Lessons learned from 2008
In this case, any government interventions should be predicated upon making the urgently required transition to a post-fossil fuel economy and society. Rescued or subsidized institutions (especially oil companies, airlines, and the banks that finance them) should be put under public control as part of an emergency climate transition plan. Once in public control, these institutions should be wound down or converted in alignment with a green industrial strategy that breaks free from the extractive business model that continues to fuel climate catastrophe and keep the American economy hostage.
As Dante Dallavalle and Christian Parenti recently put it (see excerpt from their analysis of 2008 and after below), “the real economy needs help in the form of popular debt forgiveness, green public works, free higher education, and significant socialization of health care.”
1) American finance has already been largely de facto socialized; 2) federal monetary policy is always already political; and 3) the jig is up, or nearly up, on the American version of Junkie Capitalism, or what Yanis Varoufakis in the Greek context called “extend and pretend” that is the practice of addressing each financial crisis by re-inflating asset values with government credit.
With the Federal Reserve’s main interest rates at close to zero, another conclusion is also clear: policy makers are trapped. If the current downturn snowballs into a full-blown financial panic and then into a wider economic crisis, only egalitarian economic redistribution aimed at working people and the real economy will drag capitalism from the slump. The old tricks of deregulation, regressive tax cuts, and shots of public credit have worn out. The real economy needs help in the form of popular debt forgiveness, green public works, free higher education, and significant socialization of health care.
How We Got Here
In response to the crash of 2008, which was triggered by the overproduction of subprime mortgage-backed securities, the US government had to rescue the banks because they were, and still are, genuinely “too big to fail.” Collapse of one or two of these financial giants would trigger a global economic meltdown.
In response the federal government did three things — all of which inadvertently set up the current crisis. First, the Federal Reserve cut its benchmark federal funds rate from 5.25 percent going into the crash to a historic low of 0.25 percent by December 2008. The fed funds rate is the rate at which banks charge each other for overnight loans at the end of every business day and thus reverberates out to shape interest rates in general. This cheap credit from the Fed helped to inflate stock prices but did little for ordinary people.
Second, the US Treasury Department bought (nationalized) portions of the country’s nine largest banks via the Troubled Asset Relief Program (TARP); but the government did not use its ownership stake to shape a progressive investment agenda in things like clean energy, nor did it do much to assist distressed homeowners. TARP did however help boost asset prices.
Third, the Federal Reserve — through its Quantitative Easing (QE) programs — went directly into the markets and bought nearly $2 trillion worth of financial assets from private banks and brokerage houses. This, like the other emergency actions, artificially boosted asset prices but did nothing to relieve the 9.3 million American homeowners who faced foreclosure, nor anything for the 44.7 million Americans yoked with student loan debt, nor the over 130 million Americans who report financial hardship every year due to medical expenses.
In combination, the three moves made by the Fed and Treasury amounted to a creeping, de facto nationalization of finance in which publicly controlled institutions artificially increased demand for the assets of private banks by pumping money into the financial sector. In homage to the tortured nomenclature of the Cold War, let’s call this “actually existing” socialized finance.
Tapering Off the Meds … Almost
The federal government did all this hoping to revive the financial sector and then gently wean it off credit infusions. Indeed, that began to happen.
In December 2014, the Treasury sold its last TARP-acquired formerly toxic asset. And — as if to didactically drive home the old adage, “buy low sell high” — TARP actually turned a profit. The program invested $426.4 billion at the bottom of the market. Then as asset values recovered it sold at higher prices, ending with a net gain of $15.3 billion.
Late 2014 also saw the Fed end the purchasing portion of its third and final QE buying binge. The Fed did not then start selling the vast piles of assets it had accumulated but rather just held them. (European and Japanese QE efforts went on until as recently as 2016.)
Even the Federal Reserve benchmark federal funds rate started inching back up. In 2016, it edged up a hair. Then in 2017 it crept to a target rate of 1.50 percent. And by December 2018 the target rate had reached 2.25 percent. A higher federal funds rate — or rather the ability to drastically lower it — is an essential tool for fighting any future crash.
Over the last two years it appeared as if the financial medicine had worked — at least in its own narrow, economically unfair, terms. Faith in the financial system was restored, the housing market was resuscitated, employment was picking up. And all without the widespread inflation so feared by most orthodox economists and media pundits.
But alas, trouble soon returned.
Repo and the Return of Crisis
On September 17, 2019, as if sucker punched, a rather humdrum, yet huge and vitally important, section of finance — the $1 trillion a day US repo market, the backbone of overnight interbank lending — suddenly failed to clear. Government financial firefighters rushed to the scene and hosed down the blaze with hundreds of billions more in liquidity.
