Fed should stick to its financial role
WASHINGTON — The Peter Principle is: “In a hierarchy, every employee tends to rise to his level of incompetence.” The Federal Reserve’s behavior illustrates an analogous principle: Institutions that are flummoxed by their primary responsibility will fail upward by embracing more urgent and noble purposes.
The Fed’s primary purpose is to preserve the currency as a store of value: to prevent inflation. The Fed’s newest self-proclaimed purpose is to identify — through guesswork dignified as “scenario analysis” — and mitigate the threat that climate change supposedly poses to the “financial system.” Having failed at its first responsibility, the Fed now adopts a function at which it cannot fail: Whatever it says will be unfalsifiable because “systemic” climate risk cannot, as a matter of common sense or science, be identified.
Not because climate change is not happening or poses no societal risks: It is, and does. But measurable climate risk to the financial system’s “resilience” in the time frame that regulation can foresee and control — five years or so — simply does not exist. Economic risks many decades hence — in, say, 2100 — are irrelevant to today’s banks.
The Hoover Institution’s John Cochrane, aka the Grumpy Economist, correctly says the financial system is at risk only when most or all large banks suddenly lose most of their loss reserves and capital. There is no scientific evidence to support such a hypothetical driven by climate change — as opposed to, say, a pandemic that rages for years without a vaccine and kills 10 percent of the population, not less than 1 percent. Or a global sovereign debt crisis. Or a massive cyberattack wiping out banks’ accounts. Cochrane:
“‘Risk’ means the unexpected, not changes that everyone knows are underway.” And “systemic” risk means the possible collapse of the banking system, not that someone might lose money.
“Our modern, diversified, industrialized, service-oriented economy is not that affected by weather — even by headline-making events.” No bank, let alone the financial system, failed in 2005 when Hurricane Katrina produced housing and other losses of $170 billion, a negligible sum relative to the financial system’s trillions.
Suppose the worst-case estimate of climate change lowering global GDP 10 percent below what it otherwise would be in 2100. Even postulating today’s miserable 2 percent growth, and ignoring compounding, GDP in 2100 would be 160 percent larger than today.
Cochrane: The upper range of possible climate change would “make 2100 be as terrible as ... 2095 would otherwise be.”
Like 7-year-old soccer players all congregating around the ball, Washington eminences want to cluster around the issue de jour, which today is climate. For the Fed, the temptation is irresistible because no one resists its mission creep.
In 1990, James L. Pierce, then a University of California at Berkeley economist, warned that the Fed “will be expanding its regulatory and safetynet coverage, vainly trying to protect everything in the interest of protecting ‘banks.’ ”
Today, James E. Hartley, a Mount Holyoke College economist, notes that in 2008 the Fed discovered in its charter a hitherto unexercised power to be “the lender of last resort to financial firms other than the commercial banking system.” So “it started directly buying massive volumes of assets in order to prop up their prices.” The polymathic Fed presumably knows what those prices should be.
Because socialism is government allocation of capital, it is notable that in 2020, Congress, with a Republican-controlled Senate, passed and a Republican president signed the Cares Act, which treats the Fed as the Swiss Army knife of American governance. The act, Hartley notes, allows “the Fed to lend directly to businesses, both for-profit and non-profit.” Meaning: to almost anything.
The Fed has joined the Network of Central Banks and Supervisors for Greening the Financial System. Perhaps someday someone will clarify what “greening” entails, and why it is part of the Fed’s remarkably elastic agenda.
Meanwhile, 12 years tardy, a three-judge panel of the U.S. Court of Appeals for the 5th Circuit has affirmed the obvious: The Consumer Financial Protection Bureau’s financing is unconstitutional. Created by the sprawling 2010 Dodd-Frank legislation, the CFPB gets its funding from the Fed, which cannot decline a request that does not exceed a generous cap. The court said this abdication by Congress of its appropriation power violates the Constitution’s separation of powers.
Progressives, always eager to emancipate portions of the administrative state from Congress’ nettlesome control, treated the Fed as the CFPB’s piggy bank. Well, why not, given the Fed’s current role as a jack-of-all-trades and master of ... never mind.