April 18, 2015

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.