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The Bubble Economy: Is Suitable Growth Possible?

July 28, 2014 • GLOBAL ECONOMY, FINANCE & BANKING, Capitalism in the 21st Century, Global Capital Markets, Governance & Regulation

By Robert U Ayres

How can risk spreading from the bankers to their customers or the taxpayers be reversed? Below, Robert U Ayres argues that part of the answer must be to change the incentives, and suggests ways forward.

 How can risk spreading from the bankers to their customers or the taxpayers be reversed? Part of the answer must be to change the incentives. Two recent EU decisions may point the way forward. One is to allow the European Central Bank to deal directly with troubled banks, as the US Federal Reserve has been doing since 2009. This transfers bank debt to the central bank, but not to the taxpayers, at least not directly. The question confronting political and business leaders with ever greater urgency is: what will drive future economic growth? Of course, stabilizing the global financial system is a necessary condition for long-term economic growth. In my opinion, separating the functions of investment banks and commercial banks—back to Glass–Steagall—would be the biggest single step in that direction.

The arguments used by banks to defend their high leverage risk-taking are not based on economic theory or evidence.

 
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