Entrepreneurs should, as an absolute minimum, have the same chance for entrepreneurship than the State.

Sir, with much lower capital requirements for banks when lending to the sovereign than when lending to citizens, regulators de facto indicate they believe bureaucrats know better what to do with credit they are not personally responsible for, than entrepreneurs. And with that they are subsidizing sovereign borrowing paid by less access to bank credit for the private sector.

That is why I strongly oppose when Mariana Mazzucato opines: “The UK doesn’t lack strong economic foundations; it lacks investment opportunities… the entire government, particularly the Treasury… rather than obsessing about the fiscal deficit has to put innovation at the centre of how it thinks about economic growth [and] set bold and strategic goals.” “British industry needs its own version of the moon shot”, May 23.

Sir, way before the government takes on moon shot project, something which I absolutely do not oppose, we must clear away the regulatory distortion which impedes the market sending the correct signals on the costs of public debt, and gives entrepreneurs, as a minimum, an equal chance to have their risk adjusted interest payment offers accepted by banks, so that they too can do their own moon shots.

@PerKurowski

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?

@PerKurowski

Italy would have been far from as troubled as it is, if regulators had not distorted bank credit.

Sir, Mariana Mazzucato writes: “Increasing investment is essential to Italy’s future, as is fundamentally changing public-private relationships to make them less focused on favours and subsidies, and more on transformational opportunities”, “Italy’s future growth hinges on new ways of doing business” December 13.

Let us be clear. Most true “transformational opportunities” arrive by means of the market, and many “transformational opportunities” is just a code word for crony-statism profiteering.

There is one major fact that is being constantly evaded in the debate about Italy’s and most other economies. That is the distortion the risk weighted capital requirements for banks cause in the allotment of credit to the real economy.

Italy would never have accumulated so much public debt, had it not been for the false market signals that resulted when the Basel Committee decided to assign a zero risk weight to the sovereign and one of 100% to We the People, that which includes SMEs and entrepreneurs.

De facto those risk weights translate into a belief by regulators that government bureaucrats know better what to do with bank credit than the private sector… something that unless you are a runaway statist, make no sense at all.

Even at this point, according to Basel II’s standardized risk weights that are still being applied, the weight given to the Italian public sector debt is lower than that of most participants in that real economy that represents Italy’s best chance for the future. Especially when bank capital is very scarce, like now, any little difference in capital requirements means a lot.

Italy and all other have no chance of regaining some rationality in the allocation of bank credit, unless this lugubrious piece of regulations is eliminated.

Obviously, you cannot make the changes all at once, without severely affecting bank credit. But grandfathering previous capital requirements for existing assets, on the margin, for all new bank assets that regulatory discrimination must stop.

PS. Let’s stop talking about crony capitalism when obviously, what is happening, is crony statism.

@PerKurowski

Bank regulators should not discriminate in favor of the “safer” past and present, and against the “riskier” future.

Sir, Mariana Mazzucato writes: “On the finance side, the problem is not quantity but quality: industrial and innovation policies require long-term, strategic finance, while the UK continues to reward short-term finance. The few attempts at building sources of patient public finance have been neglected” “A strong industrial strategy has many benefits” August 4.

What already exists, the past and present, is generally perceived as safer than what is planned to exist, the future.

And so when regulators decide that what is ex ante perceived as safe requires banks to hold less capital than what is perceived as risky, they allow banks to leverage their equity, and the support of society (taxpayers), much more with the past and present than with the future.

And since regulators have also decreed the sovereign to be infallible, and set the risk weigh for it at 0%, while the risk weight for an ordinary SME or entrepreneur is 100%, regulators similarly allow banks to leverage more when lending to the government than when lending to the private sector.

I have no objection to governments trying to do some of the pro-investment efforts that Mazzucato writes about in her article but, before that, and much more important for the long term, we need for the current regulatory distortions of the allocation of bank credit to the real economy to disappear.

What would the interest rate of public debt be if all hidden regulatory subsidies of it are removed? I have no idea, but perhaps then “the successful Green Investment Bank” might not be that successful.

@PerKurowski ©

You want faster growth? You want more widely shared growth? Then get rid of current bank regulators.

Sir, Martin Wolf writes: “This is the time to develop ideas on how to achieve the party’s priorities of faster, more widely shared growth” “Two cheers for Corbyn’s challenges to economic convention” October 2.

You want faster growth? Then take away the odious regulatory discriminations against the risky and let the SMEs and entrepreneurs, the tough we need to get going when the going gets tough, have fair access to bank credit.

I quote from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

You want more widely shared growth? Then take away the odious regulatory discriminations that stops banks from giving the risky SMEs and entrepreneurs the opportunity to fair access to bank credit they deserve.

I quote again from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

But the sad fact is that no new or old Labor, or anyone, would be able to get that advise from a brains trust of seven left-of-centre economic advisers who have never been out on Main-Street, who hate government austerity, but who love bank credit austerity.

Our formal banks have been embraced by a loony regulatory risk aversion that wants to clear, in the capital of banks, the perceived credit risk already cleared for by banks with risk premiums and size of exposures. Or we free them for that or the interests of economic growth, job creation and equality might be best served by unregulated banks operating in the shadows… a la Banca Sommersa style.

@PerKurowski

Mariana Mazzucato: What need rebalancing are the risk weights: Government 0% and private sector 100%, is statist lunacy.

