November 14, 2016

Odious bank regulations have hurt the working class the last decades more than Trump could do during four years

Sir, Lawrence Summers writes: “Not even US presidents with political mandates can repeal the laws of economics…Populist economics will play out differently in the US than in emerging markets. But the results will be no better”, “A badly-designed US stimulus will only hurt the working class” November 14.

But neither can almost self-appointed bank regulators repeal the laws of economic.

With their “more risk more capital – less risk less capital” technocrats send politicians and the general public the populist message that doing so, would help to stave of bank crisis without affecting growth.

For a starter that was pure nonsense since major bank crises are never the result of excessive exposures to something ex ante perceived as risky when incorporated on the balance sheet.

But much worse the populist technocrats assigned a risk weight of zero percent to the government and 100% to We the People.

Since that can only be based on the so statist and so false assumption that government bureaucrats know better what to do with bank credit than SMEs and entrepreneurs, productivity and job creation has of course been negatively affected.

The wealthy, at least in the short term, are better positioned to survive any dumb regulatory distortions than the working class. Long term, much less can the young, those who can only count on abundant risk-taking by the private sector to generate an economy that could serve their needs in the future.

Lawrence Summers is fixated on fixing the potholes of today, without concerning himself about who could use those pothole free roads efficiently tomorrow, generating profits and jobs.

Lawrence Summers also insists on that the public sector should take advantage of the very low interest rates to take on more debt, and do more infrastructure investments. That is because he resists the idea that those low interest rates might in much be the result of very costly regulatory subsidies to the sovereign, paid by us We the People, workers, SMES and entrepreneurs.

Sir, as I see, it if we insist going down the current bank regulations road, there will be an immense scarcity of basements where the unemployed young can live with their parents. 

PS. Here’s a link to what Professor Lawrence Summers answered me last week during IMF’s Annual Research Conference.