Capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs doom the world to secular stagnation.

Sir, Martin Wolf writes: “the financial mechanisms used to manage secular stagnation exacerbate it. We need more policy instruments. The obvious one is fiscal policy. If private demand is structurally weak, the government needs to fill the gap. Fortunately, low interest rates make deficits more sustainable.” “Monetary policy has run its course” March 13.

No! Secular stagnation is guaranteed by capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs. The subsidies implicit in having assigned a 0% risk weight to public debt translate into artificial low market rates. Weigh the sovereigns equal to citizens, at 100% and you will immediately see those rates shoot up.

Of course kicking the can further down with more fiscal spending based on more public debt will give our economies a breather, but for what purpose? Had central bankers and regulators accepted in that loony 62.5 times allowed bank leverages for anything rated as AAA, and insane 0% risk weight assigned to Greece that caused the crises; and gotten rid of their risk weighting based on ex ante perceptions and not on ex post possibilities, our economies would be in a much better shape. But no, their huge liquidity injections seem to have mostly been put in place in order to cover up for their mistakes. And statist journalists backed them up by solely blaming banks, credit rating agencies and markets. 

Déjà vu😡 https://teawithft.blogspot.com/search/label/secular%20stagnation

@PerKurowski

Risk weights of 0% the sovereign and 100% to its source of strength, the citizens, is putting the cart before the horse

Sir, I refer to Professor Lawrence Summers’ “The threat of secular stagnation has not gone away” May 7.

Again, for the umpteenth time: Regulators allow banks to hold less capital against what is perceived safe, like houses and friendly sovereigns, than against what is perceived risky, like entrepreneurs. This allows banks to leverage more with the “safer” present economy than with the “riskier” future. 

And this allows banks to earn higher expected risk adjusted returns on equity when financing the “safer” present economy than when financing the riskier future, something which causes banks to give too much credit to the current economy, without giving sufficient credit to the future productive means that could generate a much needed debt repayment capacity. 

This has to result in the “slow productivity growth [and] unsound lending and asset bubbles with potentially serious implications for medium-term stability” which is of such great concern to Professor Summers. Why is this so hard to understand?

Why can renowned professors with so much voice, not be able to also understand that if you assign a risk weight of 0% to the sovereign, and one of 100% to the citizens, those who signify a sovereign’s prime source of strength, you are putting the cart before the horse? Are they too statist or, behaving like sovereigns with an après nous le déluge, just too indifferent about the future. 

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

The most important investors for the economy of tomorrow, are those who act on its margin, like SMEs and entrepreneurs.

Sir, Martin Wolf writes: “Because corporations are responsible for such a large share of investment, they are also, in aggregate, the largest users of available savings”. And he lashes out at corporations for not doing enough investments. “The corporate contribution to the savings glut” November 18.

Yes, corporations are the largest users of available savings, but that does not mean they are those who move the investments on the margin. Those most important, on the margin investors, are those tough risky risk-takers we need to get going when the going gets tough. And those are the ones who have their fair access to bank credit blocked by the credit risk weighted capital requirements for banks… since banks will always preferentially access to assets against which it has to put the least of its own equity for… especially in times of scarce regulatory bank capital.

I know that Martin Wolf does not understand or does not want to admit the distortions in the allocation of bank credit that credit-risk weighting regulation does, but that does not make it one iota less distortive.

PS. Amazing. Martin Wolf even suggests we should think about taxing retained earnings to force corporations to invest and not of getting rid of those regulations that block the access to bank credit for investments. Much of that corporate cash is in banks and in the unproductive "safe havens"

@PerKurowski ©

When the Basel Committee ordered banks to stay in bed, like Brian Wilson did, they decreed “secular stagnation”

Sir, you hold that “Seizing advantage of rock-bottom rates is the best way to raise them” “The worst mistake is to ignore secular stagnation” April 18.

No! When will you understand that those “rock-bottom” rates you refer to are not natural low rates but subsidized low rates? And the best thing to do is simply to remove these subsidies, especially because these are creating havoc in other areas of the economy.

What subsidies? Those that result from allowing banks to hold so much less equity against assets perceived as safe than against assets perceived as risky. Or do you really believe rates for sovereigns would be as low as they are, if banks needed to hold the same equity against loans to a sovereign than against loans to SMEs?

The surest way to secular stagnation for a society, is deciding that it does not want to risk anything of what it already has, in order to bet on what it could have.

And Sir, that is precisely what bank regulators, with their credit-risk-weighted equity requirements for banks, de facto decreed. With these they ordered banks to stay away from the “risky” SMEs and entrepreneurs and keep to the “infallible” sovereigns and to the AAArisktocracy. And banks are of course those who should be in charge of channeling to the real economy most of the savings of the society… included the cash accumulated by the corporate Apples of this world.

