Bob Sleeper (Letters, June 15) is concerned that if central banks embraced competitive neutrality and extended to us all the utility banking they provide commercial banks, that would leave high-risk loans to the private sector. For me that’s a feature, not a bug.
He claims it would make the system more crisis prone. Why? Currently bank depositors are forced to cross subsidise both low- and high-risk lending. Central bank lending against super-collateralised mortgages (at no more than 60 per cent of the value of mortgages) would slash the resource cost of low-risk lending.
It effectively transfers it from the financial system, in which each link in the supply chain does “due diligence” on the previous one, to the monetary system which is adapted to minimise transactions costs. High-risk debt would then be (properly) repriced — with a little more “due diligence” going on. Borrowers would substitute towards more equity funding and lower spending.
There would still be the usual mistakes and herd behaviour, but it would be on a smaller scale and with lower leverage against collateral. And the central bank payments system would survive any crisis, just as we are told cockroaches will survive a nuclear winter.
That removes one central driver of bailouts. So wouldn’t asset bubbles, and the crises to which they can lead, be rarer? And milder? If existing prudential regulation of systematically important players — banks, insurers and pension funds — works now, it would work in this new world.
If it’s defective, we should fix what we can. And to the extent that we can’t, there would be less to go wrong, not more.
Nicholas Gruen Port Melbourne, VIC,
Australia Visiting Professor, King’s College London Policy Institute