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There they go again

16 Sep 2020 | News Roundup

Even the Wall St. Journal is now woke on climate and warns of “a stark warning” from “an advisory panel to the top U.S. commodities regulator” that “Climate change poses a major risk to the stability of the U.S. financial system”. But of course business people are too dumb to see it coming: “’Financial markets today are not pricing climate risk,’ wrote Bob Litterman, the chairman of the subcommittee that produced the report and a former Goldman Sachs Group Inc. executive. So people with no skin in the game will do it for them.

According to Litterman, “The financial markets cannot do that [price climate risk] on their own. Until this fundamental flaw is fixed, capital will flow in the wrong direction.” Why? Why on earth can they not do it? Pricing risk, on the up and down side, is exactly what financial markets do. If they can’t do it, they are the useless parasites, speculators or cronies of leftist mythology and should not exist. Which is an odd position for people who are or were in the industry to take, although to be sure a lot of fossil-fuel-company executives seem to believe that their product is a planet-destroying horror that should not exist, and then wonder why government policy tries to drive them out of existence.

As Rud Istvan observes, the Commodity Futures Trading Commission whose subcommittee spawned this report “is the federal entity that regulates (wait for it) commodity futures trading”. Which is a vast, hypersophisticated process whereby producers, consumers and anyone else willing to put their money where their mouth is buys and sells things not now but in the future based on their estimate of how prices will move once all risk factors are taken into account. For some people, of course, the purpose is to eliminate or at least reduce risk, for instance the farmer who locks in a price in the spring for his expected fall crop. That way he guarantees himself a certain amount of revenue provided the locusts don’t devour everything. But at the same time he accepts the risk of missing a windfall if prices rise. It’s just a matter of how much risk and what kind people want to take in pursuit of what kind of reward.

Now to hear the zealots tell it, climate change is a huge risk, bigger than the biggest thing ever, worse than the Dust Bowl and the Little Ice Age combined. And it’s happening now. Yet markets, also known as all the smart, dedicated, committed people, making, selling, buying and using something who can factor in possible fluctuations in Asian shipping capacity six months away, can’t see that California is on fire and it’s bad for business? The idea that consumers and producers are so dumb, mean or both that government has to take over the economy in large measure isn’t a new one. Nor has it stood the test of time and practice very well. Yet the report says carbon pricing is needed to show businesses the real cost of climate change which, apparently, the same state that couldn’t see the risks of piling up fuel load has figured out to several decimal places looking ahead decades. (If you’re so smart why aren’t you rich, we want to ask.)

The report seems to be the same old same old in other ways too. According to the Journal, “’As we’ve seen in the past few weeks alone, extreme weather events continue to sweep the nation from the severe wildfires of the West to the devastating Midwest derecho and damaging Gulf Coast hurricanes,’ said Rostin Behnam, a Democratic CFTC commissioner who sponsors the advisory panel responsible for the report. ‘This trend—which is increasingly becoming our new normal—will likely continue to worsen in frequency and intensity as a result of a changing climate.’” But wait a minute.

If Behnam is correct, then pricing the risks of climate change should not require an MBA from Harvard because it’s already happening. You don’t need foresight. You don’t need a lot of precarious assumptions. You just need to look out your window and realize burned crops are worthless. How dumb are we meant to think executives are?

Mind you the Journal frankly raises that question with respect to journalists, at least when it comes to credulity. It pants that “The report is the first of its kind from a federal financial regulator” before conceding that “the report itself wasn’t approved by the overall commission.” So it’s just some zealots who worked the administrative machinery in order to say the same old thing the same old way from a conference room somewhere while their colleagues did something more substantive. And if you can’t see the risk in that, well, maybe don’t short wheat.

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