May 18, 2016

Martin Wolf should be careful throwing stones at “short-sighted elites”. He is part of it.

Sir, Martin Wolf writes of the “failings of short-sighted elites” “An elite at the mercy of its own creation” May 17.

I fully share the serious concerns Wolf expresses, though I do believe he points the finger way too much at the Republican elite, forgetting that it really takes two to tango.

But, that said, when it comes to blaming short-sighted elites, I must point out that Wolf himself should be very careful with throwing stones

Banks are currently required to hold more capital against what is perceived as risky than against what is perceived, decreed (sovereigns) or concocted (AAA securities) as safe. And that allows banks to leverage more their equity with what is safe than with what is risky. And so that allows banks to earn higher risk adjusted returns on equity with what is “safe” than with what is “risky”.

That sets up the banks to dangerously overpopulate existing safe havens; and that stops banks from exploring risky bays where new sources of growth and job opportunities for the next generation could be found. And if that is not short-sighted what is?

And Martin Wolf, one who we can guess considers himself as part of the elite, has preferred to ignore or to keep mum on the dumb credit risk aversion of the absolutely useless bank regulators hauled up in the Basel Committee.

Had Wolf helped to point out the dangers of such shortsighted regulations; the QEs and other such stimulus would not have been so wasted; the economy could evidence some signs of hope; and so there could be much less of that discontentment that facilitates the job of demagogues.

PS. In case Martin Wolf needs a refresher on Basel madness this aide memoire might be helpful

@PerKurowski ©