Yellen Can’t Save the Polar Bears


The House Financial Services Committee holds a hearing Thursday on “Climate Change and Social Responsibility: Helping Corporate Boards and Investors Make Decisions for a Sustainable World.” This follows a flurry of Biden administration initiatives to thrust climate change to the forefront of financial regulation. Treasury Secretary

Janet Yellen

has announced her department will create a “climate hub,” complete with a “climate czar.” As Ms. Yellen stated at her confirmation hearing, the goal is to ensure that financial regulators “seriously look at assessing the risk to the financial system from climate change.” This plan will accomplish nothing to save the planet but will surely amount to a tax on borrowers and investors.

Ms. Yellen, congressional Democrats and others seem to believe that financial regulators have a unique ability to affect the environment. Last week Federal Reserve Board member

Lael Brainard

gave a speech titled “The Role of Financial Institutions in Tackling the Challenges of Climate Change,” in which she said, “Robust risk management, scenario analysis and forward planning can help ensure financial institutions are resilient to climate-related risks and well-positioned to support the transition to a more sustainable economy.” Her point is true as far as it goes, but it would be equally true for any other issue one might substitute for “climate-related.” Proponents of financial solutions don’t do nearly enough to explain how they would weigh the trade-offs of their policy approach.

Since the passage of the Dodd-Frank Act in 2010, U.S. financial regulation has focused on predicting, measuring and protecting against outsize risks to the financial system. Dodd-Frank created a new regulatory panel, the Financial Stability Oversight Council, for exactly that purpose. All this was premised on the idea that the Great Recession had led to an intolerable amount of taxpayer support for Wall Street that must never be repeated—hence the FSOC, which would require banks to be properly prepared for future calamities.

Unfortunately, the FSOC was unable to predict a global pandemic. By failing to require banks to hold enough capital to shore up the financial system last year, regulators left open the need for a more piecemeal but ultimately much larger bailout of American finance. Since last March, the Fed has provided unlimited liquidity not only to banks but also to businesses and even governments. This has been supplemented by Congress, whose profligate pandemic spending has added trillions of dollars to the national debt.

The point isn’t to chide financial regulators for responding to the pandemic. It’s to show that their usual policy tool kit is ill-suited to prevent unpredictable future threats, especially ones as uncertain as climate change.

U.S. financial regulators have zero expertise in assessing environmental laws and policies. They don’t employ climate scientists and have no better way of predicting the impact on the financial system of climate change than they have of predicting the weather.

Michael Bloomberg’s

Task Force on Climate-Related Financial Disclosures may be well-intended, but it’s pure fantasy to think Wall Street can accurately model the market effects of climate change. Traders employ the most complex modeling systems available, yet markets crash all the time. Predicting the future is hard, and asking Wall Street to predict climate change, and then asking financial regulators to craft policies based on those models, is destined to fail.

The difficulty of accurate modeling isn’t news to anyone. Which leads to the suspicion that financial regulations targeting climate change aren’t meant to protect the financial system; they are meant to influence who gets access to capital and who doesn’t.

Capital requirements are the main tool financial regulators use to manage risk. If a bank’s lending is deemed risky, it is forced to hold more reserve capital, which sits unprofitably on its books. Banks are similarly discouraged from making loans to borrowers that regulators disfavor. Financial regulators may try to address climate change by restricting loans to insufficiently green industries.

The Obama administration imposed a similar political limit on lending in 2013 through Operation Choke Point, which compelled banks to treat firearms dealers, payday lenders and other disfavored types of companies as high-risk, ensuring they couldn’t get loans. Media reports of the operation sparked outrage, but perhaps not enough to prevent the same strategy from being revived to target purported enemies of the green economy.

Limiting the harms of climate change without creating mass poverty through higher energy costs is a serious task best left to economists and engineers. Financial regulators won’t save the planet, but they may raise costs on borrowers, which would be an effective tax on consumers. Climate activists would be better off encouraging investment in new technologies; our best hope is in American innovation, rather than financial regulation.

Mr. Zerzan is an attorney in Washington. He served as principal deputy solicitor at the Interior Department, 2019-21, and acting assistant Treasury secretary, 2003-05.

Journal Editorial Report: Paul Gigot interviews economist Douglas Holtz-Eakin. Image: Stefani Reynolds-Pool/Getty Images

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