Floods, fires and financial risk: What climate change could do to the financial system
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Over the past two years, extreme weather events have devastated communities across the U.S. Western states have been torched with wildfires and farmlands depleted by floods in the Midwest.
It’s natural disasters like these that have one Washington regulator concerned that a changing climate carries severe market risk.
Rostin Behnam, a Democratic commissioner on the Commodities Futures Trading Commission, the government agency that regulates the futures and options markets — which set prices for everything from agriculture to manufacturing — is warning that the financial risks of extreme weather can ripple through the market system.
He recently established a subcommittee within the CFTC to examine climate change-related financial risk. Behnam recently spoke with Marketplace host Kai Ryssdal; the following is an edited transcript of their conversation.
Ryssdal: You compare the conceivable damage from climate change to the markets, to what happened in 2008 in the financial crisis. Why?
Behnam: I think one of the most important lessons from 2008 was contagion and interconnectedness. And by that I mean we had a housing bubble that built up and popped in 2008, and then we had a lot of outside factors contributing to what became a global financial crisis. And one of the big lessons was contagion: how an isolated incident crossed all elements of the financial system. As we’re seeing more extreme wildfires out west, or floods in the Midwest, or hurricanes in the southeast and by the Gulf, we have to be thinking about what contagion might occur down the road.
Ryssdal: Help me understand how climate disruption would affect corn futures or pork bellies, whatever, and how that’s going to become a systemic problem.
Behnam: Thinking about the flooding in the Midwest and the tornadoes that we experienced this past spring, you have farmland, homes, businesses that are still literally underwater and recovering from the floods. Tied to all of these are personal mortgages, commercial mortgage, or farm loans for purchasing truck equipment, or seed, or any number of farmer needs. When this land is not able to be used there’s going to be an asset impairment which could affect the lender. In that case, you could have a regional bank or a national bank that has a series of loans that are not being paid back. And if they’re not being paid back, I think it’s important that regulators start to think about what risk and what risk exposure those financial institutions have.
Ryssdal: You can, by virtue of your position, get other high level regulators on the phone, you can get CEOs of Wall Street banks on the phone, you can talk to people running the big companies in the various fields that you regulate. What do you hear from them? Are they receptive and understanding, or do they think maybe you’re not quite on point?
Behnam: I actually think there’s been quite a receptive ear. I think when folks really realize what’s going on in the environment with respect to these climate events, they understand the risk to their businesses. And I think there absolutely is a space for a sort of public-private partnership to occur where policymakers and private institutions can start thinking about a path forward that works for everyone, works for business and the economy, but also lays out a smart, thoughtful, measured approach to policy and the things that folks need to be doing on an individual basis to address and think about the risks that we face ahead.
Ryssdal: It has to be pointed out here that you are a Democratic member of the Commodities Futures Trading Commission. President Trump appointed you because he had to appoint a Democrat by statute. Yet, the president and many of his advisers and many Republican members of Congress pooh-pooh climate change, is not too harsh a way to put that. Are you spitting into the wind, here?
Behnam: I may be, but quite frankly I’m going to focus on what I can do as a commissioner. I don’t think this is a partisan issue. I think it’s an issue that all Americans could be thinking about and care about deeply. It affects our personal lives and affects our business relationships, and it affects the economy at a great level. And I think we can come out with some really solid recommendations that hopefully can be used as this data and science sort of catches up with us in the years and decades to come.
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