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Posts Tagged ‘financial markets

“A good rule of thumb is to assume that everything matters”*…

 

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Every few months, a news outlet will write a story heralding the next financial crisis, with an assumed assuredness that we should all view as suspect. Predicting the next crisis has become a sport, one that typically magnifies risks and displays an unreasonable degree of certainty. But if you had to choose a looming event that’s most likely to produce a negative shock to the financial system, it would almost certainly be the climate emergency.

That’s the takeaway from a fascinating issue brief… from the Center for American Progress’s Gregg Gelzinis and Graham Steele from the Stanford Graduate School of Business. Both worked for the Senate Banking Committee for many years, and they make a compelling case, not only that headline risks to financial stability will flow from a warming planet and the efforts to mitigate that, but that federal banking regulators have gone almost completely AWOL in monitoring or even assessing this legitimate threat.

Worse, to the extent that any financial regulators in Washington are paying attention to the climate crisis, they’re seeking to dismiss it. A subcommittee formed at the Commodity Futures Trading Commission (CFTC) to look at climate-related market risk is stacked with fossil fuel industry representatives, including several executives from climate-polluting agribusiness, banks with significant carbon-intensive portfolios, and fossil fuel giants BP and ConocoPhillips.

The committee’s clear intent is to examine the climate risks to polluting companies’ core business, not from their polluting. As one critic—Paddy McCully, the climate and energy director at the Rainforest Action Network—notes, “We should recognize that there’s risk from the climate to the economy, and that the corporate sector needs to assess their contributions to climate change and then deal with it.”

The report explains that global economic losses from a rise in temperatures of 4 degrees Celsius have been estimated at $23 trillion per year. This would pose two kinds of risk to the financial system: physical risk from natural disasters, and a more indirect risks from transitioning away from fossil fuels…

A new paper makes the case that financial regulators are ignoring the significant risks from a warming planet and even from efforts to green the economy.  The fascinating– and chilling– analysis in full at “The Biggest Threat to Financial Stability Is the Climate.”

* Richard Thaler

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As we internalize externalities, we might recall that it was on this date in 1952 that the Great Smog of London began,  A period of cold weather, combined with an anticyclone and windless conditions, collected airborne pollutants—mostly arising from the use of coal—to form a thick layer of smog over the city.  It caused far more severe disruptions than “pea-soupers” of the past,  reducing visibility and even penetrating indoor areas.  While the Underground maintained service, bus service was virtually shut down (as visibility was so severely and reduced; and thus, the the roads, congested). Most flights into London Airport were diverted to Hurn, near Bournemouth and linked by train with Waterloo Station.

Government medical reports in the following weeks estimated that 4,000 people had died as a direct result of the smog; and 100,000 more, made ill by the smog’s effects on their respiratory tracts.  More recent research suggests that the total number of fatalities may have been considerably greater, one paper suggesting about 6,000 more died in the following months as a result of the event.

The disaster had huge effects on environmental research, government regulation, and public awareness of the relationship between air quality and health.  It led quickly to several changes in practices and regulations– perhaps most notably, the Clean Air Act 1956.

Nelson's_Column_during_the_Great_Smog_of_1952

Nelson’s Column during the Great Smog

source

 

“Optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers”*…

 

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It’s been 10 years since the beginning of the Great Recession…

Some of the more pessimistic commentators at the time of the credit crunch, myself included, said that the aftermath of the crash would dominate our economic and political lives for at least ten years. What I wasn’t expecting – what I don’t think anyone was expecting – was that ten years would go by quite so fast. At the start of 2008, Gordon Brown was prime minister of the United Kingdom, George W. Bush was president of the United States, and only politics wonks had ever heard of the junior senator from Illinois; Nicolas Sarkozy was president of France, Hu Jintao was general secretary of the Chinese Communist Party, Ken Livingstone was mayor of London, MySpace was the biggest social network, and the central bank interest rate in the UK was 5.5 per cent.

It is sometimes said that the odds you could get on Leicester winning the Premiership in 2016 was the single most mispriced bet in the history of bookmaking: 5000 to 1. To put that in perspective, the odds on the Loch Ness monster being found are a bizarrely low 500 to 1. (Another 5000 to 1 bet offered by William Hill is that Barack Obama will play cricket for England. I’d advise against that punt.) Nonetheless, 5000 to 1 pales in comparison with the odds you would have got in 2008 on a future world in which Donald Trump was president, Theresa May was prime minister, Britain had voted to leave the European Union, and Jeremy Corbyn was leader of the Labour Party – which to many close observers of Labour politics is actually the least likely thing on that list. The common factor explaining all these phenomena is, I would argue, the credit crunch and, especially, the Great Recession that followed…

The always-illuminating John Lanchester ponders what happened, why, and what we have– and haven’t– learned: “After the Fall.”

[image above: source]

* “However, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers. One of the lessons of the financial crisis that led to the Great Recession is that there are periods in which competition, among experts and among organizations, creates powerful forces that favor a collective blindness to risk and uncertainty.”   – Daniel Kahneman, Thinking, Fast and Slow

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As we do our best to learn from our mistakes, we might wish a spectacularly happy birthday to Phineas Taylor (“P.T.”) Barnum; he was born on this date in 1810.

A sharp observer of the human condition, Barnum wrote and spoke frequently of characteristics that made “promotions” of the sort in which he specialized both possible and profitable:

Nobody ever lost a dollar by underestimating the taste of the American public.

There’s a sucker born every minute.

In what business is there not humbug?

Barnum came by his wisdom the round-about way: he founded and ran a small business, then a weekly newspaper in his native Connecticut before leaving for New York City and the entertainment business.  He parlayed a variety troop and a “curiosities” museum (featuring the ‘”Feejee” mermaid’ and “General Tom Thumb”) into a fortune…  which he lost in a series of legal setbacks.  He replenished his stores by touring as a temperance speaker, then served as a Connecticut State legislator and as Mayor of Bridgeport (a role in which he introduced gas lighting and founded the Bridgeport hospital)… It wasn’t until after his 60th birthday that he turned to endeavor for which he’s best remembered– the circus.

“I am a showman by profession…and all the gilding shall make nothing else of me.”

source: Library of Congress

 

Written by LW

July 5, 2018 at 1:01 am

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