Tuesday, November 10, 2015

The reverse mortgage on the economy the baby boomers allowed will forever shame their intellectual elite


In 1988, the Basel Capital Accord introduced the concept of credit-risk-weighted capital requirements for banks. More risk, more capital — less risk, less capital. That allowed banks to leverage more, and therefore to earn higher risk-adjusted returns on equity when lending to the safe as opposed to the risky.

As a result, it also imposed a de facto reverse mortgage on the economy, which extracted the value it already contained, as banks focused more on refinancing the safer past than the riskier future.

And that also meant we refused those coming after us the risk-taking that brought us here and, in such a way, we baby boomers — or at least our elite — allowed the intergenerational holy bond that Edmund Burke wrote about to be violated. That is something the good we might have done in the 1960s will never be able to excuse.