Financial regulation and climate change

 John Cochrane's Senate testimony.

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I had the honor of testifying at the Senate Committee on Banking, Housing and Urban Affairs, on Protecting the Financial System from Risks Associated with Climate Change Full video at the link, I start at 48:30 with slightly abridged version of these remarks.

Testimony of John H. Cochrane to US Senate Committee on Banking, Housing, and Urban Affairs

Chairman Brown, Ranking Member Toomey and Members of the Committee: Thank you for the opportunity to testify today.

I am John Cochrane. I am an economist, specializing in finance and monetary policy. My comments do not reflect the views of my employer or any institution with which I am affiliated.

Climate change is an important challenge. But climate change poses no measurable risk to the financial system. This emperor has no clothes. “Risk” means unforeseen events. We know exactly where the climate is going over the horizon that financial regulation can contemplate. Weather is risky, but even the biggest floods, hurricanes, and heat waves have essentially no impact on our financial system.

Moreover, the financial system is only at risk when banks as a whole lose so much, and so suddenly, that they blow through their reserves and capital, and a run on their short-term debt erupts. That climate may cause a sudden, unexpected and enormous economic effect, in the next decade, which could endanger the financial system, is an even more fantastic fantasy.

Sure, we don’t know what will happen in 100 years. But banks did not fail in 2008 because they bet on radios not TV in the 1920s. Banks failed over mortgage investments made in 2006. Trouble in 2100 will come from investments made in 2095. Financial regulation does not and cannot pretend to look past 5 years or so, and there is just no climate risk to the financial system at this horizon.

Sure, a switch to renewables might lower oil company profits. Oil stockholders may lose money. But “risk” to the “financial system” cannot mean that nobody ever loses any money! Tesla could not have been built if people could not take “risks.” Yes, we are in a transition to a decarbonized economy, but the transitions from horses to cars, and from trains to planes, from typewriters to computers did not cause even blips in the financial system. Companies and industries come and go all the time.

So why is there a push for regulators to force financial firms to “disclose” absurdly fictitious “climate risks,” and change investments to avoid them? These proposals aim simply to de-fund the fossil fuel industry before alternatives are in place, and to steer funds to fashionable but unprofitable investments and away from unfashionable ones, by regulatory subterfuge rather than above-board legislation or transparent environmental agency rule-making. This goal isn’t a secret. For example, The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), which the Federal Reserve recently joined, states plainly its goal is to “mobilize mainstream finance to support the transition toward a sustainable economy.”

But financial regulators are not allowed to “mobilize” the financial system, to choose projects they like and de-fund those they disfavor. Thus regulators must pretend that they are dispassionately finding “risks” to the financial system, and oh, just happen to stumble on climate.

The climate focus proves the dishonesty. There are plenty of genuine risks to the financial system that our regulators largely ignore. Imagine a new pandemic, one that kills 10% not less than 1%, and that lasts years with no vaccine. Suppose China invades Taiwan, or a nuclear weapon goes off in the Middle East. Another financial collapse can come. Imagine a global sovereign debt crisis. Suppose that the US Treasury runs out of room to borrow, is downgraded or defaults, and financial institutions no longer accept Treasury collateral. Imagine a massive cyberattack - all the accounts at Citibank are wiped out by North Korean hackers, and people rush for cash everywhere. These would indeed be financial system catastrophes. Yet of all of these large, obvious and quite plausible risks, our financial regulators want to focus on just one, a fictitious climate “risk.” Why? Obviously, the end justifies the means.

Some advocates are a bit more honest: They recognize there is no financial risk due to climate itself, but climate regulation could come along and “strand” assets or hurt companies. The Godfather would be proud: Nice business you’ve got there, it would be a shame if something should happen to it. But think about it. This view posits that our environmental regulators are so bone-headed, so ignorant of basic cost-benefit analysis, that they might suddenly and dramatically not just wipe out industries and millions of jobs, but do it in a way that causes colossal bank failures like 2008. And if we go down this path, here too, why just climate-related risk? There is lots of political and regulatory risk. Regulate and disclose tech exposure, in case the FTC breaks up big companies. Regulate steel exposure, always on the edge of tariffs one way or another. Uber could be outlawed by labor legislation tomorrow. An honest list of all the ways Congress or the agencies might plausibly destroy industries would make good reading. But we’re not doing that, are we? The reason is obvious.

Climate is really important. Climate is too important to let financial regulators play with it, inspired by what’s fashionable at Davos cocktail parties. Climate needs clear-headed, science-based, steady, and transparently-enacted policy, with explicit cost-benefit analysis. Underhandedly funding and defunding financial regulators’ momentary enthusiasms will repeat corn ethanol, switchgrass, an absurdly expensive rail line from Merced to Bakersfield that comes online just as all cars and trucks are electric, and other counterproductive feel-good policies. The US leads the world in carbon reduction today because of natural gas produced by fracking, which no regulator “mobilized.” Climate answers may include nuclear power, geoengineering, carbon capture and storage, hydrogen fuel cells, genetically engineered foods, zoning reform, a carbon tax, and other approaches, which financial regulators will never even envision let alone implement.

