The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security. 8 So why isn’t more being done to address it? A classic problem in environmental economics is the tragedy of the commons. The solution to it lies in property rights and supply management. 2  For instance, the IPCC has stated “Warming of the climate system is unequivocal, and since the 1950s, many of the observed changes are unprecedented over decades to millennia”. See IPCC - Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (2014). 3  See www.metoffice.gov.uk/news/releases/archive/2015/Record-UK-temps-2014. 4  See IPCC (2014). 5  See IPCC (2014) which notes that the effects of anthropogenic greenhouse gas emissions, together with other anthropogenic drivers are “extremely likely to have been the dominant cause of observed [global] warming since the mid-20th Century”. 6  See, for example, Otto et al (2015). 7  See Munich Re, NatCatSERVICE (2015). 8  The report “Risky Business – the economic risks of climate change in the United States” (2014) suggests that in the USA $ worth of coastal property could be below sea level by 2100. Research by Lloyd’s identifies climate change as an important supply-side issue for food security. See www.lloyds.com/~/media/lloyds/reports/emerging%20risk%20reports/food%20report.pdf. This is consistent with the views expressed by Lloyd’s market participants surveyed by the PRA for its report to Defra.
How to deal with systemic risk – the traditional approach While these arguments are not profoundly new, the policy consensus before the current crisis was dominated by a reluctance to address systemic risk issues directly. This consensus was based on two key arguments. First, it was largely assumed that securing the solidity of individual financial institutions would also grant system-wide stability and thus that regulation at the level of individual firms – micro-regulation – would suffice. The crisis has shown that this view is clearly questionable. As just described, risk in a financial system can arise quasi endogenously, even if individual financial institutions appear to be robust. 3  For more details, namely on ways to address TBTF issues, cf. Danthine (2011). 4  Bank of England (2011). 2  BIS central bankers’ speeches  The second critical element of the pre-crisis policy consensus is known as the “Greenspan Doctrine”. This states that pricking an asset price bubble is in general more costly than cleaning up after the bubble has burst. The foundation of this doctrine is that it is simply too difficult to identify ex ante when a bubble is forming. Specifically, it is inherently difficult to disentangle situations where a credit or asset-price boom is justified by fundamentals from those where it is based on misplaced expectations and is thus a threat to financial stability.