Wednesday, August 24, 2016
In 1988, suddenly, without asking anybody, least us citizens, bank regulators, for the purpose of setting the capital requirements for banks, decreed the risk weight of the sovereign, the government, to be Zero Percent, while the risk weight for We the People was set at 100%.
Not having to hold capital against sovereign debt permits banks to lend to government at lower rates; which translates into a regulatory subsidy of government debt.
Then in response to the 2007-08 crisis, itself a result from distorting bank regulations, central banks launched quantitative easing, which basically meant injecting liquidity into the economy by purchasing government debt; and for example the Fed has ended up with about of US$ 4.5 trillion in government paper.
Much of the liquidity injected went to prop up real estate, bonds and shares, but a lot of it spilled over into more demand for government paper.
Naturally, interest rates for public debt fell, and many, like pension funds, in order to adjust for their liabilities, had to purchase even more public debt.
And while regulatory subsidies of public debt are kept in place, this vicious circle will continue.
And to top it up, too many “experts” now advance the argument that government should take advantage of these low interest rates, to launch infrastructure projects.
Let me be very clear about it, the fact that government might (artificially) even be paying a negative rate on its borrowings, does not mean it should borrow, because it is still very capable of investing those funds in projects yielding even more (real) negative rates.
I do not know how we got to this point, whether by accident or whether a set up by runaway statists. You tell me!
PS. When utilities were being privatized in South America, I often heard accusations in terms of “savage neo-liberalism”. Since these utilities were not adjudicated to whoever offered to serve us citizens the best and the cheapest, but to whoever offered to pay the government the most, a tax advance that left us with a huge bill to pay at private investment rates of return, to me those privatizations were much more an expression of sadist statism.