Friday, November 11, 2011

What Niall Ferguson left out

Niall Ferguson in “Civilization: The West and the Rest” argues that the west's ascendancy, is based on six "killer apps": competition, science, democracy, medicine, consumerism and the work ethic. Those are indeed ingredients, but unfortunately he misses the willingness to take risks... the oxygen of development. 

Perhaps he does not remember psalms calling out “God make us daring”… and that is why he fails to understand how the bank regulators, with their stupid nanny-scared capital requirements, based on doubling up the importance of ex-ante perceived credit risks, are now slowly but surely taking the Western World down. 

Ps. Here’s a link to… Who did the eurozone in? and as you will read, it really was the butlers… and here´s also a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue!

And here a comment added December 28, 2015 

In 1988, Basel I halted the ascendancy of the Western civilization and, in 2004, Basel II provoked its fast descent.

In the preface of the book Ferguson writes:

"It was about the first decade of the twenty-first century, just as it was drawing to a close, that I really got the point: that we are living through the end of 500 years of Western ascendancy”

Not a bad estimate. The ascendance stopped in 1988, with the Basel Accord, Basel I, when regulators introduced risk weighted capital requirements for banks and decided that the risk weight for sovereigns was zero percent while for the private sector 100 percent; and then a truly fast descent began when in 2004, with Basel II, they split up the private sector with risk weights  that ranged from 20 to 150 percent, depended on the credit ratings.

That allowed banks to leverage more with “safe” assets than with risky assets; which meant they could earn higher risk-adjusted returns on safe assets than on risky; which meant they built up excessive exposures to what is perceived or deemed to be safe, and ignored what is perceived as risky, like lending to SMEs and entrepreneurs.

And anyone who understands that risk taking is required to keep the economy moving forward so as not to stall and fall, can understand the sad results of it all.

And that it affects primarily the western civilization, is explained by the fact that it possesses the largest amount of “safe” assets than banks can leverage up on, while holding on to the illusion that all is fine and dandy.