Breitbart Business Digest: Sarah Bloom Raskin's Risky Bet
Joe Biden wanted to put Sarah Bloom Raskin into one of the most powerful positions at the Federal Reserve because she is an advocate of using the central bank’s regulatory powers to diminish the supply of fossil fuels. In an age of oil priced over $100 a barrel and the highest ever nominal price for gasoline, that was too much for the U.S. Senate. So what is it that made Raskin so toxic that Sen. Joe Manchin (D-WV) killed her nomination by announcing his opposition? Basically, it was Raskin’s radicalism on climate change issues. In recent years, she adopted the stance that the way to fight climate change was to discourage fossil fuel development by having bank regulators discourage investment in the sector. Specifically, Raskin wants the Federal Reserve to force banks to weigh a novel kind of risk when making loans: The risk that people like Raskin, as Biden’s pick for the Fed’s bank supervision job, will get their way on climate policy. In her testimony before the Senate Democrats’ special committee on the climate crisis in March 2020, Raskin explained that her novel approach to bank supervision focused on the “economic risks of climate change.” She described a plan for bank capital requirements that reflect her views on what should be done about climate change. Worse, she wants supervisors to require banks to assume that her side will win the political argument over what should be done about it. In her testimony, Raskin described two different economic risks to banks from climate change.
The first is relatively uncontroversial: the physical risks to assets that back loans. If sea levels were to rise significantly, for example, coastal properties would likely suffer. Loans against those properties might sour, leaving banks and investors with losses. According to Raskin, this exposure isn’t understood by bank regulators. If that’s right, then the supervisory staff at the Fed should get to work. Sarah Bloom Raskin, nominee to be vice chairman for supervision of the Federal Reserve Board of Governors, is sworn in before her Senate confirmation hearing on February 3, 2022, in Washington, DC. (Bill Clark/Getty Images) But it’s worth noting that lenders and investors are aware of the risks of climate change. Like everyone else, bankers regularly encounter claims that climate change is increasing the risk of extreme weather, rising sea levels, wildfires, and any number of hazards that can hurt values of physical assets.
These are priced into investments and loans made against those assets, sometimes explicitly and sometimes implicitly. Climate change isn’t sneaking up on anyone. Raskin’s second climate change risk—what she describes as “transition risk”—deserves more attention. It is the risk that financial institutions could be hurt by “costs associated with transition efforts to reduce carbon dependence and adopt alternative technologies,” as Raskin put it in her 2020 testimony. In other words, she wants banks and investors to price in the risk that climate regulation will hurt the value of their assets. In Raskin’s view, the risk is most acute if the transition is “excessively delayed.” She compares this scenario to the global financial crisis, in which the market appeared suddenly to wake up to the low quality of mortgage debt and related instruments that sat on the balance sheets of so many large financial institutions. In her view, regulators and bankers ignored the risks and warnings until it was too late. “And when federal intervention did in fact occur, the repricing of mortgages and mortgage-backed securities was so sharp and dramatic that what might have been a minor downturn had become a recession that was the longest and deepest of any since the Great Depression,” Raskin wrote. If it seems odd to say that federal intervention triggered the financial crisis, that is because it is odd.
The mortgage bubble imploded not because federal regulators finally woke up and imposed sensible regulations.
The regulations came after the implosion—years after, in the form of the 2010 Dodd-Frank Act. But never mind. In Raskin’s fairy-tale version, regulators knew better than the banks when it came to mortgages—and they know better about climate change than banks do today. Note that this isn’t a question of whether the science is settled; or if climate change is real; or what the right policies are to fight, mitigate, or reverse it might be. Raskin could be 100 percent right about the climate and still be wrong about both the actual future policy response and the politics of climate change. We might, as a democratic polity, simply choose a different course—even a wrong course. In that case, Raskin’s political forecasts would be wrong even if her climate forecasts were correct. Even if we assume that Raskin is right about what would be required to keep global temperatures from rising more than 1.5 degrees—and even if we assume she is right about the prudence of avoiding a more significant change in temperatures—it seems an extreme act of hubris for her to insist that the transition is inevitable. Maybe carbon capture and sequestration will make emissions a nonissue. Maybe fusion will finally work. We simply don’t know—neither what policies will be required nor which ones will actually come into force. But Raskin not only expects assent to the inevitability of anti-emissions regulations—she wants to make that inevitability part of bank supervision. Instead of allowing banks to formulate their own ideas about likely policies—ideas that may conflict and will compete to persuade investors—Raskin wants a uniform approach.
The irony is that it was exactly this standardization that helped bring about the global financial crisis. Instead of banks holding a variety of positions on the housing market and mortgage risk, all too many held the view that mortgage-backed securities were “safe as houses”—in part thanks to regulations that gave MBS preferential treatment.
These regulations, and thus bank asset allocations, undercounted default risk and actually made the whole system more fragile. Setting banks marching along the same path when it comes to climate change and climate regulation isn’t prudent supervision. It’s an invitation to another disaster triggered by a crowded bet on climate. Fortunately, Sen. Manchin and every Republican senator realized that regulating climate through novel bank supervisory stances was a bad idea. So, for now, we’ll be spared this mistake. Raskin took a bet that America was ready for climate regulation through bank supervision rather than legislation passed by constitutionally elected lawmakers. She lost.
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