Poor Shinzo Abe. Has no one told him Japan as a member of G10 also signed up on Basel II’s risk-aversion?

Sir, Shinzo Abe, Japan’s prime minister with respect to the goal of achieving economic growth in Japan writes: “We are restoring Japan’s venture spirit, creating opportunities for start-ups to bid for government contracts, opening markets and promoting new entrants in areas including energy agriculture and medical services”, “My ‘third arrow’ will fell Japan’s economic demons” June 30.

I almost feel sorry for him. Has no one told him that Japan, as part of the G10, signed up on Basel II, those bank regulations that has it as its pillar, that all who are perceived as risky, like start-ups and new entrants usually are perceived, shall NOT have fair access to bank credit, because this is believed to promote the stability of the financial system?

With such an opposition, there is little Shinzo Abe, or anyone else for that matter can do, no matter how good the intentions.

The regulators changed the odds at the casino... surreptitiously

Sir, John Kay in “How economics lost sight of the real world” April 22, writes that “grossly imperfect information have led us to where we are today”. He is more right than he knows.

On June 26, 2004 Ministers and central bankers from the G10 endorsed the publication of the International Convergence of Capital Measurement and Capital Standards: a Revised Framework. Those regulations authorized banks to have a leverage of 62.5 to 1 if they lent to corporations to which human fallible credit rating agencies had awarded AAA-ratings. With that the regulators send out the message, loud and clear, that risks could be measured with much more preciseness than previously thought possible and that there were agents capable of doing so.

And the regulators also naively ignored that the measurement of risks would itself alter the realities of risks, and so those regulations amounted to something like fooling around with the odds at the casino without informing the players. Markets that wanted to play it safe, on black or red, were unknowingly lured into placing their bets on a number.

Those regulations contained in sum the most dysfunctional financial regulatory innovation in history and no one said a word. Shame on the tenured professors, the think-tanks, the press and all the others the society counts on to keep it informed.

P.S. https://subprimeregulations.blogspot.com/2012/12/the-basel-ii-roulette-manipulation.html

A bit of navel-gazing, haven’t we?

Sir Paul Keating is absolutely right in saying that “Global financial confidence, once destroyed, requires myriad positive events and a heavy convergence of them to counter ambient pessimism and gloom”, “A chance to remake the global financial system”, March 5.

But then Keating lists issues, like better IMF governance, which is of course a very laudable thing to do, I support it completely, that in my opinion are almost irrelevant to the confidence of markets and perhaps even to most of the official actors.

For example when he mentions “the government of China has no intention of dealing with its surpluses by letting its real exchange rate redirect national resources, especially when such action risks putting it into the hand of the IMF” I would argue that the voting rights at the IMF, at this particular moment, is one of the very last real concerns of China.

Also whether the G20 structure “is truly dynamic” or the old Breton Woods arrangements are reformed sounds currently as some pure and unashamed navel-gazing.

Since it was the G10 that by means of endorsing the concoctions of the Basel Committee empowered the credit rating agencies so much that the whole world followed their AAA signs over the subprime precipice, I cannot honestly see how the markets would regain confidence in any sustainable way from a concentration of bureaucratic powers in a G20.

Does Keaton really believe a G20 success spells recovery? Is he long or short on G20 derivatives?