September 06, 2015
Sir, I refer to Elaine Moore’s “Sovereign borrowers fall behind on record sums of debt” September 6. Indeed, and as long as bank regulators insist in their pro-government borrowing bias, it is only going to get so much worse
Anyone who believes that with regulations such as those derived from the Basel Accord in 1988, which assigned a risk weight of zero to the sovereigns of G20 and a risk weight of 100 percent to the citizens of the G20, would not sooner or later result in much excessive sovereign borrowings, is ether blind, dumb, or pushing a statist agenda.
In a letter published by FT in October 2004 I wrote: “We wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”
And in a letter published by the Washington Post in December 2009 I wrote: “Your Dec. 20 Outlook compilation of the decade’s worst ideas did not include the one most to blame for the loss of most of the past decade’s growth: regulations that allowed banks to hold absolute minimums of capital as long as they lent to clients or invested in instruments rated AAA, for having no risk. This launched a frantic race to find AAA-rated investments wherever and finally took the markets over the cliff of the subprime mortgages.
The most horrific part is that it seems likely to endure because regulators can’t seem to let go of this utterly faulty regulatory paradigm. Let me remind you that banks are allowed to hold zero capital when lending to sovereign countries rated AAA and that there are already many reasons to think that the credit quality of many sovereign states has been more than a bit overrated.”
Sir, on the subject of the distortions produced by these regulations, since you published my letter in 2004, not only has the Greek tragedy taken place but you have also ignored way over a hundred letters I have written to you on it. Should I guess that is because not so deep down in your FT heart you all carry a little statist agenda?