Renominating Jerome Powell for Fed chair is a mistake that will have serious consequences for our planet

Jerome Powell Senate Banking testimony
Federal Reserve Chair Jerome Powell adjusts his tie as he arrives to testify before a Senate Banking, Housing and Urban Affairs Committee hearing.

  • Biden is set to nominate a new Fed chair.
  • Re-nominating Jerome Powell would be a mistake.
  • Powell has downplayed climate change which has a huge effect on our economy.
  • Yevgeny Shrago is a Policy Counsel in Public Citizen’s Climate Program.
  • David Arkush is the managing director of Public Citizen’s Climate Program.
  • This is an opinion column. The thoughts expressed are those of the author.
  • See more stories on Insider’s business page.

The climate crisis is creating risks that banks and regulators like the Federal Reserve are failing to address. Wildfires like the Caldor fire are destroying homes, neighborhoods, and entire towns. Hurricanes like Ida are battering and flooding our coasts. Weekly heat waves are overtaxing electric grids and buckling infrastructure. If we don’t get emissions under control quickly, extreme weather, drought, and migration will soon gut the economies of regions and nations.

A rapid transition to clean energy would create millions of jobs, improve public health, and reduce energy costs. But banks are still making massive investments in oil wells and gas pipelines, even though such investments will become worthless if we are to get emissions under control in time to avert catastrophe. If President Biden doesn’t nominate a Fed Chair and Board who will take an active role, the transition is likely to disrupt employment, retirement savings, and the entire economy.

A new Fed chair for a new mission

The 2008 financial crisis grew out of excessive risk taking by banks, coupled with a hands-off regulatory attitude. When it comes to the risk that climate change poses to the financial system, this is our 2007, when the risks of the subprime mortgage bubble grew into the causes of a financial crisis. Massive threats are on the horizon. Financial regulators need to act, or face a spectacular collapse. As President Biden considers the Fed Chair nomination, with a decision expected as soon as next week, he should account for where the Fed is on guiding the financial system through climate-related challenges.

Last year, the Fed finally joined other central banks in acknowledging that climate change poses a threat to the financial system. Since then, current Chair Jerome Powell has repeated that it’s early days on climate, and that the Fed won’t act before studying the issue more. His speech at the Fed’s annual Jackson Hole symposium, which he used as a de facto pitch for reappointment to a second term, didn’t even mention climate.

This approach invites disaster. To cushion the financial system from climate shocks that will dwarf the 2008 financial crisis, the Fed must act now. With a Chair who appreciates the threat, the regulator has the power to mitigate both the damage climate change does to the financial system, and the damage the financial system is doing to the planet.

The Fed is responsible for making sure the biggest banks don’t precipitate a new financial crisis. That includes JPMorgan Chase, Citibank, Bank of America, and Wells Fargo, the world’s four biggest funders of fossil fuels. Until the COVID-19 pandemic, megabanks had invested more in fossil fuels every year since the Paris Agreement, even as scientists and policy makers agree that fossil fuel expansion needs to stop for the world to avoid the worst harms of climate change.

That means these big banks are plowing money into investments that will become worthless as the clean-energy transition accelerates. It’s just the kind of dangerous investment that the Fed failed to prevent in 2007, opening the door to a financial crash that wrecked the economy.

Even worse, when these banks finance fossil fuels, they actively contribute to rising global temperatures. That means more climate damage. The banks are creating conditions that harm their business and the economy long-term, in pursuit of short-term profits.

Powell may get credit for forward thinking changes to the Fed’s monetary policy framework, but his approach to financial regulation is taking us back to 2007. Given the damage the 2008 crisis did to the economy, President Biden cannot accept that attitude in his nominee. The Federal Reserve could have stopped banks from selling bad subprime mortgage loans in 2007, and it can stop them from financing emissions that the economy cannot survive now.

Once the Fed Chair accepts this responsibility, they have the tools to bring banks into line. The Fed can make banks account for the riskiness of financing emissions and run stress tests that evaluate how climate change will threaten the financial system. To reduce risk, the Fed can make banks that invest heavily in fossil fuels hold more capital to protect investors, and even put direct limits on creating or holding the riskiest fossil-fuel assets.

