George says give them a break August 30, 2011 at 7:37 am

In a great article on Bloomberg, George Magnus reprises his what we can learn from Marx about the current crisis theme. He has five policy prescriptions, all of which are worth reading; here I will concentrate on the third

…to improve the functionality of the credit system, well-capitalized and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing to small companies, especially. Governments and central banks could engage in direct spending on or indirect financing of national investment or infrastructure programs.

Exactly. Now is precisely the wrong time to be increasing minimum capital requirements. As George says, our prime focus should be on creating jobs, and a frozen credit system is not helping. I would cut capital requirements on corporate loans (only) by 50% for at least two years.

3 Responses to “George says give them a break”

  1. Interesting, China has been doing this. You think they are a poster boy or a counterexample for this sort of thinking?

  2. Hmmm, interesting question Danny – thank you. I think China faces a difficult problem. Growth is too strong there, but the banking system will collapse if too many loans are money bad, and it is only growth that will help. So the Chinese know they need to throttle back, but not too much. Cutting capital requirements keeps credit flowing while the banks try to resolve their problems. Whether it will work is hard to judge, but I certainly think this is a difficult problem from the European/US one where growth is too weak.

  3. Well cards on the table time… I think they are a counterexample. By all accounts, 2008-2010, they were just okaying every single loan possible with no accounting for probability of payback. Seen this already with the hundreds of billions of dollars the central government has forked out to bail out the local governments and the banks who lent to them. Of course at the moment they have plenty of FDI and people’s savings to burn through but at some point chickens come home to roost.

    Was an interesting talk on Gplus with Victor Shih and Carl Walter about this sort of thing.

    PS always enjoy reading your blog. Thx