#AI #ChatGPT #Grok: What causes more dangerous distortions: trade tariffs or skewed bank regulations?

I asked ChatGPT: 

"Commercial tariffs distort trade between nations.

Risk weighted bank capital/equity requirements favoring some assets over other, distort the allocation of credit within nations.

Briefly explain what you would consider more dangerous for, e.g., our grandchildren?"

ChatGPT answered:

"Both are harmful, but risk-weighted bank capital requirements could be more dangerous for future generations.

Why? 

Tariffs distort international trade, raising consumer prices and reducing efficiency, but economies can adapt through new trade agreements, innovation, or shifting supply chains.

Distorted credit allocation shapes a nation's long-term economic structure. If banks are incentivized to lend excessively to governments or real estate rather than small businesses and entrepreneurs, economic dynamism weakens. This stifles productivity, innovation, and job creation—directly impacting opportunities for future generations.

While tariffs can be reversed with policy changes, a financial system misallocating credit for decades may entrench inefficiencies that are far harder to undo."

Here’s my original dialogue with ChatGPT on tariffs.

I asked Grok:

"Commercial tariffs distort trade between nations.

Risk weighted bank capital/equity requirements favoring some assets over other, distort the allocation of credit within nations.

Briefly explain what you would consider more dangerous for, e.g., our grandchildren?"

Grok answered: 

"Commercial tariffs distort international trade by artificially raising the cost of imported goods, which can lead to inefficiencies, higher prices, and reduced global economic growth. Over time, this could shrink the overall pie of wealth and opportunity our grandchildren inherit, especially if trade wars escalate and fragment the global economy.

Risk-weighted bank capital requirements, on the other hand, skew credit allocation within nations by incentivizing banks to favor "safer" assets (like government bonds) over riskier ones (like small business loans). This can stifle entrepreneurship, innovation, and economic dynamism, potentially locking in stagnation and concentrating wealth in already-established sectors.

For our grandchildren, the latter might be more dangerous. While tariffs disrupt trade flows, they’re often visible and politically negotiable. Distorted credit allocation is subtler, baked into financial systems, and harder to unwind. It risks creating a sclerotic economy where capital doesn’t reach the innovators and risk-takers who drive long-term growth—leaving future generations with fewer opportunities and a less resilient world. Tariffs might shrink the pie, but credit distortions could rot it from the inside.

Also: Does favoring banks holding public debt over loans to e.g., small businesses and entrepreneurs, promote fiscal insolvency?

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here my many other questions to ChatGPT and Grok on bank regulations

ChatGPT OpenAI: What’s more dangerous to bank systems assets perceived as risky turning out risky, or assets perceived as safe turning out risky?

I asked ChatGPT:

"What’s more dangerous to bank systems assets perceived ex ante as risky turning out risky ex post, or assets perceived ex ante as safe turning out risky ex post?"

ChatGPT answered:

"Both types of assets can be dangerous to bank systems, but assets that are perceived as safe but turn out to be risky ex post can be particularly dangerous.

When a bank invests in assets perceived as risky, it is aware of the potential risks and should be taking steps to manage and mitigate those risks. However, when a bank invests in assets perceived as safe but turns out to be risky ex post, it may not have taken sufficient precautions to manage those risks, and the losses can be unexpected and severe.

For example, during the 2008 financial crisis, many banks had invested in mortgage-backed securities that were perceived as safe because they were rated AAA by credit rating agencies. However, when the underlying mortgages began to default at higher rates than expected, the value of these securities plummeted, causing significant losses for banks that held them.

In contrast, when a bank invests in assets perceived as risky and they turn out to be risky ex post, the bank may have already factored in potential losses and taken steps to manage the risks. Of course, it is still important for banks to carefully manage their exposure to risky assets and have strong risk management practices in place to minimize potential losses."

Note: The answers are copied exactly from those given to me by ChatGPT

Here my many other questions to ChatGPT – OpenAI on bank regulations

Note: I fully agree!

ChatGPT - OpenAI: Are large bank exposures built up with assets perceived as risky or with what's perceived as safe?

I asked ChatGPT:

"Those large exposures that can become dangerous to our bank systems are built-up with assets perceived as risky or with assets perceived as safe?"

ChatGPT answered:

"Large exposures that can become dangerous to bank systems can be built-up with either risky assets or safe assets, depending on the circumstances.

If a bank has a large exposure to risky assets such as high-yield bonds or subprime mortgages, then a sudden drop in the value of these assets can lead to significant losses for the bank. This can be especially dangerous if the bank is highly leveraged, meaning it has borrowed a lot of money to invest in these assets.

On the other hand, large exposures to safe assets such as government bonds or highly rated corporate bonds may not seem risky on the surface. However, if a bank has a significant amount of its assets invested in these types of securities and there is a sudden rise in interest rates, the value of these bonds may fall, causing losses for the bank. In addition, if many banks are invested in the same types of safe assets, a sudden market shift could lead to widespread losses across the banking system.

In either case, it's important for banks to manage their exposures carefully and have robust risk management practices in place to identify and mitigate potential risks."

Note: The answers are copied exactly from those given to me by OpenAI

Here my many other questions to ChatGPT – OpenAI on bank regulations

Many experts read, agree and rightfully praise Hans Rosling, yet don’t understand him at all.

I quote from “Factfulness”, 2018 by Hans Rosling, Ola Rosling and Anna Rosling Rönnlund. 

“Fear vs. Danger. Being afraid of the Right Things:

Fear can be useful but only if it is directed at the right things. The fear instinct is a terrible guide for understanding the world. It make us give our attention to the unlikely dangers that we are most afraid of, and neglect what is actually most risky…

‘Frightening’ and ‘Dangerous’ are different things. Something frightening poses a perceived risk. Something dangerous poses a real risk. Paying too much attention to what is frightening rather than to what is dangerous--that is, paying too much attention to fear--creates a tragic drainage of energy in the wrong directions.”

But here we are, with expert bank regulators who, with their credit risk weighted capital requirements, decided that what is frightening to them, namely what is perceived risky, is more dangerous to our bank system than what is really dangerous to it, namely what is perceived as safe.

And so by imposing their fear on our banks we have:

A banking system that is doomed to especially large crises, as a result of building up especially large exposures to what is especially perceived as safe, against especially little capital.

A banking system that finances way too much the safer present and way too little the riskier future, dooming our economy to a lack of the oxygen it most needs, namely that of risk taking.

And it is seemingly impossible to make them understand their mistake 

Where would we be had they introduced their fright of what they perceive as risky a couple of hundred years before their 1988 Basel Accord?

To top it up they decreed a risk weight of 0% to the sovereign and 100% to the citizen, and with that, they guaranteed way too high exposures to what I am most scared of, namely a great overhang of public debt that will cloud the future of my grandchildren.