And, boom, before anyone realized it, the government-led junkie finance of QE was reborn.
The story of the repo crisis deserves some explanation. Repos, short for Sale and Repurchase Agreement or Repurchase Operations, are essentially collateralized, overnight loans in which one party borrows reserves (cash) for a short period of time, usually overnight, and offers treasury bonds or other high-quality securities as collateral to the lender. If the loan isn’t renewed, the next day (or when the term is up in the case of “term repos”) the borrower repays the loan with added interest and repossesses their collateral.
This market in overnight deals offers a cheap way for banks to borrow when they need short-term cash, for example to meet their federally mandated minimum overnight reserve requirements — that is, the value of funds a bank must have on their books at the end of each day. And it gives lending banks with excess liquidity a chance to make a quick bit of profit without much risk or long-term commitment. It could be likened to plumbing: essential, ubiquitous, and unspectacular — until a pipe breaks and the ensuing flood destroys all your possessions.
Typically, repo transaction rates hover around the benchmark federal funds rate. But in the repo panic of September 2019 the repo rate suddenly shot up to as high as 10 percent in some trades, more than four times the Fed’s rate.
This happened because there was a sudden lack of liquidity: more institutions looking to borrow than there were institutions with extra cash to lend. The whole situation was odd, unexpected, hard to explain, and caused instant panic throughout the markets. At first, not even the Federal Reserve understood what was happening, but it knew it had to step in with an immediate $53 billion in emergency cash. Much more Fed money flowed in the following days.
The surge in repo rates caused by a mismatch between buyers and sellers was initially attributed to various combinations of the following factors: Corporate demand for cash to settle tax payments; a cash void created by a recent $78 billion of US Treasury offerings; a bank holiday in Japan; Dodd-Frank’s allegedly unjustifiably high reserve requirements; confusion over who actually owned which treasuries; and, most importantly, a lack of excess bank reserves to lend because of the Fed’s winding down of QE.
Indeed, when the dust settled, the Fed essentially admitted that the end of its mass purchasing of financial assets from private banks and corporations may have been “premature.” In other words, Wall Street was still addicted to government handouts.
By late December 2019 the central bank was loaning the repo market an average of $235 billion a day. The Financial Times estimated that the US central bank’s “gross cumulative support” for the repo market would top $11.5 trillion by the end of 2019.
As the FT put it: “The Fed did not just stabilise the repo market. Now, it is the repo market.” For the FT this was, “De facto nationalisation of the market.”
Consider the following chart of total assets held by the US central bank:
The blue line tracks the total assets owned by the Fed. The shaded area denotes the Great Recession. Notice the exponential surge in total assets as Fed purchases continue under three distinct QE programs.
Then in October 2014 the plateau begins when the Fed made its final massive purchases of private sector securities. The Fed maintained its bloated balance sheet of $4 trillion worth of assets until late 2017 when, believing that financial markets could finally stand on their own, it began selling off its holdings. That’s when the blue line starts to gradually slope down through 2018 and most of 2019.
Toward the end of the chart there is a sharp upward spike, which marks the September 17, 2019 collapse of the US repo market and the Fed’s resumption of massive purchases of private sector securities.
More recently, the central bank hinted that its emergency actions would be made permanent. It will create a standing “repo facility.” This is, essentially, to hook the repo market up to a dialysis machine. Currently, as of March 5, there’s close to $200 billion of repo on the Fed’s balance sheet.
In a final gift to rich speculators, the Fed is considering regular repo transactions directly with other securities’ dealers, particularly hedge funds. Unlike banks, which free market zealots and stone-cold communists alike can agree are essential to the working of a complex modern economy, hedge funds are purely parasitic. Owned by the ultrarich and engaging in some of the riskiest and most destructive forms of speculation, hedge funds serve no larger social purpose. They are to the rest of the economy, as tapeworms are to the human body — feeding off of the productive value created, nurturing themselves at the expense of the health of its host, the real economy. Absorbing hedge funds into “actually existing socialized finance” would be a remarkably outrageous twist of the screw.
Trump Hits the Gas Pedal
Even if this perverted quasi-socialism of the financiers could have been slowly undone, Donald Trump had no intention of doing so because titration off cheap credit and debt would risk a recession. And that would, in turn, risk Trump’s reelection. Instead, Trump did everything he could to pump up the asset bubble.
Most important was his highly regressive $1.5 trillion tax cut of 2017. Like every trickle-down economics ruse before it, the claim behind this tax cut was that it would stimulate the real economy. Money that would have been paid as taxes would now, the theory went, be invested in hiring new workers, buying new machinery, innovating new product lines, etc. In reality, this money was mainlined directly into financial markets.
