The week beginning Monday, March 4, 2024: Mission creep at a central bank, the debt, inflation, electric vehicles, and much, much more.
The week beginning Monday, March 4, 2024: Mission creep at a central bank, the debt, inflation, electric vehicles, and much, much more.
T he job of a central bank is (ought to be) to do a few (sometimes complicated) things well, and to stick to that mandate. Unfortunately, the European Central Bank (ECB), the euro zone’s central bank, is one of those central banks (the Bank of England is another major offender) that has succumbed to the temptations of mission creep, claiming that it has a role to play in setting climate policy. It tries to justify this by claiming that climate change is a risk to financial stability, a claim that economist John Cochrane demolished years ago, not least in a talk that he gave to, well, the ECB in November 2020.
I’ve written about this talk on a few occasions, but it’s worth once again drawing attention to one key passage from Cochrane’s remarks:
The European Central Bank and other institutions are not just embarking on climate policy in general. They are embarking on the enforcement of one particular set of climate policies—policies to force banks and private companies to defund fossil fuel industries, even while alternatives are not available at scale, and to provide subsidized funding to an ill-defined set of “green” projects.
Let me quote from ECB executive board member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends that:
[f]irst, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures. . ..
Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.
Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.
That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.)
So where, over three years later, is the ECB?
European Central Bank staff are in revolt over the board’s approach to climate change after an executive said new recruits had to be “reprogrammed” to ensure they supported its green policies.
The ECB’s staff committee has called for the bank’s president Christine Lagarde and her top team to rethink their management style in a letter, seen by the Financial Times, which complains about the “disrespectful” comments made by an executive board member at a meeting last month.
The move highlights rising dissent among ECB staff against their bosses, who have made tackling the risks of climate change a priority for the central bank.
Frank Elderson, who joined the ECB in late 2020, told the internal meeting: “Why would we want to hire people whom we have to reprogramme because they came from the best universities but they still don’t know how to spell the word ‘climate’.”
The staff representatives said “many colleagues were shocked by the choice of words and the viewpoints of Mr Elderson” and that the idea of “reprogramming” people was “in direct contradiction to the democratic values the ECB and EU stand for”.
“We would encourage the executive board to reflect on their leadership style and to acknowledge that people in democratic societies shall not be ‘reprogrammed’ but convinced by reasoning and facts and leading by example,” said the letter, which was shared with ECB staff on Monday.
The implications of that word “reprogramming” are appalling, but its use is in keeping with the increasingly authoritarian nature of climate policy, a grim mishmash of bans, prohibitions, and mandates, many of which have more to do with control than climate. And, as we have seen — most notoriously, perhaps, in the attempts to advance the agenda of climate policymakers through ESG, regulation, and executive orders — it is an authoritarianism designed to bypass democratic control.
The ECB is standing behind Elderson, but the European Parliament appears to have some doubts.
MEPs expressed their “grave concern” about [Elderson’s] comments, called for the ECB to have “an undeterred focus” on its primary mandate of price stability — defined as inflation at 2 per cent — and stressed “the importance of pluralism for the ECB’s institutional culture” . . .
Lagarde has increased the ECB’s efforts to tackle the risks of climate change, adjusting its collateral rules and bond reinvestments to take account of green factors and setting up an internal climate hub.
While some central banks such as the US Federal Reserve have taken a cautious approach, Elderson has made the issue a major focus in his role as vice-chair of the ECB’s supervisory board, which oversees the eurozone’s biggest banks.
The Dutchman recently warned 20 banks that the ECB would impose daily fines if they did not start to assess and tackle climate risks soon. He also said the ECB should consider a green shift in both its €4.7tn bond portfolio and in its cheap financing for commercial banks.
The nine-member staff committee, which is elected by all employees, said: “Many colleagues individually support the ECB’s decision to include climate change into the ECB’s mandate.” But it added there were “good reasons to question the legitimacy of the ECB to self-extend the boundary of its own mandate without any amendment of the legal framework and based on the opinions of its leadership”.
