April 24, 2015

Jason Furman, things are not starting to go right. With the current distortion of bank credit, that’s impossible

Sir, Gillian Tett quotes Jason Furman, chairman of the US Council of Economic Advisors in that a “Greek exit would be taking a risk with the global economy just when things are starting to go right” “America fears a European sequel to Lehman”, April 24. 

Where does he get that “starting to go right” from? While regulators allow banks to earn higher risk adjusted returns on equity on what is perceived safe than on what is perceived as risky, things simply cannot go right. 

But of course there could be a sequel to Lehman. That, while banks are made to finance too much what is perceived as safe, is guaranteed. Excessive exposures to what is ex ante perceived as safe but that ex post turns out to be risky, is precisely the stuff major bank crises are made off. 

But, following this line of argument, Greece will not cause it. Greece has been perceived as risky, for a sufficient long time, so as to pose a major threat.

PS. I assume of course that the equity banks are required to hold when lending to Greece has been increased… and is no longer zero J