September 11, 2013

Though policymakers cannot decree the balance of the economy, they can surely guarantee its imbalance.

Sir, how economically efficiently the banks allocate credit is going to a very high degree determine the vitality and sturdiness of the real economy.

And current bank regulations, with capital requirements based on perceived risk, by allowing banks to earn much much higher risk-adjusted returns of equity when lending to “The Infallible”, like sovereigns, housing and the AAAristocracy; than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and start-ups, guarantees an inefficient allocation of bank credit.

Robin Harding, in “Americas economic growth is built on sand” September 11, writes that “Policy makers cannot prescribe the balance of the economy”. That is correct, but policy makers, by allowing for these dumb regulations, with its phony risk aversion, are indeed decreeing the imbalance of the economy. Obviously, Washington is not alone doing that, all Europe is too.