January 07, 2017

Our “free market capitalism” is just the frosting on a statist cake baked by bank regulators in 1988.

Sir, Yuval Noah Harari writes: “Since 1989 elites in the west have come to believe in the “end of history” narrative, according to which liberal democracy and free market capitalism have won over all rival social systems, and the world is therefore bound to become a global community managed through free markets and democratic politics.” … However, since the global financial crisis of 2008 people all over the world have lost faith in the liberal recipe.” “At last, liberals are waking from a long dream” January 7.

That is indeed the conventional version, but “The truth is, so many don’t understand what’s going on in the world.”

In 1988 and in 2004, with Basel I and Basel II, regulators introduced risk weighted capital requirements for banks which allowed banks to leverage almost limitless when lending to the Sovereign, much, like 60 to 1, when lending to the safe AAArisktocracy, and only about 12 to 1 when lending to the “risky” We the People, like to SMEs and entrepreneurs.

Harari opines “the coming years might well be characterised by intense soul-searching and by attempts to formulate new social and political visions. Indeed, liberalism might yet reinvent itself”

If that is to happen, then the first order of the day for those aspiring to qualify as elite, is to understand how they so completely missed out on how these regulations would distort the allocation of bank credit to the real economy, foremost favoring governments.

Elite, where do you think the western world would be had these regulations been applied to banks during the 600 years before the Basel Accord?

Elite, what do you think Medici and many other bankers would have thought about 0 percent risk weight assigned to the Sovereign?

Elite, do you think the subprime or the Greek mess would have happened if banks were required to hold, for instance, 10 percent in capital against all assets? 

Elite, do you understand how this regulation decrees inequality?

Elite, as is don’t you think crony statism is a more clear definition than crony capitalism?

Elite, why do you think I cannot get an answer from regulators on some very basic questions?

Elite, why do you think the Financial Times will not publish this letter?