Hanging Chads, Climate Change and Monetary Policy

With the holiday season upon us, it seems appropriate to reflect on the year just gone. 2022 will certainly go down as an historic one. Inflation came back with a vengeance; central banks aggressively tightened monetary policy; the long bull market in asset prices ended; war returned to Europe; the West’s relationship with China continued to deteriorate; and the existential seriousness of climate change gained heightened recognition, with a flurry of net zero commitments, and more and more well-intentioned regulation.

Back on 29 September, for example, the Fed announced a pilot climate scenario analysis exercise with major banks, to measure and manage climate-related financial risks. On 2 December, they invited public comment on the proposed principles of a framework that would apply to banking organisations with more than $100 billion of assets. Fed Governor Bowman dissented the on the cost-benefit aspects of the proposal, while Fed Governor Waller dissented on the basis that while climate change is real, he did not agree it posed a serious risk to financial stability beyond the scope of current stress tests.

Many commentators thought these objections made sense. As did I. For the avoidance of doubt, the Governors’ objections had nothing to do with the reality of the climate crisis, just that additional tests were unnecessary given the robustness of the current system of stress tests.

The climate crisis and monetary policy might seem odd bedfellows. Then I started thinking more about the linkages.

Al Gore lost the 2000 Presidential Election to George W. Bush by a mere 537 Florida votes, amid much controversy over “hanging chads”. In 2006, his documentary on the climate crisis “An Inconvenient Truth” was released, the same year President George W Bush appointed Ben Bernanke as Fed Chairman. It made me wonder if those "hanging chads" were actually responsible for Gore’s failure, then they might also have been responsible for Bernanke’s success.

If Gore had become President, instead of an oil man from Texas, America might have played more of a leadership role in tackling climate change. If Bernanke had not been appointed Fed Chairman, monetary policy might have been conducted differently. Maybe inflation might not have returned, wealth and income inequality might not have worsened, and asset prices might not now be falling, and set to fall further in 2023.

Comparing the two men is interesting.

Both won Nobel Prizes, jointly with others. Gore the Peace Prize in 2007 and Bernanke the Economics Prize in 2022.

One failed to influence US climate policy as much he had hoped. The other succeeded in influencing US monetary policy beyond what anyone could have imagined.

Gore pleaded for action to be taken on carbon emissions, while his opponents argued that the less costly course was to deal with the consequences of global warming when they happened. Throughout his career, Bernanke argued strongly against the idea that central banks should act to rein in excessive credit growth, or make judgements about whether equities, house prices, or credit spreads were warning of speculative behaviour and market excesses. His view was that central banks should simply be on the ready to clean up the mess when the “bubble” burst, and that this was less costly than the alternative.

We know now that Gore was right. Are we soon going to discover that Bernanke was wrong?

You might well ask if it is unfair to single out “Helicopter Ben”, as he was widely known for his views on money printing, the so-called "Bernanke Doctrine". After all, he was not a lone advocate. But the Fed Chairman always leads on global monetary policy, and he certainly led it down a path that earlier generations of central bankers would have considered grossly irresponsible.

Bernanke famously said that QE “shouldn’t work in theory, but clearly worked in practice”. His contemporaries and successors fully embraced this view, swelling central balance sheets to a size his forebears could not have comprehended. They followed his approach of acting swiftly to underwrite the downside risk to markets, every time equity or bond prices went down. Rarely have they expressed concern about the astonishing global accumulation of debt, or acted against obvious speculative excesses, like crypto and NFTs. They even quietly acquiesced in the emergence of truly silly theories like Modern Monetary Theory (MMT).

William McChesney Martin, Fed Chairman from 1951 to 1970, famously said that the task of the Federal Reserve was “to take the punch bowl away just as the party gets going”. ?One could be forgiven for thinking that that for the past two decades, central bankers seized every opportunity to add more alcohol.?

Like those sceptical of the dangers of global warming, for self-interested or political reasons, have this generation of central bankers condemned us to outcomes with profoundly unwelcome consequences?