Silicon Valley Bank's collapse not a one off

At the beginning of every banking crisis, the pundits say that it has been contained, that there will be no more failures. But this is never true. The stresses and imbalances that caused that bank to fail are being felt by most banks in the system. As investors and the public start to fear for their deposits and their shares, a crisis of confidence is *added* to the underlying problems. Banks become cautious about lending to each other --- and the interbank market is critical --- and cautious about lending to companies and individuals. Credit starts to contract. Every company, every individual, every country who/which is under stress find the capital markets closed to it, or finds borrowing prohibitively expensive.  And the drying up of credit causes more failures, more bankruptcies, more losses of bank capital, in a doom loop broken only by interest rate cuts and floods of "printed" money from central banks.

This article is from The Guardian

It has been a year since the Federal Reserve started to raise interest rates and banks are starting to fall over in the US. Anybody who thinks Silicon Valley Bank was a one-off is deluding themselves. Financial crises have occurred on average once a decade over the past half century so the one unfolding now is if anything overdue.

The reckoning has been delayed because since 2008 banks have been operating in a world of ultra-low interest rates and periodic injections of electronic cash from central banks. Originally seen as a temporary expedient in the highly stressed conditions after the collapse of Lehman Brothers, cheap and plentiful money became a constant prop for the markets.

Over the years, there was debate about what would happen were central banks to raise interest rates and to suck the money they had created out of the financial system. Now we know.

The action deemed necessary to rein in inflation has deflated housing bubbles, sent share prices plunging and left banks nursing big losses on their holdings of government bonds.

The Bank of England was quicker out of the blocks than the Fed. Threadneedle Street began raising rates in December 2021 and has now raised them 10 times in a row. The European Central Bank waited until July last year before making the decision to increase borrowing costs for the first time in a decade, and went ahead with an increase last week despite news that the banking malaise had spread across the Atlantic to Credit Suisse.

Ignore the fact that the US, UK and eurozone economies have all held up better than was expected in the immediate aftermath of the energy price shock caused by Russia’s invasion of Ukraine. It takes time for changes in monetary policy – the decisions central banks make on interest rates and bond-buying or selling – to have an impact.

As Dhaval Joshi of BCA Research pointed out last week there are three classic signs that a recession is coming in the US: a downturn in the housing market, bank failures, and rising unemployment. Housebuilding is down by 20% in the past year, which means the first has already happened. The problems at SVB and other US regional banks suggest the second condition is now being met. The third harbinger of a US recession is a rise in the US unemployment rate of 0.5 percentage points. So far it is up by 0.2 points.

“Banks tend to fail just before recessions begin,” Joshi says. “Ahead of the recession that began in December 2007, no US bank failed in 2005 or 2006. The first three bank failures happened in February, September, and October of 2007, just before the recession onset.


“Fast forward, and no US bank failed in 2021 or 2022. The first bank failures of this cycle – Silicon Valley Bank and Signature Bank – have just happened. If history is any guide, the start of bank failures presages an economic recession that is more imminent than many people anticipate.”

The Fed and the Bank of England meet to make interest-rate decisions this week and the financial markets think that in both cases the choice is between no change and a 0.25 point increase. Frankly, it should be a no-brainer. Given the lags involved, even a cut in interest rates would be too late to prevent output from falling in the coming months, but against a backdrop of falling inflation, plunging global commodity prices and evidence of mounting financial distress any further tightening of policy would be foolish.

Central banks seem to think there is no problem in achieving price stability while maintaining financial stability. Good luck with that. The Fed, the ECB and the Bank of England have tightened policy aggressively and things are starting to break.

It wasn’t always thus. There was a marked absence of banking crises in the 25 [actually nearer 28] years after the second world war, a period when banks were much more tightly regulated than they are today, and played a more peripheral economic role. Reforms put in place after the Great Depression, including capital controls and the US separation of retail and investment banking were designed to ensure governments could pursue their economic objectives without fear that they would be blown off course by runs on their currencies or turmoil in the markets.

Over the past 50 years, the financial sector has been liberalised and grown much bigger. Regulation and supervision has been tightened since the global financial crisis but with only limited effect. SVB was supposed to be a small bank that could operate with less stringent regulation than a bank deemed to be “systemically important”. Yet when it came to the crunch, all the depositors of SVB were protected, making the distinction between a systemic and non-systemic bank somewhat academic. The financial system as a whole is both inherently fragile and too big to fail.

