Crony capitalism, which is really crony statism, includes many crony relations with central banks and bank regulators

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky. 

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses

@PerKurowski

In banking, by means of its regulations, the governments are the biggest receivers of crony capitalism gifts.

Sir, I fully agree with Martyn Roetter in that “An honest economics profession should help defend against crony capitalism, not act as an apologist by obfuscating its reality and denying its existence.” “Fighting the cronies calls for honest economists” October 21.

And when looking for the crony relations in banking, all you need to do is to follow that which has been awarded the regulatory blessing of lesser capital requirements. Clearly, since that would be the sovereign, awarded an amazing zero percent risk weight, the governments are de facto in that sector, the biggest exponents and beneficiaries of crony capitalism.

Requiring more bank capital for some exposures than for other clearly distorts the allocation of bank credit to the real economy. And so an honest economics profession should also be denouncing that… but most economists keep mum on it… perhaps because they do not even understand it.

Financial Times, for unexplained reasons, has been extremely reluctant to report on such crony bank regulatory relations… would this be crony journalism going hand in hand with crony capitalism? 

@PerKurowski ©