November 01, 2016
Sir, Huw van Steenis writes: “The private sector’s demand for loans, banks’ profitability, capital adequacy and risk aversion — all these affect not only financial aggregates but also financial wealth and the real economy through a variety of channels. Overlooking how banks function means the models that central bankers have relied upon are, by construction, overly simplistic fair-weather versions only.” “Time to put financial frictions at the heart of central bank models” November 1.
Of course, central banks must wake up to the frictions and distortions caused by the risk weighted capital requirements for banks. Though that is probably not what van Sttenis refers to, because, if he did, he should be very careful. He might wake up bankers, his bosses, from their realized wet dreams of earning the highest risk adjusted rates of return on equity, when financing what’s perceived as the “safest”
But Van Steenis also writes: “Every MPC should have members who have a real-world understanding of the plumbing of financial intermediaries. It’s time to put financial frictions into macroeconomic models.”. And Sir No! Careful there! “Huw van Steenis is the global head of strategy at Schroders”; and the Main-Street understanding Monetary Policy Committees around the world most need, is that of discriminated against bank borrowers, like SMEs and entrepreneurs.