The effective corporate tax rate was cut in half from 17.2 percent in 2017 to 8.8 percent in 2018. Tax rates on repatriated foreign profits were also slashed from 35 percent to 15.5 percent. And the $664 billion that firms repatriated from overseas tax havens did not go into higher wages or new investment in productive activities. Instead, the vast majority of that money helped fund 2018’s staggering $1.1 trillion in stock buybacks — the largest in history — thus inflating stock prices even more!
Then came three interest rate cuts in 2019, pushing yet more money into the financial markets. Fed Chair Jerome Powell had been trying to raise rates, but constant harassment from Trump, accompanied by a still precarious financial system, seem to have encouraged him to reverse course.
Zombie Firms and Mounting Corporate Debt
At the level of individual firms, this tsunami of money encouraged new rounds of dangerous borrowing. Since the financial crisis corporate debt has swelled to record levels — over $10 trillion, equal to 48 percent of GDP. Companies haven’t been this heavily leveraged since 2009, at the depth of the crisis. In January the New York Fed reported that only two US companies — Johnson & Johnson and Microsoft — still carry triple-A ratings.
According to the world’s largest asset manager, BlackRock, over 50 percent of this corporate debt is rated BBB, “the most vulnerable of all investment-grade debt in a recession.” Any rating below triple B is considered “non-investment grade” better known as “junk bonds.”
The IMF’s 2019 Global Financial Stability report warned, with robotic understatement, that these gargantuan levels of corporate debt will “amplify shocks” when crisis-provoked deleveraging cuts into investment and employment and significantly precipitates defaults.
The strange survival of the once iconic, now moribund JC Penney illustrates the insanity of the mounting corporate debt scene. Carrying $5.3 billion in leases and debt, and unable to cover its operating costs let alone turn a profit for most of the last decade, JC Penney’s last two CEOs have both made millions. One started at $20.44 million annually in 2014, failed at his job, and was replaced by another in 2018 whose starting package was $17.4 million annually.
Over the last decade the company has also: closed a quarter of its stores, fired 2,000 employees, and watched its stock fall from $29 a share to $0.60 a share. Its corporate bonds are now rated “Caa1” — that’s below classic junk bond levels.
Yet, in 2018 JC Penney sold corporate bonds offering a 9 percent return and thus managed to raise $400 million! How is this possible?
Financial Times columnist Robert Armstrong explained the mystery. “Economists and occultists have a word for things that walk the earth, dimly aware that they are no longer alive: zombies. After a decade of central banks pushing liquidity into the global economy, there are a lot more of them … reanimated by cheap money.”
JC Penney is not alone. A Bank for International Settlements (BIS) study found that the number of companies unable to earn enough money to cover their interest payments doubled from 3 percent in 2007 to 6 percent in 2016. When the next recession hits, these zombie firms will be, as Armstrong puts it, “forced into a rush of disorganised reorganisations and liquidations.”
Meanwhile, very little of this corporate leveraging has benefited workers. The overall labor share of corporate income — that portion of corporate income received by workers as wages and benefits — has not yet even returned to pre-recession levels.
Inequality and Bad Signs Ahead
Now that the latest experiment in extreme and financialized corporate welfare — junkie capitalism — is entering a new crisis, all signs augur something bad.
Airlines are expected to lose $100 billion this year. Oil prices have plunged by nearly 30 percent.The Purchasing Managers’ Index, which foreshadows trends in the manufacturing and service sectors, is looking weak.
Perhaps most ominous of all, bond markets have seen a “yield curve inversion” in which long-term Treasury bonds are in greater demand and thus offer lower rates of return (“yields”) than short-term Treasury bonds.
Normally, short-term interest rates are lower than long-term rates because the immediate future is typically more predictable and thus a safer bet than is the more distant future. When that relationship inverts it means investors are seeking safety and fear an imminent downturn. Yield curve inversions have preceded every recession since 1950.
Not only has the yield curve inverted, ten-year Treasury bond yields are now at all-time lows. On March 3, they fell below 1 percent for the first time ever; three days later they bottomed out at 0.74 percent. In other words, big investors are gathering in long-term government debt like apocalypse-focused “preppers” stocking up on ammo and Jim Bakker’s food buckets.
And now the longest expansion in US history threatens to end with hardly any discernible increase in the average worker’s standard of living. And the key lesson to learn is that this is because of policy, not despite it. The artificial inflation of financial asset prices through stock buybacks facilitated by low rates and daily Fed repo transactions has redirected money away from productive investment; that is, away from the real economy and the mechanisms, like good-paying jobs, by which markets could actually help working people.
As former president and CEO of the Federal Reserve Bank of Dallas, Richard Fisher, put it a few years ago, the Fed’s policy has, “made rich people richer.”
