January 07, 2014

Did the baby-boomers’ parents’ not take risks, or use reverse mortgages in order to extract everything for themselves?

Sir, Janan Ganesh writes “Bad luck, not policy, is the scourge of the young” January 7. What is this? I’ve seen a photo of him in FT, and so is he here just working for the baby-boomer establishment?

Of course “There is no law of the universe that says each generation most be more prosperous than the last”, but that should not diminish one iota the moral obligation of each generation from trying that to be so.

Currently grey-haired bank regulators base the capital requirement for banks which should take care of the unexpected losses, on the perceptions of expected losses. And with that they have introduced a distortion that guarantees banks will finance mostly what is perceived “safer”, like the known past, and keep out from what is perceived “risky”, like the future.

And does that mean that the young will at least inherit a safer banking sector? Of course not! The risk-weights which determine the capital requirements are portfolio invariant. That means these do not take account of the added risks of asset concentrations, or the dissipation of risks by means of asset diversification. And that means that the risk of the banking system might be increasing exponentially, even while it is being reported as safer.

Yes “Baby boomers enjoyed almost miraculously circumstances” but, to attribute that to luck and not to the daring risk-taking of previous generations is ungrateful, to say the least.

Just look at the financial products offered to baby-boomers. “Reverse mortgages” which allow parents to extract all equity possible from their houses, for their own consumption, and thereby leaving much less for their heirs. Did the baby-boomers’ parents do such things?

If the young would only look up from their virtual world, and react to what is happening in reality, then Paris of May 1968 might just seem in comparison to have been just another hip peaceful gathering of premature baby-boomers.

PS. There is not a day in which I do not thank all my antecessors for all their risk-taking, and not a day I do not fret I am not capable of taking enough risks for my successors.