Because of distortive bank regulations, current tax cuts will deliver much less growth than what could be expected.

Sir, I refer to George Magnus’ “New regime’s growth pledge poses challenge for the US central bank” December 14.

In it, like many other commentators, Magnus draws comparisons between current Trump/Steven Mnuchin economic plans, with the lowering of taxes, and the Reagan years. He find several differences, though again like most or perhaps all commentators, he ignores the fact that during Reagan years, there was no such thing as risk weighted capital requirements for banks that distorted the allocation of credit.

That regulation stops us from getting the most bang out for any stimulus, be it tax cuts, QEs, fiscal deficits, low interest rates, etc.

If adjusted for it, the Committee for a Responsible Federal Budget’s already worrying estimates would even seem too optimistic.

What is truly harrowing though, is that those distortions are not even discussed, as if these did not exist, as if these should not be named.

For instance I have been unable for more than a decade to get straight answers from the regulators to some very basic questions, zero contestability; and Sir, FT’s Establishment has also refused to ignore these questions, notwithstanding my soon 2.500 letters to you on “subprime bank regulations”

@PerKurowski

Fed, before lowering interests, tear down the Basel wall that keeps “risky” from having fair access to bank credit

Sir, George Magnus discussing the increase of interest rates writes: “If the Fed continued with financial market stability as the leitmotif of policymaking, a later more disruptive policy adjustment and greater instability are the all too likely outcomes” “Fed should start making clear it faces difficult trade-offs” September 22.

I agree but before thinking of increasing rates, the Fed must make certain it tears down the regulatory Basel Committee wall that is keeping SMEs and entrepreneurs from gaining fair access to bank credit. The zero rates the Fed and other have been experimenting with the last seven years have not been able to reach the risky because of credit-risk weighted capital requirements. To increase interest rates, before eliminating this Maginot line built by the Basel Committee so stupidly where the passing was already difficult, would really be to leverage the difficulties of the real economy even more.

And it is all really about picking some low hanging fruit because, though some individual banks might have suffered, never ever has a major bank crisis been caused by excessive exposures to what is perceived as risky.

Few can inject so much vitality into a sagging economy as the tough we need to get going when the going gets tough, like the SMEs and entrepreneurs. And so therefore, if I was the Fed, I would immediately make sure that banks were not obliged to hold one cent more of capital than what they already hold against all assets, if they lend to risky SMEs and entrepreneurs.

The zero rates the Fed and other have been experimenting with the last seven years have not been able to reach those perceived as risky. To increase interest rates before eliminating any silly regulatory barrier, amounts to an assassination.

@PerKurowski

We must stop petit bank regulatory bureaucrats from distorting the markets with their risk-weights

Sir, George Magnus opines that “Draghi’s bond-buying plan is economically unsound” September 18. I fully agree with him but for a reason he does not mention, or is perhaps not even aware of. 

Most of those funds that ECB’s “outright monetary transaction” generate more sooner than later, will flow through a banking system that has become regressive, as a consequence of bank capital requirements based on risk. 

If regulators are not willing to allow the funds to flow where these could be most productive, but insist on these flowing to where they ex-ante believe these to be safer, they completely ignore the role of the market… and that is as economically unsound as it comes. 

We must urgently allow the market decide without some petit bank regulatory bureaucrats distorting its functioning by assigning, quite haphazardly, the risk-weights which decide how much capital each bank needs, and, with that, who in this bank capital scarce world, gets the loans.