LIQUIDITY AS FIRE INSURANCE.

LIQUIDITY AS FIRE INSURANCE. An article by Francesco Guerrera in the Wall Street Journal (November 22) says that some of the biggest banks (he mentions Goldman, Morgan Stanley, and UBS) are keeping around 20 to 25% of their balance sheets in liquid securities and cash, even though they provide little return. They are choosing protection against adverse movements in the markets which will affect their ability to borrow. He says that: “Before 2008, investors would have decried this as a huge waste of shareholder money—a ‘lazy’ balance sheet in Wall Street parlance.” Guerrera says that shareholders will have to make do with lower profits and there will be less total credit in the economy. This is a heartening development. This week’s newspapers have articles recounting arguments against new regulations by bank lobbyists to the effect that requiring banks to comply with the regulations will lead to lower profits and less credit. Kids, adequate liquidity should be a cost of doing business. It’s protection against risk for the bank, like fire insurance. It’s also a cost that should figure into the cost of borrowing in the economy. There has been too much risk taking by banks and too much borrowing by the economy because these costs have been ignored.