April 28, 2018

Few things are as risky as letting besserwisser technocrats operate on their own, without adult supervision.

Sir, Martin Wolf when discussing Mariana Mazzucato’s “The Value of Everything: Making and Taking in the Global Economy” writes: “In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.” “A question of value” April 28.

Indeed. Let me, for the umpteenth time, refer to those odiously stupid risk weighted capital requirements that the Basel Committee and their regulating colleagues imposed on our banks.

Had not residential mortgages been risk-weighted 55% in 1988 and 35% in 2004 while loans to unrated entrepreneurs had to carry a 100% risk weights, the “funded zero-sum competition to buy the existing housing stock at soaring prices” would not have happened.

Had not assets, just because they were given an AAA rating by human fallible credit rating agencies, been risk-weighted only 20%, which with Basel II meant banks could leverage 62.5 times, the whole subprime crisis would not have happened.

Had not Basel II assigned a sovereign then rated like Greece a 20% risk weight, and made worse by European central bankers reducing it to 0%, as it would otherwise look unfair, the Greek tragedy would only be a minor fraction of what happened.

Had not bank regulators intruded our banks would still prefer savvy loan officers over creative equity minimizers.

Had not regulators allowed banks to hold so little equity there would not have been so much extracted value left over to feed the bankers’ bonuses.

Having previously observed Mariana Mazzucato’s love and admiration for big governments, who knows she might even have been a Hugo Chavez fan, I am not surprised she ignores these inconvenient facts. But, for Martin Wolf to keep on minimizing the distortion, that is a totally different issue. 

The US public debt is certainly the financial risk with the fattest tail risk. It was risk weighted 0% in 1988, when its level was $2.6tn. Now it is $21tn, growing and still 0% risk weighted… and so seemingly doomed to become 100% risky. Are we not already helping governments way too much?