EIGHT

Paid to Gamble

It is difficult to get a man to understand something, when his salary depends upon his not understanding it!

Upton Sinclair, I, Candidate for Governor: And How I Got Licked (1935)

WHEN ARGUING AGAINST higher capital requirements, bankers and others routinely claim that having more capital would “lower returns on equity” (ROE).1 These lower returns, they claim, would harm their shareholders and could “make investment into the banking sector unattractive relative to other business sectors.”2

Arguments against higher capital requirements that are based on such reasoning are fundamentally flawed. Such arguments ignore the basic connection between borrowing and risk, discussed in Chapter 2, and the basic connection between risk ...

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