Monday, October 13, 2014

Bank regulators regulate based on the safety needs of the very old, and not on the risk-taking needs of the young.

On October 13 2014, in the International New York Times, Mary Williams Walsh, in “No smoke no mirrors” analyses comprehensibly the pension plan in the Netherlands.

And therein she writes that, after seeing what the financial crisis had done to the pension accounts: “Dutch young people found their voice. No matter their employment sector, they could see that their pension money was commingled with retirees’ money…[and] they realized that they and the retirees had fundamentally opposing interests. The young people were eager to keep taking investment risk, to take advantage of their long time horizon. But the retirees now wanted absolute safety, which meant investing in risk-free, cashlike assets. If all the money remained pooled, young people said, the aggressive investment returns they wanted would be diluted by the pittance that cashlike assets pay.”

Mary Williams Walsh describes precisely what should be the objection of all young people around the world to current bank regulations, but that the young, unfortunately, have not yet discovered.

The pillar of current bank regulations, is credit risk-weighted capital (equity) requirements for banks… in short more perceived credit risk more equity, less perceived risk less equity. 

And that causes banks to be able to earn much higher risk adjusted returns on assets perceived as “absolutely safe” than on assets perceived as “risky”… which leads banks to not financing the riskier future, but only to refinancing the safer past.

And given that risk-taking, not risk aversion, is what took the western world economies to become what they are, without it, they are bound to stall and fall.

And if that is not dumb short-termish regulations, which might perhaps benefit some of those baby-boomers sooner to pass away, but certainly hurt the young who risk becoming a lost generation, I do not know what is.

It would be great if the young Dutch kids also opened their eyes on this issue, and started a revolt against the banks being all castrated.

A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

Secular stagnation, deflation, mediocre economy and all similar obnoxious creatures, are direct descendants of silly risk aversion.

Banks need to be regulated more in the interests of the advancees than in the interest of the retirees.