Saturday, September 17, 2011

“That used to be us” misses completely that us used to be risk-takers.

Thomas L. Friedman and Michael Mandelbaum recently authored the book “That used to be us: How America Fell Behind in the World It Invented and How We Can Come Back” 

From the comments I have heard, I have not read the book yet, the authors, like most other thinkers, fail to understand the most fundamental cause the US, as well as the Western World, is falling behind, namely a growing risk-adverseness, and which is represented most clearly in the current bank regulations. 

Even though banks already take consideration of the risks of default they perceive when they set their risk-adjusted interest rates, and amounts the lend, the regulators ordered the banks to have higher capital when lending to those perceived as “risky” than when lending to those perceived as “not-risky”. 

Suffices to say, that translates into a subsidy to bank lending to those already favored by the market, like “good” sovereigns and the triple-A rated, and into a tax on bank lending to those already disfavored by the market, like the small businesses and entrepreneurs. 

Those regulations are inexplicable since whatever is perceived as “risky” does not carry in it the potential to cause a systemic crisis, only what is perceived as “not risky” can. 

Those regulations have been designed without a single word being stated about what the purpose of our banks should be, and much less with respect to how much risk they should take to fulfill their vital capital allocation role. 

One of the reasons the truth has not come out, is because the world has been caught into a linguistic trap. Most experts attribute the crisis to excessive risk-taking, but which considering that all the significant losses originated in what was ex-ante perceived as “not-risky”, must clearly be wrong. 

The US, and the Western Word, became what they are because of risk-taking, and without it the US, and the Western World, will stall and fall. 

With respect to this odious wall of regulatory discrimination against risk-taking, that needs to disappear if we are going to have a chance to Come Back, we can only shout out: “Mr. Regulator. Tear down that wall” 

PS. Here´s a short video that explains the current regulatory madness it in an apolitical red and blue!