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> It’s simple. Tax the externality. In this case institute a carbon tax. A currently popular idea is “a revenue neutral carbon tax” in which funds raised are p

> It’s simple. Tax the externality. In this case institute a carbon tax. A currently popular idea is “a revenue neutral carbon tax” in which funds raised are paid back out to low emitters. Maybe the progress of this idea will be a good benchmark for whether we’re a well functioning democracy. I appreciate this sounds cynical, but I mean it sincerely. > One solution could be to try and identify what tools we have in our collective toolbox to taclke the problem at hand. Another solution is to blame the banks that they don’t have enough civic virtue. To me it looks like one of these two solutions is more likely to work than the other. You’re layering in a value judgement here about the civic virtue of banks into a problem statement which I hope can be evaluated on factual accuracy rather than values. If the problem statement holds, the solutions can then be debated and the toolkit of solutions evaluated for the job. 1. Banks have a powerful ability to determine which projects happen and which don’t through the credit mechanism. Because often times no credit = no project. 2. When projects are evaluated on narrow financial criteria, wealth can be destroyed rather than made. The project will create free cashflow and the loan will be repaid, but the credit issuance process will not take into account whether the project is a net benefit to human wealth across other important metrics such as environmental and human heath. 3. Banks lobby to prevent the credit issuance mechanism being broadened to exclude projects which move costs onto third party balance sheets. You’ve pointed out a possible problem with the democratic process, so maybe the above is really a symptom and not a true root cause, which in fact would be something along the lines of: Powerful economic actors stymy reform of the economic system to favour financial profit at the expense of sustainability. [Edit: for inclusion of final two paras]

