John Kenneth Galbraith would probably include Alan Greenspan among men of wisdom that missed the point.

Sir, Robert Gordon, reviewing Alan Greenspan’s and Adrian Wooldridge’s “Capitalism in America: A history” writes: “Three themes are highlighted — productivity as the measure of economic progress; the “Siamese twins of creation and destruction” as the sources of productivity growth; and the political reaction to the consequences of creative destruction.”, “After the gold rush”, October 20.

I have not read that book yet, I will; creative destruction plays absolutely an important role in the acceleration and sustainability of growth.

I do not know Adrian Woodridge, but, when it comes to the former Fed Chairman Alan Greenspan, I have an inkling that if John Kenneth Galbraith was still around, he would suggest Greenspan does not have all what it takes to write that book.

Let me explain that by quoting from Galbraith’s “Money: Whence it came where it went” 1975: “For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.”

Alan Greenspan clearly fits in with those “Men of economic wisdom” (of the East) who are distasted by unstable banking. To make banks stable, he supported risk-adverse risk weighted capital requirements, much lower for what’s perceived safe (the present) than for what’s perceived risky (the future). 

Sir, and if one is to tellthe real “full, epic story of America's evolution from a small patchwork of threadbare colonies to the most powerful engine of wealth and innovation the world has ever seen”; which is how this book is being promoted, one would need to begin with the willingness of its people to take risks.

What would have happened to America if banks with risk-weighted capital requirements had met its immigrants? Probably that imagined 1620 meeting in Davos about the future world, in which “one region goes unmentioned: North America. The region is nothing more than an empty space on the map” would not have found its way into this book.

The saddest part of all this is that our current generation of central bankers and regulators, like Alan Greenspan, those who prioritized bank stability over growth, as if these two aspects could be separated, anyhow did it totally wrong. With their risk weighted capital requirements, they only guarantee that banks will end up with especially big exposures, against what’s perceived as especially safe, against especially little capital; something which can only cause especially big crises, like that of 2007-08.

PS. Galbraith’s book also explained that, de-facto, regulators had also decreed inequality

PS. Gordon writes about “millions of immigrants being drawn in from Europe as the ever-expanding railroads, enjoying massive government subsidies in the form of free land, in turn subsidised the new arrivals so that they would populate the west.”.  I am not sure that amounted to “massive government subsidies”. If not zero, most of it must have been extremely low valued land. It was those migrants who with their sweat, inventiveness and willingness to take risks built up the value of that land.

PS. Gordon complains the book has “only a page or two reckons the human cost of underpaid labourers, including the consequences of malnutrition [and on] labour unrest”. That reads just like political correctness’ flag waving; and belief in that if only the task of development was assigned to the right kind of central planners, his kind, it would be achieved in a nice and fair way, with no sufferings and no inequality.

PS. In Venezuela, during a conference, 1978, forty years ago, John Kenneth Galbraith autographed “Money” for me. Mine was the only one he signed explaining he did so because it was a pocket book and much underlined  J His book inspired the first Op-Ed that I wrote, more than twenty years ago.

@PerKurowski

Banks “throw yourselves back into life” and dare visit the risky bays that our grandchildren need explored.

Sir, Philip Delves Broughton writes: “Economists often miss all the peripheral activity that might actually answer their questions. Professor Robert Gordon, the American economist, has been arguing recently that the US is in an innovation lull… an age of innovative trivia such as Facebook and Pokémon Go. Add the headwinds of poor demographics, a fouled-up education system, debt and inequality, and America is headed for an era of low growth.” “Let facile optimism change the world”, July 16.

Indeed the economists have entirely missed the distortion in the allocation of bank credit to the real economy produced by the risk weighted capital requirements for banks. These, by favoring the access to credit of those ex ante perceived as safe, de facto discriminate against the access to bank credit of those perceived as risky, like SMEs and entrepreneur; and so they have completely overlooked one of the main causes of innovation and economic lull. How this serious oversight has happened remains a great mystery to me. But, then again, since FT has been able to ignore the thousands of letters I have send it over the years to FT on this, there might be some dark forces at work.

Delves Broughton ends with: “The problem is that you cannot write “throw yourself back into life” on a prescription pad” Yes you can! You could at least write: “Banks throw yourself back into life, don’t dangerously and uselessly overpopulate safe havens, and dare explore the risky bays that our grandchildren need explored. 

PS. Free us from imprudent risk aversion

@PerKurowski ©

A mindless structural reform of regulations castrated the banks and helped to kill the dynamism of the economy.

Sir, Martin Wolf quotes Robert Gordon with “Ours is an age of disappointing growth because the technological breakthroughs are relatively narrow”, and then dicusses what could be done. Wolf concludes “The tendency to believe that some “structural reforms” will fix this is, similarly, an act of faith. It is essential for policy to promote invention and innovation, so far as it can. But we must not assume an easy return to the long-lost era of dynamism”, “An end to facile optimism about the future” July 13.

But “structural reforms” can kill dynamism too. And as you Sir and Wolf already know, in my opinion, nothing has done more harm to the economy than the risk weighted capital requirements for banks introduced with Basel I in 1988, and applied much more intensely with Basel II in 2004.

By allowing bank to leverage more their equity, and the support they receive from society with “safe” assets, regulators made it harder for those perceived as risky, like the SMEs and the entrepreneurs, to compete for access to bank credit.

Since perceived risks were already cleared for with the size of the exposures and the risk premiums charged, having bank clear again for those same perceptions in the capital, basically castrated our banks.

Now banks no longer help provide the “risky” proteins the economy needs in order to grow new muscles, they just finance the “safer” carbs that only makes the economy more obese.

Sir, when compared to what is needed to give the future a fair chance to deliver something good, it is clear that never ever before has a generation consumed so much borrowing capacity to sustain its own current consumption.

PS. And with their zero risk weight to sovereigns, and 100% of citizens, bank regulators de facto stated that government buracrats make the best use of bank credit. If that is not runaway loony statism what is?

@PerKurowski ©

If you insist on killing it, even limited growth will be over.

Sir, I refer to Martin Wolf´s “Is the age of unlimited growth over?" October 3. It includes a recount of an interesting paper written by Robert Gordon on the slowing rate of innovations, and that should naturally also lead into the theme of how we account for growth. That when women work that is growth but when they stay home not, is only one of the many questions. 

That said, I just know that whenever a society instructs one of their primary resource allocations agents, the banks, to forget the “risky” and go exclusively for the not-risky, with an “if you do so we will allow you to hold much capital and you will be able to leverage much more and thereby obtain a higher return on your equity”, then even the age of limited growth can come to its end. 

And of course, if growth is over, there are going to be more pressures for the Martin Wolf´s of this world, those in the 1 percent of the job markets, to quit their jobs earlier, so as to allow younger generations a chance for a job, albeit for a shorter and shorter period… that is of course unless he suggests they should haul water for fun, and he wants to pay for it.