Capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs doom the world to secular stagnation.
Sir, Martin Wolf writes: “the financial mechanisms used to manage secular stagnation exacerbate it. We need more policy instruments. The obvious one is fiscal policy. If private demand is structurally weak, the government needs to fill the gap. Fortunately, low interest rates make deficits more sustainable.” “Monetary policy has run its course” March 13.
No! Secular stagnation is guaranteed by capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs. The subsidies implicit in having assigned a 0% risk weight to public debt translate into artificial low market rates. Weigh the sovereigns equal to citizens, at 100% and you will immediately see those rates shoot up.
Of course kicking the can further down with more fiscal spending based on more public debt will give our economies a breather, but for what purpose? Had central bankers and regulators accepted in that loony 62.5 times allowed bank leverages for anything rated as AAA, and insane 0% risk weight assigned to Greece that caused the crises; and gotten rid of their risk weighting based on ex ante perceptions and not on ex post possibilities, our economies would be in a much better shape. But no, their huge liquidity injections seem to have mostly been put in place in order to cover up for their mistakes. And statist journalists backed them up by solely blaming banks, credit rating agencies and markets.
@PerKurowski
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