July 03, 2016
Sir, Tim Harford, economist, concludes his discussion of the whys of Brexit, with “Those of us who are committed to openness and prosperity for everyone… now have a long campaign on our hands. We should start by accepting that, if we cannot bring back broad-based and growing prosperity to the advanced economies, Brexit will not be the last political shock we must face”, “We’re all winners or losers now” July 2.
That is the correct attitude. Do the best with what you have.
And so let me once again remind Harford that long before Brexit, in 1988, there was the Basel Accord, something never subjected to a referendum. With its risk weighted capital requirements for banks, it introduced the nutty concept that banks should hence on earn higher risk adjusted returns on equity on assets ex ante perceived as save, than on assets perceived as risky.
And that regulatory risk aversion, when layered on top of bank’s natural risk aversion, guaranteed, especially after Basel II in 2004, that banks would only be refinancing the (for the time being) safer past, and ignore the financing needs of the riskier future.
And so of course our economies stopped moving up and began their descent.
And now, because of that, and assisted by QEs and similar, our safe havens are already becoming dangerously overpopulated… so much that we must even accept negative interests as the price for anchoring there.
To bring back broad-based and growing prosperity requires getting rid of current blind and dumb bank regulators… and have our bank’s help finance the “risky” SMEs and entrepreneurs, in their exploration of the risky bays where a good future for our young could be found. .
Let’s see if committed Harford helps out, or prefers to remain undercover on this issue that makes Brexit signify chicken-shit.
PS. And the regulatory aversion of ex ante perceived credit risk, does not lead to more bank stability, much the contrary. Voltaire prayed “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”