November 08, 2012

No “fiscal cliff” of the current size can be jumped over without a lot of private risk-taking.

Banks currently need to hold much more capital when lending to “The Risky”, like small businesses and entrepreneurs, than when lending to “The Infallible”, like the government or anything with a good credit rating.

So here the question: How much more does “The Risky” have to pay the banks, on top of their normal risk premiums, in order to be competitive when accessing bank credit? 

That question reveals the profound distortions produced by bank regulations which impede banks to perform with any sort of efficiency their absolute vital role of economic resource allocation. 

Unfortunately, that distortion is a topic not yet discussed by the private sector as can be seen in Ed Crooks’ report “Business calls for accord to boost growth” November 8. And, as for the bank regulators, they won’t even acknowledge questions on it. 

One of the problems is that “The Infallible”, and many banks too, are very much benefitted by such distortions, and so, until “The Risky” lift their own voice in protest, very little will be happening on this front. 

To me it is amazing that in the “land of the brave” the private business sector can sit down to discuss the future without discussing what an excessive regulatory risk-aversion must mean for that future. There is no “fiscal cliff” on earth that can be jumped over without abundant, and hopefully smart, private risk-taking.