Friday, 19 September 2014

Spot the flaw in this argument relating to bank capital.

The illustrations below come from a Bloomberg article by Peter McCoy. I like the illustrations, but the argument behind them is actually flawed, though the flaw is not serious. Or rather, rectifying the flaw actually SUPPORTS McCoy’s argument rather than detracts from it.

The flaw is thus.
If banks are made to hold more capital, the TOTAL AMOUNT that individuals, households etc need to invest in capital in ALL INDUSTRIES for the country as a whole must rise (all else equal). That means the RETURN that households will demand for holding or investing in capital will rise. Thus banks will have to charge more for loans.
However, contrary to the claims of bankster / criminals, that will not reduce GDP: in fact it will INCREASE it. Reason is that when banks have a low capital ratio they are more likely to fail, thus they are implicitly relying on taxpayer funded subsidies or guarantees. And subsidies distort markets and reduce GDP. Thus a rise in capital requirements, while it will reduce loans and debts, will actually increase GDP.

Bank capital ratios in the 1800s when taxpayer funded bail outs for banks were unheard of were often around 50%: way above current levels. That 50% is some indication of what the genuine free market ratio would be.

But of course Wall Street bankster / criminals don’t want genuine capitalism or free markets. Their praise for capitalism is one HUGE LOAD OF HYPOCRISY. What they really want is socialism for the rich, while the poor are exposed to capitalism red in tooth and claw.
H/t to Anad Atmati.

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