December 18, 2012

But neither would Lord Keynes have agreed with the bank regulators' super potent bubble blowing machine

Sir, Jeffrey Sachs writes “Hayek was prescient: a surge of excessive liquidity can misdirect investments that lead to boom followed by bust” “We must look beyond Keynes to fix our problems” December 18.

Absolutely, but add to that the fact that bank regulators, by means of capital requirements based on perceived risks, also decided to direct, through the banks, most of the excessive liquidity to “The Infallible”, like the AAA rated or prime sovereigns, and you will be able to better understand what an incredible bubble blowing machine has been created, because, of course, there is never a boom and a bust in what is perceived as “risky”, these always happen where it is perceived to be absolutely safe.

But neither should we imply that Lord Keynes would have agreed with what the regulators were up to, he was much too intelligent for that. Anyone who wrote “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them”, cannot have approved of the crazy idea of bank regulators doling out risk-weights in order to determine different capital requirements for banks.

And Keynes, an aggressive speculator in the stock market, who for instance obtained what has been termed as impressive but volatile capital growth of King´s College Chest Fund, knew very well about the importance of risk-taking… definitely not like our bank regulators whose bedroom fantasies are about a world with no risks and absolutely no volatility.