One climate crisis, many possible climate-related financial shocks

It’s been a hot second since I went toe-to-toe with Tony on an article of his (we’ve been agreeing on quite a lot, recently) but his Wednesday article got my dander up – so here we are.

In ‘Climate causes and consequences’, he makes the important point that not all economic downturns are alike.  A recession may be defined as several quarters of negative economic growth, yes, but lots of different things – or combinations of things – can lead to such contractions, and these matter a great deal when it comes to who bears the pain.

In particular, the type of catalyst is an important determinant of how much stress the banking sector subsequently comes under.  The stagflation of the 1970s pummeled equities and hurt savers, but didn’t precipitate a banking panic. In contrast, the global financial crisis knocked out hundreds of banks.  Why?  The former was caused by two macroeconomic shocks (namely, the energy shocks of 1973 and 1979) that (most) banks were largely able to adapt to.  The latter was primarily a function of poor underwriting of mortgage debt by banks themselves, and then the mass securitization of these bad loans.  Of course, differences in the regulatory and monetary policy environment also played a role – more on that later. 

I’m with Tony on all of this.  Yes, banks’ fortunes wax and wane in line with the real economy, but not all downturns threaten financial stability.  This much is evident from the data.  

Where I think he goes off the rails is when he transfers this finding to the climate context.