Bryan Olin Dozier/NurPhoto via AP
Demonstrators gather near the White House in Washington, March 3, 2023, demanding that President Biden stop the Willow Master Development Plan, an Alaskan oil drilling project.
The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
In a rational world, the news this week would not be about the banking system. On Monday, President Joe Biden reapproved one of the largest oil and gas leases on federal lands in American history, a project that will spew the equivalent of 64 new coal plants or 1.7 million more gas-powered cars’ worth of carbon dioxide into the atmosphere. Biden’s sign-off on the so-called Willow Project, after pledging “no more new drilling on federal lands, period” on the campaign trail, is a stunning betrayal of the same young voters he credited for the passage of “the largest environmental plan in all of history” in an interview with The Daily Show this week.
“If we don’t keep the temperature from going above 1.5 degrees Celsius raised, then we’re in real trouble. That whole generation is damned,” Biden said in his interview, which aired the same day he approved a new oil drilling project that will produce roughly twice as much carbon dioxide as the amount reduced by all of Biden’s renewable-energy leases on federal lands thus far put together.
The Willow Project is sure to have far greater long-term consequences for the planet than whether or not some tech jerks got their money out of a failing bank on Monday. However, the drama of the collapses of Silicon Valley Bank (SVB) and Signature Bank has captured the media’s attention far more than the drilling project.
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Infuriating as that is, if one takes a step back, one can see that these two stories are really just different angles of looking at the same problem: Our political and economic systems are woefully ill-suited to handle the challenges we face. When financiers and Silicon Valley venture capitalists blow up their medium-sized bank, political elites practically trip over themselves to protect the financial system. But when climate change threatens exponentially greater harms taking hold over decades, elites dither and procrastinate for decades. Indeed, the way that the SVB story resolves itself could have extraordinary consequences for the climate, and the urgent need to end the fossil fuel industry outright.
For decades, federal officials have reacted slowly to environmental crises and, until the passage of the Inflation Reduction Act, done practically nothing serious to prevent climate change from getting worse. It’s quite the contrast with last week, when federal banking regulators not only sprang into action to contain economic damage to SVB’s wealthy depositors, but also immediately set sweeping new precedents to prevent any threat to the ultra-rich going forward. On Sunday, the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation invoked emergency rules to bail out depositors, and the Federal Reserve set up a vast new program to lend to banks with SVB-like balance sheets at extraordinarily generous terms. Though SVB shareholders and executives will be wiped out, every bank that hasn’t collapsed now benefits from the expectation that all depositors will be made whole in case of crisis. In a matter of hours, the Biden administration gave just about every rich person yet another security blanket to protect them from the consequences of another class of bad decisions.
We cannot rely on this system of crossing our fingers and hoping that the financiers will do what we need them to.
It’s rare to see the leftists at The Lever and the centrists at the Brookings Institution align on a political economy issue. But everyone who isn’t stupid enough to believe that bank failures are a consequence of DEI trainings agrees right now that the current situation is untenable. Rep. Katie Porter is leading a charge to reverse the most relevant part of the deregulatory 2018 Crapo bill, and Fed Chair Jerome Powell is facing long-overdue scrutiny for virtually abandoning his institution’s bank oversight duties. There’s also more interest than ever in consumer FedAccounts, which would let anyone store their money and access the payments system risk-free without the moral hazard of private actors getting guaranteed gambling money.
These excellent proposals all aim to prevent the series of events that led regulators to invoke emergency powers from ever happening again. But this raises the question: Is this really such an emergency? And even if it is, why did it marshal far more action from government leaders—and intense interest from the public—than climate change has for decades?
One answer is that a financial crisis can take hold much more quickly than climate change, lending itself to dramatic news stories and immediate public interest. Another is that political elites are close personally to financiers, if not actually dependent on them for campaign contributions, and so their problems feel more real.
