September 13, 2014

On allocating resources, why does the undercover economist care more about donations than bank credit?

Sir, I refer to Tim Harford’s “Ice bucket challenge: the cold facts” September 13.

In it he refers to the problem that many very well intended donation drives, for all types of individually very worthy causes, may not, in aggregate, reflect the best use of donations.

Who is to decide? Harford suggests: “GiveWell, an organization that aims to give donors the information they need to make the most effective donations”, a sort of donation effectiveness rating agencies. But, Harford would of course not go to the length of making donors have to heed the opinions of GiveWell, as that would of course give GiveWell a power that, sooner or later, it would be tempted to abuse.

But in banking that happens! Even though banks considered credit ratings and other risk information when deciding to whom to lend and at what rates, the besserwisser risk adverse Basel Committee decided that it had to intervene, and with its credit risk weighted capital requirements, it much favored bank lending to those already favored, “the infallible”, which of course meant that those who already had less access to bank credit, “the risky”, would have that even more restricted.

And so the question that remains is… why would the undercover economist Tim Harford care more about the efficient allocation of donations, than about the efficient allocation of bank credit?