Saturday, October 18, 2014

Janet Yellen, are you really so unaware you are also one of the equal opportunities killers?

“Owning a business is risky, and most new businesses close within a few years. But research shows that business ownership is associated with higher levels of economic mobility. However, it appears that it has become harder to start and build businesses. The pace of new business creation has gradually declined over the past couple of decades, and the number of new firms declined sharply from 2006 through 2009… One reason to be concerned about the apparent decline in new business formation is that it may serve to depress the pace of productivity, real wage growth, and employment. Another reason is that a slowdown in business formation may threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth.” 

Unbelievable! Janet Yellen, even though she is extremely connected to bank regulations, seems not to have the faintest idea of how these effectively block the creation of new businesses, by unfairly discriminating the access to bank credit of those who are perceived as risky… like new businesses. 

Janet Yellen (and others at the Fed), let me explain it for you: 

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

And that translates into banks being allowed to earn much much higher risk adjusted returns on equity when lending to the “absolutely safe” than when lending to the risky” 

And that translates directly into that those who are perceived as “risky”, like new businesses, and who, precisely because they are perceived as “risky”, already have to pay higher interests and have lesser access to bank credit, will then have to pay up twice for that perception…and so will then need to pay even higher interests and then get even less access to bank credit. 

And that is odious discrimination, a great driver of inequality… and a killer of the equal opportunities the poor so much need in order to progress. 

And of course, let us not even think of what the Fed’s QE’s have done in terms of un-leveling the playing fields. The fact is that had it not been for how the financial crisis management favored foremost those who had most, Thomas Piketty’s "Capital in the Twenty-First Century”, would have remained a manuscript. 

And Janet Yellen thinks: “it is appropriate to ask whether this trend [of widening inequality] is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.” 

Frankly to hear someone who favors regulatory risk-aversion, daring to speak about American values, in the “home of the brave”, in the land built up on the risk-taking of their daring immigrants… is sad.

PS. To me it is amazing how bank regulators in America can so blitehly ignore the Equal Credit Opportunity Act (Regulation B)