Not just China needs to allocate capital to the more productive, dynamic and employment-generating parts of the economy

Sir, Eswar Prasad, a professor at Cornell University and senior fellow at the Brookings Institution, writes: “Fixing the financial system is not just about managing risks and avoiding disaster, but also about allocating capital to the more productive, dynamic and employment-generating parts of the economy.”, “How to fix China’s unstable financial system” July 19.

How do you do that, not only in China but everywhere, with bank regulators who do not care one iota about the efficient allocation of credit to the real economy, but only about banks avoiding what is perceived as risky?

Especially since 2004’s Basel II, banks have been allowed to multiply their capital with many times more the net risk-adjusted margins when investing in something “safe”, like the past and the present, like sovereigns, the AAArisktocracy and residential houses, than when investing in something “riskier”, like the future, like SMEs and entrepreneurs.

That has completely distorted credit allocation and for no particularly good reason, since there is never ever major bank crisis that result from excessive exposures to something ex ante perceived as risky when placed on banks’ balance sheets.

@PerKurowski

FT – IMF: Debt should be a growth hormone and not just a hallucinogen or painkiller for the après nous le deluge crowd

Sir, you refer “a financial storm [that] hit the global economy… fuelled by heedless borrowing”, “Stop worrying and learn to live with debt” June 8.

Clearly bank regulators are FT’s protégées. The heedless lending that was fueled by ultralow capital requirements for banks was what caused the financial storm’s excessive borrowings.

And now you praise a recent IMF paper that says “most countries can relax: debt ratios should be allowed to decline “organically” with growth, or through opportunistically pocketing windfalls.”, based on the argument: “Cutting debt requires higher taxes or less public investment, both at the expense of economic efficiency”

Sir, what certain link is there between public investments and economic efficiency? Sir, are there not plenty of public sector spending savings that could be done in order to increase economic efficiency?

Had baby-boomers bit the bullet in 2007-08, and accepted the losses without pushing the can down the road with Tarp, QEs and fiscal deficits, they would have suffered some quite hard times, but the deck would be cleared for the next generation to have a go.

That of course, as long as we got rid regulator’s silly aversion against banks lending to SMEs and entrepreneurs, only because these are perceived as risky, all as if bankers are blind children unable to perceive those risks.

That of course, as long as we got rid of communist or statist regulator’s who with their zero risk weight for government borrowing tell us they believe government bureaucrats can use bank credit more efficiently than a SME or an entrepreneur.

That current generations should relax about the debt, and let it “decline ‘organically’ with growth, or through opportunistically pocketing windfalls (like winning a lottery), in order to remain on easy street, expresses a shameful après nous le deluges attitude.

@PerKurowski

Ben Bernanke’s joke, will quite probably end up being on him.

Sir, Robin Harding reports: “Bernanke’ joke [‘The problem with QE is it works in practice but it doesn’t work in theory’] underscores questions on QE’s efficacy” October 13.

The joke might be on Bernanke because, as is, one could say it is just the opposite, QE might have worked, in theory, if in practice all the stimulus it provided, had not been channeled to where it was least needed.

As happened credit-risk weighted capital requirements for banks have blocked the way for QE liquidity reaching “the risky”, all those SMEs and entrepreneurs who could have helped to put some new sting into the economy.

As I see it we now have wasted a QE, and there is little we can do about that, so let us wait until QE has been soaked up, if it is ever going to be soaked up, to make any final evaluation of how the Fed and Bernanke did… let’s cross our fingers they did not too bad.

FT, Liikanen, what is so great with avoiding the bank crisis of tomorrow, if our economies meanwhile have to die?

Making Europe´s banks safer, is a good but clearly insufficient objective, since you must also make them better in allocating efficiently resources. And in fact, the Liikanen Group, when established, included also the mandate to promote financial efficiency. 

But, on that, there is not a word in the Liikanen Report. And the truth is that you cannot achieve an efficient allocation of resources while some petty bank regulating bureaucrats persist in discriminating against what is perceived as “risky”. Sincerely, since those ex ante perceived as “risky” have never endangered banks, again I must wonder why the regulators seemingly hate them so much. 

And FT also eludes the issue of the need for efficient resource allocation completely, in “EU sets out vision for safer banking” October 4. 

What is so great with avoiding the banking crisis of tomorrow if the price for it is our economies crumbling? You also seem somehow to think that, as long as the taxpayers do not have to pay for the crisis, the crisis is ok and will not have serious consequences. FT, come on, take off the blinders!

Inefficiencies are often very precious.

Sir, Martin Flash in response to your editorial “Corporate France comes into focus” raises the question of “Is inefficiency a cost worth bearing?” May 17. I would dare to go much further, even stating that inefficiencies are in fact extremely valuable societal factors, that should be nourished and protected, of course in an efficient way. Think of it, if the world was really as efficient as it could be, what would there be left to do for the likes of me and you. And this by the way reminds me of another issue close to my heart and that I have not written to you previously about, I think.

We often see tables where they discriminate between occupations, like agriculture, manufacturing, services and so on, but when it comes to the unemployed they are usually bunched up into one and the same group. This is tragic, we urgently need to create new categories of unemployed so that we for instance can start recording those millions that more and more belong in special categories such as the “employed unemployed” (see Scandinavia) and also the gainfully unemployed. In a global world order disrupted by more efficient job allocation it is important for Universities and others to start giving courses on how to be and make a living being structurally unemployed, (Unemployed BA)and perhaps this is something that the French, with an intuitive efficiency, have been able to pick up.

On the other hand the French, with their savoir faire, might have just decided that the markets should not be trusted in its efficiency, and personally I think they have a point, especially when some few credit rating agencies have been ordered to substitute for so much of the market.