In 2018 median CEO pay was $12 million a year. At the same time almost half of all workers — 44 percent according to a Brookings Institute study from late 2019 — work in low-wage jobs where the median annual earnings are a paltry $18,000 a year. The money created by the Fed under QE and the Treasury with TARP saved the banks but virtually none of it reached the average worker, unless in the form of more unsustainable medical, educational, and credit card debt.
The intervention by the Federal Reserve via QE was the largest economic stimulus program and — not by accident but by design — the largest single transfer of wealth, as well, in modern history. The prime beneficiaries of these seemingly obscure transactions between Wall Street and the US central bank were, also not coincidentally, the same institutions and networks of rich people responsible for the financial meltdown of 2008.
The financial markets are a highly modulated, planned, and protected system of relations between our quasi-public institutions and wealthy companies and individuals. The life support now being undertaken via repo injections is more of the same. The major difference is that it’s coming at a time when all signs point toward the inevitability of recession.
The “Purely Technical” Case for Egalitarian Redistribution
The tragedy in all this was that government action could have helped working people. In 2008 Congress could have used its financial power to bailout homeowners and thereby also revive the banks. The more recent deficit spending caused by Trump’s tax cut could have been better used to assist the scores of communities shattered by fourteen separate billion-dollar-plus catastrophic climate-related disasters that occurred in 2018. But that sort of policy would constitute “free stuff” and “moral hazard” and the slippery slope toward socialism.
Our point is not that the Fed should stay out of markets. The United States has always been an interventionist state and its political institutions share considerable credit for the awesome development of land, labor, and capital experienced over the last 200-plus years of its existence. Our economy, whether we like to admit it or not, is already “mixed.”
We support a full and conscious socialization of finance. But we want its power used to create social outcomes that are diametrically opposite of the disgusting regressive welfare for plutocrats that is America’s “actually existing socialized finance.”
What needs to change is how and for whom our public agencies shape economic activity. Instead of the large-scale asset purchases that allowed banks to resume lending to each other and re-inflate securities prices that disproportionately benefited the wealthy, the publicly controlled heart of finance could have been used to begin an egalitarian social transition of our economy.
Bizarrely, there is a possible silver lining in this gathering crisis. It is this: the old monetarist tricks are structurally played out. The Fed Funds rate is effectively at zero and the central bank has already taken over and semi-nationalized whole sections of finance. In the face of a new slump the cheap money strategy won’t work. The only polices that will revive growth will be the sorts that socialists are already demanding on purely ethical grounds: debt cancellation, free higher education, single payer health care, government jobs programs, and a Green New Deal to drive an energy transition.
Given the crisis of Junkie Capitalism and the reality of actually existing socialized finance for the 1 percent, these left-wing demands will soon take on a new purely technical utility. Nothing else will revive the economy.
**
The lessons of 2008
When the financial system collapsed at the end of the 2000s, policymakers responded with an escalating series of public interventions. Between September 2007 and January 2008, the Fed slashed its federal funds rate five times (ultimately the rate reached near zero percent by the end of 2008). When this failed to arrest economic concerns, President Bush signed into law a stimulus package containing a tax rebate and the Federal Reserve began making more aggressive interventions into the financial markets (including purchasing toxic debt and bailing out the investment bank Bear Stearns). This was then followed with even more direct action including, ultimately, the nationalization and quasi-nationalization of several companies (including Fannie Mae, Freddie Mac, AIG, and General Motors), bailouts of hundreds of banks through the TARP program, and the injection of trillions of dollars of new money into financial markets through Quantitative Easing.
Despite the extensive nature of the government’s interventions, and the enormous public cost associated with them, very little was changed with regards to the structure and purpose of the country’s economic system. In fact, if anything, the episode further entrenched financialization, corporate power, and fossil-fuel dependence. For instance, many of the too-big-to-fail banks are now even bigger, and have, since 2016 (the year of the Paris climate agreement), poured well over US$500 billion into fossil fuel projects. Moreover, economic inequality has risen to levels not seen since the Gilded Age, the racial wealth gap is getting worse, and greenhouse gas emissions remain unacceptably high.
In 2008 and 2009, we missed a golden opportunity to reshape and restructure our economic system. Instead of supporting homeowners and working people who saw their jobs and life savings evaporate, the government bailed out the financial sector and their wealthy investors. Instead of using strong regulations to re-shape the financial sector for a generation (as President Roosevelt did with Glass-Steagall, which separated commercial and investment banking, and other legislation after the 1929 crash), the government passed a relatively weak financial reform law (Dodd-Frank) that made few, if any, structural changes to the sector. And instead of using public ownership of, and influence with, financial institutions to catalyze an energy transition, the government quickly turned control back over to the private sector and allowed them to get bigger and continue their risky, extractive, and speculative behavior.
