Sunday, February 28, 2016
Nancy Birdsall in “Middle-Class Heroes”, Foreign Affairs March/April 2016 writes:
“The fear is that the new middle class will be hit hard if it turns out that global growth was built too much on easy credit and commodity booms and too little on the productivity gains that raise incomes and living standards for everyone”
That is precisely what happened, and the awful consequences of it are already to be seen.
When bank regulators decided on risk weighted capital requirements for banks, they allowed banks to leverage their equity, and the support they received from society, much more with assets perceived or deemed as safe than with assets perceived as risky.
And that meant that banks would earn much higher expected risk adjusted returns on equity with “safe” assets than with “risky” assets.
And what is the biggest source of safeness? What we already know it, what is already here, what comes from the past.
And what is the biggest source of riskiness? What we still do not know, what is not here, what still lies in the future.
And so banks were given the incentives to refinance the safe past, like placing reverse mortages on what had already been achieved; and to forget to finance the riskier future.
And that is destroying not only the current middle class but, much worse yet, the of our young ones, who need a great dose of risk-taking in order to have a chance for a better future.