Home > Macroeconomics > How to conquer a rational long-term growth path, by Juan María Nin.

How to conquer a rational long-term growth path, by Juan María Nin.

With a Neo-Austrian economic background and a deep knowledge of the roots of the Great Recession started in 2008, (dated well before though) Juan María Nin explains in his recently published book, titled “For a rational (economic) growth” and subtitled “From the Great Recession to Stagnation: Solutions to compete un a Digital World”(1), his recommendations for structural change. He states thar our economies need to escape from the current low-growth or recession situation and from the institutions and structures that generated it since we accepted: (i) A money generation monopoly by Central banks or similar institutions, (Fed); (ii) a fractionary reserve banking system and the subsequent working capital structural deficit in the banking industry; (iii) a monetary policy-led constant inflationary pressure, the bubbles arising from them, and the banking failures emerging from them; (iv) the necessary last resort lender role of central banks and the public support when things go bad for the private bank balances, (v) a tacit agreement in exchange for the loans granted to the public sector in his unstoppable growth path.

He suggests some structural and institutional changes if a rational path for growth not blindly based in debt, inflation and low interest rates is to be pursued:

 

  1. Changes to the incentive and institutional system:
    1. A complex and pro-cyclical accounting “fair value” standard needs to be abandoned so that a prudent approach is recovered.
    2. Increase in capital requirements for banks (even more simple rules not including averaged weitghed assets) and macroprudential rules.
    3. Avoidance of a systematic interest rate level manipulation by monetary policy agents, the recurrent cause of bubbles or masive mistaken investment decisions, when agents look for the lost profitability of projects in riskier activities.
    4. Recovery of a higher financial education by the public, at least allowing them to search the best banks where to allocate their deposits, in a broader responsibility environment in which…
    5. banks may fail and go bankrupt (once bail-in mechanisms have been brought forward) and are not systematically saved by (taxpayer`s) external capital (bailed out).
    6. Introduction of a deeper and in situ oversight by the banking supervising authority that helps avoid hyper-regulated banking environments, which are not always effective.
  2. Changes to the banking business:
    1. Stop to the risk modelling arrogance, where models based in past correlations don`t allow for probabilistically irrelevant black swans, and enhancement of the relationship with the client.
    2. Stop to excessive regulation that pushes for greater banks with very similar business models; greater role for market forces, (including bankruptcy for worst performers and of course higher banking consumer and investor education).
    3. Improvement in management practices that allow and force to clean and purify when necessary, instead of letting problems grow until public intervention and new interest rates reductions are inevitably needed, which allows the banking market to be crowded with more zombie banks, incapable to confront black swans when they appear.
    4. Reduction of agency problems with executives via better compensation practices, (plus true market forces threat like takeover bids or bankruptcy procedures, instead of the very friendly public rescue).
  3. Ethics in finance and the morality of debt:
    1. Our societies shouldn`t “automatically accept” as they generally do in media and public opinion that capitalism equals egoism, greed and inmorality; that only the government (master of good and bad) can correct that through new regulation and uniforming safe harbors; the market refers more to human action, cooperation, and search for prosperity through reputation than to competition and fight based in greed. There is no such a thing (and we don`t need it) as a state that saves men from themselves.
    2. Freedom needs to be enhanced combined with responsibility, (shareholders and other funds providers to banks will pay for the mistakes and failures).
    3. The historical moral belief that debts must be honoured and the corresponding individual responsibility component must be kept. In a modern banking system not relying anymore in personal relationships trust is needed, and thus the moral committement by puclic or private debtors is required.
  4. Principles for a more rational growth:
    1. Monetary policy must be normalized and should somehow be anchored to the real economy so that the artifical loss of value for money is avoided; the same applies for fiscal policy which should abandon the love for debt which would give broader room for private activites.
    2. A society where changes above promote higher savings, capital and investment. A society where productivity increases and technological improvements foster prosperity, (without excess of debt and or taxes being an obstacle for that).

(1) https://www.planetadelibros.com/libro-por-un-crecimiento-racional/213710

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