Fi­nan­cial Re­forms

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We need to im­pose far higher bank cap­i­tal re­quire­ments than those set out in the BaselIII stan­dard, but we must also use re­serve re­quire­ments di­rectly to limit banks’ money cre­ation ca­pac­ity.

We should change tax regimes to re­duce the bias in favour of debt fi­nance and against equity. We should equip cen­tral banks as macro­pru­den­tial reg­u­la­tors with pow­ers to im­pose far larger coun­ter­cycli­cal cap­i­tal re­quire­ments than have so far been es­tab­lished. We should place tough con­straints on the abil­ity of the shadow bank­ing sys­tem to cre­ate credit and money equiv­a­lents, and must not be di­verted from that path by spu­ri­ous ar­gu­ments about the dan­gers of in­ad­e­quate liq­uid­ity in credit mar­kets.

We should use pub­lic pol­icy for a dif­fer­ent al­lo­ca­tion of credit than would re­sult from pri­vate de­ci­sions, de­lib­er­ately lean­ing against the pri­vate bias to­ward real es­tate and, in­stead, should favour other po­ten­tially more so­cially valu­able credit al­lo­ca­tion. Min­i­mum risk weights that de­ter­mine the cap­i­tal needed to sup­port the cat­e­gories of lend­ing should be set by reg­u­la­tors, and not on the ba­sis of in­di­vid­ual banks’ as­sess­ments of risks.

Con­straints on mort­gage bor­row­ers through max­i­mum loan-to-value and loan-to-in­come ra­tios play an im­por­tant role. We should be will­ing to place some lim­its on the free flow of in­ter­na­tional cap­i­tal; frag­men­ta­tion of the fi­nan­cial sys­tem can be a good thing.

From “Be­tween Debt and the Devil: Money, Credit, and Fix­ing Global Fi­nance”

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