We cannot afford to make the same mistakes again. With some of the key institutions responsible for the climate crisis struggling to keep their business afloat, now is the time to act decisively. From fires in California to flooding in the Midwest to COVID-19 itself, we are already starting to get a preview of how destabilizing and damaging climate change will be. What is more, as central banks across the world are becoming increasingly aware, the stranded assets of fossil fuel companies (those reserves that simply cannot be exploited if the world is to avoid catastrophic levels of warming) pose a massive financial risk to the world economy.
During this, or any future, economic crisis, public support and funding to stricken industries must be conditioned on public ownership and control within the overall perspective of a Green New Deal and a just transition for workers and communities affected by the required shifts to renewable energy and less carbon intensive modes of transportation and production. This means not simply injecting public money into banks, oil and gas companies, and airlines in order to stabilize and resurrect their existing business so they can continue financing, extracting, and burning fossil fuels at a pace that will blow our chances of keeping temperature increases below 2 degrees Celsius by 2036. Instead, government interventions should ensure that such businesses are resolved or transitioned in an orderly fashion based on the imperative of rapidly reducing greenhouse gas emissions and resource intensity, along with mitigating the impacts on frontline groups, displaced workers, and disenfranchised communities.
Equally important, once public control has been extended over these companies and sectors, and corporate power displaced, we should ensure that those most impacted are at the forefront of the decision-making processes around transition and conversion strategies. This approach centers the knowledge and experience of workers and local communities and is the mirror opposite of the last-minute layoffs, facility closures, and evisceration of pension and healthcare obligations that occur when the private sector decides to restructure. After all, to overcome the climate crisis we need to transition as fast and as equitably as possible, and that means leaving no worker or community behind.
**
Large companies, tax breaks already, and big stock buybacks: Many of the companies now asking for government support received a big corporate tax break from Mr. Trump’s 2017 tax cuts and have spent years returning cash to shareholders in the form of stock buybacks and dividends. That has drawn criticism from Democratic lawmakers, who accuse big companies of moving jobs out of the United States and putting shareholders ahead of workers, whose wages have risen only modestly since the last recession ended in 2009. The companies that make up the broader S&P 500 index spent more than $5 trillion in buybacks and dividends over that period. Even if companies had returned no cash to shareholders, they probably would have found other places to spend the money rather than keeping it on their balance sheets for a rainy day. On Feb. 6, as the virus was already spreading, Delta approved a $257 million dividend to shareholders, according to Allied Progress, a consumer advocacy group. “They have known about the risks of an outbreak to their business for years,” said Derek Martin, the group’s director. “We ask Americans and average people to be prepared for a crisis.”
Airlines: The four biggest American airlines collectively bought back $39 billion in stock from 2015 to 2019 and paid out $6 billion in dividends, according to data from Capital IQ.
Treasury officials proposed on Wednesday that Congress spend $50 billion on a bailout for airlines and $150 billion for other hard-hit industries, like cruise lines. But Democratic and Republican senators alike have insisted that any bailouts contain provisions meant to change how corporations spend their money going forward. Senator Josh Hawley, Republican of Missouri, said on Twitter on Wednesday that any multinational company seeking assistance would need to “explain how you will move supply chains and jobs back to America.”
Thomas M. Hanna and Carla Santos Skandier 16 March 2020
The rapid spread of COVID-19, or the coronavirus as it is commonly known, has heightened economic fears and anxiety around the world.
On Thursday March 12, US stock markets saw their biggest single day losses since Black Monday in 1987 and three days later the Federal Reserve announced that it would be cutting its benchmark interest rate to effectively zero and restarting its Quantitative Easing program. With businesses and whole cities shut down for the foreseeable future, a full-blown financial crisis is not out of the question and many analysts now see a recession later this year as an inevitability.
As was the case during the last major financial crisis 12 years ago, the Trump administration appears to be considering and readying a wide range of government interventions to prop up collapsing markets and failing industries. For instance, with eerie echoes of George W. Bush’s failed 2008 economic stimulus package (which included a tax rebate), President Trump initially suggested an stimulus package that includes a payroll tax break. Subsequently, an economic relief bill was negotiated between the Congress and the White House that includes unemployment insurance and virus testing, among other measures. Direct public bailouts for airlines, oil companies, banks, and other corporations hardest hit by COVID-19 appear to be all but certain if economic conditions continue to deteriorate. Already, many observers are expecting the administration to move quickly to bail out heavily indebted shale companies imperiled by the drop in oil prices.
