Alan Greenspan's Fake Claim That Raising Bank Capital Requirements Wastes Resources: For the Virtual Green Room
The Malevolent Ex-Maestro: [T]he most offensive thing intellectually is the incredible fallacy of claiming that higher capital requirements for banks amount to keeping resources idle. Hello? Bank capital doesn’t consist of canned food or steel ingots held in a vault somewhere, and raising capital requirements doesn’t mean that food or raw materials have be stored in a bunker. All that’s happening when you increase capital requirements is that you are requiring that banks reduce their leverage, financing more of their portfolio from equity and less from deposits or borrowing. And this has nothing to do with resource use; it’s about the distribution of risk. Specifically, raising capital requirements means that if something goes wrong, more of the cost will be borne by the bank’s owners, less by depositors, lenders, and/or whoever (including the taxpayer) insures those deposits or loans. It’s true that shifting the equation in this way will discourage risk-taking — but that’s a feature, not a bug. In case you hadn’t noticed, banks took too many risks in the past, helping land us in the mess we’re in.