Along with bank regulation, the Fed must review the monetary tools it employed during the pandemic. The Fed’s emergency lending during that panic was a bailout for fossil fuel companies. This bailout provides an ongoing implicit subsidy for these companies, lowering their borrowing costs. The Fed should instead put stringent conditions on any future lending and force investors to reckon with the true riskiness of fossil fuel investments.

Finally, the Fed must help cushion the economy from the impacts that are already baked in, which will disproportionately fall on low-income communities and communities of color. It must maintain its belated focus on full employment, making it easier for those displaced by the economic harms of climate change to find work. It should also help finance a just transition by deploying a stronger Community Reinvestment Act and show greater willingness to lend to state and local governments.

This is climate change’s eleventh hour. The Biden administration has acknowledged climate change as an urgent threat to the financial system. But in the absence of Congressional action, Powell seems determined to sit on his hands and let the financial system fund its own oblivion.

Biden must nominate a Chair and Board members who recognize the scale and urgency of the threat – and who will fulfill the Fed’s mission to protect the economy from climate-related threats using its full range of powers.

Read the original article on Business Insider

A Wall Street investment chief lays out a foolproof formula for ‘spectacular’ stock gains – and says Fed actions could soon offer the perfect setup

NYSE Trader
  • Investors have often treated volatility as their enemy, as it’s usually associated with falling stock prices.
  • But the Federal Reserve’s near-decade-long practice of quantitative easing has turned volatility into an investor’s best friend, according to Jim Paulsen of The Leuthold Group.
  • Here’s how investors can take advantage of a likely upcoming scenario where volatility pays off.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Volatility can be a scary word on Wall Street, as it likely brings back painful memories for investors who experienced swift and sharp price declines in the stock market.

Whether it was the 1987 crash, the popping of the dot-com bubble, or the 2008-2009 financial crisis, a spike in volatility has scarred investors and conditioned them to panic for the exits.

But according to Jim Paulsen, chief investment strategist of the Leuthold Group, a certain scenario of market volatility can be an investor’s best friend, as forward returns have historically proven to be strong for stocks.

In a recent client note, Paulsen laid out the environment where investors should get bullish on stocks amid a rise in volatility, primarily thanks to the Federal Reserve’s ongoing quantitative easing policies.

“Investors should be aware of the way the Fed has altered the investment landscape, and, when available, be prepared to exploit ‘valuable volatility,” Paulsen explained. “Massive and constant use of QE has essentially squashed bond market volatility, creating far more frequent opportunities for stock investors to exploit a specific ‘valuable’ volatility.”

Paulsen’s profitable setup for stocks is predicated on bond volatility staying subdued while equity volatility rises, according to the note. Since the Fed began quantitative easing measures, bond volatility has been below average 97% of the time. Prior to quantitative easing, bond volatility was below average just 31% of the time.

When volatility jumps for stocks but remains subdued for bonds, market performance more than doubles other periods of time on a 1-month forward, 3-month forward, and 6-month forward time frame, according to the note.

“The combination of an elevated wall of worry for stocks with the perception of bond-market stability is a home run for stock investors. Al least since 1990, this is a ‘volatility’ worth buying!” said Paulsen. And recent actions from the Fed has increased the frequency of this scenario playing out.

Read more: Goldman Sachs names 31 stocks to buy as the economy reopens despite the looming threat of the COVID-19 Delta variant

Prior to 2012, the frequency of having below-average bond volatility with above average stock volatility was just 8.8%. But after 2012, “the Fed has provided the stock market with this gift almost 20% of the time!,” the note said.

Paulsen explained that quantitative easing policies has likely contributed to both aspects of the volatility scenario, has the easy money policies helped depress bond volatility “while also contributing to a wall of worry among stock investors due to the potential ills of overuse and abuse of monetary policies,” Paulsen said.

With bond volatility still subdued, and the VIX just two points below its average, a valuable period of volatility could be right around the corner as the VIX index “will likely eventually slip back above average and present equity investors with another opportunity to enjoy Valuable volatility!,” Paulsen concluded.

Paulsen measures the volatility of stocks with the VIX index, and the volatility of bonds with the MOVE Index.

