, the financial system is now safer, simpler and fairer”

If that’s not spoken as a member of a club that will not call him out on anything, what is?

And now Carney wants “a set of networks that can turn the existential threat of climate change into the greatest commercial opportunity of our time… and the Institute of International Finance’s Taskforce on Scaling Voluntary Carbon Markets is developing a large-scale, high-integrity carbon offset market.”

A new powerful mutual admiration club, backed enthusiastically by all climate-change fight profiteers. Scary indeed!

PS. As I read it, Pope Francis, when nailing his “Encyclical Letter LAUDATO SI’” to the web, denounced carbon credits to be just like the indulgences Martin Luther protested, when he nailed his “95 Thesis” to the church door.

PS. Why do you not ask Mark Carney to comment on Chris Watling’s “Now is the time to devise a new monetary order”, FT, March 19.