Financial regulation is really important. Financial regulation is too important to be eviscerated on the altar of de-funding fossil fuel and subsidies to pet projects. Once regulators cook up fantasy “climate risks,” the books remain cooked, and financial regulation loses whatever any ability to perceive and to offset genuine risks. Once financial regulators demand funding of today’s fashionable green projects, the political allocation of credit will expand.

Financial regulation and the financial system are in peril, and not because of climate. Contemplate the abject failure sitting in front of us. Despite 12 years of Dodd-Frank regulation, stress tests, and armies of embedded regulators, despite centuries of experience, ARS, H1N1, Ebola, Aids, 1918, and many federal pandemic plans, financial regulators failed to consider that a pandemic might come along. We made it through the last year by one more massive bail-out, not by regulatory prescience. The financial system remains far too leveraged and far too reliant on an even larger bailout that may not come in the next crisis. And now they want to soothsay climate?

We need to get financial regulation back to its job: making sure that run-prone financial institutions have adequate capital to withstand all sorts of shocks, which none of us, not least the regulators, can pretend to foresee. It’s boring. You don’t get invited to Davos to talk about it. Industry hates being told to get more capital. But that’s its job and there is plenty to do.

Don’t let the EPA regulate banks, and don’t let our financial regulators dream up climate policy. You will get bad climate policy, and an even more fragile and sclerotic financial system if you do.

How to make sure Blacks don't succeed

 The way to make sure that Blacks don't succeed at college is to make sure that they attend a college where the coursework is way over their heads.

Affirmative action is a two edged sword.

Here is John Lott's perspective.  He is on target.  However, he fails to mention the terrible environment for learning - home, neighborhood, culture - that makes it likely that poor Blacks will enter the educational system unprepared and with cultural and behavior problems that hinder learning.

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Some simple, obvious facts are too politically incorrect for academics to state publicly. Georgetown University just fired law professor Sandra Sellers and forced out professor David Batson. Sellers’ offense? “I end up having this angst every semester that a lot of my lower ones are blacks,” Sellers’ said in discussion with another professor at the end of a Zoom call.

Batson’s offense? He didn’t condemn the statement, but instead sympathized with Sellers’ concerns. “What drives me crazy is… my own unconscious biases playing out in the scheme of things” might be responsible for their poor scores, he said. The logic is that blacks do poorly in college because of professors’ biases.

Georgetown Law Dean Bill Treanor said he was “appalled” by these statements, but all academics know that this is true.

I held teaching or research positions at many universities – the Wharton Business School, University of Chicago, UCLA, Yale, Stanford, and Rice — and I have heard these concerns raised many times. I have listened to even the most liberal professors make the same statements as Batson and Sellers.

But the left has only itself to blame for the harm that affirmative action in academia does to black students. For decades, black law school students’ LSAT scores have regularly been much lower than those of whites or Asians. At the University of Chicago Law School, I heard faculty say that over several decades there was only one time when the highest black LSAT score was above the lowest white score.

The purpose of standardized tests is to predict how well students will do in college and law school. So guess what? Students with much lower scores than other students don’t do well. Some of the students are so overwhelmed with the material that they get little out of their classes. Others switch to softer majors that don’t prepare them well for successful careers after college. Still others drop out with such low grades that they can’t get admitted to other schools that might be more at their level.

When I was on the Wharton Business School’s faculty in the early 1990s, one of the most shocking things that I learned was that only 26 blacks in the country that year had scored above 700 on the math section of the SAT. Only 64 scored above 700 on the verbal part of the test. The average entering undergraduate at Wharton had an average SAT score in the mid-1,400s, but while Wharton ideally wanted a hundred black students admitted each year, there weren’t many in the country who had scored over 1400 on their SATs. Wharton is competing against many other top schools, so the only way of accepting more blacks into its ranks is by dramatically reducing its standards of admissions.

Schools have tried to give a helping hand to these students, but with little success. When I taught at UCLA’s business school, special summer sessions were set up for minorities to bring them up to speed with the other students. But one summer-long course couldn’t make up for the skill gaps.

This affirmative action has caused major changes in how colleges operate. For example, students are no longer failed out of school the way that they were in the 1960s. If they were, most of the students who flunkout would be black. Have you ever wondered why colleges report SAT and ACT test scores as ranges from the 25th to the 75th percentile? Why not from the 5th percentile to the 95th? The 25th percentile cutoff conveniently hides the low scores of affirmative action students.

Political pressure has gradually corrupted standardized testing. When the SAT started, the goal was to design a test that would best predict student performance in college. However, over time, test questions were excluded if minorities or women tended not to do well on them. If women did relatively poorly on the SAT History subject questions that contained dates, dates were excluded. If blacks or women did relatively poorly on certain types of Math or English questions, the College Board replaced them with ones on which they did relatively better. That sealed the fate of SAT analogy questions such as “warm is to hot, as amusing is to hilarious.”

Some state legislatures ban public universities from engaging in affirmative action, so colleges resort to other tricks. For example, instead of relying on standardized tests, they simply admit the top 5% or 10% of their high school classes. Since some schools are overwhelmingly black or Hispanic, this ensures admission of certain percentages of minorities. But it’s not a good way of measuring academic ability. After all, the 25th-ranked student at one school might be smarter than the top student at another school.

