May 29, 2017

When will the nonsensical talk about failures of the neoliberal system in the midst of runaway statism end?

Sir, Rana Foroohar writes: “Many progressive economists believe that the failures of the neoliberal system itself (which have been chronicled by even the IMF) have created a broad-based existential angst reflected in the new propensity of Americans to save rather than spend.” “The trust deficit is permanent” May 29.

Nonsense! Since 1988, Basel I, we have had regulations that for the purpose of setting the capital requirements for banks, have risk weighted the sovereign with 0%, and the ordinary unrated citizen, like any SME or entrepreneur, with 100%. That means banks can leverage their equity, and the explicit or implicit support they receive from taxpayers, many times more when lending to sovereigns than when lending to citizens. That means banks will obtain much higher expected risk adjusted returns on equity when lending to the sovereigns than when lending to the citizens. That causes banks to lend too much at too low rates to sovereigns, and too little or at too high rates to citizens.

What on earth has that to do with neoliberalism? Nothing! It is just the opposite. It is raving statism!

What we really have though are truly second or third class (or overly statist) progressive economists. They are unable to understand these bank regulations, by favoring so much the sovereign, the AAA-risktocracy and house ownership, over allowing the citizens to access that bank credit that could help them move up in life, is putting inequality on steroids.

There is no problem at all with high savings, if these can be efficiently channeled to the real economy, for instance by banks. But, if that is not the case, then these savings will not serve any good purpose… these savings will not even recover their original value when the real economy stalls and falls.