The Green Swan: BIS Urges Climate Action to Prevent a new GFC

Guest essay by Eric Worrall

Banking globalists are piling on the pressure too try to wreck the coal industry and for governments to hand out lots of free cash, to save the planet from a climate problem which doesn’t exist. But something sinister might be happening behind the scenes.

The abstract of the report;

The green swan
Central banking and financial stability in the age of climate change

Patrick BOLTON – Morgan DESPRES – Luiz Awazu PEREIRA DA SILVA Frédéric SAMAMA – Romain SVARTZMAN
January 2020

Climate change poses new challenges to central banks, regulators and supervisors. This book reviews ways of addressing these new risks within central banks’ financial stability mandate. However, integrating climate-related risk analysis into financial stability monitoring is particularly challenging because of the radical uncertainty associated with a physical, social and economic phenomenon that is constantly changing and involves complex dynamics and chain reactions. Traditional backward-looking risk assessments and existing climate-economic models cannot anticipate accurately enough the form that climate-related risks will take. These include what we call “green swan” risks: potentially extremely financially disruptive events that could be behind the next systemic financial crisis. Central banks have a role to play in avoiding such an outcome, including by seeking to improve their understanding of climate- related risks through the development of forward-looking scenario-based analysis. But central banks alone cannot mitigate climate change. This complex collective action problem requires coordinating actions among many players including governments, the private sector, civil society and the international community. Central banks can therefore have an additional role to play in helping coordinate the measures to fight climate change. Those include climate mitigation policies such as carbon pricing, the integration of sustainability into financial practices and accounting frameworks, the search for appropriate policy mixes, and the development of new financial mechanisms at the international level. All these actions will be complex to coordinate and could have significant redistributive consequences that should be adequately handled, yet they are essential to preserve long-term financial (and price) stability in the age of climate change.

Read more:

From the report: a carbon tax is the best solution to save the world from a green global financial crisis;

Naturally, the first-best solution to address climate change and reduce greenhouse gas emissions is Pigovian carbon taxation. This policy suggests that fundamental responsibility for addressing issues related to climate change lies with governments. But such an ambitious new tax policy requires consensus- building and is difficult to implement. Nor can central banks resolve this complex collective action problem by themselves. An effective response requires raising stakeholders’ awareness and facilitating coordination among them. Central banks’ financial stability mandate can contribute to this and should guide their appropriate involvement. For instance, central banks can coordinate their own actions with a broad set of measures to be implemented by other players (governments, the private sector, civil society and the international community). This is urgent since climate-related risks continue to build, and negative outcomes such as what this book calls “green swan” events could materialise.

The attack on fossil fuel;

Limiting global warming to less than 1.5°C or 2°C requires keeping a large proportion of existing fossil fuel reserves in the ground (Matikainen (2018)). These are referred to as stranded assets. For instance, a study (McGlade and Elkins (2015)) found that in order to have at least a 50% chance of keeping global warming below 2°C, over 80% of current coal reserves, half of gas reserves and a third of oil reserves should remain unused from 2010 to 2050. As the risk related to stranded assets is not reflected in the value of the companies that extract, distribute and rely on these fossil fuels, these assets may suffer from unanticipated and sudden writedowns, devaluations or conversion to liabilities.

Offering an exit path to fossil fuel investors;

In the worst case scenario, central banks may have to confront a situation where they are called upon by their local constituencies to intervene as climate rescuers of last resort For example, a new financial crisis caused by green swan events severely affecting the financial health of the banking and insurance sectors could force central banks to intervene and buy a large set of carbon-intensive assets and/or assets stricken by physical impacts.

Given the severity of these risks, the uncertainty involved and the awareness of the interventions of central banks following the 2007–08 Great Financial Crisis, the sociopolitical pressure is already mounting to make central banks (perhaps again) the “only game in town” and to substitute for other if not all government interventions, this time to fight climate change. For instance, it has been suggested that central banks could engage in “green quantitative easing”10 in order to solve the complex socioeconomic problems related to a low-carbon transition.

Relying too much on central banks would be misguided for many reasons (Villeroy de Galhau (2019a), Weidmann (2019)). First, it may distort markets further and create disincentives: the instruments that central banks and supervisors have at their disposal cannot substitute for the many areas of interventions that are needed to transition to a global low-carbon economy.

I used to work for merchant bankers. I know some of their games.

In my opinion there is no evidence central bank interventions during the 2007-8 GFC reduced the pain for ordinary people.