credit_guy 3y ago
The 3rd bullet point is conspiracy theory. Also, difficult to parse. I'll give it a try: banks are lobbying to prevent something. That something is the broadening of the credit issuance mechanism. The way the broadening is supposed to work is by excluding projects that move costs onto third party balance sheets. How can you broaden something by excluding a category of projects? That's quite a headscratcher. I think I see another way to parse your statement. Banks lobby to prevent X in order to exclude Y. Where X is the broadening and Y is some projects. But I don't understand your point. If the bank lobbying on this matter is bad, it follows that you are in favor of including Y, vs excluding Y. So you want to include projects that move costs onto third party balance sheets? What does that even mean? What projects do you have in mind, and how would these projects help with climate change? Anyway, back to your central point, which I believe is this: > no credit = no project And this: > projects are evaluated on narrow financial criteria You would like banks to evaluate ESG loans in such a way as to account for the net benefit to society. That sounds like a sensible idea. It results in yes credit = yes project. The problem is that the loan continues to exist after its origination too. And at that point the financial criteria revert to being narrow. Let's say JP Morgan announces during the quarterly earnings call that they increased the loan loss reserve by $20 billion because of non-performing ESG loans. And Jamie Dimon hops on the call and explains to the analysts that those loans were made with the full consideration of the societal benefit they entail. Do you think people will say, "Ah, ok, then we're all set. Good job Jamie, keep it up". Well, there's actually quite a good chance that this is exactly what they'll say, but millions people will vote with their wallet, and the share price of JPM will tank. I see how you can perceive this as being short-sighted, or unfair, or [insert some bad sentiment]. But this is how the world works. And guess what. At least the US Government is aware of how the world works, and the Inflation Reduction Act decided to work within the system rather than fight it. So banks are very happy to extend credit, and green projects are booming. See for example [1]. All in all, a lot of people see the glass half full. [1] https://www.gsam.com/content/gsam/uk/en/institutions/market-insights/gsam-insights/perspectives/2023/us-inflation-reduction-act-is-driving-clean-energy-investment-one-year-in.html https://www.gsam.com/content/gsam/uk/en/institutions/market-...
- Biologist123 3y ago
  Thanks for your response. Reading it, and your references to ESG lending, it appears we are talking across terms. If lack of clarity in my proposed problem statement was the reason for the confusion then my apologies. Let me state the problem less abstractly and point out that in particular the problem statement is not about ESG lending. 1. Bank credit policies allow continued investment in fossil fuel extraction projects, meaning those projects go ahead. 2. Regulation could force a change in those credit policies, but regulation has not happened as banks have lobbied against them. You state conspiracy theory, but again this is layering in value judgement into an hypothesis that is either correct/incorrect. Incidentally, depending on your definition of lobbying, the parent Bloomberg article does provide evidence of bringing influence at a closed event (arguably lobbying) and my general assumption is that Bloomberg is a credible source. That said, as mentioned before, the problem of climate change could be solved by stopping fossil fuel production. But powerful actors prevent this. This may be with good reason, eg national security concerns, lack of political support, etc.
  - credit_guy 3y ago
    > but regulation has not happened as banks have lobbied against them I have worked (a lot) with regulators, and here's how it goes: if a regulation exists, lobbying to change it is almost impossible. It sometimes works, but banks have finite resources, believe it or not, and they have to carefully choose their battles. I'll give you an example of regulation that was changed following such lobbying: starting in 2016 you need to post initial margin on any non-cleared derivatives you do (with some exceptions). Banks do a lot of internal trades between any of their hundreds of legal entities. Well, the regulation included those trades too, and for many banks the margin posted on these trades exceeded (by a factor of 2 or 3) the margin posted on the genuine, external trades. One could argue this type of margin was quite nonsensical and it was draining something close to $100 BN from the financial markets. At some point the regulation was changed to eliminate this. Still, the way regulators work, it was not simply voided. The banks need to continue to monitor how much margin they would need to post on these internal trades, and check against their capitalization, and if the capitalization is not enough, they need to start posting the margin. What is the point of my anecdote? Banks have sometimes legitimate reasons to lobby. Even when they have, lobbying is very difficult, and the results are always quite convoluted. They don't get exactly what they wish. > But powerful actors prevent this In other words, the powerful actors are not that powerful. To give a few more details. To change some regulations, it is not only necessary to grease a pair of hands in Washington. There are hundreds of government officials involved in the actual details of drafting the regulations, and many of them are quite rigid. You could say, "no problem, the top guy will propagate some of the grease down the ladder". This probably happens in a country like Russia, but in Western countries it's very difficult to pull a lot of government officials into a conspiracy. Now, to your points. I think you are actually making two points, not one. 1. banks need to change how they lend to the good guys 2. banks need to change how they lend to the bad guys And maybe a third: 3. banks like the way they currently do business, thank you very much, and they lobby against any change, be it for the good guys or for the bad guys. In that, they are the "powerful (bad) actors" you talked about. While my argument before is that lobbying to change regulations (either existing or incoming) is hard, I will contend that lobbying to prevent new regulations is probably not that hard, because democracies are a bit dis-functional to some extend. They need to be: a democracy has lots of checks and balances to prevent bad things happening, and a side effect is that sometimes these checks and balances make it hard to enact good changes. We need to live with this fact of life. So, it does not take that much lobbying to make Congress not pass a law. Despite that, at least in the US, Congress managed to pass the Inflation Reduction Act, and this is a huge victory. Let's stop here. Would you at least agree with me that the IRA was a good law, and it is real progress towards our green goals? As for solutions, I'm not proposing any, I talked enough already.

credit_guy 3y ago

The 3rd bullet point is conspiracy theory. Also, difficult to parse. I'll give it a try: banks are lobbying to prevent something. That something is the broadening of the credit issuance mechanism. The way the broadening is supposed to work is by excluding projects that move costs onto third party balance sheets. How can you broaden something by excluding a category of projects? That's quite a headscratcher. I think I see another way to parse your statement. Banks lobby to prevent X in order to exclude Y. Where X is the broadening and Y is some projects. But I don't understand your point. If the bank lobbying on this matter is bad, it follows that you are in favor of including Y, vs excluding Y. So you want to include projects that move costs onto third party balance sheets? What does that even mean? What projects do you have in mind, and how would these projects help with climate change? Anyway, back to your central point, which I believe is this: > no credit = no project And this: > projects are evaluated on narrow financial criteria You would like banks to evaluate ESG loans in such a way as to account for the net benefit to society. That sounds like a sensible idea. It results in yes credit = yes project. The problem is that the loan continues to exist after its origination too. And at that point the financial criteria revert to being narrow. Let's say JP Morgan announces during the quarterly earnings call that they increased the loan loss reserve by $20 billion because of non-performing ESG loans. And Jamie Dimon hops on the call and explains to the analysts that those loans were made with the full consideration of the societal benefit they entail. Do you think people will say, "Ah, ok, then we're all set. Good job Jamie, keep it up". Well, there's actually quite a good chance that this is exactly what they'll say, but millions people will vote with their wallet, and the share price of JPM will tank. I see how you can perceive this as being short-sighted, or unfair, or [insert some bad sentiment]. But this is how the world works. And guess what. At least the US Government is aware of how the world works, and the Inflation Reduction Act decided to work within the system rather than fight it. So banks are very happy to extend credit, and green projects are booming. See for example [1]. All in all, a lot of people see the glass half full. [1] https://www.gsam.com/content/gsam/uk/en/institutions/market-insights/gsam-insights/perspectives/2023/us-inflation-reduction-act-is-driving-clean-energy-investment-one-year-in.html https://www.gsam.com/content/gsam/uk/en/institutions/market-...

