Regulators, you can even let Libor be the result of a raffle, but please stop distorting and subsidizing the risk-free rate

Sir, I refer to Tom Braithwaite’s and Brooke Masters’ “Regulators urge speed in replacing the Libor rate” April 26.

By allowing banks to hold much less capital when lending to the “infallible” sovereigns than when lending to “risky” citizens, regulators have completely distorted what is probably the most important reference rate, the borrowing rates of the most solid sovereigns, one of these usually the proxy for the risk-free rate.

And that is why I am amazed about how much attention regulators give to the Libor rate, a rate that really, for its small relative importance, could just as well be the result of a raffle among some quotes, after eliminating some outliers. One day, the winning Libor could be somewhat higher than its true rate, and on that day, Libor based borrowers would pay somewhat more, and investors earn somewhat more; other days the picked Libor could be somewhat lower than its true value and the opposite would hold. But, in the long run, no one is really much harmed.

Could it be that regulators are ashamed of what they have done and are using the Libor incident as a distraction?

Martin Wolf analyzes America’s fiscal policy with some blinders on

Sir, if I would turn a blind eye to the fact that the interest rates the US pays on its government debt is subsidized by means of generating for the banks much lower capital requirements than for all other bank lending, then I would in general terms agree with Martin Wolf’s “America’s fiscal policy is not in crisis”, January 23.

But I do not turn a blind eye to the insidious and not so transparent regulatory discrimination which is making all bank borrowings much more expensive for all the “risky”, those who act on the margins of the real economy and those who are indispensable in order to generate tomorrow’s jobs, tomorrows fiscal revenues, and, why not, tomorrows “absolutely not risky” borrowers.

And neither do I turn a blind eye to the fact that the artificial “zero interest rates”, though of course a blessing for the government of turn, is creating big earning holes elsewhere in the economy, which will catch up on us all sooner or later.

This of course does not stop me from agreeing 100 percent with Wolf on the need for sensible reforms that contains the costs of the health sector, before the reforms called for might be truly insensible to the needs of the citizens.

PS. Since the US public debt is often used as an approximation for the risk-free rate, you should notice that what is believed to be the “risk-free-rate” is actually the “risk-free rate minus the subsidies provided by discriminatory bank regulations”. And so the reading of one of the most important instruments when trying to navigate our economies is completely wrong… and, for the record, that has a cost too.

End the damaging regulatory repression of risk-taking which subsidizes “risk-free” government debt.

Sir there is no question Lawrence Summers' recommendations for increased investments by the US Government is based on the government´s capacity for borrowing “at near-zero real rates of interest”, “End the damaging obsession with the budget deficit” January 22.

But why is he unable to see the real present danger in that the government is being able to borrow “at near-zero real rates of interest”? Is that something natural? Is that healthy? Of course not!

If the banks had to, as they should, hold just as much capital when lending to a “risky” citizen than when lending to “the infallible” government, then the current interest rate on US government debt, often the approximation of the “risk-free rate”, would be higher, as it would not have the benefit of this regulatory subsidy.

It is only if the regulatory taxing of “The Risky”, which subsidizes “The Infallible” is eliminated in the US, "The Home of the Brave", that its economy can start breathing freely again and grow sturdy... and this, of course, goes for Europe too.