December 15, 2017

Good intentions are not sufficient. Regulators, wanting to do good by making our banks safer, messed it up completely for us.

Sir, Gillian Tett writes a “survey by US Trust shows that three-quarters of millennials put a high priority on social goals when they invest; that is a stark contrast to baby-boomers, where the proportion was only a third.” “Making money and doing good” December 15.

“US millennials are slated to inherit around $12tn of assets in the next decade or two”

In Wikipedia, on millennials we read: “The Great Recession has had a major impact on this generation because it has caused historically high levels of unemployment among young people, and has led to speculation about possible long-term economic and social damage to this generation.

That great recession was caused by the financial crisis 2007-08, and that crisis was the result of well-intentioned regulators wanting to keep banks away from the “risky” allowed banks to leverage immensely with the “safe”. And so banks created excessive exposures to AAA rated securities, residential mortgages and sovereigns like Greece, which all blew up.

And if millennials understood how their future older age could be so much more difficult than their current elders, precisely because good intentioned risk-aversion have kept banks away from financing the risks needed in order to build their future, they would give less priority than baby-boomers to good intentions and consequentially by slightly more skeptical about investing in social goals.

A Ford Foundation has all the right in the world to pursue its goal as they feel fit, but it should not forget that the world is full of good intentions gone wrong.

Tett mentions that “one of Ford’s first projects, for example, will be to invest in affordable housing in Detroit and Newark; the idea (or hope) is that this will provide measurable returns and statistics about home formation”. I hope Ford, before that, analyzes well the prospects of getting jobs there because, much more important than giving someone an affordable home, is to help that someone to afford a home.

Basel Committee’s standardized risk weights of 35% for residential mortgages and 100% for loans to entrepreneurs just guarantees that so many more of the millennials will end up living in the basements of their parent houses… and if reverse mortgages keep on increasing, then without even the hope of inheriting the houses… severely reducing the expectations of “US millennials are slated to inherit around $12tn of assets in the next decade or two”

Sir, the real value of an inheritance only shows up at the moment of the inheritance… something that too many Venezuelan’s that inherited assets there can attest to.

Here is an alternative doing good proposal for the Ford Foundation. Capitalize a bank to hold 15% against all assets, except for loans that have great job creation or green ratings for which only 10% of capital is needed, and then pressure the management to obtain high returns on equity. That is taking risks with a purpose, that could somewhat help to neutralize the distortions produced in the allocation of credit to the real economy by the current risk weighting… and that is something definitely good…I think… though of course even I could also be wrong.