Its letter compared the ECB’s approach to climate change with topics such as immigration and geopolitical conflicts, saying the ECB should strive for diversity of thought “instead of having one-sided views unilaterally imposed from the top to the bottom”.
There are at least two phrases in the last two paragraphs that are typical of the way that climate policy-makers operate.
The first is this: “self-extend[ing] the boundary” of their own mandates “without any amendment of the legal framework and based on the opinions of [their] leadership.”
Of course, the serially overpromoted president of the ECB, Christine Lagarde, is no stranger to the self-extension of boundaries. As France’s finance minister, she had this to say after she participated in the group that, in 2010, approved the (first) Greek bailout during the euro zone crisis:
“We violated all the rules because we wanted to close ranks and really rescue the euro zone,” Lagarde was quoted as saying.
“The Treaty of Lisbon was very straight-forward. No bailout.”
When in 2020 she promised to examine changes to all of the ECB’s operations in the fight against climate change, it was always likely that a “self-extension” of boundaries lay ahead. And, to take other examples of where this has occurred in the field of climate policy, we have seen “self-extension of boundaries” with the SEC’s venture into mandating climate disclosures (albeit, it seems, more cautiously than once expected), and we have seen it with proposed new rules by the EPA designed to squeeze the sale of new conventional cars. And, of course, we have seen this with the development of stakeholder capitalism and ESG, concepts that have allowed large investment firms and corporate managers to shatter the restraints imposed by the fiduciary duties that were supposed to define their relationships with clients and shareholders.
But, of course, Lagarde has #thescience on her side, something she demonstrated when asked whether the pandemic would mean deprioritizing greenery at the ECB:
“I have children, I have grandchildren. I just don’t want to face those beautiful eyes, asking me and others: ‘What have you done?’”
Alrighty then.
And what was the second phrase so typical of climate policy in that paragraph? It was: “One-sided views unilaterally imposed from the top to the bottom.”
See the coerced introduction of electric vehicles as just one example of this among many. And, of course, there’s the neurotic fear of climate “disinformation” (in reality a call for censorship), and the desire to “reprogram” more than just ECB staffers.
But to get back to the topic of central banks and climate, central banks would do well to pay more attention to the advice that John Cochrane gave the ECB back in 2020:
Working for a central bank is a bit boring. One may feel a longing to do something that feels more important, that helps the world in its big causes. One may feel longing for the approval of the Davos smart set. Why does Greta Thunberg get all the attention? But a central bank is not the Gates Foundation, which can spend its money any way it likes. This is taxpayers’ money, and regulations use force to transfer wealth between very unwilling people. A central bank is a government agency, and central bankers are public servants, just like the people who run the DMV.
Central banks must be competent, trusted, narrow, independent, and boring. A good strategy review will refocus central banks on their core narrow mission and let the other institutions of society address big political causes. Boring as that may be.
Sadly, Christine Lagarde has other things in mind.
The Forgotten Book
Capital Matters has a fortnightly feature, The Forgotten Book, which is written by National Review Institute fellow, the writer and historian, Amity Shlaes. We live in an age of short attention spans, and one of Amity’s objectives is to introduce readers to books or other primary sources that warrant a second look.
In her Capital Matters column, Amity dedicates herself to sharing with Capital Matters readers older, forgotten books, along with new books that aren’t getting the attention they perhaps warrant.
Her latest column can be found here, and discusses the use of real or imagined “crises” to force legislation through:
Most of us date this crisis culture to 2008 and Rahm Emanuel’s line: “You never want a serious crisis to go to waste.” But in fact, hyping emergencies to win elections or to justify unprecedented spending has been the American game for more than a century now. How very tight the correlation can be comes clear in a book that will make good Thursday-evening reading for anyone hoping to look away from the SOTU screen: Robert Higgs’s 1987 Crisis and Leviathan: Critical Episodes in the Growth of American Government.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 160th episode, David is joined again this week by economic guru and long-time investing writer, John Mauldin. They assess the current economy, what people have gotten wrong, what to expect in 2024, the actions of the Fed, the “wall of maturity” in a lot of debt, and most importantly, what it all means to investors, savers, citizens, and more. This is a practical conversation between two old friends you will not want to miss.
