August 25, 2010

Sheila Blair... keep away from Basel.

Sir Sheila Blair opines that “The road to safer banks runs through Basel”, August 24. She is in her right to ask for safer banks but let me remind her that there are plentiful of people with no savings and no jobs who most want and need the banks to travel on the road of being more productive for the society, and that will not happen by going through the Basel Committee where not a word is spoken about the purpose of the banks.

But even in having the Basel Committee helping making the banks safer, Sheila Blair is wrong, because since that Committee has yet to understand what is wrong with their regulatory paradigm, it is not as she says “now moving to correct the problem”.

Blair correctly indentifies capital misallocation as the cause of the bust, but that was in itself caused by giving the banks, in real and relative terms, higher incentives to pursue what ex-ante is perceived as not risky, the AAA-ratings. We simply need to ask… where else but in excessive investments in what ex-ante is perceived as not being risky have all the bank crisis originated? The answer is nowhere!

The Basel Committee must be made to understand that they do not have the right to interfere in the markets by imposing on it, through the different capital requirements for banks, their own set of arbitrary and regressive discrimination of what is perceived as having higher risk.

Currently small businesses and entrepreneurs, those usually perceived as riskier, but who could perhaps most help us to generate the next generation of jobs, must pay around 2 percent more in interest rates, just in order to be competitive when accessing bank credits, just because of the discriminating capital requirements. The members of the mutual admiration club in Basel seem incapable to understand that… and unfortunately that seems to go for Sheila Blair too.