G20, keeping our economies from stalling and falling might depend on unregulated shadow banks… a ‘Banca sommerza’.

On September 17, New Rules for Global Finance and the International Trade Union Confederation are hosting a seminar titled “Reducing Unemployment & Inequality: Policy Options for the G20”

And I wanted the participants, in preparation for it, to read the following which is quoted from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And then I wanted the participants to reflect on the fact that the pillar of current bank regulations, is the perceived-credit-risk capital requirements for banks, less risk less capital - more risk more capital.

That allows banks to earn much higher risk-adjusted returns on equity on what is perceived as safe than on what is perceived as risky. And this, as should easily be understood, kills the opportunities for SMEs and entrepreneurs to have fair access to that bank credit with which they could help generate the next harvest of decent jobs. As you should understand it also serves as a potent inequality driver.

Friends, or we free our formal banks from this loony regulatory risk aversion to credit risk already cleared for by risk premiums and size of exposures, or the interests of job creation and equality might be best served by unregulated banks operating in the shadows… a Banca Sommersa. 

You decide, personally I am surprised to see a big majority of progressives keeping silence on bank regulations that clearly serve best the interests of “the respectfully affluent”… or those of aging baby-boomers’ après nous le deluge.

Let us responsibly live up to our part in that intergenerational continuum of the past, the living and the unborn, that Edmund Burke spoke about.

And this issue is also relevant to many of those you would define as being as far away as possible from the progressives… but which is of course no reason to shy away from it... much the contrary.

As an example, Mark R. Levin initiates his “Plunder and Deceit” by asking: “Can we simultaneously love our children but betray their generations and generations yet born? 

G20, please, for the future of our descendants, let us pray together “God make us daring!”

Why on earth do regulators refuse to discuss the issue of how their bank capital requirements distort the allocation of credit to the real economy? I once again refer to Galbraith’s Money: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

What shall we do with regulators that have clearly failed? I once again refer to Galbraith’s Money: “We should be kind to those whose performance has been poor. But we must never be so gracious as to keep them in office.”

Frankly, what does for instance a Thomas Piketty from University Boulevard, know about unequal opportunities on Main Street?

@Per Kurowski

Am I a radical of the middle? Yes, or perhaps only an extremist of the center.