December 16, 2013

More than a new normal, stagnation has been decreed, by risk adverse regulators, as the new structural standard.

Sir, Lawrence Summers writes “The risk of financial instability provides yet another reason why pre-empting structural stagnation is so profoundly important”, “Why stagnation might prove to be the new normal” December 16. 

And I do not know what to say to that. It was precisely well intended but horribly executed efforts to avoid financial instability which basically has decreed stagnation as the new standard.

When regulators risk-weighted capital requirements for banks, they allowed banks to earn much higher expected risk adjusted returns on assets perceived as “absolutely safe”, than on assets perceived as “risky”.

And that translates into bank credit, one of the most important drivers of growth, not going any longer go to finance the “risky” future, but only to refinance the “safer” past.

And how you can avoid stagnation with that kind of misplaced risk-aversion beats me.

Does Professor Summers really believe that the economies of West would have become what they are with that kind of bank regulations?

Any economy growth based solely on “easy money”, and not based on astute risk-taking, is doomed to solely become froth on the surface.

And all for nothing as the current financial instability has, as usual, been created by excessive bank exposures to what was officially perceived as “absolutely safe”, like AAA-rated bonds, real estate in Spain, loans to Greece etc.