In other words Sir, the Basel Committee decreed a secular stagnation. And that was not nice of them!

To get our children and grandchildren out of the hole they find themselves in, we need to get rid of the odious regulatory discrimination against the risky, those who already are naturally sufficiently discriminated against by the banks. 

@PerKurowski

Martin Wolf, bank regulators hindered savings from reaching investment projects… and so secular stagnation resulted.

Sir, Martin Wolf asks and answers: “Why are interest rates so low? The best answer is that the advanced countries are still in a “managed depression”. This malady is deep. It will not end soon.”, “Strong currents that keep rates down” March 18.

And Wolf argues: “The most plausible explanation [for what] Lawrence Summers… has labelled the forces “secular stagnation” — by which is meant a tendency towards chronically deficient demand… lies in a glut of savings and a dearth of good investment projects”.

No Wolf! There are indeed a glut of savings but the reason for the “dearth of good investment projects” is that the savings are hindered from reaching the prime drivers of investment projects, SMEs and entrepreneurs; because bank regulators considered them too risky, and favored bank credit to go where it was perceived as safe.

In 1988 regulators launched the Basel Accord. In it, if banks lent to the government, so that some bureaucrats were to decide how to allocate those resources, the banks needed to hold cero equity.

But, if banks lent that money to some SMEs and entrepreneurs, so that these were given a chance tried to come up with growth, then banks needed to hold 8 percent in equity.

Could the explanation be any clearer? Of course banks stopped lending to “the risky” because “the safe” suddenly provided them with much higher risk adjusted returns.

So when Wolf writes: Ultra-low interest rates are not a plot by central bankers. They are a consequence of contractionary forces in the world economy” it just shows that he still cannot understand what contractionary forces can be powered by means of regulatory risk-aversion.

Wolf holds “We should view central banks not as masters of the world economy, but as apes on a treadmill” Indeed, but what to do when central bankers act like masters of the universe?

@PerKurowski

With Portfolio Invariant Perceived Credit Risk Weighted Equity Requirements for Banks, Europe, the whole G20, is doomed.

Sir I refer to the reports and warning about Europe’s economy, November 13.

As long as regulators insist on using Portfolio Invariant Perceived Credit Risk Weighted Equity Requirements for Banks, Europe, in fact the whole G20, is doomed.

What more can I say that I have not already explained to you in more than a 1600 letters about what these regulations with their misguided credit risk aversion cause, and that you prefer to ignore?

Economic stagnation is doomed to happen as a consequence of credit-risk-weighted capital/equity requirements for banks.

Sir, Wolfgang Münchau holds that secular stagnation in the Eurozone is very probable “The euro is in greater peril today than at the height of the crisis” November 10.

It is worse than that, stagnation is doomed to happen, as a result of credit-risk-weighted capital requirements for banks that impede the access to bank credit of many who though “risky” would provide the new sources of growth Europe needs to move forward.

Frankly, where does Wolfgang Münchau believe his Europe would be had these risk-adverse regulations been adopted some two hundred years ago?

Again: Europe is denying its children the risk taking it took for the European parents to prosper. Shame on it!

Does Lawrence Summers really think risk adverse bureaucrats can deliver “bold reform”?

Sir the pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main street.

And so you can understand how frustrating it is to read Lawrence Summers finding room to include “policies to promote family-friendly work” in his list of needed structural reforms essential to increase productivity, and not including the need of correcting the above mentioned regulatory distortion, “Bold reform is the only answer to secular stagnation” September 7.

“Bold reform” Ha! How can clearly overly risk-adverse bureaucrats carry out that? They only know about throwing money at problems.

PS. As Summers also refers to the need of “infrastructure investments” we should not forget that there is a prior need of making sure those “infrastructure investments” are done efficiently, in terms of costs.

“More safe assets” might just quite dangerously signify too much safe assets.

Sir, I refer to Tim Harford’s “Low inflation targets becalmed our economies” August 22.

Harford writes “Low real rates suggest lots of people are trying to save, and particularly in safe assets, while few people are trying to borrow and invest” and that “regulators (understandably) insist that banks and pension funds hold more safe assets”.

Labeling it as “understandably”, Harford seems to miss the possibility that “more safe assets” could and does most likely signify too much safe assets. If our banks, those who have usually played the role of designated risk-takers, standing in for us much more risk adverse citizens, are by means of the risk-weighted capital requirements given incentives to also avoid risk, there is no way we can have anything but secular stagnation.

PS. FT reporters... dare to ask The Question!