July 26, 2015

FT, have you envisioned that in the future you might now have to apologize Japanese style for your omissions?

Sir, you write “The FT has thrived, and continues to thrive, in an age of global economic interdependence defined by the free movement of capital, goods and people and instant digital communication”, “A new future for the FT, without fear or favour” July 26.

What free movement of capital? Is not bank credit one of the most important means by which capital moves around? And when bank regulators allow banks to leverage more on some assets than on other, based on perceived credit risks, something which clearly distorts the allocation of bank credit, is that not a capital control?

Let me recap for you what I have been arguing for over a decade, for now with over 1.900 letters to you, and which have basically been ignored. 

Regulators first decided that banks should hold 8 percent in capital against asset… no problems with that. But, in 1988, with the Basel Accord (Basel I), in order to determine how much of that basic capital banks should hold against different assets, regulators set the risk weight for loans to the governments of OECD at zero percent, and the risk weight for loans to the private sector at 100 percent.

That meant banks could lend to governments against no equity of their own (8% x 0%), and had to hold 8 percent (8% x 100%) when lending to the private sector. What did that mean?

That meant banks could leverage their equity and the support they received from tax payers, like with deposit guarantees, unlimited times when lending to governments, and only 12.5 times to 1 when lending to the private sector.

That meant banks could obtain much higher risk adjusted returns on equity when lending to governments than when lending to the private sector, or; that the dollars in net interest margins paid to banks by governments are worth much more than the same dollars paid to banks by the private sector.

And that meant banks lend more and at lower rates to governments, and less at higher rates to the private sector, than what they would relatively have done in the absence of these regulations.

That implies bank regulators believe governments present less credit risk than the private sector… as if governments do not depend on the private sector… as if governments don’t default in so many ways, like for instance by means of inflation, requests for higher taxes or outright haircuts.

And of course that must mean regulators believe government bureaucrats can use bank credit much more efficiently than the private sector.

Now why on earth would regulators believe such crazy things?

They might be communists or statists, or it all might just be some good old hanky-panky scheming going on between bureaucrat and technocrat colleagues.

Whatever, they are surely sinking our economies and we should absolutely not bet our children’s future on such bank regulations.

And why on earth should a newspaper like FT who proclaims itself without fear and favor, keep mum on something extremely important like this? I dare you to answer that.

Sir, have you envisioned that in the near future you might now have to apologize for this omission in Japanese style?