Five tweets and four PS: When shares and houses will want or need to transition from here to there, what will happen?

Huge QE, large fiscal deficits, and generous bank credit pushed on by very low capital requirements, injected huge amounts of liquidity that, among others, caused the price of shares, and the price of houses that morphed from homes into investment assets, to increase immensely.

Soon many of the elderly owners of shares and houses, will want to reconvert these assets again into main-street purchase capacity, whether voluntarily, in order to cover for their retirement costs, or involuntary, by having these assets becoming part of an inheritance.

The sale of shares and houses will then face: An extremely indebted economy that includes huge unfunded social obligations. Gig jobs, robots that tend to hold down wages, and pension funds and insurance companies also needing to sell assets in order to meet their own commitments.

How is all that going to play out? Since there are no possibilities of reenacting Troubled Asset Relief Program (TARP), or placing all shares and houses on central bank’s balances, it has me very troubled and finding very little that could bring me, a grandfather, some relief.

Is someone somewhere preparing financial or economic counter measures that could alleviate the problems brewing in the horizon? I really doubt it! As Einstein said, “We can't solve problems by using the same kind of thinking we used when we created them.”

PS. All this could be further much complicated by social tensions caused by lack of employment. Therefore I would ignore all the redistribution profiteers’ natural objections, and immediately enact an Unconditional Universal Basic Income. Even $100 per month would do for a start.

PS. That UBI could be partially funded by a high tax on carbon emissions. That would allow us to use market signaling more, in order to avoid that whatever little resources we might have available for fighting climate change, are captured by green-profiteers.

PS. Bank regulators messed it up for us. Their risk-weighted capital requirements only guarantee banks building up especially large exposures, to what’s perceived as especially safe, against especially little capital, dooming bank systems to especially large crises

PS. If our descendants are to stand a chance they must understand that risk-taking is the oxygen of any development, and so they must be wary of any loony runaway risk aversion, imposed by expert besserwisser nannies. God make us daring!

The solutions I offer are ignored. Might it be because these provide too little business to expertize and redistribution profiteers?

Before the 2007-08 crisis there was some economic growth resulting from a big expansion of credit, which was fed by some very low capital requirements to banks and that allowed these to, in some cases, leverage their equity over 50 to 1.

Then disaster struck, as a consequence of excessive exposures to what had very little capital requirements, like loans to sovereigns (Greece), investments in AAA rated securities and the financing of houses. 

In panic, floods of money, for instance by means of QEs, were poured over the economies, with little results to show for it, and now, the most important world economies, are stuck. Any additional stimuli, be it by means of public borrowing for infrastructure projects, QEs or low or negative interest rates will only complicate matters much more... like for pension plans.

The truth is that trying to get strong and sustainable economic growth, while keeping in place credit risk-adverse capital requirements for banks that exclude SMEs and entrepreneurs from fair access to bank credit, is just impossible.

What to do?

1. Very carefully remove the risk-weighted capital requirements for banks that distort the allocation of bank credit to the real economy. In order to make sure banks have sufficient capital while adapting, and that credit is not constrained, central banks could offer to purchase some of their bad portfolios, with the understanding that no dividends would be paid until these portfolios had been repurchased by the banks. (See what Chile did)

2. Create new demand (and lessen inequalities), by means of 100% tax-funded Universal Basic Income schemes. One of these could, if funded with carbon taxes, also help with environmental sustainability.

I have been arguing against the risk weighted capital requirements for banks for soon two decades, and I have explained many of its mistakes over and over again. I have yet not been able to obtain one single answer from those responsible, like from the Basel Committee or the Financial Stability Board. Could it be because they have no answers? 

Or could it be that my counter proposals are too straightforward, to simple, and would therefore erode the earnings potential of bank regulators (and consultants), of climate change and inequality fighters, and of the general expertize and redistribution profiteers?

Or is it that I just don’t know what I am talking about? It could be, though I think I can prove I do know by means of somecertifiable early opinions on these issues.

Thomas Piketty. Would you tax wealth if this only benefited even more some few oligarchs?

We begin to hear proposals about taxing wealth, like that presented by Thomas Piketty in “Capital in the Twenty First Century”

Taxing wealth might reduce the fever of inequality, but it does not attack its causes. In fact, forcing the sale of assets, which is where wealth is stored, in order to increase the consumption of the less well off, might direction the funds away from those who have earned their wealth naturally, to those who earn it thanks to market imperfections, or to outright crony capitalism. An in such a way it could undermine even more the meritocratic values on which democratic societies are based, something that Piketty himself would seem to abhor.

In other words, if in Russia, would you tax wealth if that benefited the oligarchs?

I believe it would be better to concentrate on what is causing unjust artificial inequality and in this respect I could mention the following possibilities.

Like to eliminate the concept of risk weighted capital requirements for banks which channels bank credit away from “the risky”, in much a proxy for the poor, to “the infallible”, in much a proxy for the wealthy.

Like to increase the tax on all those profits which have originated under the protection of intellectual property rights. There is no reason for these to be taxed at the same rate as profits obtained from competing naked in the markets.

Finally, let´s give it a thought to what would have happened to all that unequally accumulated wealth, had not TARP and Quantitative Easing come to its rescue.

Just the fact that, except for religious considerations, when in the grave, we’re all equal, and the Gini coefficient is zero, should not mean we should hurry to get there... I think.