April 06, 2015

In 1988, US bank regulators enlisted the “Home of the Brave” to the causes of risk aversion and communism.

Sir, Lawrence Summers writes: “we may be headed into a world where capital is abundant and deflationary pressures are substantial. Demand could be in short supply for some time… the priority must be promoting investment, not imposing austerity”, “It is time the US leadership woke up to a new economic era”, April 6.

That is correct, but, when Summers opines the remedy to be: “The present system places the onus of adjustment on ‘borrowing’ countries. The world now requires a symmetric system, with pressure also placed on ‘surplus’ countries”, I disagree. What the US most needs is to get rid of its regulatory asymmetry, that which is expressed by requiring banks to hold more equity against assets perceived as risky than against assets perceived as safe.

Summers mentions that because China is launching a development bank, and some of US’ allies will join it, that “This… may be remembered as the moment the United States lost its role as the underwriter of the global economic system”. Not true!

It was in 1988, when the US signed up on the Basel Accord that stated the risk weight which determined the equity requirement for banks was to be zero percent for sovereigns, and 100 percent for unrated citizens, that the ‘Home of the Brave’ gave up the willingness to take the risks that had allowed it to become the underwriter of the global economic system.

In essence that was also the date when the US went statist, or, in more direct terms, became communistic.