One of the noble houses of global macroprudentialism, the International Monetary Fund (pictured), declared Tuesday that “The Great Lockdown” will plunge the global economy into the “worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.”
Along with the rest of the world’s economic overseers and protectors of financial stability, the IMF seems to have been unprepared for — and overwhelmed by — the arrival of COVID-19.
That the IMF was blindsided is clear in the opening words of Tuesday’s World Economic Outlook.
“The world has changed dramatically in the three months since our last World Economic Outlook update on the global economy. A pandemic scenario had been raised as a possibility in previous economic policy discussions, but none of us had a meaningful sense of what it would look like on the ground and what it would mean for the economy.”
That’s some statement: “None of us” had a sense of what such a pandemic might impose on the world economy.
It’s not clear who is included in the collective “us,” but it seems fair to assume the IMF is referring to the host of other members of the global fraternity of institutions that have assumed the role of guardians of the stability of the global financial system.
Among the institutions that should have been preparing for and assessing the risks of a global viral pandemic, in addition to the IMF, are the Financial Stability Board, the Bank for International Settlements, the G20 assembly of finance ministers, the World Bank, and the European Central Bank.
In the wake of the 2008 financial crisis, which “none of us” had anticipated, these global entities and national authorities adopted “macroprudential policy” to prevent the next global financial meltdown and, if possible, prepare plans to deal with a new blow to global financial stability.
Wikipedia has an excellent and authoritative review of the origins of macroprudentialism, describing it as an “approach to financial regulation that aims to mitigate risk to the financial system as a whole.”
In the aftermath of the 2008 financial crisis, policymakers and economic researchers backed the need to reorient the global regulatory framework “towards a macroprudential perspective.”
As the world sinks into lockdown and decline, one wonders why the whole macroprudential policy preparations, underway since the 2008 financial crisis and formally installed in 2016, so obviously failed to prepare for the financial stability shakeup brought on by the COVID-19 pandemic?
There are two explanations. One is that the whole financial stability-macroprudential effort is an international bureaucratic collection of agencies dedicated to the pursuit of meaningless bureaucratic interventions.
The second explanation is that the macroprudential apparatus, from the IMF through to the FSB and down, was hijacked by activists pushing climate change as the dominant systemic risk of our time.
In 2017, Mark Carney, then-Bank of England governor and head of the FSB, reviewed the successes of macroprudential policy and highlighted new risks.
The FSB, said Carney, is assessing “emerging vulnerabilities affecting the global financial system … within a macroprudential perspective.”
Among the risks identified, he said, were “risks from FinTech, climate‐related financial risks, and misconduct in financial institutions.”
Carney has been something of a poster boy for climate change.
In a 2015 speech at Lloyd’s of London — titled “Breaking the tragedy of the horizon — climate change and financial stability,” Carney warned the insurance industry to prepare for big climate risks — including defaults, lawsuits, stranded assets and increased liabilities related to a changing climate.
The insurance execs picked up the macroprudential warnings.
The replacement of pandemic risks with climate change as a threat to the global financial and economic system was highlighted this week by Roger Pielke Jr. at the University of Colorado.
In 2008, the No. 1 risk cited by insurance executives was a pandemic, described as “a new highly infectious and fatal disease spreads through the human population.”
In 2019, the top risk was identified as “global temperature change.” Pandemic was not even one of the top-10 insurance risks.
Over the past several years, but especially through 2019, the major efforts of the macroprudes has been to spread alarm about the financial stability risks allegedly building around climate change.
Never mind pandemics and other more mundane but genuine financial risks, such a soaring government debt buildup and U.S. political schemes to dismantle Big Tech.
Instead, banks and other financial institutions have been pressed to get out of fossil fuels and shift into ethical investing, sustainable financing, green financing, social financing, impact investing, ESG investment, responsible investing.
At the turn of the 2020 New Year, Carney appeared on BBC television calling for “action on financing” from banks against fossil investments.
One day later, the Communist government in China informed the World Health Organization of pneumonia cases in Wuhan City, Hubei province, with an unknown cause.
Carney’s get-out-of oil call caused alarm within Canada’s fossil fuel industry. At the time, oil was trading at US$55 a barrel.
On Tuesday, thanks in part to the pandemic Carney and the macroprudes failed to plan for, West Texas crude continued to languish at just above US$20.
Read rest at Financial Post
From the New York Times:
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES Published: September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
…
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.
”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
There were voices in the wilderness speaking out about the dangers of a financial failure – even as early as 1999. The “financial world” ignored them.
(The “New York Times” “Business” masthead shows October 1, 1999.)
From a “Google” search:
Peter J. Wallison
Former White House Counsel
Description
Description Peter J. Wallison is a lawyer and the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. He specializes in financial markets deregulation. He was White House Counsel during the Tower Commission’s inquiry into the Iran Contra Affair. Wikipedia
Born: June 6, 1941 (age 78 years), New York, NY
Spouse: Frieda Wallison (m. 1966)
Previous office: White House Counsel (1986–1987)
Party: Republican Party
Education: Harvard College, Bob Jones University, Harvard Law School, Harvard University