There is not the remotest possibility of a return to the curbs on banks that were in place during the 1950s and 1960s. Desirable though that would be, there is no political appetite for taking on an immensely powerful financial sector. But that, as has become evident in the past 15 years, has its costs.

One is that economies dominated by the financial sector only really deliver for the better off: the owners of property and shares. A second is that the financial markets have become hooked on the stimulus that has been provided by central banks. A third is that the crises endemic to the system become much more likely when – as now – that stimulus is removed. Which means that eventually more stimulus will be provided, the markets will boom, and the seeds of the next crash will be sown.

Clicking on the chart produces a clearer image

 

De-carbonisation via carbon capture is a mirage

From The Conversation.

Collectively we three authors of this article must have spent more than 80 years thinking about climate change. Why has it taken us so long to speak out about the obvious dangers of the concept of net zero? In our defence, the premise of net zero is deceptively simple – and we admit that it deceived us.

The threats of climate change are the direct result of there being too much carbon dioxide in the atmosphere. So it follows that we must stop emitting more and even remove some of it. This idea is central to the world’s current plan to avoid catastrophe. In fact, there are many suggestions as to how to actually do this, from mass tree planting, to high tech direct air capture devices that suck out carbon dioxide from the air.

The current consensus is that if we deploy these and other so-called “carbon dioxide removal” techniques at the same time as reducing our burning of fossil fuels, we can more rapidly halt global warming. Hopefully around the middle of this century we will achieve “net zero”. This is the point at which any residual emissions of greenhouse gases are balanced by technologies removing them from the atmosphere.

This is a great idea, in principle. Unfortunately, in practice it helps perpetuate a belief in technological salvation and diminishes the sense of urgency surrounding the need to curb emissions now.

We have arrived at the painful realisation that the idea of net zero has licensed a recklessly cavalier “burn now, pay later” approach which has seen carbon emissions continue to soar. It has also hastened the destruction of the natural world by increasing deforestation today, and greatly increases the risk of further devastation in the future.

 

To understand how this has happened, how humanity has gambled its civilisation on no more than promises of future solutions, we must return to the late 1980s, when climate change broke out onto the international stage.

On June 22 1988, James Hansen was the administrator of Nasa’s Goddard Institute for Space Studies, a prestigious appointment but someone largely unknown outside of academia.

By the afternoon of the 23rd he was well on the way to becoming the world’s most famous climate scientist. This was as a direct result of his testimony to the US congress, when he forensically presented the evidence that the Earth’s climate was warming and that humans were the primary cause: “The greenhouse effect has been detected, and it is changing our climate now.”

If we had acted on Hansen’s testimony at the time, we would have been able to decarbonise our societies at a rate of around 2% a year in order to give us about a two-in-three chance of limiting warming to no more than 1.5°C. It would have been a huge challenge, but the main task at that time would have been to simply stop the accelerating use of fossil fuels while fairly sharing out future emissions.

Four years later, there were glimmers of hope that this would be possible. During the 1992 Earth Summit in Rio, all nations agreed to stabilise concentrations of greenhouse gases to ensure that they did not produce dangerous interference with the climate. The 1997 Kyoto Summit attempted to start to put that goal into practice. But as the years passed, the initial task of keeping us safe became increasingly harder given the continual increase in fossil fuel use.

It was around that time that the first computer models linking greenhouse gas emissions to impacts on different sectors of the economy were developed. These hybrid climate-economic models are known as Integrated Assessment Models. They allowed modellers to link economic activity to the climate by, for example, exploring how changes in investments and technology could lead to changes in greenhouse gas emissions.

They seemed like a miracle: you could try out policies on a computer screen before implementing them, saving humanity costly experimentation. They rapidly emerged to become key guidance for climate policy. A primacy they maintain to this day.

Unfortunately, they also removed the need for deep critical thinking. Such models represent society as a web of idealised, emotionless buyers and sellers and thus ignore complex social and political realities, or even the impacts of climate change itself. Their implicit promise is that market-based approaches will always work. This meant that discussions about policies were limited to those most convenient to politicians: incremental changes to legislation and taxes.

