October 07, 2009

Bumpy roads indeed!

Sir Martin Wolf writes that “Big bumps lie ahead on the road to recovery and reform” October 7. Though I sort of agree, on most, for me the biggest real bump for recovery is that of not knowing yet what kind of growth is sustainable, given the two bottlenecks of oil and climate change. Some countries could resume growing as if these constraints do not exist, but that might very well not take us where we want to go. Yes, we want to stimulate the world, but we also want it to take off in the right direction.

Then of course we have the problem with the monetary system, most particularly for the US, the exporter of the currency the world most trusts in lieu of other alternatives, and that therefore has to live with the safe-haven curse. All of us who come from resource cursed nations know there are serious difficulties living with a curse, not the least the fact that those resources are finite, and though we know that one morning investors might wake up finding the safe-haven unsafely overcrowded, there is little to be done until that happens. Just like they could not stop until they had chopped down the last tree on Easter Island.

But where I might disagree completely with Wolf is when he quotes Andrew Smithers arguing to “force banks to raise the needed capital and if they cannot, let government provide it” if with this he implies he believes public bank capital is the same as private bank capital. What we most need in term of reforms is to eliminate any bureaucratic interference with the risk and capital-allocation mechanism of the market, like those of the minimum capital requirements for banks based on perceived risk of default. What is most needed, especially in the “comfy” countries, is for a banking sector willing to take risks on those few willing to take risks.