Unbeknownst to it, the world has begun unruly bankruptcy proceedings

(An Op-Ed that shall seemingly not be published)

“The assets assigned the lowest risk, for which capital requirements were therefore nonexistent or low, were those that had the most political support: sovereign credits and home mortgages… The “overall leverage” approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return government securities." That is Paul Volcker valiantly explaining 1988’s Basel I.

Though risk-taking is the oxygen of all development, it introduced serious credit risk-aversion. Paraphrasing Mark Twain: “A banker is a fellow that should lend the umbrella when the sun shines and should urgently take it back when it rains”.

By much favoring banks holding “safe” government debt and residential mortgages (demand-carbs) than loans to “risky” small businesses and entrepreneurs (supply-proteins), way too much debt has been generated against a weakly obese not muscular economy. Of course, in the process, bureaucracy autocracies were empowered, and houses transformed from home into valuable investment assets. 

Naturally, that completely distorted the transmission of central banks’ monetary policy and those interest rates set in free markets that had been used as references e.g., the risk-free interest rate.

And since these capital requirements are mostly based on perceived credit risks, not misperceived risks or unexpected events, e.g., pandemic or war, our banks stand there naked, just when we surely need them the most.

More than three decades of this has now come home to roost. Sadly, three major obstacles stand in our way of finding the least painful ways out.

First, those who have benefitted from an empowered Bureaucracy Autocracy don’t want to let go until its last breath.

Second, those who abundantly profit financially, politically or just narcissistically from polarization will not let go while they can still breath.

Third, frontline defenses, like the academy and the press, have kept complicit silence. When all explodes, they will blame other events that “no one in their sane mind could foresee” … or, as usual, neoliberalism. In their defense, they will probably point to the fact that Ben Bernanke, who defends these regulations, won the 2022 Nobel Prize in Economics. 

What’s now going on in Britain, is the canary in a coal mine.

The Easy Debt governments have counted with the last decades, kept bureaucrats, politicians and their dependent on Easy Street. We will all pay dearly for that. God help us.

PS. What can be done? Not a full plan, but here's a start:

1. Zero dividends, buy-backs and big bonuses, before banks have ten percent in capital against ALL assets.

2. Debt to equity conversion should be one of the most important resolution tool

PS. I quote from a letter I wrote published in 2004 by Financial Times: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. We wonder how many Basel propositions it will take before they start realizing the damage, they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

PS. My 2019 letter to the Inquisitional Financial Stability Board.