Around the time they were first developed, efforts were being made to secure US action on the climate by allowing it to count carbon sinks of the country’s forests. The US argued that if it managed its forests well, it would be able to store a large amount of carbon in trees and soil which should be subtracted from its obligations to limit the burning of coal, oil and gas. In the end, the US largely got its way. Ironically, the concessions were all in vain, since the US senate never ratified the agreement.


Postulating a future with more trees could in effect offset the burning of coal, oil and gas now. As models could easily churn out numbers that saw atmospheric carbon dioxide go as low as one wanted, ever more sophisticated scenarios could be explored which reduced the perceived urgency to reduce fossil fuel use. By including carbon sinks in climate-economic models, a Pandora’s box had been opened.

It’s here we find the genesis of today’s net zero policies.

That said, most attention in the mid-1990s was focused on increasing energy efficiency and energy switching (such as the UK’s move from coal to gas) and the potential of nuclear energy to deliver large amounts of carbon-free electricity. The hope was that such innovations would quickly reverse increases in fossil fuel emissions.

But by around the turn of the new millennium it was clear that such hopes were unfounded. Given their core assumption of incremental change, it was becoming more and more difficult for economic-climate models to find viable pathways to avoid dangerous climate change. In response, the models began to include more and more examples of carbon capture and storage, a technology that could remove the carbon dioxide from coal-fired power stations and then store the captured carbon deep underground indefinitely.

This had been shown to be possible in principle: compressed carbon dioxide had been separated from fossil gas and then injected underground in a number of projects since the 1970s. These Enhanced Oil Recovery schemes were designed to force gases into oil wells in order to push oil towards drilling rigs and so allow more to be recovered – oil that would later be burnt, releasing even more carbon dioxide into the atmosphere.

Carbon capture and storage offered the twist that instead of using the carbon dioxide to extract more oil, the gas would instead be left underground and removed from the atmosphere. This promised breakthrough technology would allow climate friendly coal and so the continued use of this fossil fuel. But long before the world would witness any such schemes, the hypothetical process had been included in climate-economic models. In the end, the mere prospect of carbon capture and storage gave policy makers a way out of making the much needed cuts to greenhouse gas emissions.

When the international climate change community convened in Copenhagen in 2009 it was clear that carbon capture and storage was not going to be sufficient for two reasons.

First, it still did not exist. There were no carbon capture and storage facilities in operation on any coal fired power station and no prospect the technology was going to have any impact on rising emissions from increased coal use in the foreseeable future.

The biggest barrier to implementation was essentially cost. The motivation to burn vast amounts of coal is to generate relatively cheap electricity. Retrofitting carbon scrubbers on existing power stations, building the infrastructure to pipe captured carbon, and developing suitable geological storage sites required huge sums of money. Consequently the only application of carbon capture in actual operation then – and now – is to use the trapped gas in enhanced oil recovery schemes. Beyond a single demonstrator, there has never been any capture of carbon dioxide from a coal fired power station chimney with that captured carbon then being stored underground.

Just as important, by 2009 it was becoming increasingly clear that it would not be possible to make even the gradual reductions that policy makers demanded. That was the case even if carbon capture and storage was up and running. The amount of carbon dioxide that was being pumped into the air each year meant humanity was rapidly running out of time.

 

With hopes for a solution to the climate crisis fading again, another magic bullet was required. A technology was needed not only to slow down the increasing concentrations of carbon dioxide in the atmosphere, but actually reverse it. In response, the climate-economic modelling community – already able to include plant-based carbon sinks and geological carbon storage in their models – increasingly adopted the “solution” of combining the two.

So it was that Bioenergy Carbon Capture and Storage, or BECCS, rapidly emerged as the new saviour technology. By burning “replaceable” biomass such as wood, crops, and agricultural waste instead of coal in power stations, and then capturing the carbon dioxide from the power station chimney and storing it underground, BECCS could produce electricity at the same time as removing carbon dioxide from the atmosphere. That’s because as biomass such as trees grow, they suck in carbon dioxide from the atmosphere. By planting trees and other bioenergy crops and storing carbon dioxide released when they are burnt, more carbon could be removed from the atmosphere.

With this new solution in hand the international community regrouped from repeated failures to mount another attempt at reining in our dangerous interference with the climate. The scene was set for the crucial 2015 climate conference in Paris.

