January 31, 2014

When regulators exorcised primal risk-taking from the banks, they doomed our economies to decadence.

Sir, Edmund Phelps writes that “Nations with once-dynamic economies will be helpless to recover their prosperity as long as they misunderstand what causes economic progress”, "Free innovators from the state’s deadening hand”, January 31.

Indeed before it is realized that primal risk-taking is what leads to innovations and start-ups, and which is what keeps the economy sturdy muscular. Any economic growth based on risk-aversion leads only to economic obesity. Unfortunately, bank regulators, with their loony capital requirements based on ex ante perceived expected losses exorcised such risk taking from the banks.

And Edmund Phelps also correctly states “The state is no better suited to take a big role in the technical innovation than in artistic creation”. But Phelps might not be aware of how bank regulations are stacked in favor of the state assuming such role. Currently when a bank gives a loan to a “risky” innovator, let’s for example call it a Solyndra; it is required to have much much more capital than when lending it to the “infallible sovereign”, and so that instead a bureaucrat can relend that money to an innovator, like a Solyndra.