More than making them safer, we need the banks to be more useful.

Sir Stephen Cecchetti affirms that the current proposals from the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) that will impose higher capital and liquidity requirements on the banks is “A price worth paying to make banks safer”. It is just the same old story! When will we hear about making the banks more useful, or at least less useless?

Cecchetti correctly mentions that “lower capital means higher returns on equity but a smaller buffer against loan defaults and investment losses”. He ignores though the fundamental problem that the lower capital requirements are applied discriminating in favor of what is perceived ex-ante as having lower risks… and therefore increasing the returns of what is perceived ex-ante as having lower risks… and therefore pushing the banks to excessively invest in what is perceived ex-ante as having lower risks… precisely the stuff that financial and bank crisis are made of.

Eliminate the discrimination in the capital requirements and banks will start lending more to the small business and entrepreneurs who though most likely to be perceived ex-ante as more risky are also most likely to hold in their hands more of our future generation of jobs…which will thereby make our banks more useful.

Indeed moderation needs to be sustained…but it better be the right kind.

Sir Stephen Cechetti wrote “We need to sustain the great moderation”, June 23, 2008 and I initially thought he meant a “from-now-on”. To my big surprise, reading it I then saw that he refers to the period 1985 to 2005 when the $500bn in home mortgages grew to $9,500bn, signifying debts of about 7 months of the current GDP, and of which $7,500bn was used for securities, as the “moderation” that with some minor tweaking, needs to be sustained.

On what planet does he live? As I see it the most important result of that boom was to make the USA even more energy dependent, in the midts of an environmental threath, and luring many babyboomers to anticipate their current consumption.

Can you imagine how much better the US would have been off if those $9,000bn had gone to infrastructure investments that prepared the US for the new realities?

But of course that could never have happened when the bank regulators all they care about is to stop the banks from defaulting… no matter where the rest of the country ends up.

Indeed moderation needs to be sustained…but it better be the right kind.