Despite more than 10 years of reflection and analysis of the 2008 financial crisis, it appears that policymakers on both sides of the aisle have learned very little and are reaching for the same old playbook of corporate bailouts, messy backroom dealings, and asset price inflation. For instance, during a Democratic presidential primary debate on Sunday night, Joe Biden (who was as Senator during the 2008 crisis and Vice President in its immediate aftermath), stated that the 2008 bailout had been a success because the economy had been “saved” and the banks paid back the bailout funds with interest.
However, simply bailing out failing industries with no strings attached and restoring the status quo of an increasingly financialized form of crony corporate capitalism (where profits are privatized but risks socialized) isn’t the only option. During a time of crisis, government interventions backed with public funds could, and should, be used to assert more democratic control over economic decision-making and reshape economic approaches and institutions to respond to pressing public needs. As Dante Dallavalle and Christian Parenti recently put it, “the real economy needs help in the form of popular debt forgiveness, green public works, free higher education, and significant socialization of health care.”
In this case, any government interventions should be predicated upon making the urgently required transition to a post-fossil fuel economy and society. Rescued or subsidized institutions (especially oil companies, airlines, and the banks that finance them) should be put under public control as part of an emergency climate transition plan. Once in public control, these institutions should be wound down or converted in alignment with a green industrial strategy that breaks free from the extractive business model that continues to fuel climate catastrophe and keep the American economy hostage.
The lessons of 2008
When the financial system collapsed at the end of the 2000s, policymakers responded with an escalating series of public interventions. Between September 2007 and January 2008, the Fed slashed its federal funds rate five times (ultimately the rate reached near zero percent by the end of 2008). When this failed to arrest economic concerns, President Bush signed into law a stimulus package containing a tax rebate and the Federal Reserve began making more aggressive interventions into the financial markets (including purchasing toxic debt and bailing out the investment bank Bear Stearns). This was then followed with even more direct action including, ultimately, the nationalization and quasi-nationalization of several companies (including Fannie Mae, Freddie Mac, AIG, and General Motors), bailouts of hundreds of banks through the TARP program, and the injection of trillions of dollars of new money into financial markets through Quantitative Easing.
Despite the extensive nature of the government’s interventions, and the enormous public cost associated with them, very little was changed with regards to the structure and purpose of the country’s economic system. In fact, if anything, the episode further entrenched financialization, corporate power, and fossil-fuel dependence. For instance, many of the too-big-to-fail banks are now even bigger, and have, since 2016 (the year of the Paris climate agreement), poured well over US$500 billion into fossil fuel projects. Moreover, economic inequality has risen to levels not seen since the Gilded Age, the racial wealth gap is getting worse, and greenhouse gas emissions remain unacceptably high.
In 2008 and 2009, we missed a golden opportunity to reshape and restructure our economic system. Instead of supporting homeowners and working people who saw their jobs and life savings evaporate, the government bailed out the financial sector and their wealthy investors. Instead of using strong regulations to re-shape the financial sector for a generation (as President Roosevelt did with Glass-Steagall, which separated commercial and investment banking, and other legislation after the 1929 crash), the government passed a relatively weak financial reform law (Dodd-Frank) that made few, if any, structural changes to the sector. And instead of using public ownership of, and influence with, financial institutions to catalyze an energy transition, the government quickly turned control back over to the private sector and allowed them to get bigger and continue their risky, extractive, and speculative behavior.
We cannot afford to make the same mistakes again. With some of the key institutions responsible for the climate crisis struggling to keep their business afloat, now is the time to act decisively. From fires in California to flooding in the Midwest to COVID-19 itself, we are already starting to get a preview of how destabilizing and damaging climate change will be. What is more, as central banks across the world are becoming increasingly aware, the stranded assets of fossil fuel companies (those reserves that simply cannot be exploited if the world is to avoid catastrophic levels of warming) pose a massive financial risk to the world economy.
During this, or any future, economic crisis, public support and funding to stricken industries must be conditioned on public ownership and control within the overall perspective of a Green New Deal and a just transition for workers and communities affected by the required shifts to renewable energy and less carbon intensive modes of transportation and production. This means not simply injecting public money into banks, oil and gas companies, and airlines in order to stabilize and resurrect their existing business so they can continue financing, extracting, and burning fossil fuels at a pace that will blow our chances of keeping temperature increases below 2 degrees Celsius by 2036. Instead, government interventions should ensure that such businesses are resolved or transitioned in an orderly fashion based on the imperative of rapidly reducing greenhouse gas emissions and resource intensity, along with mitigating the impacts on frontline groups, displaced workers, and disenfranchised communities.
