Thursday, April 26, 2012

The great risk of risk aversion

As part of the civil society, whatever that now means, I attended the recent spring meetings of the World Bank and International Monetary Fund (IMF), this time on behalf of my granddaughter who, being just some months old, has not yet sufficient capacity to protest what could be a usurpation of representation. One of the topics to be discussed there was the creation of jobs, and, of course, I figured my granddaughter and those of her generation, would all like to have an abundant access to good jobs.

The world now faces a financial crisis of monstrous proportions, far from being solved, as a natural consequence of the excessive incentives that regulators gave to the banks to lend or invest in what was or is, officially, ex ante, defined as little or absolutely not risky ... for example Greece, "subprime" triple-A securities, Icelandic banks and other weeds that can turn out so dangerous, ex post. In other words, a crisis caused by regulation which contained an excessive risk aversion.

But the experts cannot think of anything else. In the "Report on the Global Financial Stability 2012" prepared by the IMF, to continue to speak about safe assets, and to ignore that nothing can be as dangerous for some havens inherently safe than exaggerate their safety, and therefore run the risk of turning them into overcrowded death traps.

And in their report they listed "potentially marketable assets inventory Insurance", and where it would seem that "potentially" was included just reluctantly. The list contains a total of 74.4 trillion U.S. dollars: 33.2 (45%) in sovereign bonds AAA / AA 5 (7%) in sovereign bonds A / BBB, 16.2 (21%) in securities with special guarantees; 8.2 (11%) in corporate bonds rated investment grade, 3.4 (5%) in other governmental or supranational debt, and 8.4 (11%) in gold.

By the way, since at its current price gold can only have value as an insurance for the case that the other assets end up not being worth anything, I do not really understand how gold and the other "safe" assets can be in the same list.

And some experts mentioned time and again, almost as “triple-A” sovereign bond salesmen, almost as if to avoid the need for their own central banks to buy these bonds, that one of the most acute problems of the financial system is the scarcity of safe assets. Of course, we all want safe assets, who not, but, much of its real shortage, also depends on that the regulators require their regulated entities to possess these "safe" assets, and so that we, the ordinary citizens, find it difficult to acquire such safe assets at safe prices.

But, returning to the job prospects of my granddaughter, the report is unfortunately completely silent on the urgent need we have of “risky" assets, such as loans to small businesses and entrepreneurs, and which, at the moment of truth, are those which can most generate the jobs to eliminate the immense risk of millions and millions of unemployed youth.

Please regulators, the world needs to take real risks, and not hide in the skirts of that artificial safety which only produces fragility. Without risk-taking there can be no stability! ...except, of course, of the type you can get in the grave.