Treasury Secretary Yellen says climate is biggest stability risk

Yellen YouTube Thumbnail copy

Secretary of the Treasury, and ex Federal Reserve Chair Janet Yellen recently hosted an important meeting of the Financial Stability Oversight Council. Here’s an excerpt from her remarks:

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.

In response, John Cochrane blogged this letter. Here’s an excerpt:

How do financial institutions react when they hear the Treasury Secretary repeating such obvious balderdash?  They get the message: The FSOC is not looking for honesty, they’re looking for political accommodation. Repeat the credo on climate, thereby signal your partisan support, and perhaps when we’re discussing just why we bailed out your money market fund, the regulators will go easy on you. What other message could you expect regulated financial companies to get?

When the American people, likely in two years, wake up to the fact that the institutions of government are spouting obvious nonsense, how will they react? Four years ago was a rebellion against the impression that the technocratic elite was incompetent. That impression is not allayed by these kinds of statements. That will hurt the important cause of climate.

It will also hurt the cause of financial regulation, which, as the first part of your remarks noted, we desperately need. Why should institutions pay any attention to your great thoughts on treasury market illiquidity, money market fund bailouts, and more, if the analytical thinking behind it can say in public that the way to stop civil unrest in the mideast in 50 years is to subsidize electric cars?

You did not have to do it. You could have said, “The FSOC should study implementation of the Administration’s executive orders on climate.” You could even have said “The FSOC will continue to research the possibility of climate related risks to the financial system, ” knowing full well what any honest quantitative research will find. You did not have to assert things that are so blatantly preposterous.