The Capital Matters week that was . . .
Antitrust
Riddle me this: Why have increases in food prices been in line with inflation from the 1980s until the Biden administration took over?
Food prices increased by 11.4 percent in 2022, an astonishing jump that inflicted deep harm on the budgets of millions of families. In 2023, the rise in food prices was more than 5 percent, for a combined two-year increase of more than 17 percent in the price of groceries. These increases, however, follow a long period in which food prices increased at a stable 2.5 percent per year.
The Biden administration wants us to believe that the reason for this 17 percent jump in the price of food is “greedflation.” That’s the impetus behind the Federal Trade Commission’s antitrust lawsuit to block Kroger’s $25 billion bid for Albertsons . . .
Climate Policy
To claim that somebody is (or is not) on the “right side of history” is an argument resting on the belief, popularized by Karl Marx and other determinists both before and after him, that history moves in a certain pre-ordained course. It doesn’t. History zigs and zags. It lurches in one direction, and then another. It has no goals, no purpose, no destination, no sense of right and wrong. Those who talk about its “right side” have (for the most part) either run out of rational arguments or are trying to convince their audience that, to borrow a phrase, resistance is futile.
The Financial Times reports that, criticizing money managers who have been turning away from climate-policy groupings such as Climate Action 100+ (I wrote about this topic in a recent Capital Letter), John Kerry had this to say . . .
Labor
The largest union filing of the year so far is to join the United Auto Workers union — by non-tenure-track faculty at Harvard.
According to the March 1 filing with the National Labor Relations Board, 3,100 full-time and part-time non-tenure-track employees at Harvard University would be covered by a collective-bargaining agreement to be negotiated by the Harvard Academic Workers-UAW union (HAW-UAW).
Harvard graduate students voted to unionize in 2018, and Harvard undergraduate non-academic student workers voted to unionize in 2023. Both of those votes were also to join the UAW . . .
I wrote earlier today about how the United Auto Workers union doesn’t really exist to represent autoworkers. Its biggest organizing successes in recent years have been in higher education, and there are now as many UAW members in the University of California system as there are at General Motors.
Nonetheless, it received a bunch of positive coverage from the press and fawning from politicians during its strike against Ford, GM, and Stellantis last year. You’d think it was a huge win for autoworkers . . .
Inflation
Kevin Hassett and Cale Clingenpeel:
Data released last week confirmed that January inflation was hotter than it was meant to be at this stage, according to the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index. Despite that, a growing chorus attributes the flames to technical matters. January, the story goes, is a month that always runs hot for inflation.
Could the January print — and the potential of outright inflation reacceleration — be a mirage? Or does the core-services-led surge in price pressure indicate the disinflationary pressure experienced to date is dissipating and that much work remains for the Federal Reserve to deliver on its price-stability mandate?
The answer depends on the two sexiest words in the English language (not really): residual seasonality . . .
Tesla
The lawyers who voided Elon Musk’s $56 billion compensation as excessive on Friday sought a record a $6 billion legal fee, payable in the electric car maker’s stock . . . .
Trade
The Coast Guard needs an icebreaker. It can’t buy one at a reasonable price or on a reasonable timeline from an American shipbuilder. It can buy one from a foreign commercial shipbuilder for one-fifth the cost, and it could have done so nine years ago. How is the U.S. national defense enhanced by paying five times as much for the promise of an icebreaker in the future than it could pay for an actual icebreaker now?
“Better a decent ship today than the perfect ship never,” Luther writes. And better a foreign built ship that exists than a domestically built one that does not.
In a debate hosted by the University of Buckingham in England, Daniel Hannan used an intriguing thought experiment to argue for free trade . . .
Proponents of steel protectionism often cite national defense as a reason to except steel from the general principle of free trade. The military needs steel to build ships and tanks, the argument goes, and that production needs to happen domestically, therefore the government should prop up steel companies and block foreign competition.
