Huge investments are needed to make the American economy carbon neutral.
It is seductive to think that the Federal Reserve could secure funding for these projects through green monetary policy.
However, Federal Reserve Chairman Jerome Powell dashed such hopes this week when he made it clear in a keynote speech that his central bank would not pursue climate policy.
Good this way!
One senses the political context of the speech.
The Federal Reserve needs trust capital for upcoming unpopular decisions.
She does not want to jeopardize this by entering a political battlefield.
The climate change debate in the United States is poisoned by right-wing ignorance and left-wing perpetual alarmism.
A Federal Reserve entering the combat zone risks losing political support from at least one faction.
More than politico-tactical considerations
This does not describe an abstract possibility, but a concrete threat: the Republicans had refused the post of a candidate for the Federal Reserve nominated by President Joe Biden because she had demanded that the Fed play a more active role in climate policy.
But the reasons why the Federal Reserve must exercise restraint go far beyond politico-tactical considerations.
The Federal Reserve of the United States simply lacks the legitimacy for climate policy.
Its mandate is limited to ensuring price stability, creating the greatest possible employment and ensuring a financial sector that can weather adverse storms.
The Federal Reserve has no mandate to save the world.
Western democracies have decided to delegate monetary policy to independent central banks.
In this way, politicians protect themselves from themselves and the temptation to have their favorite political projects financed by central banks.
The delegation of powers to an independent institution has proven itself, but it harbors a democratic deficit: decisive decisions are made by men and women who have not been elected.
This is particularly important in view of the Federal Reserve's power, which has already increased significantly in the most recent crises.
It is not for nothing that the Fed is now considered “the only game in town” on Wall Street.
need to delegate power
The idea that democracies are too slow and too unreliable to meet the great challenges facing humanity is not new.
This legitimizes the need for power delegation.
The idea has taken root primarily among political activists who are tired of the tough democratic processes.
They have taken a new liking to the decision-making power of authoritarian regimes, as demonstrated by China, for example - recently with the abrupt about-face in its corona policy.
But the sympathy is just as unjustified as the contempt for democratic processes.
However, the legitimate demand for the Federal Reserve to stay away from active climate policy does not mean that it can ignore the risks of climate change.
Bank balance sheets hold assets that are vulnerable to natural disasters such as floods, storms and droughts.
It is assumed that these disasters will increase with global warming.
In addition, climate policy is aimed at making fossil fuels superfluous.
Banks that have to write off assets on a large scale lend less money and thus complicate a central transmission mechanism of monetary policy.
In other words, climate change deserves the Federal Reserve's attention because it affects the effectiveness of its monetary policy.
Therefore, as a learning exercise, it makes sense that the Fed tries to identify the climate risks in special stress tests for large financial institutions.
However, careful humility in analyzing the results of such stress tests is warranted.
Until recently, oil reserves were classified as “stranded assets” or lost values.
Recent events suggest that oil will be used just a little longer than many had hoped.
A robust alternative would be to accept the limited informative value of stress tests for depicting climate risks and instead to preemptively prescribe a higher equity ratio as a general risk buffer.
That would be honest, pragmatic and sensible.