Reviving Economic Growth: A Cato Online Forum: My unsolicited opinion

Question: If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?

My answer:

Anyone who thinks the US would have become what it is by allowing banks to earn much higher risk-adjusted returns on equity when financing what was perceived as absolutely safe than what was perceive as risky... raise his hand.

I say this because current credit-risk-weighted capital (equity) requirements for banks, allow banks to hold government debt and loans to the AAAristocracy against much less equity than when financing “risky” small businesses and entrepreneurs, and so that is de facto what you get.

And since risk taking is the essence of development, “the home of the brave” will go down if you continue to impose on your banks such regulatory risk-aversion.

Have you lately asked your friend the banker how much equity he needs to have in order to give a loan to an unrated fellow American citizen, compared to what he needs to have when lending to his government? Do that! And then you will begin to understand how much communism is creeping in on “the land of the free.”

You are already giving your banks a lot of support, so don’t also give them easy money allowing high returns leveraging on the safe… make them sweat their returns lending also to the risky... because that is how you build, or keep a nation great.

And so friends, if you want to have growth, get rid, urgently, of that distorting regulatory nonsense; which by the way does not make your banks safer, as never ever are major bank crisis the result of excessive exposures to what is perceived as risky… these always result from excessive exposure to something that was wrongly thought as absolutely safe.