December 21, 2011

US, and the Western World, is becoming “the home of the risk-adverse”.

Sir, I, as most humans, am extremely risk-adverse, and that is why I have always appreciated the role of designated risk-takers that the banks perform for the society. We cowards were used to worry our bankers were too cowards to, with their lending of the umbrella while the sun shines and taking it away when it rains. But then came the bank regulators and with their capital requirements that discriminate fiercely based on perceived risks made it all so much worse. 

Martin Wolf comments on the “Great Stagnation” by Tyler Cowen of George Mason University, December 21. What they both fail to identify is that requiring banks to have a lot of capital when the perceived risks are high, and allowing them to hold minuscule capital when the perceived risks are low, stacks the returns on bank equity against what is perceived as risky. And that has nothing whatsoever to do with what made “the Home of the brave” big. The US is now, as is most of the Western World, becoming the Home of the risk-adverse. 

Not taking risks is about the most dangerous things a society can do… as the only thing that can result from that is the overcrowding of the ex-ante safe-havens