Sunday, July 14, 2013
Allowing banks to lend to what is perceived as “absolutely safe” holding less capital than when lending to what is perceived as “risky”, allows banks to earn a higher expected risk adjusted return on equity when lending to what is perceived as absolutely safe than when lending to what is perceived as risky.
And that of course makes banks want to lend even more than usual to The Infallible, the sovereign and the AAAristocracy, and to lend much less than usual to what is perceived The Risky, the small and medium businesses and entrepreneurs.
And that in all essence means that banks are extracting the benefits of the risk-taking of the past, without investing in the risk-taking needs of the future.
In other words banks are using the past as a cash-cow; in other words regulators allowed banks using something like the mother of all a reverse mortgages, and which guarantees that our economies will extract as much equity it can for current consumption as is possible, and so leave much less for the next generation.
Damn the bank regulators, nobody authorized them to do what they are doing.