Equally important, once public control has been extended over these companies and sectors, and corporate power displaced, we should ensure that those most impacted are at the forefront of the decision-making processes around transition and conversion strategies. This approach centers the knowledge and experience of workers and local communities and is the mirror opposite of the last-minute layoffs, facility closures, and evisceration of pension and healthcare obligations that occur when the private sector decides to restructure. After all, to overcome the climate crisis we need to transition as fast and as equitably as possible, and that means leaving no worker or community behind.
For decades there has been intense discussion and speculation about what the tipping points would be that trigger the transformative changes in our environmental, economic, and social systems to ensure the continued flourishing of human civilization in the long term. Perhaps one of those moments is unfolding before our eyes as COVID-19 threatens economic stability across the globe. Confronted consciously and strategically, this crisis could become an opportunity to break out from our carbon-dependent economy and create the pillars of an economic system focused on a vision of long-term sustainability and shared prosperity for generations to come.
California is a climate leader. But here’s why it needs to move even faster
By SAMMY ROTHSTAFF WRITER MARCH 18, 202010:51 AM
California is aiming to slash planet-warming emissions faster than ever over the next decade — and critics say state officials aren’t acting with nearly enough urgency.
The Golden State reached its 2020 climate change goal four years early, bringing economy-wide emissions back down to 1990 levels without most Californians noticing that anything was different. But the state’s next target, a 40% reduction in climate pollution by 2030, will be a much bigger lift.
A recent report from the research firm Energy Innovation found that the state must cut emissions nearly twice as quickly over the coming decade as it did during the last one, and that current policies won’t get the job done. The think tank Next 10 reached a similar conclusion, finding that the state is on track to meet its 2030 target three decades late.
Despite those findings, the California Public Utilities Commission is considering a proposal to cut power-sector emissions by just 25% during the 2020s, a slower pace than during the previous decade. Commission staff also studied a plan that would aim to cut climate pollution in half, before recommending the less aggressive target.
Climate advocates are alarmed, saying the regulatory agency is poised to let the transition to cleaner energy sources keep chugging along at an unacceptably slow pace. Commission staff say their preferred plan will already be plenty difficult, requiring clean energy infrastructure to replace fossil fuels at an unprecedented speed and scale.
The debate reflects a growing tension between the physical reality of the climate crisis and the difficulty of moving fast enough to meet the challenge — even in California, a leader in the climate change fight.
In the meantime, wildfires are worsening, sea levels are rising and heat waves are getting more extreme.
“We need to get this right. We need to set ourselves on the right path,” said Deborah Behles, an attorney representing the California Environmental Justice Alliance.
The 2020s could be a make-or-break decade. Scientists have found that global emissions must fall to zero, or close to it, by 2050 for humanity to have a chance of avoiding the worst effects of a warming planet. Hitting that midcentury target will be much harder if pollution levels don’t decline steeply over the next 10 years.
What happens in California could have an outsized effect globally. State policymakers are trying to show the world that planet-warming emissions can be slashed quickly and cheaply, in hopes of motivating other states and countries to follow its lead.
“If California faltered, global efforts to reduce [greenhouse gas] emissions would be dealt a major setback,” Energy Innovation wrote in its January report.
The San Francisco-based research firm used its Energy Policy Simulator, an open-source modeling tool, to determine whether California is on track to meet its 2030 target. Researchers concluded the state would fall short under current policies, reducing economy-wide emissions from 424 million metric tons in 2017 to around 284 million in 2030.
That would be a huge drop, but still about 25 million metric tons short of the 40% reduction called for by state law.
“Even under very optimistic assumptions about how effective the climate strategies are supposed to be, we see a high likelihood that they don’t put us on track to hitting the 2030 target,” said Chris Busch, Energy Innovation’s research director.
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Energy Innovation’s modeling suggested six policies that Busch said would provide a relatively straightforward, low-cost path to bridging the gap. One of those policies is ratcheting up California’s renewable energy supply more quickly — the issue currently being debated at the Public Utilities Commission.
Commission staff are recommending that power-plant emissions fall from 62 million metric tons in 2017 to 46 million in 2030. That would be roughly in line with electricity providers getting 60% of their power from renewable sources such as solar and wind by the end of the decade, as required by state law.
But Energy Innovation is urging more ambition from the power sector, where emissions have fallen more consistently than they have in other parts of the economy. Ever-cheaper solar panels, wind turbines and lithium-ion batteries have had far more success displacing fossil fuels on the power grid than electric vehicles have had on the highway, for instance.
“Electricity is something we know how to do,” Busch said.
Lower power-plant emissions might also drive down emissions from other economic sectors.
That’s because state officials are counting on millions of Californians replacing their gasoline and diesel cars and trucks with electric vehicles, and swapping out natural gas-burning furnaces and stoves for electric heat pumps and induction cooktops.
