Eliminate the loony regulatory risk-taking austerity imposed on banks, and you will help the real economy

Sir, Wolfgang Münchau writes that “If you are serious about structural reform it will cost you upfront money, and so therefore “Austerity is the obstacle to real economic reform” February 25.

Indeed there might be many much needed reforms that might require increased fiscal spending, but not all of them do.

The reform that I most advocate is eliminating the negative effects on the real economy that bank regulators’ runaway risk-taking austerity is causing. That would not cost the tax-payer money today, and that will actually save the tax-payer money tomorrow.

The lunacy of allowing banks to earn a much higher expected risk-adjusted return on equity for exposures to what is perceived as “safe”, than for exposures perceived as “risky”, only guarantees ineffective resource allocation by banks, and the dangerous and very expensive overcrowding of today’s “absolutely-safe” havens.

But I’d better whistle in the dark or sing too!

Sir there we are, sky-walking on a slack-wire over a high ravine in windy weather with no safety net under us, and Martin Wolf comes along with his timely advice telling us we could hurt ourselves by falling on either side, “How unruly economist can agree” February 26. Thanks! Now, how are we to remain calm?

Wolf recommends a very active use of a balancing pole which on one side (hand) has the closing of “structural current deficit relatively rapid”, to keep our faith in the sustainability of the public debt, and on the other, “credible temporary offsets, particularly via spending on investment and tax holidays”, as a stimulus for the economy.

Sounds swell but, since I am absolutely not as daring as a Maria Spelterine, I’d better also start doing some whistling in the dark or singing to stop me shaking like a leaf. “I’m singing in the rain.... what a glorious feeling...”

Obama has more than enough on his own plate

Sir Martin Wolf is right blaming an absolutely excessive consumption gap between deficit countries led by the US and surplus countries led by China for the ongoing implosion, now when the music stopped, and that therefore it is not only the US’s responsibility to provide the fixes, “Why President Obama must mend a sick world economy”, January 21.

I would go even one step further. When Wolf mentions that “much of the expansion is expected to come from the US Federal Budget” we should not, even for a second, “leave aside the question of whether this will work”, knowing, as Wolf says, that the “US cannot run fiscal deficits of 10 per cent of GDP indefinitely.” In this sick world economy, one of the few healthy spots that remains is the dollar, curiously the representative of the leading deficit country, and to keep the dollar healthy should be one of Obama’s prime responsibilities.

Anyhow anyone that stops looking at yesterdays statistics and walks the main streets, in real time, will soon come to the conclusion that whatever “good” the fiscal expansion might bring to the USA, pardoning financial losses, reducing excess inventories, financing private savings, making the local adjustments easier, a sustainable USA expansion does not carry sufficient punch to assist in keeping up any significant consumption disequilibrium, and so the adjustments now going on in the surplus countries must, unfortunately, be absolutely brutal. That though cannot be Obama’s prime concern; he has enough on his own plate. In other words, the world cannot afford the US drowning while trying uselessly to save it. “Healer heal thyself”, comes more readily to my mind.

Finally, Wolf rightly mentions that “more of the world’s surplus capital needs to flow into investments in emerging countries” but for that to happen the financial system requires two reforms that have to take place in Basel. First to take away the power of agencies to set up AAA directions signs and that will by sheer inertia always tend to guide capital to status quo economies; and second to eliminate the current formula of minimum capital requirements for banks based on risks and that places an additional tax burden on those risks that are more prevalent in emerging markets. Those two reforms are in my mind more important and urgent than the also much needed IMF governance reforms that Wolf focuses his attention on.