Banks should be allowed to take more risk to underpin the recovery in spite of the lasting damage caused by the financial crisis, a leading regulator has suggested.Foolish Thinking and Revisionist History
Andrew Haldane, executive director of financial stability at the Bank of England, argued that banks have over-reacted and are now suffering from "acute risk aversion".
This aversion has pushed up the cost of credit and "may be retarding the recovery".
Departing from current thinking, Mr Haldane suggested regulators now allow banks to operate with weaker finances to encourage lending.
Specifically, he indicated that banks could reduce the amount of loss-bearing capital they hold from around 10pc to 7.5pc.
"Setting regulation to boost risk-taking may feel like a radical departure," he said. But, drawing parallels with the Great Depression, he pointed out that President Franklin Roosevelt relaxed bank regulation in 1933.
More risk will mean more losses.
The world is flooded with overcapacity in nearly everything except energy. Encouraging more production and expansion in this environment when overspent boomers heading into retirement are not about to go on a spending spree is a mistake.
Moreover most of these comparisons to the 1930's are nonsensical. FDR did so many stupid things, some of which were blatantly illegal if not treasonous including confiscation of gold, forced crop burning, and the National Industrial Recovery Act (NIRA) of 1933 that was found unconstitutional.
However, and as is typically the case, various stimulus efforts in the 30's (numerous "CCC" type programs) died out by 1937 and the economy went back into recession. Of course Keynesian clowns now argue a pissy tightening action "caused" the relapse, when then as now, stimulus ran its course.
Contrary to popular fantasy, the unemployment picture following Roosevelt's policies is not as rosy as is often cited.
Here is a table from Wikipedia on Franklin D. Roosevelt
| Unemployment (% Labor Force) | ||
|---|---|---|
| Year | Lebergott | Darby |
| 1933 | 24.9 | 20.6 |
| 1934 | 21.7 | 16.0 |
| 1935 | 20.1 | 14.2 |
| 1936 | 16.9 | 9.9 |
| 1937 | 14.3 | 9.1 |
| 1938 | 19.0 | 12.5 |
| 1939 | 17.2 | 11.3 |
| 1940 | 14.6 | 9.5 |
| 1941 | 9.9 | 8.0 |
| 1942 | 4.7 | 4.7 |
| 1943 | 1.9 | 1.9 |
| 1944 | 1.2 | 1.2 |
| 1945 | 1.9 | 1.9 |
Derby counts Works Progress Administration (WPA) workers as employed, Lebergott as unemployed.
Of course you can have 100% employment if the government employed everyone.
War Recovery vs. Austrian Economic Theory
Unemployment did not really drop until 1941 or 1942. WWII started with the invasion of Poland in September 1939.
It was war that started the recovery, not the policies of Roosevelt. That statement may sound contrary to Austrian economics but it's not.
Destruction of productive capacity and assets is always a net loss. War is never a good thing in this regard. To believe otherwise is to believe in the Broken Window Fallacy.
However, the US was the only major country that did not suffer major losses in production capacity. Following WWII, the US became the growth engine of the world, further fueled by war-weary soldiers who returned home and started families, kicking off the "baby boom" and all of its ramifications.
Europe followed eventually, but no one in their right mind could suggest that WWII or wars in general are a good thing for stimulating economies.
Saddled with the Failed Policies of FDR
Today we are saddled with the consequences of Roosevelt's inept actions.
- There is no gold standard to act as a trade moderator or to impose spending restraints.
- Unions have bankrupted cities and states.
- Trillions of dollars of public pension promises that cannot and will not be met.
- Government is bloated at every level: city, county, state, federal
Finally, this is not 1939 in terms of demographics, in terms of public debt, or in terms of private debt. To suggest otherwise displays incompetence. In general, to expect anything but incompetence, greed, corruption, or graft from regulators is a mistake.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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