But another equally important factor is more subtle: The SVB collapse rubs in our collective faces the fact that the financiers with great influence over our political economy are, by and large, a pack of greedy idiots. SVB failed because its asset sheet was enormously exposed to the Fed’s heavily telegraphed interest rate hikes, and its clientele skewed toward risky tech startups with an intense culture of groupthink. SVB was heavily invested in low-rate, long-term bonds and securities, but didn’t diversify even as rates began to rise. This left it with unattractive assets to sell when it needed to raise cash fast. Preventing things like this is Finance 101. If the banks’ managers and regulators at the San Francisco Fed were halfway competent, they should have easily foreseen and prevented the problem.
The fact that they failed is a scandal in itself, but regulators’ emergency actions indicate that they suspect (along with Moody’s) that a lot of other banks’ leaders could be just as comically stupid as SVB’s. Their response to that potential for mass incompetency was to nationalize all of the consequences for said incompetency, because letting the incompetents face the market discipline they preach could have far worse spillover effects for everyone.
Financial regulators, like every other part of the federal government, haven’t shown anything close to this level of intense concern and rapid response to the climate crisis. When the assets of a small subset of the ultra-wealthy (venture capitalists) are threatened, officials set sweeping precedents in a matter of days. When we’re living through a mass extinction event and more frequent natural disasters, officials approve even more projects to develop the resource causing the chaos—after all, someone somewhere already has money invested in it.
This doesn’t even make sense within the logic of the financial system. Eventually, the Willow Project is going to become a stranded asset, and as we’re seeing, regulators will likely leave the public holding the bag when investors realize they won’t make a return on their planet-destroying project anymore. Climate change threatens literally trillions in assets—real estate in New York City, for instance. For years, ourselves and many others have begged financial regulators to treat climate change as the systemic risk it clearly is. If we cannot trust bankers to hedge against interest rate hikes when inflation is high, we cannot possibly expect them to properly assess the risks of climate change, and then to manage their portfolios in their own best interest, much less the planet’s.
This is not just because climate change is complicated and difficult to predict in terms of moment-to-moment economic consequences. The real reason is that bankers are greedy and dumb, yet political elites have allowed them to become indispensable for society. Hence whenever they make stupid decisions, as the SVB executives did, the government must step in. To ensure that the economy is protected from climate change, and that we actually build out the things we need to fight it, we cannot rely on this system of crossing our fingers and hoping that the financiers will do what we need them to, then picking up after the war zones they inevitably leave behind.
We’re already seeing some of this with the revitalization of industrial policy in Washington. It’s no coincidence that this is driven by climate concerns: Things like the Green New Deal and Inflation Reduction Act are direct consequences of that damned generation hearing for 20 years that the free market would naturally find and develop sustainable climate solutions, while exactly the opposite is happening.
Changing the financial regulatory system to reflect and account for climate change is a natural extension of that industrial-policy work. Congress must not waste this rare chance to pass strong new financial regulatory statutes; it has to include climate-focused powers in any SVB response package, such as climate capital charges or mandating reduced exposure to fossil fuels. But even under existing statute, there’s so much more that our leaders can and should be doing that they have chosen not to. The Fed can declare certain asset classes entirely off-limits for banks due to systemic risk concerns, and it can incorporate a range of climate-related risks into its regular bank stress tests. It should be using both of these powers, and others, a lot more.
Last week, days before the SVB drama began, Treasury Secretary Janet Yellen declared that “taking climate change into account is prudent risk management” for financiers in a speech few noticed and fewer still cared about. Yellen was speaking before the Financial Stability Oversight Council (FSOC), the consortium of regulators that has by far the most existing power to shift banks away from exposure to climate risks. She probably assumed at the time that most bankers are prudent risk managers on their own. Then a few days later, she led a once-in-a-decade regulatory response to a crisis proving that they transparently are not.
The only crises that get Washington to move fast and act preventatively are the ones that might threaten the wealth of the already wealthy. Not even preserving a habitable planet seems to matter more to decision-makers than keeping financiers and their rich clients comfortable. The SVB collapse presents a rare opportunity to disrupt business as usual, and the Willow Project is a grave omen of what’s to come if well-intentioned leaders fail. This may be our only chance to pass, implement, and enforce strong constraints on bankers’ will to cash in on fossil fuels leading to the destruction of us all. Future generations are counting on the choices we make in the coming weeks.