Sir, I refer to John Thornhill's “You always need the state to roar”, “Lunch with the FT Mariana Mazzucato” August 15.

Thornhill writes: “The challenge, Mazzucato says, is to rebalance the relationship between the private sector, which is all too often overly financialised and parasitic, and the public sector, which is frequently unimaginative and fearful.” 

What is Mazzucato talking about? In 1998, with the Basel Accord, regulators introduced risk weighted capital requirements for banks. Those determined (God knows why and how) that lending to the governments was so safe it should carry a zero percent risk-weight, while lending to the private sector was so risky, that it should have a 100 percent-risk weight. 

In other words bank regulators de facto opined it was the government’s role to take risks, because it is so safe, while the private sector needs to stay away from risks, because it is so unsafe.

What happened? Banks stopped lending to the real risky risk-takers, like to SMEs and entrepreneurs (the real lions); while governments used the regulatory subsidy of their borrowings to finance, not much of real risk-taking, but mostly their political conveniences; and central banks, with their QE’s, bought solely “safe” assets; which injected liquidity to those who already hold assets, like corporations, of whom many proceeded to repurchase shares, responding naturally like kittens to the incentives.

If there is some urgent rebalancing to do, that is to eliminate all the differences in risk weights that lead to differences in capital requirements for banks and that have been imposed by the statist regulators.

Mazzucato holds: “Academics have a duty to use their expertise t challenge false political narratives”. Indeed but that includes her as well, since rarely has their been a more false political narrative than that of a sovereign being less risky than its citizens.

@PerKurowski

Private innovation needs government help, but it also needs not to be blocked by regulators

Sir, of course nations need to be bold, and take risks, in order to have a better future. That is, or at least was, why we used to go to our churches and pray “God make us daring!”

And so of course most of us would wholeheartedly support Marianna Mazzucato’s call for more government financed basic research; especially if this resulted from redirecting to it other governmental waste; and this even though we suspect the argument will, as usual, be exploited by those who 

just want to increase taxes, “Why private innovation needs government help”, August 22.

But, that said, the fact is that currently, if a bank lends directly to a innovation project, like the failed solar power company Solyndra in the US, then it is required to hold about 8 percent in capital, but, if it instead lends that money to the government, so that a bureaucrat can relend it to a Solyndra, then it has to hold no risk-weighted capital... which skews all too much in favor of the government.

I do understand the importance of Mazzucato´s call, but, frankly, to me, it is of secondary importance when considered in relation to the fact that bank regulators, with their risk-weighted capital requirements, are effectively castrating our banks, making them sing in fAAAlsetto.

The state, instead of taking on more risks, should reorient its risk-taking, towards more basic research

Sir, from what I see from many letters, it would seem that Mariana Mazzucato’s “The Entrepreneurial State”, and Martin Wolf’s review of it, is unleashing a call for the state to run more risks on behalf of society.

Indeed, there is a big and unquestionable role for the state in helping to fund and carry out basic research, but, since the state takes enough risks already on behalf of taxpayers, like with fiscal deficits and quantitative easing, should not the real call be for the state to reorient its risk-taking?

And again I have to remind you. If a bank lends to a small private entrepreneur to carry out some risky research, it is required to have 8 percent in capital but, if it lends to the state so that the state performs exactly the same function, with tax-payer’s money, then the banks needs to hold zero capital. Frankly, is that not risking enough on the state’s capability for you?

PS. State and private entrepreneurs are neither alike nor equal.

State and private entrepreneurs are neither alike nor equal

Sir, I refer to Martin Wolf’s comments on Mariana Mazzucato’s “Debunking Public vs Private Sector Myths”, “The State is the real engine of innovation”, August 5.

In these Wolf writes “the state is also an active entrepreneur taking risks and of course accepting the inevitable failures”. This entirely fails to recognize that state and private entrepreneurs are neither alike nor equal.

Currently, under Basel II bank regulations, if a bank lends to a private entrepreneur, it needs to hold 8 percent in capital/equity, but, if it lends to the state entrepreneur, then it does not have to hold any capital/equity... zero!

Also if the private entrepreneur is unsuccessful in his undertaking he will suffer the consequences, while if the state-bureaucrat-entrepreneur wastes away taxes, he will most likely not suffer at all.

I do not understand how one can ignore those differences, and conclude that “the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state”, and especially so when extremely little of public spending really goes to take bold risk to achieve breakthroughs.

To describe the financing of innovation as “a parasitic [system] in which the most loss-making elements are socialized, while the profitmaking ones are largely privatized”, is to completely confuse the losses incurred when lending to safe-non-entrepreneurial activities, such as financing real estate and sovereigns, with losses derived from investments in innovation. In fact, the socialized losses in innovation financing that most comes to mind, are those which originate in loans given to entrepreneurs by the state, like that to Solyndra.

We do of course not object to the state lending a much needed helping hand in basic research but, if it goes overboard doing so, that will only guarantee this will be abused by those entrepreneurs who specialize in the extraction of rents from the state.

Wolf concludes “The failure to recognize the role of the government in driving innovation may well be the greatest threat to rising prosperity”. Wrong! The greatest current threat is the silly risk-aversion imposed on banks by regulators who fail to understand what brought our economies to where they are. 

God make us daring!