November 26, 2010

We need to start by fixing our banking infrastructure

Sir Martin Wolf correctly writes that “Assets matter just as much as cutting debt” November 26, asking the key question of “What is the sense of cutting spending today if the result is a poorer country tomorrow.” I have for more than a decade asked the very similar question of “What is the sense of trying to make our banks avoid risk-taking so that they do not default if the result is a poorer country”.

If there is some infrastructure that really needs strengthening that is our banking system, something that on top of it all does not require money but just a dose of common sense. If we just ask the bank regulators to tell us what they believe the purpose of the banks to be, and require it to be something more than just avoiding bank failures, which only places us on the road to the too big to fail banks, then we would advance significantly our chances to find the growth we all clamor for.

Let us just accept that by diminishing the capital requirements on what is perceived as not-risky will not lead us anywhere, as all it does is to increase the profitability for banks of doing business with what is perceived as not risky, without insulating us from the risk of the systemic bank defaults which all anyhow result exclusively from excessive investments in what ex-ante is perceived as not-risky.