August 18, 2016
Sir, Bill Gross asks: “Why would the private sector… not borrow at practically no cost to invest in a centuries’ old capitalistic model proven to reward risk-taking in the real economy?”, “Central bankers are threatening the engine of the economy”, August 18.
In his comments Gross forgets there are now two private sectors. One, perceived, decreed or concocted as “safe”, AAArisktocracy and residential housing, and to whom banks can lend against very little capital; and the one which includes those perceived as risky, SMEs and entrepreneurs, those that regulators require the banks to hold much more capital when lending to.
And so “The Safe”, by allowing banks to leverage more their equity, provides the banks with higher expected risk adjusted return than what “The Risky” can do,
And so regulators decreed that money paid in net risk adjusted margins by “The Safe”, is worth more to banks than that same money when paid by “The Risky.
And so The Risky have been left out in the cold, that is unless they accept to compensate banks for this regulatory discrimination; by paying rates over what their ordinary risk adjustments would justify.
QEs and other fiscal stimuli, or negative interests, finds it hard to overcome this hurdle and reach with bank credit the vital SMEs and entrepreneurs, who might want to borrow, and so most of it gets wasted.
And besides The Risky, we all lose out! It refuses the risk-taking tomorrow’s economy requires be taken by todays’; and all for nothing, because The Risky never cause that type of excessive bank exposures that can cause a major crisis; that dishonor belongs entirely to “The Safe”.