Biologist123 3y ago
Thanks for your response. Reading it, and your references to ESG lending, it appears we are talking across terms. If lack of clarity in my proposed problem statement was the reason for the confusion then my apologies. Let me state the problem less abstractly and point out that in particular the problem statement is not about ESG lending. 1. Bank credit policies allow continued investment in fossil fuel extraction projects, meaning those projects go ahead. 2. Regulation could force a change in those credit policies, but regulation has not happened as banks have lobbied against them. You state conspiracy theory, but again this is layering in value judgement into an hypothesis that is either correct/incorrect. Incidentally, depending on your definition of lobbying, the parent Bloomberg article does provide evidence of bringing influence at a closed event (arguably lobbying) and my general assumption is that Bloomberg is a credible source. That said, as mentioned before, the problem of climate change could be solved by stopping fossil fuel production. But powerful actors prevent this. This may be with good reason, eg national security concerns, lack of political support, etc.
- credit_guy 3y ago
  > but regulation has not happened as banks have lobbied against them I have worked (a lot) with regulators, and here's how it goes: if a regulation exists, lobbying to change it is almost impossible. It sometimes works, but banks have finite resources, believe it or not, and they have to carefully choose their battles. I'll give you an example of regulation that was changed following such lobbying: starting in 2016 you need to post initial margin on any non-cleared derivatives you do (with some exceptions). Banks do a lot of internal trades between any of their hundreds of legal entities. Well, the regulation included those trades too, and for many banks the margin posted on these trades exceeded (by a factor of 2 or 3) the margin posted on the genuine, external trades. One could argue this type of margin was quite nonsensical and it was draining something close to $100 BN from the financial markets. At some point the regulation was changed to eliminate this. Still, the way regulators work, it was not simply voided. The banks need to continue to monitor how much margin they would need to post on these internal trades, and check against their capitalization, and if the capitalization is not enough, they need to start posting the margin. What is the point of my anecdote? Banks have sometimes legitimate reasons to lobby. Even when they have, lobbying is very difficult, and the results are always quite convoluted. They don't get exactly what they wish. > But powerful actors prevent this In other words, the powerful actors are not that powerful. To give a few more details. To change some regulations, it is not only necessary to grease a pair of hands in Washington. There are hundreds of government officials involved in the actual details of drafting the regulations, and many of them are quite rigid. You could say, "no problem, the top guy will propagate some of the grease down the ladder". This probably happens in a country like Russia, but in Western countries it's very difficult to pull a lot of government officials into a conspiracy. Now, to your points. I think you are actually making two points, not one. 1. banks need to change how they lend to the good guys 2. banks need to change how they lend to the bad guys And maybe a third: 3. banks like the way they currently do business, thank you very much, and they lobby against any change, be it for the good guys or for the bad guys. In that, they are the "powerful (bad) actors" you talked about. While my argument before is that lobbying to change regulations (either existing or incoming) is hard, I will contend that lobbying to prevent new regulations is probably not that hard, because democracies are a bit dis-functional to some extend. They need to be: a democracy has lots of checks and balances to prevent bad things happening, and a side effect is that sometimes these checks and balances make it hard to enact good changes. We need to live with this fact of life. So, it does not take that much lobbying to make Congress not pass a law. Despite that, at least in the US, Congress managed to pass the Inflation Reduction Act, and this is a huge victory. Let's stop here. Would you at least agree with me that the IRA was a good law, and it is real progress towards our green goals? As for solutions, I'm not proposing any, I talked enough already.