August 22, 2015

We need a free finance sector able to feed proteins to the real economy, not one regulated to only feed it carbs.

Sir, I refer to Tim Harford’s “What’s the diet for growth?” August 22.

Harford states: “research reminds us that we shouldn’t simply bash ‘banking or ‘finance in some generic way, blaming the banks for anything from the weather to the struggles of bees. We need to look at the details of what the financial services industry is doing, and whether financial regulations are protecting society or making things worse… The truth is that we desperately need a strong banking sector.”

Absolutely, but foremost we need a free banking sector able to deliver a balanced diet of credit to the real economy, one that includes proteins.

In an Op-Ed in 1997 I wrote: “If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, but presiding over the funeral of the economy. I would much prefer the regulators to put some blue jeans on and try to help to get the economy moving.”

And in April 2003, as an Executive Director of the World Bank, in a written statement presented to the Board I pleaded: "Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. Once again, the World Bank seems to be the only suitable existing organization to assume such a role." 

I said so because I thought that as the world’s premier development, bank the World Bank would know risk-taking is the oxygen of any development. 

Sadly, neither World Bank, nor anyone else, wanted to assume such responsibility and so the world got stuck with portfolio invariant credit-risk weighted capital requirements for banks. That guaranteed the economy is fed a diet of bank credit based almost exclusively on carbs, unable to provide it the nourishment needed for sustainable economic growth. 

And, to top it up, those capital requirements, which are extremely small for what is perceived as safe, also guaranteed too many banks to become too obese to fail.