July 20, 2012

Any country declines if it starts taxing risk-taking

Sir, congressman Paul Ryan writes many truths in “Republicans must return to free-market principles” July 20, the truest in my opinion being that of “the defeatism of those seeking to manage the west’s decline. 

But if the congressman would just pick up his phone and call a banker in his constituency, to ask him how much capital the bank needed to hold in order to lend to an unrated a more fuller understanding about the urgency of returning to free-market principles. 

With immense hubris bank regulators, thinking themselves to be the risk-managers of the world, started to allot risk-weights which determines how much capital a bank needs for any specific asset. And, that translates into extraordinary interest rate subsidies to what is officially perceived as not-risky and extraordinary interest rate taxes on what is officially perceived as risky. 

What drives a country forward is its willingness to take risk. If bank regulators skew the access to bank credit in favor of the not-risky, those already favored by risk-adverse bankers, then the country will stall, decline, and finally fall drowning in obese bank exposures to what is officially deemed as absolutely not risky.