Bank regulations placed populist socialism on steroids, but neo-class-wars represent challenges

Sir, David McWilliams writes:“Mr Bernanke’s unorthodox “cash for trash” scheme, otherwise known as quantitative easing, drove up asset prices, left baby boomers comfortable, but the millennials with a fragile stake in the society they are supposed to build… spawning a new generation of socialists. Soaring asset prices, particularly property prices, drive a wedge between those who depend on wages for their income and those who depend on rents and dividends “‘Cash for trash’ was the father of millennial socialism”, March 2.

I agree. With QEs central banks renounced to all possible cleansing benefits a hard landing could provide, and decided to kick the can forward. But that is not the whole story. 

By distorting the allocation of bank credit with risk weighted capital requirements, which much favored the “safer” present/properties over the riskier future/ventures, it was de facto bank regulators who caused the crisis.

As a brief background, after Basel II in 2004, for all European banks and for US investment banks, the following were the standardized allowed leverages for banks: a) for loans to sovereigns rated AAA-AA the sky was the limit; b) 62.5 times when holding AAA rated securities; c) 62.5 times when holding any asset, no matter how risky, if it had a default guarantee issued by an AAA rated entity, like AIG; d) 35.7 times when holding residential mortgages and e) 12.5 times when lending to unrated entrepreneurs or SMEs.

The 2008 crisis was caused, exclusively, by excessive bank exposures to assets perceived as safe, and that could be held against the least of capital. In US and Europe it was the b, c, d and e assets, and a bit later in Europe, sovereigns, like Greece, that not withstanding it did not have an AAA rating, not withstanding it was taking on debt in euros, which de facto is not their domestic printable one, was assigned by EU authorities a risk weight of 0%.

After the crisis, with Basel III, some new capital regulations were introduced, notoriously a minimum leverage ratio, but the distortions produced by the risk weighted capital requirements are still alive and kicking a lot on the margin, there were it means the most.

As a consequence the can has been kicked forward in precisely the same wrong direction from where it came. Therefore, the day it begins to roll back on us, it could be so much worse.

McWilliams opines: “One battle ground for the new politics is the urban property market”. Indeed, there is a de facto class war going on between those who want their houses to be great investment assets too, and those who simply want to afford to own a home. Just as there is a de facto new class war between those who want higher minimum wages and those unemployed who want any job.

For the time being the old and new socialists on the scene have not been forced to take sides in these wars, as they still gather that going after the filthy rich will suffice to become elected. But the more voters realize that what the wealthy have is not money but assets, and that converting those assets into redistributable money can have serious unexpected consequences for the value of assets, some of which could trickle down on every one… that day redistribution driven populism will lose some power.

Hear this question: “Do you want us young to afford houses or do you want our parents’ houses to be worth more? Make up you mind, you cannot serve both.”

@PerKurowski