Tuesday, October 7, 2014

IMF, Christine Lagarde, “the new mediocre” was ordained by risk adverse bank regulators.

Christine Lagarde speaks about “the new mediocre the state of the global economy—and the risk that the world could get stuck for some time with a ‘mediocre’ level of growth”; and of that we need a mix of bolder policies to inject a ‘new momentum that can overcome this ‘new mediocre’ that clouds the future.

The “New Mediocre” is the direct result of a growing risk adversity, most clearly illustrated by the credit-risk-weighted capital (equity) requirements for banks that for no good reason at all, distorts the allocation of bank credit, by allowing banks to earn much much higher risk-adjusted returns on equity on exposures ex ante perceived as “absolutely safe” than on exposures perceived as “risky”… since risk-taking is the oxygen of any development such risk-aversion can only lead to our economies stalling and falling, and where “mediocrity” is only a benign intermediate point.

How the IMF and others have allowed bank regulators to regulate banks without even defining the purpose of the banks, and caring exclusively about the banks and not about the allocation of bank credit to the real economy, is just incomprehensible to me.

Two times during civil society round-tables (do not ask me what civil society means) I have asked Christine Lagarde about the odious discriminatory regulations that impedes “the risky” to have fair access to bank credit, two times she has answered as she could be understanding, two times she has clearly not.

This year I will not be present at the IMF/World Bank annual meetings in Washington... (I have better things to do in her Paris :-))... but I sure hope, and pray for, that when she speaks of the “need of bolder policies”, she will understand that for that it might very well suffice with getting rid of silly and dangerous credit-risk-adverse bank regulations.

PS. Christine Lagarde, let me be even clearer still. Secular stagnation, deflation, mediocre economy, unemployment and all similar creatures, are direct descendants of silly risk aversion.

PS. Comments on IMF Global Financial Stability Report October 2014 Chapter III: Risk Taking by Banks: The role of Governance and Executive Pay