October 20, 2016
Sir, Stefan Gerlach writes: “there are many public investment projects that have a higher return than funding costs, given the low level of interest rates. In this case, the idea that undertaking the investment project will raise income and make the economy better able to weather a future storm is not a debatable proposition from economic theory, it is a tautology.” “Even good economic stewards should heed sound arguments” October 20.
“Low level of interest rates”? Yes, but totally artificial! Those are the result of QEs; and of risk-weighted capital requirements for banks that so much favor the sovereign (0% risk weight) over We the People (100% risk weight)
Much of that non-transparent regulatory subsidy of the sovereign is paid by millions of SMEs and entrepreneurs, by means of less and more expensive access to bank credit. Take those clothes off the Emperor and you would see quite a lot of his frightening nakedness.
Gerlach also writes: For anyone interested in economic history, it is hard not to think about how the management of the financial crisis will be assessed by future monetary historians.”
Indeed, and one question those historians will surely make is: After about 600 years of banking, why did regulators in 1988 with Basel I, and later much more in 2004 with Basel II, introduce risk weighted capital requirements that so dangerously distorted the allocation of bank credit to the real economy?
Their answer must be… The regulators, in their mutual admiration club so prone to group thinking, had not the faintest idea about what they were doing. For a starter they never defined the purpose of banks before regulating these; and to make it worse, they never did empirical studies on what has caused previous bank crises, something which was never ever what was ex ante perceived as risky.