February 6, 2023

While the rest of the Fed climbs on the maybe-anvils-might-fall-from-the sky climate financial risk fantasy, Chris Waller has the courage in Haiku-simple prose to state that the emperor has no clothes. 

I cannot support this issuance of guidance on climate change. Climate change is real, but I disagree with the premise that it poses a serious risk to the safety and soundness of large banks and the financial stability of the United States. The Federal Reserve conducts regular stress tests on large banks that impose extremely severe macroeconomic shocks and they show that the banks are resilient.
Granted, in my view stress tests are a lot less reliable. Stress tests didn’t uncover the weakness that led to the pandemic bailout, so there is no hope of them assessing climate risk. The Fed is, let us not forget, fresh off of a second huge bailout in a pandemic their stress testers never considered, and a consequent fiscal-policy inflation that their forecasters never imagined. The “transition risk” crowd got the sign wrong on what happens to oil company profits if you restrict fossil fuel investment. A “how did we screw up so badly” effort seems more important. But we need not fight about this issue. Different logic leads to the same conclusion. 
Chris is right that it is completely obvious that “climate risk” does not conceivably imperil the financial system, or at least not with more than infinitesimal probability and a lot less than other dangers — war, sovereign debt collapse, pandemic, etc. 
Bravo, Chris. A reckoning of this highly political move will come. Yes, the Biden administration wants a “whole of government” effort to restrict fossil fuels and to subsidize windmills, photovoltaics and electric cars (so long as they are built in the US), but the Fed is supposed to be politically independent. Because, you know, administrations and Congresses change. I suspect caving to this pressure will cost the Fed a lot. 

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