October 08, 2015

Stimulus, stimulus and more stimulus? Lawrence Summers, FT, IMF, can’t you see the economy has been made frigid?

The world has been given fiscal deficits, massive liquidity injections with the QEs, and extraordinary low rates… and all we get is a blah economic response. I know why, but most decision makers (including journalists) do not. That is because as Lawrence Summers explains the “policymakers… ignore adverse market signals [that] are inconsistent with their preconceptions”. “FT Big Read: Global Economy: The case for expansion”. October 8.

So here is the why… for the umpteenth time:

Bank regulators, Basel Committee, FSB, Fed, IMF, FDIC and others, by imposing as the pillar of their regulations loony portfolio invariant credit-risk weighted capital requirements, gave banks a risk-taking antiaphrodisiac, meaning an ingredient that kills the libido, the opposite effect caused by Viagra or Cialis. And it is not that banks needed it; they were already quite adverse to ex ante perceived credit risks. Ask Mark Twain.

And boy have the adverse market signals been ignored. All assets that caused the crisis were, as is usual with bank crises, those that were perceived or declared safe, like AAA rated securities and loans to sovereigns like Greece, and that banks, in this case, on top of it all, were allowed to hold against basically no capital at all. And having banks been given the incentives to go to safe havens by the risk adverse regulators, experts now even call it “excessive risk-taking” when, as a result, banks ended up in dangerously overpopulated safe havens.

And all those “risky” bays where SMEs and entrepreneurs reside, and which could provide much growth, they are left, equally dangerous, highly unexplored. When have you seen a stress test of a bank’s balance sheet that has included looking at what should have been on it?

So No! Professor Summers… and you all! Before giving Lawre economy more stimulus first rid banks of this regulatory antiaphrodisiac… and, thereafter, give them perhaps even some aphrodisiac in order to increase their willingness to take risks on projects that can help the sustainability of planet earth or the creation of the jobs our children and grandchildren will need.

@PerKurowski ©  J