August 27, 2014

The inexplicable inconsistency of Martin Wolf

Sir, I refer to Martin Wolf´s “Opportunist shareholders must embrace commitment” August 27.

With respect to the corporations, those entities “largely responsible for organizing the production and distribution of goods and services across the globe”, Martin Wolf argues that “we have made a mess off them… with shareholder value maximization… which leads to misbehavior but may also militate against their true social aim, which is to generate greater prosperity”.

And though I agree with most of his concerns, I am left wondering if we would not run the risk of causing an even greater mess trying to correct it.

But, if Wolf is so concerned about how corporations allocate resources in the world, should he not be even more concerned about how bank regulators, with their risk weighted capital requirements, are providing a much worse and more concentrated distortion of something perhaps even more important like bank credit? Or is not the function of banks also to help generate greater prosperity?

Clearly Wolf should be concerned with it, but, for reasons that I do not comprehend, Wolf has never been able to understand that the risks with risk weighted capital requirements for banks are so much greater than the credit risks which are being weighted.

And Wolf ends admonishing “We should let 100 governance flowers bloom”. Yes indeed, but in these days when the reach of regulators is global and therefore more prone to causing systemic risks, should we also not look much closer into the governance of that sole regulating flower represented by the Basel Committee and the Financial Stability Board?

PS. And just in case, it is of course not my intention to single out Martin Wolf as someone who does not understand that risk-weighted capital requirements distort… he is in incredibly abundant and qualified company.