July 13, 2016

A mindless structural reform of regulations castrated the banks and helped to kill the dynamism of the economy.

Sir, Martin Wolf quotes Robert Gordon with “Ours is an age of disappointing growth because the technological breakthroughs are relatively narrow”, and then dicusses what could be done. Wolf concludes “The tendency to believe that some “structural reforms” will fix this is, similarly, an act of faith. It is essential for policy to promote invention and innovation, so far as it can. But we must not assume an easy return to the long-lost era of dynamism”, “An end to facile optimism about the future” July 13.

But “structural reforms” can kill dynamism too. And as you Sir and Wolf already know, in my opinion, nothing has done more harm to the economy than the risk weighted capital requirements for banks introduced with Basel I in 1988, and applied much more intensely with Basel II in 2004.

By allowing bank to leverage more their equity, and the support they receive from society with “safe” assets, regulators made it harder for those perceived as risky, like the SMEs and the entrepreneurs, to compete for access to bank credit.

Since perceived risks were already cleared for with the size of the exposures and the risk premiums charged, having bank clear again for those same perceptions in the capital, basically castrated our banks.

Now banks no longer help provide the “risky” proteins the economy needs in order to grow new muscles, they just finance the “safer” carbs that only makes the economy more obese.

Sir, when compared to what is needed to give the future a fair chance to deliver something good, it is clear that never ever before has a generation consumed so much borrowing capacity to sustain its own current consumption.

PS. And with their zero risk weight to sovereigns, and 100% of citizens, bank regulators de facto stated that government buracrats make the best use of bank credit. If that is not runaway loony statism what is?

@PerKurowski ©