Thursday, August 4, 2016

Regulators stupidly infantilized our bankers, and so we ended up with a dangerously obese economy

Jonathan Klick and Greg Mitchell  in "Infantilization by Regulation” “Cato:Regulation” Summer 2016." write:

“With the rise of libertarian paternalism has come greater acceptance of the view that citizens often fail to act in their best interests and that it is the government’s job to put a stop to that. In this mindset, the market is a predator rather than a check on stupid mistakes. 

If the behavioral assumptions behind libertarian paternalism gain widespread acceptance among policymakers, then we should prepare for an onslaught of nudges and shoves. And every time a nudge is adopted, an opportunity for learning and individual development is lost. 

Perhaps the gains from intervention will be sufficient to justify the opportunity cost, but those costs should be included in the cost-benefit analysis. Too often only the predicted benefits are considered, while the attendant long-term costs go unseen.”

Absolutely! When regulators, even knowing that bankers already cleared for perceived risks by means of interest rates and size of exposure, told bankers they also needed to clear for the same perceived risk in their capital, they essentially infantilized bankers… in a very dumb and dangerous way.

They told the bankers: “If you eat ice cream (what’s perceived as safe) then we will reward you with chocolate cake (lower capital requirements that allows for higher leverage that allows for high risk adjusted rates of return on equity); but if you eat broccoli (what is perceived as risky) then you will also have to eat spinach (higher capital requirements that causes lower leverage that causes lower risk adjusted rates of return on equity.”

And so what have we? A debt obesity crisis that was resulted caused by excessive eating of ice cream and chocolate cake… and an economy that does not want to ignite because of the lack of the nutrients present in spinach and broccoli.