Basel III’s Effect On Gold And Silver

Basel III and gold safe

There is sometimes a tendency to confuse ends and means. For example, in traveling through an airport there is an extensive inspection of passengers. Before you are allowed to board an airplane, you must go through a process that is intrusive and increasingly invasive. This is deemed to be security. How do we know it makes us secure?

Because it is annoying.

See the switcheroo? The degree of disruption of your schedule and possessions bears only a faint relationship to the degree of safety.

So it is with many other regulated areas. Banking is no exception. It’s worse, actually, as the governments and their central banks offer trillions of perverse incentives for banks to act in ways that are most unsafe. Ultra-low interest rates provide both the means and the motive to take risk. The means is that leverage is cheap. The motive is that profit margins are compressed, and banks cannot survive without leverage.

So the banks respond to these perverse incentives by taking perverse trades. And this causes all sorts of problems. The kinds of problems that lead to the 2008 global financial crisis.

And governments respond to this by imposing what they call “macro-prudential regulation.” They don’t remove the perverse incentives. No, that is a matter of policy (and inexorable necessity of irredeemable currency). Instead, they think to compensate for it by controlling what banks can do.

Basel III as Macro-Prudential Compensation

Compensation is doing the wrong thing, on purpose. Purportedly to address something else, that you cannot or will not properly correct. Like letting the air out of the other three tires, when you have a flat.

Or imposing macro-prudential regulation, when you have a failing regime of irredeemable paper and a pathological falling interest rate that both makes it possible, and necessary, for banks to take risks such as extreme leverage, extreme duration mismatch, and chasing risk to obtain a few basis points of yield.

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Disclaimer: The content in this article is provided as general information and for educational purposes only and should not be taken as investment advice. We do not guarantee the accuracy ...

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