The Green New Financial Deal

Alexander Barnstone - Politics and Economics

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2137. After a financial collapse government authorities only bailed out corporations whom had mismanaged their money if they signed onto a strict investment policy of renewable energy and green practices.

For the decades preceding the GFC the Minsky Financial instability Hypothesis was largely ignored. The theory, proposed by Hyman Phillip Minsky, a late American economist from Washington University St. Louise and distinguished scholar at Bard college’s Levy Economics Institute, argued that finance in capitalism was inherently unstable. Minsky claimed that periods of prolonged economic prosperity and stability would generate high optimism about future prospects in investment institutions. This confidence would lead to institutions seeking out riskier and riskier assets in the search for greater returns leaving the financial system vulnerable to default. Overconfidence during a time of economic prosperity would lead to a highly leveraged economy, meaning that the debt to GDP ratio would be blown out of proportion. Then, in the event that these risky accrued debts go badly, the entire economic system is at risk of a severe crisis.

It was exactly this phenomena in that defined the GFC. Banks took on risky subprime mortgages, extending credit to dubious investors in the pursuit of higher returns. When the realisation hit that these investments were propped up on unsustainable risk the entire financial system collapsed like dominoes, leaving millions unemployed, millions poorer, and the banks in dire need of a bailout.

Minsky’s hypothesis is built upon witness of a capitalist system that has cyclically experienced crisis since its conception. Amidst the neoliberal fever of eighties and nineties, where deregulatory policy and free market enterprise was fetishised, Minsky identified as a staunch advocate of the Keynesian ideology. He supported government regulation in financial markets and opposed the financial deregulatory policy of Raegan and Thatcher.

Minsky argued that rather than debating tax cuts versus spending increases, policymakers should be discussing how to reform the financial system so that it serves the rest of the economy. Investment is the driver of our capitalist system, and the answer to the question how finance can best serve our interests has now changed. Climate change is the precipice that demands action.

The financial system must be recalibrated to best support the realisation of a new future. Capital must be radically redistributed to best enable our economies, and by extension humanity, to contend with the threat of climate disaster.

Money In Climate Destruction

The Rainforest Action Network conducted research into banking practices and climate change in 2019. Its’ report Banking on Climate Change found that since 2016 thirty-three banks have invested roughly 1.9 trillion US dollars in fossil fuels. Current projections for carbon emissions indicate that based on our current trajectory we will fail to achieve what was set out by the Paris agreement. The IPCC found, with high confidence, that based on the current trajectory man-made global warming will exceed 1.5 degrees of pre-industrial levels between 2030 and 2052 and then exceed the 2 degree mark.

Financial crises are unequivocally horrible. 2008 resulted in the loss of millions of peoples’ savings and jobs. But they also are key turning points in the way financial institutions are structured. When in crisis, banks lose their bargaining power, the ideological doctrines dominating finance are weakened, and government is afforded an opportunity to implement constructive policy that reshapes the state of the economy. 2008 has come and gone, and fiscal policy has done little to push to address our cataclysmic trajectory. Financial institutions are shifting, but not quickly enough. They continue to fund the degradation of the planet.

Could another financial crisis be a route to addressing climate change?

A historical look

Historically, financial crisis has been an avenue through which government can pass sweeping reform on the sector. In the book Capitalism in America Alan Greenspan and Adrian Wooldridge explore how Franklin De Roosevelt passed the sweeping legislation of the New Deal.

In 1933 FDR faced the chaos of a bank run. There was rampant stock market hysteria and extremely loose credit margins. FDR closed the banks to stop people from withdrawing their funds, and then conferred with Hoover’s team whom had devised a plan for re-opening the banks without people frantically withdrawing their money. They created a class system based on the financial health of the banks, ranking them by their stability. Healthy banks were categorised as class A banks, and were allowed to re-open first. Class B banks were given loans and class C banks were monitored closely to discern whether they could be re-opened or should be nationalised.

The frailty of the banks, and their dire need for government assistance, meant that FDR could pass broad legislation reforming the industry. FDR passed the Emergency Banking Act that guaranteed 100% of banking deposits. People began to take the cash back out from under their mattresses and deposit it back into the institutions. He created the Securities and Exchange Commission and required banks to publish detailed information about their companies including their profit and loss statements, balance sheets and directors names. Mandating banks to share their company information made investing considerably easier for the general public, meaning that more people than the executives of JP Morgan could benefit from the growth of capital.

As Naomi Klein explains in her book This Changes Everything the financial collapse of 2008 was a missed opportunity. Obama could have done what FDR did, but in the interest of addressing climate change. The financial sector was crippled with debt and in need of a government bailout, which it received. Obama could have implemented sweeping reform, demanding that investment in fossil fuels be eschewed in favor of investments in low-carbon energy production. If banks refused they could have been nationalised and not received the stimulus package.

In fact, two of the Big Three automotive companies also received financial bailouts during 2008. General Motors and Chrysler LLC faced bankruptcy, and were bailed out by the Obama administration. In exchange for the bailout Obama could have required these companies sign onto a strict transitional plan to phase out fossil fuel automobiles. Instead, in conjunction with his chief economic advisor Larry Summers - an ex CEO of Goldman Sacks - Obama passed a stimulus bill without strict requirements on green policy. Although the stimulus bill did include a push for wind and solar, it did little to comprehensively reshape the entire sector. As University of Leeds ecological economist Julia Steinberger said; “2008 should have been an opportunity to invest in low-carbon infrastructure for the 21st century, instead, we fostered a lose-lose situation: carbon emissions rocketing to unprecedented levels, alongside increases in joblessness, energy costs, and income disparities.

Capitalism is cyclical, experiencing peaks and troughs. As Minsky said; finance is inherently unstable. Another financial collapse will eventually occur. Especially since society was not fundamentally restructured after the GFC. Mervyn King has said that “There has been no fundamental questioning of the financial structure following the GFC” and warns of another financial collapse being imminent. We still exist in an ideologically neoliberal financial system.

There may be many reasons why the next financial crisis occurs. In his last conference before resigning from his position as European Central Bank President Mario Draghi warned that uncertainty over Brexit and slowing economic growth may be the cause for the next recession. Whatever the cause, it will eventually happen. But, the question should not be why will it happen inasmuch as what should we do when it does, and how can we make the most out of this opportunity for structural reform to radically address the climate crisis.

If 2008 was a missed opportunity, what is different about the current context that may promise a different result? Crucially, a key difference between now and 2008 was a lack of political will. Since the GFC the climate movement has burgeoned to unprecedented heights. Urged on by young activist groups such as School Strike 4 Climate and individuals such as Greta Thunberg millions of people around the world now march at rallys, demanding a shift to renewables, an end to fossil fuels, and a just transition. As students grow into voters, the demands of the population will shift, as will their voting patterns and consequently those in power.

The political will to take climate action seriously, and to capitalise on the next financial crisis to do so, may seem a distant promise given the rise of right wing populism today. The leadership under the umbrella of Bannon ideology seem to promise that society is headed in the opposite direction. But the youth, tenacity, and collective political of the climate movement should not be underappreciated. Radical change is the abstract sentiment that transcends the political spectrum of today, it is the direction of that change that differs.

If a government with green sympathies were to be ushered into power, and a financial crisis did once again cripple the corporations behind capitalism, it could be a recipe for the realisation of an eco friendly future. Government could provide a bailout package that demanded an end to investment in fossil fuels, and realise a better future through the radical reallocation of capital toward a green future.

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