The Fed is heading for an F on a $7 trillion test

The people President Donald Trump has chosen to protect America’s money insist that a warming planet won’t set that money on fire. But trillions of dollars have already been burned, and there is a danger of burning even more exponentially. Many of these losses may be permanent.

Former Federal Reserve Governor Kevin Warsh, Trump’s choice to succeed Jerome Powell to run the central bank, said the Fed should ignore climate change, dismissing concerns about the issue as a “fad” and “temporary” “bandwagon.” He also called it “illegal”, which as a professional English user I think is not a correct use of the word because it is not illegal to care about the climate. Anyway, for now.

Treasury Secretary Scott Bessent recently said climate change was an issue that “has no clear connection to safety and soundness” for banks. At a congressional hearing last week, he said the Financial Stability Oversight Council’s work on climate was “discredited.”

The only thing that is discredited at this point is this kind of rhetoric. Climate policy is financial policy, something most other central banks around the world recognize. The European Central Bank, the People’s Bank of China, the Bank of England, the Bank of Japan and many more have strict rules for banks when it comes to managing climate risk.

The nonprofit group Green Central Banking gives top central banks letter grades for addressing these issues. Those mentioned above get Bs and Cs. The Fed under Powell received a well-deserved D-. If Warsh is taken down a notch, it will join Argentina and Russia as the only banks to fail on climate.

The main thesis of the FSOC study, which Bessent called “discredited,” is this:
Climate change is an emerging threat to U.S. financial stability. In the United States and around the world, climate-related impacts in the form of rising temperatures, rising sea levels, droughts, wildfires, intensifying storms, and other climate-related events are already imposing significant costs on the public and the economy. Show me the lie. The world has spent $20 trillion on natural disaster cleanup and higher insurance premiums over the past 25 years, according to Bloomberg Intelligence, and annual costs are rising steadily. The US alone has taken a $7 trillion hit from extreme weather over the past 12 years, making it twice as expensive as the Great Depression.

According to Intercontinental Exchange Inc., home insurance premiums have increased 69 percent since December 2019; During this time, mortgage principal (23%) far outstripped the cost of interest (27%) and taxes (27%). This is called “inflation”; It is a pillar of the Fed’s dual mission to stabilize prices and maximize employment.

Despite this budget crunch, there are still major gaps in coverage that many homeowners won’t discover until disaster strikes. Investor Dave Burt, who spotted the 2008 housing crisis early, warned that underinsurance could mean America’s housing stock is overvalued by as much as $2.7 trillion. Warsh, who helped manage the financial crisis that followed the housing collapse, must acknowledge that this is a potential problem for the financial sector.

If you want to give Warsh and Bessent the benefit of the doubt, you can acknowledge that the science of measuring how a warmer planet would affect prices and employment (via economic growth) is still relatively young. Initial efforts predict minimal impact; seemingly unable to imagine how disasters disrupt supply chains, how rising temperatures harm labor productivity, how droughts trigger political instability, and more. As warming-related disasters increase, such pain points have become clear, and we have experienced them firsthand.

More recent estimates have taken a broader view and predicted more extensive damage. These include a National Bureau of Economic Research report by economists from Northwestern and Stanford that found that every 1 degree Celsius of warming accounts for 20% of global GDP. There is also a paper by the Potsdam Institute for Climate Impact Research (retracted, but soon to be republished); If warming is not controlled, it is estimated that GDP will be affected by 60% by 2100.

There is still plenty of room for economic impact studies to improve. A report published last week by researchers at the University of Exeter and the nonprofit group Climate Tracker surveyed dozens of climate scientists about ways to improve the discipline. They want to see studies better reflect the real world, where extremes matter more than long-term averages, where disasters (such as power outages that follow hurricanes) increase financial losses, and where things like tipping points and adaptation can influence the outcome.

Future studies may also want to focus less on GDP, which could miss the structural damage to long-term productivity. A series of restructurings can increase GDP even if, for example, loss of education and poor health cripple future economic growth. Still, Exeter and Climate Tracker researchers asked scientists to estimate economic losses at specific temperatures. These increased from around 10% of GDP at 1.5°C warming to around 35% at 3°C ​​warming.

Perhaps the most important takeaway from the report is that climate disasters lead to losses at the base level of economic activity. They won’t be slowly depreciating over the next century like a car payment. At some point, these losses may be large enough to halt or reverse growth altogether. Countries that understand and prepare for such outcomes will lose less money when they happen. Meanwhile, Trump chooses ignorance. There will be no happiness.