May 11, 2015

Nial Fergusson, do not blame Keynes, Keynesian economists do not give Keynesian policies a fair chance to work.

Sir, Niall Ferguson holds that Keynesians have lots of egg on their face after the elections in the UK where the conservatives won, by a lot “Labour should blame Keynes for their election defeat” May 11.

Indeed they should have, but the reason for it has little to do with what Ferguson thinks or wants to imply.

No Keynesian policy on earth, could deliver real positive and sustainable results, when bank regulations impede the liquidity their spending policies generate, to reach those who could make the most of it.

In 1988 with the Basel Accord, sort of when everyone was busy attacking the Washington Consensus for its private sector bias, the regulators (for ideological reasons), for purposes of defining the equity banks had to hold against assets, decided that the risk weight of the infallible sovereign was to be zero percent, while the risk weight for lending to the fallible citizen was to be 100%.

With that the regulators privileged government bureaucrats’ access to bank credit over the others in the markets.

Later, in 2006, with Basel II, they “half mended” it, by stating that some AAArisktocrats were good enough to have a risk weight of only 20%.

And so then everyone met happily in Davos, where of course no lowly “risky” SMEs are invited.

And here we are with for instance Paul Krugman preaching us about inequality, but keeping mum on the fact that the risk-weighted equity requirements for banks, by killing the opportunities of the risky to access bank credit in fair terms, is a great inequality driver.

The real problem might be that many of current Keynesians want much more statist governments than Keynes ever considered, and so the zero percent risk weighting of sovereigns, attracts them too much… and so they do not want to even give Keynesianism a fair chance to work.

Of course, the free-market defendants who failed to see how distorted the allocation of bank credit has become; or who do not want to cross banker friends who just adore the concept of being able to leverage immensely what is ex ante perceived as safe, and therefore keep silence on all this, will also end up having egg on their faces. (You too Niall Ferguson?) 

PS. How can you give a zero credit risk weight to a debtor who, right in your face, is pursuing financial repression, inflation (just another kind of haircut)?