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Bernard Hickey agrees with Henry Paulson that a carbon bubble is creating the same sort of financial risks built up in the credit bubble before the GFC

Bernard Hickey agrees with Henry Paulson that a carbon bubble is creating the same sort of financial risks built up in the credit bubble before the GFC

By Bernard Hickey

Everyone now understands that borrowing too much is a bad thing for any household or economy.

Borrowing and spending simply pulls forward consumption and if it borrowing rises faster than income then eventually the bubble of debt will burst.

That is exactly what happened in the US economy and the global financial system during the crisis of 2008 and 2009. American households consumed more than than earned for decades, using debt to bridge the gap.

Eventually they could not service the debt, triggering defaults that almost destroyed the global banking system in a cascading and ricocheting series of defaults, credit market freezes and bank collapses.

US Treasury Secretary Henry Paulson was the guy driving the ambulance at the bottom of the financial cliff in 2008 so he knows a thing or two about how imbalances build up in a system and how catastrophe can be unleashed by apparently small events.

Now Paulson has gone against the orthodoxy of his own Republican Party and called for concerted action to reduce carbon emissions and try to prevent a climate change catastrophe.

He has compared the credit bubble before 2008 with a carbon bubble now and he is very worried.

"Looking back at the dark days of the financial crisis in 2008, it is easy to see the similarities between the financial crisis and the climate challenge we now face," Paulson said this week.

"We are building up excesses (debt in 2008, greenhouse gas emissions that are trapping heat now)," he said.

"Our government policies are flawed (incentivizing us to borrow too much to finance homes then, and encouraging the overuse of carbon-based fuels now)."

Paulson, a former boss of Goldman Sachs, has cleverly turned a contentious political and scientific debate on its head.

He is saying climate change is as much a financial issue as an environmental one.

Quite correctly, he has addressed climate change as a financial risk management exercise, rather than purely a debate about science, politics and economics. Pointing to the potential for the melting of the West Antarctic ice sheet to melt and increase sea levels 4 metres, Paulson argued apparently small climate events could unleash big surprises.

"As we all witnessed during the financial crisis, a chain reaction of cascading failures ensued from one intertwined part of the system to the next," Paulson said.

"It’s easy to see a single part in motion. It’s not so easy to calculate the resulting domino effect. That sort of contagion nearly took down the global financial system," he said.

This week Paulson took the unthinkable step for a Republican of calling for a carbon tax. That puts him in the same camp as the Green Party in New Zealand.

Paulson argued that discouraging carbon emissions now may save massive public costs and fiscal deficits over decades as Governments are forced to pay to clean up after storms, repair damaged infrastructure and invest in ways to cope with rising sea levels, higher temperatures, droughts and many more severe storms.

The biggest companies all around the world are beginning to look at the issue of climate change and carbon emissions in the same way: as a long-term financial risk that has to be managed like any other.

Even oil giant Exxon Mobil was forced in April to acknowledge the financial risks of climate change, although it rejected suggestions from shareholder activists that its huge oil reserves may end up 'stranded' once regulators and politicians finally catch up with the science and act to reduce emissions.

Insurers have for years been calling for action and adjusting their catastrophe forecasting models for bigger and more damaging storms. Last year All Blacks sponsor and global insurer AIG issued a report calling on regulators, investors and credit raters to take climate risk into account when assessing insurers.

Corporations and Governments should now be building these risks into their own financial outlooks, which in turn should force voters and politicians to face up to the facts now determined by the likes of the Intergovernmental Panel on Climate Change.

For example, the Reserve Bank of New Zealand has just limited riskier mortgage lending to control the risks to the financial system from a potential bursting of a house price bubble.

Interestingly, the Reserve Bank is also the regulator of the insurance system.

How long before the Reserve Bank starts to build the risks from climate change into its assessments of the strength of insurers?

Should it, therefore, be making analysing and making recommendations about controlling carbon emissions in the same way it controls the riskiest lending?

These are the questions every business owner, banker, insurer, investor, regulator and credit rater should be asking.

This reassessment of climate change as a very real financial risk should jolt voters and politicians out of the vacuum that has sucked the life out of climate change policy debate for years.

Until now, politicians could easily point to the financial costs of carbon taxes as a reason not to take action.

Now it's the turn of the bankers and insurers and chief executives to tell politicians and voters about the financial costs and risks of not taking action.

Home owners and voters understand the concept of a housing bubble bursting. Paulson has rightly warned they should understand what a bursting of the carbon bubble would mean for their finances.


A version of this article appears in the Herlad on Sunday. It is here with permission.

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If we know one thing for certain about Hank, we need to follow the money and the power. The man should be behind bars and the company he once ran should be expunged. His only green credentials or care for the future relates to the colour of the US dollar and the pursuit of US global imperialism. What's the bet there's a grand plan to use "Climate Crimes" as the new catch cry in taking down/overthrowing whatever nation it (the bankster fraternity) deems the next emerging enemy - and his think tank is concentrating on the US and China. 


Here's an idea - let's write off sovereign debt in exchange for national emission reductions and other environmental stewardship programmes. Solves both the crisis of credit he engineered and his new found concern for the environment all in one. Has his new think tank thought of that?  Nope - they want a tax - one that will be paid for by everyone other than the banks. 


He thinks the credit crisis is fixed?


