More Climate-Change Consequences

“The associated risks and effects of climate change are relevant considerations for the Federal Reserve.”

As the current occupant of the White House has made clear — and who knows better than he — earth’s changing climate is a hoax perpetrated by the Chinese… or scientists trying to stay on the research-grant dole… or liberal politicians wanting to tax us some more.

Whether climate change is a hoax or not, banks are not taking chances.

You may recall the financial meltdown of ’08 (W. Bush) or the Savings-and-Loan bailout of 1989 (Reagan). The coming financial crisis may not be the result of anything underhanded or nefarious. That doesn’t mean taxpayers won’t pick up the tab, though.

As the Pentagon is making plans for conflicts from populations displaced by crop failures or lack of water resulting from a warming planet (regardless of what the Commander in Chief says), so is the Federal Reserve warning that the impact will also be felt in the financial markets. The Fed considers “severe weather events” as a factor in its role as overseer of the nation’s finances.

Climate change is already affecting real estate. Properties likely to be under water when sea level rises a foot currently are selling for fifteen percent less than comparable properties not so situated. Lower property values in turn will erode the local tax base. Researchers say their findings show “a potential threat to the stability of financial institutions.” They warn that the threat will grow as global warming leads to more frequent and more severe disasters, More loans will go into default as homeowners cannot or will not make mortgage payments.

Banks, in turn, are handing over riskier mortgages in coastal areas, to the federal government. Statistics show that mortgages issued after a hurricane have a greater chance of default. In those areas, lenders react by selling a greater portion of mortgages to Fannie Mae and Freddie Mac, government-sponsored enterprises whose debts are backed by taxpayers. After the huge losses sustained post-2008, the federal government started backing their debts.

Regulations do not allow them to factor the added risk from natural disasters into their pricing. Lenders can offload mortgages in susceptible areas without financial penalty. They can make loans, then sell their increased risk. Buying mortgages for at-risk homes, without charging a premium reflecting that risk, the federal government effectively encourages home construction and purchases in vulnerable areas. Losses will be covered by taxpayers.

The major lenders, of course, deny any such strategy in their lending practices.

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