Dominic Rossi: Populist bank regulation “strongmen” have promoted the state apparatus ever since 1988’s Basel Accord

Dominic Rossi writes: “The twin freedoms of capital and labour movement are fading, secular relics from a passing liberal age… The tendency of “strongmen” to use the state apparatus to conjure up growth will set our new course. The tedium of recent years, slow but steady growth, looks set to be dislodged by the seductive alchemy of a fiscally induced boom-bust cycle beloved by populists” “Dr Doom awaits seat at table as president-elect enjoys a free lunch” November 24.

Sir, I am sorry, we are already there. The Basel Committee for Banking Supervision’s technocrat strongmen, in 1988 decided that for the purpose of capital requirements for banks, the risk weight of the sovereign was 0% and that of We the People 100%. Could there be a more devious way of favoring the growth of a “state apparatus”?

Where would the rates on US Treasuries, those that usually serves as a proxy of the risk free interest rate be without this enormous regulatory subsidy? 

And that subsidy does not come free. Since decreed, it has been paid by millions of SMEs and entrepreneurs not getting access to bank credit on real undistorted market terms.

Rossi writes: “The repatriation of offshore US corporate balance sheets will help finance the good times” Yes and no! It might help finance good times for government if it causes more fiscal income, but let us not forget that those balance sheets might already be fully invested in US assets.

Rossi ends in: “Populism and strong currencies are rarely seen together for long.” Indeed it will, sooner or later, guarantee the dangerously overpopulation of what is decreed, perceived or concocted as safe havens… and when that happens everything will come tumbling down 

@PerKurowski

The credit-risk weighted capital requirements for banks should never even have been on the table as an alternative.

Sir, Dominic Rossi writes “Negative real interest rates on bank deposits cannot be the road to prosperity, yet the promise of low nominal returns on traded securities looks risky… It is only by investing in innovation that we can escape this otherwise humdrum nominal world”, “Don’t look for escape routes when the third deflationary wave hits” September 3.

And I just ask: Are current credit-risk weighted capital requirements for banks helpful or not when it comes to allowing fair access to bank credit to finance innovations? Or is it only borrowers with high credit ratings who should be allowed to innovate?

The global deflationary wave that is hitting our economies is very much caused by the retrenchment of bank credit to whatever is perceived as risky, caused by the risk weighted capital requirements being applied to scarcer bank equity.

It is amazing to read how many claiming for less government austerity are simultaneously ignoring or even claiming for more bank credit austerity. 

If we want to get out of this we must realize that since risk taking is the oxygen of any development, we must get rid of that loony risk aversion of regulators that hides behind the risk-weights. God make us daring!

@PerKurowski