Market Stress Signals Need for Climate-Smart Finance

Wisconsin has lost over 1,600 small family-owned dairy farms since Donald Trump became President. His Secretary of Agriculture says the family farm may disappear from the American landscape. This is happening, because economic trends, tax breaks targeted at industrial producers, and other Trump policies, are undermining the everyday food economy in the United States. Food and farming are becoming less affordable for ordinary people.

This trend is indicative of an economy in trouble.

In the years 2005-2006, it was becoming evident the financial sector was in trouble, in a very particular way. Major banks had bound up too much of their overall value in tenuous claims of future wealth, buying into the idea that “subprime” mortgages with a fixed maximum value could also be AAA-rated securities with unlimited growth potential.

That process was effectively fictionalizing balance sheets, creating a mathematical hole that would need to be filled in. Quantitative easing, the Troubled Assets Relief Program, and tens of billions of dollars per month in no-cost lending to major banks, were all efforts to fill in that hole. While the Obama years saw real economic expansion, the two major structural threats were not fully eliminated:

  1. The gap between the real foundations of future wealth and what banks claim to own is still too big for any private institution to leapfrog or ignore.
  2. The gap between new income going to the already wealthy and new income going to everyone else is widening.

The policies and regulatory interventions from Donald Trump’s administration have made both of these structural problems worse. It has been argued this is a war on the middle class, and it may be, but the truth is the current standard practice in the US financial sector does not provide solid ground for measurable expansion of real wealth, across the whole economy.

As the middle class loses ground to the wealthy and super-wealthy, in shares of new income, the Main Street economy undergoes serious stress. Small businesses, dependent on income from small-volume everyday retail consumers, find it harder to stay in business. People pull back and focus on saving, to keep their own household afloat.

Stress in the agriculture sector parallels stress in manufacturing, small-business start-ups, and small business lending. Policies that have been touted as “pro-business”, “de-regulation” or “tax reform” have tended to serve as band-aids to deliver temporary infusions of money to the largest and most powerful financial institutions and industrial companies, leaving the Main Street economy without the rescue and resilience it needs.

We are seeing the limits of the extractive economy. At some point, without a way to earn significant new income from engaged, loyal, and well-resourced consumers, industry falters. Size, easy credit, and tax relief, are not enough to force new revenues into being. They have to be earned from somewhere, and that means people have to have new income too.

Warren Buffett has expressed concern at the hype surrounding recent so-called “unicorn” investments, characterized by brazen claims of potential future value, even without evidence of profitability. (He famously prefers to invest in companies that provide quality products to loyal consumers, with coherent business plans, and reliable real-world math on their books.)

That clash of cultures between the Buffett-minded and the brazen is really a question about where macro-scale finance will find new value. The extraction-driven economy is faltering. The big agriculture industry is undermining value across the agriculture sector. Too much free financial help given to industry is robbing ordinary people and SMEs of much-needed credit, capital, business efficiency and income.

2018 saw worrying contraction across 10 major asset classes. Only uninvested cash saw a measurable increase in value—a sign investors are pulling back from mounting structural and sectoral risk. Investors at all scales are searching for good bets and openly asking policy-makers to help create those opportunities.

It may be that large industrial-scale institutions need to tighten their belts, and public authorities need to favor smaller and medium-scale enterprise and finance. The farming sector needs a shift to smaller-scale, distributed production, sustainable practices, and localized financial flows. We need new financial instruments—both from the public and private sectors—designed to facilitate this shift.

It is bad math to view major new climate-related investments as “extra” or “unplanned” cost. The trillions of dollars in climate-related investments advertised as a Green New Deal or as green infrastructure upgrades are necessary investments that must happen anyway. Aligning those investments with climate goals adds greater efficiency, value-generation potential, and resilience, than business as usual.

Incumbent industries will always make the argument that new investment should flow to their preferred business model. There comes a time, however, when their model of wealth extraction is no longer the best case for generalized future value creation. The main sign we are at that point, if nothing else registers, is the sheer volume of free help given to incumbents in recent years and the fact that it is not working.

We need systems that identify embedded climate and environment-related opportunity, which will constitute the biggest expansion of measured value in world history.