Looking for wisdom in Davos dummy spits

This article has been made free-to-view. Like what you read? Then consider buying us a coffee here👇

I’m going to start by channeling the spirit of John Lennon and get you to imagine a better world.  

In this place, which is very similar to that which we inhabit, humanity faces a severe and desperate climate crisis. The big difference here is that politicians are awake to the threat and know that they will lose elections if they fail to adequately address the crisis.  In this world, national governments are all on the same page and are pulling in the same direction.  They wind up with a set of powerful, coordinated policies designed to expedite the transition to net zero while minimizing economic fallout.  The policies ensure that the burden of adjustment is shared fairly across society.

In this world, banks face tougher regulations on the loans they are allowed to underwrite and must submit to increased regulatory scrutiny to ensure transition risks do not overwhelm the financial system.  But these policies are minimal and somewhat peripheral to the overall effort, the bulk of the lift being provided by more effective changes to the taxation system and new industrial regulations introduced by the legislature.  Because the financial rules are mandated by the electorate they have broad political support both within and outside the banking system.

In this world, governments fund research programs, driven by the best minds in science, economics, and statistics, to develop tools to measure “greenness”, facilitate accurate reporting of company carbon intensity, and precisely gauge the progress toward and cost of achieving net-zero goals.

Since the government has stepped up to the plate and is acting boldly, bankers can concentrate on maximizing the value they provide to shareholders.  In order to do so, they must respect and adhere to the regulatory environment lest they suffer reputational losses or be forced to pay large and escalating fines.

In this world, the government handles long-term issues with ramifications for the entire community.  Bankers can be left alone to maximize the private value of shareholder capital, albeit in the context of enhanced regulation.  

This is the way things should be organized.  Governments should govern and bankers should bank.  If there’s a clear market failure, like global warming, it must be addressed by the government and not by the private sector.  Self-interest will not fix the problem: the scorpion will always kill the frog, it has no other option. 

This ridiculously bloated preamble brings me to the point of today’s article – to rebut Louie’s take on Sergio Ermotti’s comments on the role of banks in addressing climate change.   I also want to offer some (heavily qualified) sympathy for Mr Ermotti’s plight.  To this end, we need a term for something that is a “first world problem” but applies only to the global super rich.  Perhaps “Davos dummy spit” fits the bill?

The point of the preamble was to make clear that many of the actions we view as critical to the net-zero mission are actually second-best solutions that would not be necessary if governments around the world acted boldly with broad electoral support.  One of the major drawbacks to pursuing these second-best solutions is that they provide a smokescreen for politicians that enable them to continue to fudge their responsibilities and thus block access to the most efficient and effective policies to rectify the climate crisis.

Suppose for a moment that financial regulators were given a clear mandate to impose climate-related capital charges – arguably the boldest action available to a central bank.  This would make sourcing debt finance to engage in carbon-intensive activities dearer and force such activities to become more reliant on equity capital.  Alternatively, if the government imposed a carbon tax, both debt and equity financing would become more expensive, reducing the incentive for everyone to engage in the activities.  Climate-specific capital charges are certainly better than doing nothing, but such a regime is simultaneously a very poor substitute for an effective carbon tax.  

Likewise, making subjective assessments of bank lending policies and favoring institutions that can demonstrate their virtue, we shouldn’t kid ourselves, is a really bad way to implement public policy.  It’s still better than nothing I guess, but not by very much.  I’d prefer a situation where we did not have to rely on the largesse of evil bankers to save ourselves from climate oblivion.  It is an indictment on our political classes that we find ourselves in a position where this seems to be necessary and vital.

For me, I’d prefer it if the managers of my pension fund could concentrate on maximizing my retirement income and not have to worry about solving the climate crisis.  Much more importantly, I also want global warming to be fixed once and for all.   I recognize that I might not get everything I want, so if a second-best solution is all I can hope for, I’ll grit my teeth and accept that I won’t be able to afford that second ivory backscratcher in retirement.   Meanwhile I’ll plaintively appeal for the first-best solutions to be tried, and solemnly pledge to vote accordingly.

And as for Mr Ermotti and his ilk, I recognize and respect the role you play as evil bankers in society.  Insofar as I have sympathy for the Davos classes, I recognize and affirm your feelings about being required to act as the “climate police.”  It is wrong and should not be necessary, you shouldn’t have to pick up the slack caused by the dereliction of our elected representatives.   In an ideal world you should be allowed to evil bank as you see fit, constrained only by a strict regulatory landscape designed to contain the evil.

And to my friend Louie – don’t get mad at evil bankers.  Like the scorpion in the fable, they are doing what they’re evolved to do.  They know no other way.

Instead, direct your anger to the ballot box and vote as often as you possibly can.