Sunday, October 26, 2014
Michael Sandel, in “The Art of Theory Interview” refers to:
“a tendency, over the past three decades, of economics to crowd out politics. This has been an age of market triumphalism. We’ve come to the assumption that markets are the primary instruments for achieving the public good.”
And that is a much distorted, and quite often a very interested version of what is actually happening.
Over the last few decade banks, instead of allocating their credit based on adjusting to the perceptions of credit risk, by means of the interest rates (risk premiums), and the size of their exposures, have also had to adjust those credits to capital requirements (meaning equity requirements), and that are also based on the same ex ante perceived credit risks.
“More risk more equity – less risk much less equity” has translated into banks earning much higher risk adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.
For instance, a bank, according to Basel II, when lending to an infallible sovereign, can hold zero equity but, when lending to a citizen, it has to have 8 percent of equity.
That means banks can leverage their equity 12.5 times to 1 lending to citizens while not even the sky is the limit when lending to their sovereign.
Professor Sandel, what on earth has that do with "market triumphalism"? It has all to do with an obnoxious non-transparent triumph of government powers.
And the credit risk aversion introduced by bank regulators, effectively blocks "the risky" from having fair access to bank credit, and thereby impedes equal opportunities and promotes inequality.
Is this all a conspiracy of some mighty self declared "infallible", against us their declared "risky" citizens?
It looks like we honest citizens again need to take refuge in a Sherwood Forest, in this case among the trees making a living in the world of shadow-banking. Hell, they are now even trying to convert our Robin Hood into a Sherif of Nottingham tax-collector for King George.