Martin Wolf, again, any good economic plan needs, sine qua non, to get rid of bank credit distorting regulations.

Sir, I refer to Martin Wolf’s “Without an economic plan, patriotism is Johnson’s last refuge” FT, October 18, 2021

In Martin Wolf’s Economist Forum of October 2009, FT published an opinion I titled “Please free us from imprudent risk-aversion and give us some prudent risk-taking” (The link is gone, I wonder why)

In that article, commenting partly on the 2008 crisis, I held that getting rid of the risk weighted bank capital requirements, that which distorts the allocation of credit to the real economy, was an absolute must. 

Now, 11 years later, I must still insist in that, without doing so, there’s no economic plan that can deliver sustainable results.

The history I’ll tell my grandchildren has little to do with Philip Stephens’ history.

Sir, Philip Stephens writes: “Twenty-five years ago… the world belonged to liberalism. Soviet communism had collapsed. Historians will record the 2008 global financial crash as… the moment western democracies suffered a potentially lethal blow. The failure of laissez-faire economics was visible before the collapse of Lehman Brothers.” “The west is the author of its own weakness” Financial Times, October 1, 2021.

The history I will be telling my grandchildren is quite different.

Thirty-three years ago, the world belonged to liberalism and Soviet communism was collapsing. Historians will record how in 1988, one year before the Berlin Wall fell, the western world’s bank regulators introduced risk weighted bank capital requirements that distorted the allocation of credit. That put an end to any laissez-faire economics. With risk weights of 0% the government and 100% citizens, as if bureaucrats know better what to do with credit than e.g., entrepreneurs, communism took over. 

The 2008 global financial crash resulted from banks being allowed to leverage their capital/equity/skin-in-the game a mind-boggling 62.5 times, with assets that human fallible credit rating agencies had assigned a AAA to AA rating.

Yes, the west is the author of its own weakness… it much renounced to the willingness to take risks that had made it great. 

Sadly though, there are way too many interested in not disclosing what really happened… and therefore our banks are still in hand of insane risk aversion. “Insane”? Yes, because those excessive exposures that could become dangerous to our bank systems, are always built-up with assets perceived as safe, never ever with assets perceived as risky.

PS. My 2019 letter to the Financial Stability Board