Contributor: David Renz

When thinking of the root causes of the recent financial crisis, clearly the unsustainable path of credit creation stands out as the central problem plaguing the financial sector. Due to the taming of inflation post-1982 and a secular decline of interest rates accelerated by changed aggregate savings processes in emerging economies, the price of credit has been very low for nearly two-and-a-half decades. This phenomenon, dubbed the Great Moderation stood, alongside the introduction of the Euro behind a very rapid growth of credit in many countries. Following the calamities of 2008, this bubble has burst with spectacular side-effects, among which are new efforts to regulate the banking industry. Basel III is set to yield higher capital and liquidity levels across the globe and thus make banking both safer and less profitable, as high-yielding credit is set to be partially replaced, at the same time, by low-yielding liquidity while capital requirements are set to rise drastically.... read more