September 04, 2014

We must expel regulators who only think of banks as mattresses to stash away savings

Sir, Martin Wolf, naturally reluctant to make a reference to all my letters to him about risk-weights that we have discussed over the years, writes: “An important part of higher capital requirements is that these should not be based on risk-weighting. In the event, the risk weights used before the crisis proved extraordinarily fallible, indeed grossly misleading” “Call to arms” September 4. 

He approximates, but he is still far from comprehending the fundamental problem with risk-weighting… it is indeed proving very difficult for him. The most serious problem with the risk-weights is that even if they are accurate, even if they do not (momentarily) mislead, they will still be distorting the allocation of bank credit in the real economy, and thereby setting up the worst of the calamities, not the destruction of the banks, but the destruction of the real economy.

Again, for the umpteenth time, you cannot allocate bank credit so preferentially as the risk weighing based on credit risks causes, to what is perceived as absolutely safe, in detriment of what is perceived as risky, and expect the economy to keep moving. Risk-taking is the most fundamental part in keeping an economy going forward, without stalling, and falling.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

So the most urgent action we must take is to remove from regulating our banks those who only think of banks exclusively in terms of a more secure mattress to stash away our savings… and for the time being at least, I am sorry to say those still include Martin Wolf.

Some fifty years ago we saw the photo of Nikita Khrushchev and Swedish Prime Minister Tage Erlander in a little rowboat close the shore, discussing. This year we saw Angela Merkel, David Cameron, Mark Rutte and the host Fredrik Reinfeldt, doing the same, in the same place, and in the same or a similar boat… but now they were all wearing life-vests. 

And just the other week we heard of a team being sued in the US because of some head injuries sustained by someone …playing soccer… and I fret for the destiny of this new manic risk adverse western world in which my grandchildren will have to live.