Wednesday, November 11, 2015

A letter in Washington Post: Reverse-mortgaging the future

Reverse-mortgaging the future

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.






When will US Congress or Scotus review the constitutionality of current risk weighted bank capital requirements?


PS. The capacity to borrow at a reasonable cost is a very valuable strategic sovereign asset. It should not be squandered away by the generation in turn only to benefit its members, or with some non-productive investments. 

PS. In 1988, when bank regulators decreed a 0% risk-weight for US public debt, its debt was $2.6 trillion, 50% GDP. Now on way to $ 30 trillion, about 130% GDP, it still has a 0% risk weight. When do you think its risk weight should increase to 0.01%?



PS. Some couples might benefit from a reverse mortgage on their house, but it would be very irresponsible for a whole nation/generation, to place a reverse mortgage on all the economy. Modern Monetary Theory (MMT) is a poisonous Love Potion Number Nine.


It should not be surprising if those young living in the basements of their parents’ houses one day shout out: “Ma-Pa, now it’s our turn to live upstairs, you move down to the basement!” 

This letter in The Washington Post