August 15, 2015

Mariana Mazzucato: What need rebalancing are the risk weights: Government 0% and private sector 100%, is statist lunacy.

Sir, I refer to John Thornhill's “You always need the state to roar”, “Lunch with the FT Mariana Mazzucato” August 15.

Thornhill writes: “The challenge, Mazzucato says, is to rebalance the relationship between the private sector, which is all too often overly financialised and parasitic, and the public sector, which is frequently unimaginative and fearful.” 

What is Mazzucato talking about? In 1998, with the Basel Accord, regulators introduced risk weighted capital requirements for banks. Those determined (God knows why and how) that lending to the governments was so safe it should carry a zero percent risk-weight, while lending to the private sector was so risky, that it should have a 100 percent-risk weight. 

In other words bank regulators de facto opined it was the government’s role to take risks, because it is so safe, while the private sector needs to stay away from risks, because it is so unsafe.

What happened? Banks stopped lending to the real risky risk-takers, like to SMEs and entrepreneurs (the real lions); while governments used the regulatory subsidy of their borrowings to finance, not much of real risk-taking, but mostly their political conveniences; and central banks, with their QE’s, bought solely “safe” assets; which injected liquidity to those who already hold assets, like corporations, of whom many proceeded to repurchase shares, responding naturally like kittens to the incentives.

If there is some urgent rebalancing to do, that is to eliminate all the differences in risk weights that lead to differences in capital requirements for banks and that have been imposed by the statist regulators.

Mazzucato holds: “Academics have a duty to use their expertise t challenge false political narratives”. Indeed but that includes her as well, since rarely has their been a more false political narrative than that of a sovereign being less risky than its citizens.