The Fed is heading for an F on a $7 trillion test: Mark Gongloff

The people whom President Donald Trump has picked to protect America’s money keep insisting a heating planet won’t set that money on fire. But it’s already burned trillions of dollars and threatens to burn exponentially more. Many of these losses could become permanent.

Former Federal Reserve Governor Kevin Warsh, Trump’s choice to run the central bank after Jerome Powell, has said the Fed should ignore climate change, dismissing concern about it as a “bandwagon” that is “fashionable” and “fleeting.” He also called it “contraband,” which, in my opinion as a professional English user, is not a proper use of that word because it isn’t illegal to care about climate. For now, anyway.

And Treasury Secretary Scott Bessent recently called climate change an issue that had “no clear nexus to safety and soundness” for banks. In a congressional hearing last week, he sniffed that the Financial Stability Oversight Council’s work on climate “has been discredited.”

The only thing discredited at this point is that kind of rhetoric. Climate policy is financial policy, something most of the world’s other chief central banks have recognized. The European Central Bank, the People’s Bank of China, the Bank of England, the Bank of Japan and many more have strict rules for banks on managing climate risk.

The nonprofit group Green Central Banking assigns letter grades to top central banks for their handling of these issues. Those mentioned above get Bs and Cs. The Fed under Powell received a well-deserved D-. If Warsh takes it one more step down, it will join Argentina and Russia as the only banks failing on climate.

The FSOC work Bessent calls “discredited” has this as its central thesis:

Climate change is an emerging threat to the financial stability of the United States. In the United States and across the globe, climate-related impacts in the form of warming temperatures, rising sea levels, droughts, wildfires, intensifying storms, and other climate-related events are already imposing significant costs upon the public and the economy.

Show me the lie. The world has spent $20 trillion in the past 25 years on natural-disaster cleanup and higher insurance premiums, according to Bloomberg Intelligence, with annual costs rising steadily. The US alone has taken a $7 trillion hit from extreme weather in the past 12 years, making it twice as expensive as the Great Depression.

Home-insurance premiums have soared 69% since December 2019, according to Intercontinental Exchange Inc., far outpacing mortgage principal (23%), interest (27%) and tax (27%) costs during that time. The word for this is “inflation,” one pillar of the Fed’s dual mandate to stabilize prices and maximize employment.

Despite this budget squeeze, there are still yawning gaps in coverage that many homeowners won’t discover until after disaster strikes. Investor Dave Burt, who was early to recognize the 2008 housing crisis, has warned underinsurance could mean America’s housing stock is overvalued by as much as $2.7 trillion. Warsh, who helped manage the financial crisis that followed housing’s collapse, should recognize that as a possible problem for the financial sector.

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If you wanted to give Warsh and Bessent the benefit of the doubt, you could admit the science of measuring how a hotter planet will affect prices and employment (through economic growth) is still relatively young. Early efforts forecast minimal impacts, apparently unable to imagine how disasters crimp supply chains, soaring temperatures hurt labor productivity, droughts trigger political instability and more. Such pain points have become obvious as warming-related catastrophes have increased and we’ve experienced them firsthand.

More recent estimates have taken a broader view and predicted broader damage. These include a National Bureau of Economic Research paper by economists from Northwestern and Stanford finding each 1 degree Celsius of heating takes 20% from global GDP. Then there’s the (retracted but soon to be republished) paper from the Potsdam Institute for Climate Impact Research estimating a 60% hit to GDP by 2100 if heating is left unchecked.

There’s still plenty of room for economic-impact studies to evolve. A report released last week by researchers from the University of Exeter and the nonprofit group Climate Tracker surveyed dozens of climate scientists about ways to improve the discipline. They would like to see studies better reflect the real world, where extremes matter more than long-term averages, where compounding disasters — power failures that follow hurricanes, for example — compound financial losses, and where things like tipping points and adaptation could affect the outcome.

Future studies might also want to focus less on GDP, which can miss the structural damage done to long-term productivity. A bunch of rebuilding can boost GDP, for example, even as lost education and poor health sap future economic growth. Nevertheless, the Exeter and Climate Tracker researchers did ask scientists to estimate economic losses at certain temperatures. These rose from about 10% of GDP at 1.5C of warming to about 35% at 3C.

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Possibly the most important takeaway from the report is that climate disasters inflict losses on the baseline of economic activity. They won’t be gently amortized over the next century like a car payment. At some point, these losses could be big enough to stop or reverse growth altogether. Countries that understand and prepare for such outcomes will lose less money when they happen. Trump, meanwhile is choosing ignorance. It will not be bliss.