If you finance “safe” consumption more than “risky” production, growth will come to a standstill.

John Dizard writes: “What if global income growth, or even national income growth, cannot cover the cost of servicing capital? Then the capital market machinery would have to shift into generating losses rather than returns.” “Bondholders face greater likelihood of haircuts as system goes into reverse” January 26.

Absolutely! When regulators decided that banks could hold less capital against the “safer” present than against the “riskier future”; meaning they could leverage more with the safer present than with the riskier future; meaning they would be able to earn higher expected risk adjusted returns on equity when financing the safer present than the riskier future, they ordained that to happen.

Basel II assigned a risk weight of 35% to residential mortgages, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 35.7 times.

Basel II assigned a risk weight of 100% to unrated entrepreneurs, which on an 8% base capital signified a capital requirement of 2.8%, which signified an allowed leverage of 12.5 times.

That allows banks to earn higher risk adjusted returns on equity financing residential mortgages than giving loans to entrepreneurs.

The consequence? Many will sit in their houses without the jobs needed to service the mortgages or pay the utilities.

@PerKurowski