February 01, 2011

The era of regulatory distortions should draw to a close

Sir, Richard Dobbs and Michael Spence write “The era of cheap capital draws to a close” February 1. Given the current losses, would not this era, in these terms, be more accurately defined by calling it the era of “capital cost postponements”?

Also, given that if banks had been limited to more traditional leverages, we would never had seen the credit expansion that occurred, was it really cheaper capital we saw or was it not an era of regulatory distortions?

It was arbitrary regulatory discrimination which caused bank credits to be relatively very cheap for anything that could dress itself up to be perceived as low risk, as bank equity could then leverage more than 60 to 1, and relatively much more expensive for what could not do so, and for which bank leverage was kept to a 12 to 1. That is what pushed the world into financing houses in the US and other “safe” places and away from infrastructure and machinery and other “unsafe” ventures.

If there is anything we should ask for now, that is for the financial regulators to immediately stop acting with such hubris as the risk-managers of the world.