Tuesday, October 20, 2015

The Basel Committee, with Basel I, II and III, has condemned our grandchildren to secular stagnation and lack of jobs

Secular stagnation, a condition of negligible or no economic growth in a market-based economy, is explained in terms of investment demand falling relative to savings supply. 

Overall investment can be subdivided in: safe investments that can remain safe, safe investments that can become risky, risky investments that are in fact risky, and risky investments that turn out safe. The last group provides by far the most dynamism to our economies. 

The Basel Committee’s portfolio invariant credit risk weighted capital requirements for banks; more risk more capital – less risk less capital; allow banks to leverage their equity more when financing the safe; which allows banks to earn higher risk adjusted returns when financing the safe; which impedes the fair access to bank credit of the risky, among these the SMEs and entrepreneurs.

In short its credit-risk-aversion causes banks to over-refinance the safer past and under-finance the riskier future and thereby condemns our children to lack of opportunities, and our grandchildren to secular stagnation and lack of jobs.

And all for nothing since bank crisis are always caused by excessive bank exposure to something perceived as safe but that ex post turns out risky, and never because of excessive exposures to something perceived as risky.

This bank regulation was introduced with Basel I en 1988 and made much more distorting of credit allocation with Basel II in June 2004… and Basel III keeps the risk-weighting.

And the distortions they cause are not even discussed. In much because too many economists find it unworthy to dirty their hands with bank regulation technicalities. How vulgar! Keynes knew much about banks and finances, modern Keynesian do not.