It isn’t true. Don’t take my word for it, though. Listen to a former deputy undersecretary of defense for industrial policy . . .
Internet Subsidies
The Affordable Connectivity Program (ACP) began as an “emergency” Covid program and has since expanded to cover over 20 million households. It provides a subsidy of $30 per month to cover internet bills. The Biden administration and a bipartisan group of legislators wants it extended. As things stand, it is set to run out of money next month, and the Federal Communications Commission, which administers the program, has stopped taking new applicants.
Congress should let the program expire. It’s a classic case of a temporary program growing out of control. It is prone to fraud. And it contributes to rising prices as internet service providers (ISPs) capture a chunk of the subsidy . . .
New Mexico
The oil and gas boom has helped New Mexico has become the nation’s second-biggest oil-producing state (despite having a population just over 2 million). Taxes paid on the state’s oil production will generate “more money than we know what to do with,” according to Democrat state senator and Legislative Finance Committee vice chair George Muñoz.
Sadly, despite having had similar surpluses in recent years, the state’s Democrat Governor Michelle Lujan Grisham and Democrat-held legislature again showed their commitment to a government-first philosophy. Yet again, “more money than we know what to do with” resulted in virtually no tax relief for New Mexico taxpayers and businesses . . .
Office Property
The collapse in office-property prices will have plenty of knock-on consequences — few of them pleasant — and that includes the effect on the banks that have lent to the owners and/or developers of office buildings . . .
China
“How does China grow 5% despite so many headwinds, from collapsing property investment to declining population?” Greg Ip asks in the Wall Street Journal. “Very likely, it doesn’t. Actual growth is probably slower, perhaps a lot slower.”
China’s economic data were likely never trustworthy, but the gap between statistics and reality seems to be growing . . .
The Debt
Venezuela is doing what most governments do when they can’t pay their bills: print more money. It turns out that funding socialism with oil revenue doesn’t work. The ability to print money is a superpower governments have.
Like any superpower, it can be abused, and in the hands of politicians, it usually is.
Fortunately in the U.S., we have central-bank independence, so politicians don’t control the money supply. But in the event of a stalemate in Congress over paying the bills, the eyes of the world will turn to the Federal Reserve, and it would be hard — possibly even irresponsible, from the central bank’s perspective — to refuse demands to print more money to pay the bills . . .
The Economy
A few weeks ago, economist Jeremy Horpedahl looked at generational wealth and how today’s young people are faring compared with previous generations. His findings are surprising. After all the talk about how Millennials (born between 1980 and 1989) are the poorest or unluckiest generation yet, Horpedahl’s data show that they are dramatically wealthier than Gen-Xers were at the same age. And this wealth continues to grow . . .
According to an old Wall Street joke, the longest river in the emerging-market countries is “De Nial.” Given recent comments by U.S. Treasury secretary Janet Yellen and International Monetary Fund Managing director Kristalina Georgieva about the “resilience” of the world economy, we must wonder if that Wall Street joke is more applicable to the policy-makers in advanced economies . . .
Electric Vehicles
One common characteristic of central planning is the failure of central planners (or those carrying out their wishes) to anticipate what people actually want. A second is that the planners then tend to react to that failure by explaining that the people — a primitive, sometimes selfish (Kulaks!) lot — simply do not know what is good for themselves and/or society . . .
A little over a year ago, Toyota’s CEO, Akio Toyoda, was (sort of) squeezed out (he became the company’s chairman and is clearly still highly influential), at least in part (it appears) for being insufficiently enthusiastic about a one-size-fits-all approach to the electrification of the automobile . . .
Taxation
These charts, from Chris Edwards at the Cato Institute, will be useful for those watching the State of the Union address tonight. Keep them in mind when the president claims that the rich are not paying their fair share, or that “the average American worker paid about a 25% tax rate in 2022,” or that “the wealthiest individuals paid about 8% from 2010 to 2018.”
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