Saturday, November 12, 2016
In the IMF’s Annual Research Conference during the final Economic Forum: Policy challenge after the Great Recession I had the chance to pose Olivier Blanchard a question session of Professor Lawrence Summers Mundell Fleming Lecture I had a chance the pose a question (1:01:10)
I might insist here briefly on a point: Why do you say that interest rates on public debt are low, when they are based on so much of regulatory subsidies? Add to the zero low rates of the public debt, all those costs that comes from not giving SMEs and entrepreneurs, millions of them, the chances for credit, only as a result of this distortions produced by risk weighted capital requirements for banks.
Olivier Blanchard answer:
This is a theme that you have explored over the years. You are absolutely right that the answer is: if the very low safe rates is due to distortions, then the first order of business, should be to eliminate the distortions.
That’s true, if your right, of regulations, but it may be true of the lack of social insurance in some countries which leads people to basically be willing to save enormous amounts that they should not be saving, it could also be true because of missing markets.
For all this reason you are absolutely right, step zero in what I say, lets make sure that we have removed all the distortions which we can, which affect r, so we have the right r. I take your point.
I sure appreciate Olivier Blanchard's acceptance of the relevance of my concerns, its been a long trip. In 2004 in a letter in the Financial Times I wrote “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?"
And I hope the research on it starts now, not only by the IMF. It is long overdue. In fact the possible distortions should have been analyzed before these regulations were imposed.
PS. The day earlier I had posed Professor Lawrence Summers a similar question