Worse, plenty of senior people who worked in banking were in my opinion well aware that the interventions were not benefitting the general economy, but most of them kept their mouths shut because they wanted to keep their jobs. Without the cash injections, the people who knew what was really happening, people who had a lifetime of savings invested in the failed banks would have lost everything.

One of the few governments to resist urgent demands from banks to inject vast sums of free cash into the system was Iceland. Their experience is instructive.

Gudrun Johnsen: The reckoning 

Gudrun Johnsen was on the special commission set up to learn lessons from Iceland’s banking collapse. 

“The banks were 10 times the GDP of Iceland; 20 times the state budget. They were too big to bail out.

“The stock market collapsed: 80% of the stock market was wiped out overnight. Shareholders were badly hurt. About every other business in Iceland became technically bankrupt. 

“97% of the banking sector collapsed in a matter of three days, and I hope I will not witness this anywhere in the world again.

“People felt very let down. They were very angry and took to the streets. Two or three per cent of the entire nation gathered in front of parliament demanding answers.

“The government demanded that the banks decrease the debt of households [owing more than the value of their house], and that people would not be driven into bankruptcy.

“The government also set up a special agency where people in big financial trouble could apply for debt forgiveness. 

“Parliament had to respond to the outcry and set up a Special Investigation Commission, equipped with enormous data privileges so it could reveal the truth behind the collapse. 

“It found the assets of the banks and the loans had been extended into a cobweb: firm A owns firm B, which owns firm C and, sometimes firm C owns firm A. There was virtually very little or no equity in those businesses. The operations are entirely dependent on credit from the banks. 

“What also came to light was that those who owned these pyramids of corporations were in the ownership of the largest shareholders of the banks themselves. That was very worrisome – we had a financial system that was really opaque. The bankers didn’t really know how much equity there was to be matched against the loans they were extending. 

“If you don’t know exactly what happened, you don’t know what type of behaviour you need to correct, and cultural change is really difficult. There was a benefit in the entire system going down. We know what failed and as a consequence we were able to clean house pretty quickly.”

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Iceland’s politicians let their failed banks fall, and investigated and prosecuted the criminals whose recklessness and fraud allowed it to happen. The courage of Iceland’s politicians was rewarded with a comparatively rapid financial recovery – the Icelandic government allowed their banking system to self correct and purge itself of failure.

What about the coal industry? Even if the general economy doesn’t need a bailout, maybe coal investors and coal workers need some kind of special treatment? Not so much.

Thermal coal prices set for recovery this year as oversupply tightens

in  Commodity News 21/01/2020

Thermal coal prices are expected to recover this year after losing around a third of their value last year as demand from some south-east Asian countries grows and oversupply tightens due to financing constraints for new capacity.

Investors widely anticipate the slow demise of coal use due to policies encouraging cleaner natural gas and renewable energy generation, as well as public pressure on companies to fight climate change and increasing divestment from coal assets.

However, the shorter-term outlook is for a resurgence in prices as oversupply is reduced.

“As 2020 gets under way there are signs that the support that international coal prices found at the tail end of last year could just be a foretaste of a market recovery in the year ahead,” said Guillaume Perret at consultancy Perret Associates.

“Although demand looks set to remain largely subdued, tightening supply, especially in the Atlantic market, could boost prices after their heavy fall in 2019,” he added.

Scant investment in the industry, difficulties securing finance and cost-cutting measures means stocks are depleting quickly which will reduce oversupply.

Read more:

If the Hellenic Shipping News report is correct, parachuting money into the coal industry right now would do more harm than good. In 2019, there was an oversupply of coal. The industry responded to market signals by cutting back on investment and shuttering less efficient, higher cost mines, cutting supply. As inventories run down, pressure will build for a price recovery. Capitalism 101.

Given the dubious and likely nonexistent benefits of bailouts to the global economy, why this sudden globalist push for a new round of green free money giveaways?

I no longer work in the banking sector, so I am not as in touch as I once was with what is really happening in the world of finance. But my personal, very speculative view is that hidden in the banking system is a dangerous asset bubble or series of bubbles, of similar, or perhaps even greater magnitude than the subprime bubble which triggered the 2007-8 GFC.

How do bankers convince the long suffering public to save their necks with yet another colossal bailout? By calling it a climate crisis of course. If the next banking crisis was caused by global warming, then it is not the fault of the world’s bankers.

via Watts Up With That?

January 20, 2020 at 08:36PM

One thought on “The Green Swan: BIS Urges Climate Action to Prevent a new GFC”

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