A “funny” thing happened during the post-mortgage Bubble’s so-called “deleveraging” period. Since the end of 2008, total TMDS has jumped $8.348 TN, or 29%, to a record $37.542 TN. As a percentage of GDP, TMDS ended Q1 2014 at a record 220%. Even more importantly from a Bubble analysis perspective, in 21 quarters Total Securities (debt & equities) inflated $27.2 TN, or 61%, to end March 2014 at a record $72.039 TN. To put this in context, Total Securities began 1990 at $10.0 TN, ended 1999 at $33.0 TN and closed 2007 at a then record $53.01 TN. Amazingly, Total Securities as a percent of GDP ended Q1 at 421%. For comparison, Total Securities to GDP began the nineties at 183%, ended Bubbly 1999 at 356% before peaking at 378% in a more Bubbly 2007. No Bubble today? “Valuations in historical range”?


Let’s return to “A Bubble is predicated on leverage.” Yes, Total Household Liabilities declined $715bn from the 2008 high-water mark (much of this from debt defaults). Yet over this period federal liabilities increased almost $10.0 TN. Corporate borrowings were up more than $2.3 TN. On system-wide basis, our system is inarguably more leveraged today than ever. 

Over the years, I have argued that “money” is integral to major Bubbles. A Bubble financed by junk debt won’t inflate too far before the holders of this debt begin to question the rationale for holding rapidly expanding debt of suspect quality. In contrast, a Bubble fueled by “money” – a perceived safe and liquid store of nominal value – can inflate for years. The insatiable demand enjoyed by issuers of “money” allows protracted excesses and maladjustment to impart deep structural impairment (financial and economic).

Related to what you say.  Fascinatingly relevant paper from 2002 here regarding Minsky's financial instability theory as it applies to the global system.  According to Minskey we're toast. 

After a colossal bail out by the lenders of last resort there's been virtually no regulation of the banks or the ponzi lending which caused the problem.  Where are we now? Lenders of last resort have impaired balance sheets.  OBR on the horrizon.  We have virtually no impediment to capital free flows, particularly here in NZ (think Auckland housing market, but equally all NZ asset markets).  Thanks National government for acting as if NOTHING AT ALL has happened in the last decade. 

Thanks National Government for maintaining status quo  and continuing with failed neoliberal financial ideas which have been proved wrong time and time again by Steve Keen and others.   The only beneficiaries too all this are the super wealthy and it's ruination for bank depositor New Zealanders.  Why the hell are our interest rates so high?  Why is our money so much more expensive domestically when say Germans can borrow at 3.5 % for 15 years.  What's to stop foreigners pumping their cheap money into our asset markets and destroying the buying power of our overpriced dollars?  


Oh, how quickly we forget - reminds me - crooked as a dogs hind leg  - yes, he should be in jail


The big difference between a climate or carbon bubbble and a financial bubble is that a financial bubble only last for a few years while we print more money whereas a carbon bubble will last for thousands of years. Climate change has hardly started yet as there is a delay of at least thirty years while the heat is soaked uo by the oceans.has not really started yet and when it really starts to bite there is no way of stoping it.


Tell us Bob, what is the thermal capacity of the oceans compared to the land mass?


...on the same vein and a real cheerful way to start the week .....

Better savour those oysters or green-lipped mussels while you can, because New Zealand shellfish could be obliterated by greenhouse gases.

An American expert told a University of Otago conference that a "massive shellfish extinction event" could be on the cards.

....could be on the cards looks to be an understatement. 

So, Hank Paulson, the former US Treasury Secretary who helped transform the 2008 crash from a temporary crisis into a long-running, still-unresolved disaster, has now turned his expertise to the subject of climate change. "I was secretary of the Treasury when the credit bubble burst, so I think it’s fair to say that I know a little bit about risk, assessing outcomes and problem-solving. Looking back at the dark days of the financial crisis in 2008, it is easy to see the similarities between the financial crisis and the climate challenge we now face."   This is a bit like the Captain of the Titanic returning from his watery grave to tell us: "Trust me. I have experience of managing disasters. That's why I'm just the man you want to appoint as the next head of the Federal Reserve." Except not quite as ridiculous as Paulson's claim, obviously. Really Bernard!!! You have had a bad slip of judgement

It seems you dont undertsand risk. Lets look at the points,

a) Fixing the issue while there was no actual melt down was I suspect politically impossible.

b) When the GFC blew HP made some actions that kept the global finance industry/sector from totally imploding. ie te banks stayed open across the world.

So I'll agree that he was in a position to at least warn of the bubble growing, but Im not so sure he could have done much more given the context. 

c)  "it is easy to see the similarities between the financial crisis and the climate challenge" he is correct, this is risk managment and mitigation.  The subject doesnt matter, its how big a risk and what impact is there, in both cases it is high.

The Captain of the titanic had some constraints, he could do nothing about,

1) he sailed with too few lifeboats, that regulation got changed.

2) The entire society of the day believed the Titanic was un-sinkable. Putting that delusion aside, this was primarily an error of the Naval architect and generally the limitations of engineering and science not the Captain.

3) Many passengers refused to get in the boats, outside the Captain's control.

4) Yes he ran to fast due to pressures from the company board to break records despite the conditions, here was his primary direct failure.

The big Q is would he have repeated this mistake? I bet teh answer is no.

5) Did he mis-manage the evacuation? As an ex-marine engineer Ive read the accounts and taken a general interest in the event in terms of engineering and doing the best he could, he probably came out OK.

Lets look at HP, the GFC first time round, not that good. Now he's seeking not to repeat it with AGW, trying to do a "no" yet the rabid right such as yourself is attacking him for it. 


Take a look around, really only the far right wing is still in denial, many reasonable ppl seem to be saying yes lets fix this.