The University of California and University of Texas systems are abandoning standardized tests in admissions, which only means more randomness in who gets in. Many smart students lose out.

The fault doesn’t lie with the universities. The fault lies with horribly performing public K-12 schools — a result of protecting teacher unions from competition. Hoping that colleges can make up for this damage is irresponsible.

Firing Sellers and Batson won’t solve problems, but it will make everyone afraid to talk about them. The real losers will be black students.

Being Woke is being Broke

 Here is a link to the Grace Church School's "Grace Inclusive Language Guide".

This is exactly what we don't need.

Faster than light travel possible?

 Here is an article at sciencedaily.com

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If travel to distant stars within an individual's lifetime is going to be possible, a means of faster-than-light propulsion will have to be found. To date, even recent research about superluminal (faster-than-light) transport based on Einstein's theory of general relativity would require vast amounts of hypothetical particles and states of matter that have "exotic" physical properties such as negative energy density. This type of matter either cannot currently be found or cannot be manufactured in viable quantities. In contrast, new research carried out at the University of Göttingen gets around this problem by constructing a new class of hyper-fast 'solitons' using sources with only positive energies that can enable travel at any speed. This reignites debate about the possibility of faster-than-light travel based on conventional physics. The research is published in the journal Classical and Quantum Gravity.

The author of the paper, Dr Erik Lentz, analysed existing research and discovered gaps in previous 'warp drive' studies. Lentz noticed that there existed yet-to-be explored configurations of space-time curvature organized into 'solitons' that have the potential to solve the puzzle while being physically viable. A soliton -- in this context also informally referred to as a 'warp bubble' -- is a compact wave that maintains its shape and moves at constant velocity. Lentz derived the Einstein equations for unexplored soliton configurations (where the space-time metric's shift vector components obey a hyperbolic relation), finding that the altered space-time geometries could be formed in a way that worked even with conventional energy sources. In essence, the new method uses the very structure of space and time arranged in a soliton to provide a solution to faster-than-light travel, which -- unlike other research -- would only need sources with positive energy densities. No "exotic" negative energy densities needed.

If sufficient energy could be generated, the equations used in this research would allow space travel to Proxima Centauri, our nearest star, and back to Earth in years instead of decades or millennia. That means an individual could travel there and back within their lifetime. In comparison, the current rocket technology would take more than 50,000 years for a one-way journey. In addition, the solitons (warp bubbles) were configured to contain a region with minimal tidal forces such that the passing of time inside the soliton matches the time outside: an ideal environment for a spacecraft. This means there would not be the complications of the so-called "twin paradox" whereby one twin travelling near the speed of light would age much more slowly than the other twin who stayed on Earth: in fact, according to the recent equations both twins would be the same age when reunited.

"This work has moved the problem of faster-than-light travel one step away from theoretical research in fundamental physics and closer to engineering. The next step is to figure out how to bring down the astronomical amount of energy needed to within the range of today's technologies, such as a large modern nuclear fission power plant. Then we can talk about building the first prototypes," says Lentz.

Currently, the amount of energy required for this new type of space propulsion drive is still immense. Lentz explains, "The energy required for this drive travelling at light speed encompassing a spacecraft of 100 meters in radius is on the order of hundreds of times of the mass of the planet Jupiter. The energy savings would need to be drastic, of approximately 30 orders of magnitude to be in range of modern nuclear fission reactors." He goes on to say: "Fortunately, several energy-saving mechanisms have been proposed in earlier research that can potentially lower the energy required by nearly 60 orders of magnitude." Lentz is currently in the early-stages of determining if these methods can be modified, or if new mechanisms are needed to bring the energy required down to what is currently possible.

How to punish low-skilled black workers

 Here is a letter from Don Boudreaux to the Wall Street Journal.

DB is Professor of Economics and Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center, George Mason University

DB is on target.

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Suppose that a KKK Grand Wizard is caught on tape squawking out the following: “Compared to white workers, a larger portion of black workers are low-skilled. So companies that employ low-skilled workers give disproportionate help to blacks. These employers are helpin’ to raise the inferior race up to our level! To discourage this assistance to our inferiors, I propose that government punitively tax the employment of low-skilled workers!”

The predictable public reaction to this proposal would be revulsion. Properly so. This proposal would be dismissed as the poisonous fruit of hatred and ignorance.

So where’s the revulsion at Sen. Bernie Sanders’s (I-VT) proposal to punitively tax certain firms that employ low-skilled workers – that is, to punitively tax firms that employ workers currently earning less than $15 per hour (“Plan B for a $15 Minimum Wage,” March 1)?

Because wages are lower the lower are workers’ skills, and because a larger portion of black workers than white workers are low-skilled, Sen. Sanders’s proposal to punitively tax the employment of low-skilled workers amounts to a proposal to use the U.S. tax code to encourage labor-market discrimination against blacks.

Don’t black jobs matter? Where’s the outrage at Sanders’s proposal?