Towards a Green New Lending Crisis?

Wednesday, February 13, 2019

Writing in the Washington Examiner, Mike Palicz of Americans for Tax Reform warns of recent threats to the Federal Reserve issued by a gang of Democratic Senators that includes several presidential candidates. The threats come in the form of a letter "suggesting" the Fed manipulate interest rates in favor of "green" industries:

The scary part is that they don't really believe this can work. (Image by nattanan23 via Pixabay (license).)
Green investment, which purposefully favors lower-carbon emission investment, is inherently at odds with financial regulators' main goal of ensuring financial stability. Under this scheme, bank loans to companies producing renewable energy would receive a lower risk assessment than under a neutral regime simply for being "green" and favored by Democrats. Conversely, loans to companies producing traditional forms of energy such as oil and coal would be given artificially higher risk weights. This would incentivize banks to load up on green assets they wouldn't otherwise take on, creating an unstable lending environment.
Palicz correctly notes that such economy-wide incentives to assume high-risk loans is a similar recipe to the one that caused the 2007 subprime mortgage crisis.

It is bad enough that we have a central bank at all. It is worse that politicians are quite happy to mis-use it in a way that can so obviously lead to disaster.

-- CAV


Today: Corrected a formatting error. 

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