April 14, 2015

How long would roulette remain a valid game under a Basel Committee for Gaming Supervision?

Sir, roulette is a game where absolutely all bets produce exactly the same expected financial payout; in this case a small loss since the house wins when the zero comes up. What would happen if regulations forced casino to increase the payout for “safer” bets, like betting on a color, than for “riskier” bets, like betting on a number? Easy, the game of roulette (and the casinos) would not be sustainable.

But, to forcefully alter the payouts and introduce a disequilibrium, is exactly what bank regulators have done by allowing banks to leverage much more their equity, and the support they receive from taxpayers, with assets perceived as safe than with assets perceived as risky.

The result will be too much betting on what’s perceived as safe, and too little betting on what perceived as risky; something that of course makes the financial sector and the economy unsustainable.

Unfortunately, the IMF, the Basel Committee, the Financial Stability Board; and experts like Lawrence Summers, Ben Bernanke, Paul Krugman, and Martin Wolf, none of them wants to acknowledge the risk-adverse distortions in the allocation of bank credit to the real economy, that the current bank regulations produce.

And, without considering that, then the whole discussion to which Martin Wolf refers to in “An economic future that may never brighten” April 15, becomes incomplete and unproductive… or in franker terms… nonsensical.