August 15, 2016

To generate societal and economic resilience, risks need to be intelligently faced and not just brutishly avoided.

Daniela Schwarzer opines: “Democratic leaders have to join the battle of ideas and be audible in defending their ideals. They need to fight nondemocratic, antiliberal and extremist propaganda proactively and show vision and the capacity to recast in adverse circumstances”, “Resilience is important for societies as well as individuals” August 15.

But real leaders are also open to that dangers can come in all shape and forms, and among the most dangerous, is any kind of populist groupthink generated within mutual admiration clubs, like that of the Basel Committee for Banking Supervision and associated regulators.

The regulators, too fearful of banks failing, imposed risk weighted capital requirements. These resulted in that banks earn higher expected risk-adjusted returns on equity when investing in something perceived ex ante as safe than when investing in something “risky”, like loans to SMEs and entrepreneurs. And that distortion of the allocation of bank credit to the real economy did not only cause the 2007-08 bank crisis, but has also decreased the resilience of the economy…“the capacity to recover quickly from disaster.”

And so “democratic leaders”, and the elite in general, must also fight bank regulations that deny the economy what it most needs to stay vibrant, namely lots and lots of prudent risk-taking, prudent meaning risk in not too big doses.

And in doing so they would hopefully also fight against that statism that has been smuggled in through regulations by non-elected technocrats, that which is represented by a 0% risk-weight for the Sovereign and one of 100% for We the People. 

@PerKurowski ©