Chart of market returns amid heightened volatility
Read the original article on Business Insider

Rep. Don Beyer is proposing a new bill to regulate digital assets and provide the Fed with clear authority to issue a digital dollar

Crypto coins circle
  • Representative Don Beyer of Virgina introduced a bill in the House that aims to create a widespread framework for regulating digital assets.
  • One proposal in the bill is to provide the Federal Reserve with explicit authority to issue a digital version of the US dollar.
  • The bill would also clarify which assets are securities and therefore under the jurisdiction of the SEC.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Representative Don Beyer introduced a bill in the House on Thursday that aims to create a widespread framework for regulating digital assets.

Through the Digital Asset Market Structure and Investor Protection Act, Beyer is seeking to provide a regulatory environment that both protects consumers and promotes innovation within the sector, the Democratic Representative from Virginia said in a statement.

One proposal in the bill is to provide the Federal Reserve with explicit authority to issue a digital version of the US dollar. It would also clarify that digital assets and fiat-based stablecoins are not US legal tender while providing the Treasury Secretary with authority to permit or prohibit US dollar and other fiat-based stablecoins.

The bill would also create statutory definitions for digital assets and clarify which assets are securities and therefore under the jurisdiction of the SEC, and which assets are under the jurisdiction of the CFTC.

The uncertainty over the roles of the two government agencies is at the heart of one of the most high-profile cryptocurrency lawsuits by the SEC against Ripple. Ripple claims XRP is a commodity and therefore out of the SEC’s reach, while the regulator says Ripple ran an unregistered securities offering.

Through a joint SEC/CFTC rulemaking session, the bill provide legal certainty to the regulatory status for every digital asset in the top 90% of the market, measured by market capitalization and trading volume.

“Digital asset holders have been subjected to rampant fraud, theft, and market manipulation for years, yet Congress has hitherto ignored the entreaties of industry experts and federal regulators to create a comprehensive legal framework,” Beyer said. “Our laws are behind the times, and my bill would start the long overdue process of updating them to give digital asset holders and investors basic protections.”

Read the original article on Business Insider

Stocks are in a ‘rational bubble’ as long as investors remain confident in continued Fed support, economist Mohamed El-Erian says

Mohamed El-Erian
  • Mohamed El-Erian told CNBC stocks are in a “rational bubble” and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to support the markets. 
  • “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher,” the Allianz chief economic adviser said. 
  • El-Erian said that the US will continue to see a contrast between what the market is doing and what the broader economy is indicating because of the liquidity in the market.
  • Visit Business Insider’s homepage for more stories.

Mohamed El-Erian told CNBC on Wednesday stocks are in a “rational bubble” at the moment and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to provide support for the markets.

“This is not an irrational bubble. This is a rational bubble,” the Allianz chief economic adviser said. “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher.”

Typically, a stock market bubble is created when asset prices surge to levels that greatly exceed the their intrinsic value. Legendary investor Jeremy Grantham said on Tuesday that the stock market is in a  “fully-fledged epic bubble,” driven by extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior.” 

For El-Erian, there is a rational reason why stock prices keep going up, and it’s investor confidence in support from the Federal Reserve.

Read more:Deutsche Bank says buy these 14 beaten-down financial stocks poised for a bullish recovery from 2020’s ‘savage sell-off’ – including one that could rally 30%

Stock prices ballooned in 2020: the S&P 500 gaining 16%, while the tech-heavy Nasdaq soared 43%. El-Erian said there’s so much liquidity “sloshing around the system,” that stock prices will continue to move higher this year.

The result is that stock prices continue to rise despite political and economic turmoil outside of Wall Street.  On Wednesday as protesters stormed the US Capitol building, the stock market remained unbothered. The Dow Jones closed at a record high, while the S&P 500 closed up 0.5%. 

El-Erian said that the US will continue to see a contrast between what the market is doing and what “conditions on the ground” are saying because of the liquidity in the market.

Also on Wednesday, the ADP monthly employment report revealed that the US lost 123,000 private payrolls in December. The reading marks the first contraction in nationwide hiring since April. El-Erian said that the report was a “big miss” and demonstrates the “power of liquidity.” 

 

 

Read the original article on Business Insider