January 18, 2016

#WEF, the world needs some ordinary people (like me) to ask the salon experts in #Davos2016 some awkward questions.

Sir, John Thornhill titles his review of World Economic Forum’s Klaus Schwab’s recent book, “The world’s problems solved the Davos way”, January 18. 

And he begins it with: “The World Economic Forum does a remarkable job of forging the conventional wisdom among the global elite. The trouble is that conventional wisdom is invariably wrong.”

Indeed, and that is especially true considering that among the experts there gathered, there will always be too many who, in John Kenneth Galbraith’s words, qualify as those who by pretending to knowledge they do not posses, cannot ask for explanations to support possible objections.

And there are many urgent questions waiting to be made about the nakedness of experts. Among these the following:

Regulators currently allow banks to leverage their equity, and the support the society gives them with deposit insurance schemes and implicit bailout promises, much more when lending to what is deemed or perceived as safe, like infallible sovereigns and the AAArisktocracy, than when lending to the risky, like SMEs and entrepreneurs.

For instance with Basel II, banks could leverage as much as they wanted with OECD sovereigns, over 60 times with what’s rated AAA, 12 times with what is not rated, and 8 times with what’s rated below BB-.

And that of course allows banks to earn much higher risk adjusted returns on equity when lending to “the safe” than when lending to “the risky”.

Why do regulators allow that?

Does that not, by distorting the allocation of bank credit to the real economy, impede banks to perform well what is perhaps their most important social function?

How on earth can something rated ‘highly speculative’ below BB-, be considered more dangerous to the banking system than something rated ‘prime’ AAA?

Do not regulators know that banks already took into consideration credit risk when setting interest rates and size of exposures, before requiring these to double down on ex ante perceived credit risk in their capital?

Do not regulators understand that all risks, even if perfectly perceived, cause the wrong actions if excessively considered?

Regulators know that bank equity is to cover for unexpected losses. Do they not understand that the safer something is perceived the larger its potential to deliver unexpected losses?

Do not regulators and central bankers understand that, while this distortion is in place, whatever fiscal or monetary stimulus they provide will be wasted and not reach where it is most needed?

Do not regulators understand that by favoring “the safe” over “the risky” they will increase inequality?

Do not regulators understand that by doing this, banks will no longer sufficiently finance the riskier future, which is what our young need, but will mostly keep to refinancing the safer past?

World Economic Forum, during #Davos2016, for the good of the world, especially for our young, have someone ask these questions to Stefan Ingves, Mark Carney, Mario Draghi, Jaime Caruana, Janet Yellen, Martin Gruenberg, Christine Lagarde or any similar experts present… and press them for full answers.