The cleaner the electricity that supplies those new cars and appliances, the less they’ll pollute the climate.
Energy Innovation recommended a 2030 emissions target of 38 million metric tons for the power sector, which corresponds to a renewable energy mix of about 67%. Environmental advocacy groups and clean energy companies have pushed the Public Utilities Commission to adopt an even more ambitious goal of 30 million metric tons.
Ed Randolph, director of the commission’s energy division, defended the less aggressive target selected by agency staff.
Requiring more than the 60% renewable energy mandated by state law, Randolph said, could cause electricity prices to rise more than necessary. Energy affordability is a growing concern for lawmakers, in part because utility investments to reduce the risk of wildfires are expected to send California’s already high electricity rates even higher.
“We balanced the factors that we’ve got to balance, which is: How do we get to our 2030 targets while maintaining reliability at the least possible cost,” Randolph said.
Randolph also said reducing power-sector emissions to 46 million metric tons will be more than challenging enough, requiring the construction of 23 gigawatts of new solar farms, wind turbines and battery storage over the next decade. That’s roughly the size of California’s entire renewable energy fleet today.
Reducing greenhouse gas pollution to 30 million metric tons, the commission found, would require roughly twice as much new solar power and battery storage, and three times as much new wind power, as the less-aggressive scenario.
“No matter what you pick, you’re on a very dramatic decline in emissions,” Randolph said.
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The five-member Public Utilities Commission is scheduled to vote on the staff proposal March 26. A coalition of environmental advocacy groups sent a letter to Gov. Gavin Newsom on Wednesday urging him to intervene at the commission.
“Your leadership is critical; even with the many other high profile energy matters on your desk, California’s role as a clean energy leader will be tarnished if we do not get this right,” the groups wrote.
Mark Specht, an energy analyst at the nonprofit Union of Concerned Scientists, said in an interview that deeper emissions reductions wouldn’t be enormously more expensive. By the commission’s own estimation, the goal preferred by environmentalists would cost around $2.4 billion more per year by 2030 than the goal selected by commission staff — a tiny fraction of the tens of billions of dollars Californians spend on electricity every year.
The middle-ground emissions target recommended by Energy Innovation would cost about $1.1 billion more per year by 2030 than the commission staff recommendation.
“The investments that would need to be made to get to lower emissions targets are not massive in the grand scale of things,” Specht said.
Randolph emphasized that the Public Utilities Commission will revisit the end-of-decade emissions goal in two years, and can move the number downward then if needed.
But Danielle Osborn Mills, California director of the American Wind Energy Assn., said there’s upside to setting a stronger target now rather than later.
The kinds of infrastructure the state might need to cut emissions more dramatically — such as offshore wind farms or long-distance power lines — can take many years to permit, finance and build. The longer officials wait to signal to energy companies that those projects are needed, the less likely they’ll be ready by 2030.
“What I worry about is changing the target after a few years,” Osborn Mills said.
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Building the clean energy infrastructure needed to reduce emissions to 30 million metric tons would be “very ambitious,” said Wade Schauer, a Sacramento-based researcher at the energy consulting firm Wood Mackenzie.
Schauer said it’s “extremely difficult” to build new wind turbines in California because of what he described as NIMBY-style opposition. He also noted that San Bernardino County has severely restricted new solar development, and that concerns over the environmental impacts of sprawling solar farms are common.
“The transmission lines to connect this much solar will face public opposition as well,” Schauer said in an email.
The California Air Resources Board, the state’s top climate regulator, says cutting power-plant emissions to 46 million metric tons by 2030 should be sufficient.
But Rajinder Sahota, chief of the Air Resources Board’s industrial strategies division, noted that the agency will revisit its statewide climate plan in 2022, and could set a lower target for power plants then. It depends on how things go in other sectors, particularly transportation, which is responsible for 40% of California’s greenhouse gas emissions.
On the transportation front, Energy Innovation advised state officials to require that 80% of new cars and light trucks sold in 2030 be zero-emission vehicles, up from today’s mandate of 15% by 2025. The research firm suggested several other policy changes, including reforms to cap and trade, a controversial market-based program for reducing emissions.
Sahota said the Air Resources Board’s modeling shows that existing policies are capable of reducing greenhouse gas pollution 40% by decade’s end — at least in theory.
She also acknowledged that California needs to cut emissions twice as fast in the 2020s as it did in the 2010s. And that’s a tall order.
“We all agree that we need to do more, and do it faster,” Sahota said.
Sammy Roth covers energy for the Los Angeles Times. He previously reported for the Desert Sun in Palm Springs. He grew up in Westwood and would very much like to see the Dodgers win the World Series.
