Martin Wolf there is a slow moving but sure regulatory destruction of our economies, and that is a guaranteed disaster

Sir, Martin Wolf writes: “If one wants to worry, there is plenty to worry about. Yet, from the economic viewpoint, what matters is not so much whether the world will be well managed: it will not be. What matters more is whether a disaster will be avoided… The cumulative chance that at least one of all such disasters will occur is greater than the chance that any one of them will do so. Nevertheless, the likelihood that none of them will occur is surely bigger”, “Why economic disaster is an unlikely event” January 6.

Wolf ignores the ongoing slow moving but sure destruction of the economy that results from the distortion in the allocation of bank credit introduced by regulators by means of the credit risk weighted capital requirements for banks. In terms of what our banks can do for our real economies, these have been castrated.

If the stress testing of banks had, besides looking at what is on their balance sheets, looked for what should be on and is not, the technocrats would have discovered the growing absence of credit to the risky SMEs and entrepreneurs, those that on the margin are responsible for moving the economy forward in order not to stall and fall.

How do I know that? Well, if banks are allowed to leverage more on assets perceived as safe than on assets perceived as risky; and thereby earn higher risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky, that is doomed to happen.

How does Martin Wolf not know that? I haven’t the faintest. From what he answered me on one occasion, it would seem he thinks bankers should resist the temptation to maximize their returns on equity. That is a strange thesis, especially when that maximization results from holding assets perceived as safe. Make the most on the safest sounds like a banker’s dream come true.

@PerKurowski ©