As its general secretary brought the 21st United Nations conference on climate change to an end, a great roar issued from the crowd. People leaped to their feet, strangers embraced, tears welled up in eyes bloodshot from lack of sleep.

The emotions on display on December 13, 2015 were not just for the cameras. After weeks of gruelling high-level negotiations in Paris a breakthrough had finally been achieved. Against all expectations, after decades of false starts and failures, the international community had finally agreed to do what it took to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels.

The Paris Agreement was a stunning victory for those most at risk from climate change. Rich industrialised nations will be increasingly impacted as global temperatures rise. But it’s the low lying island states such as the Maldives and the Marshall Islands that are at imminent existential risk. As a later UN special report made clear, if the Paris Agreement was unable to limit global warming to 1.5°C, the number of lives lost to more intense storms, fires, heatwaves, famines and floods would significantly increase.

But dig a little deeper and you could find another emotion lurking within delegates on December 13. Doubt. We struggle to name any climate scientist who at that time thought the Paris Agreement was feasible. We have since been told by some scientists that the Paris Agreement was “of course important for climate justice but unworkable” and “a complete shock, no one thought limiting to 1.5°C was possible”. Rather than being able to limit warming to 1.5°C, a senior academic involved in the IPCC concluded we were heading beyond 3°C by the end of this century.

Instead of confront our doubts, we scientists decided to construct ever more elaborate fantasy worlds in which we would be safe. The price to pay for our cowardice: having to keep our mouths shut about the ever growing absurdity of the required planetary-scale carbon dioxide removal.

Taking centre stage was BECCS because at the time this was the only way climate-economic models could find scenarios that would be consistent with the Paris Agreement. Rather than stabilise, global emissions of carbon dioxide had increased some 60% since 1992.

Alas, BECCS, just like all the previous solutions, was too good to be true.

Across the scenarios produced by the Intergovernmental Panel on Climate Change (IPCC) with a 66% or better chance of limiting temperature increase to 1.5°C, BECCS would need to remove 12 billion tonnes of carbon dioxide each year. BECCS at this scale would require massive planting schemes for trees and bioenergy crops.

The Earth certainly needs more trees. Humanity has cut down some three trillion since we first started farming some 13,000 years ago. But rather than allow ecosystems to recover from human impacts and forests to regrow, BECCS generally refers to dedicated industrial-scale plantations regularly harvested for bioenergy rather than carbon stored away in forest trunks, roots and soils.

Currently, the two most efficient biofuels are sugarcane for bioethanol and palm oil for biodiesel – both grown in the tropics. Endless rows of such fast growing monoculture trees or other bioenergy crops harvested at frequent intervals devastate biodiversity.

It has been estimated that BECCS would demand between 0.4 and 1.2 billion hectares of land. That’s 25% to 80% of all the land currently under cultivation. How will that be achieved at the same time as feeding 8-10 billion people around the middle of the century or without destroying native vegetation and biodiversity?


Growing billions of trees would consume vast amounts of water – in some places where people are already thirsty. Increasing forest cover in higher latitudes can have an overall warming effect because replacing grassland or fields with forests means the land surface becomes darker. This darker land absorbs more energy from the Sun and so temperatures rise. Focusing on developing vast plantations in poorer tropical nations comes with real risks of people being driven off their lands.

And it is often forgotten that trees and the land in general already soak up and store away vast amounts of carbon through what is called the natural terrestrial carbon sink. Interfering with it could both disrupt the sink and lead to double accounting.

As these impacts are becoming better understood, the sense of optimism around BECCS has diminished.

Given the dawning realisation of how difficult Paris would be in the light of ever rising emissions and limited potential of BECCS, a new buzzword emerged in policy circles: the “overshoot scenario”. Temperatures would be allowed to go beyond 1.5°C in the near term, but then be brought down with a range of carbon dioxide removal by the end of the century. This means that net zero actually means carbon negative. Within a few decades, we will need to transform our civilisation from one that currently pumps out 40 billion tons of carbon dioxide into the atmosphere each year, to one that produces a net removal of tens of billions.

[The article continues, here]

There is only one plausible way to cut CO2 and methane emissions.  And that's to actually cut them.  Offsets won't work.  Negative emissions won't work.  BECCS won't work.  It's no wonder emissions continue to rise.  We are heading towards a 3° C rise, not 1.5°.  And that will be catastrophic for our civilisation, the world's people and the environment.