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.

Does FT really want to impede banks to help out, so that we must rely on government? I pray it is not so.

Sir, “Moody’s grows nervous at Britain’s extension of austerity” reports Sarah O’Connor, February 25. 

But what Moody really should be nervous about is the fact that bank regulators allow banks to make so much higher expected risk-adjusted profits when lending to someone with a good rating than when lending to for instance someone unrated. That will of course dampen the risk-taking a nation needs to move forward. And, if Moody and the others don’t know that, then they should lose their credit rating quality ratings. 

And in “British credit fears” you hold Sir that “ratings decisions can sometimes have real effects because of the wrong-headed way investment mandates and capital rules are designed to rely on them”. And that leads me to ask you, if you believe it “wrong-headed”, why have you then been so silent about it? Might it be because you are too hard-headed? 

You write “As this newspaper has long argued, there is room to shift resources from inefficient subsidies to uses that can stimulate the economy [and] to unclog banking and tilt Britain away from over relying on finance”. But Sir, if there is a real clog that stops banks from helping us to efficiently allocate resources in our real economy that is precisely imposing different capital requirements for banks based on perceptions of risk. 

Sir, you sometimes leave me feeling very uneasy. Could it really be that you want to impede banks to help out, just so that we must rely more on government? I do pray I am wrong.

The willingness to take risks is the true locomotive of an economy

Sir, Sir Samuel Brittan ends his “Britain has a funny way of firing up the locomotive” of January 18 with “Keynes…was up against the self-destructive instincts of political leaders, who transferred home truths about family budgets to wrong-headed principles for running national economies.” 

Indeed, just as I am up in arms against the self-destructive instincts of bank regulators, and who transfer home truths about individual risk avoidance into wrong-headed principles for our banks. 

Sir, again, for the umpteenth time, if you know all bank crises have been caused by excessive exposures to some erroneously classified as absolutely safe, why on earth, as Basel regulations require, need banks to hold much more capital when lending to “The Risky” than when lending to The Infallible? 

It is any risk-taking austerity that most causes a nation to stall and fall. The willingness to take risks that is the true locomotive of an economy. And that is precisely why we go to our churches to pay “God make us daring!” while ignoring that some besserwisser regulators have kept themselves busy castrating our banks.

Get the misguided and distortion creating regulatory risk-taking austerity out of our banks, fast!

Sir, Wolfgang Münchau writes against “blindly rushing into semi-automated austerity” and about the “perma-austerity” that he sees invading the US and Europe, “US joins Europe´s misguided pursuit of austerity” January 7. 

And again I must comment that the most dangerous austerity, in the US and in Europe, has nothing to do with fiscal or central bank accounts, and all to do with the foolish risk-taking austerity that, by means of capital requirements based on perceived risk, has been imposed on our banks. 

That austerity signifies that those in the real economy who are the most vulnerable and dependent on access to bank credit on favorable terms, “The Risky”, are currently the ones most discriminated against by bank regulators who like overly scared nannies, insist in favoring “The Infallible”, those who least need favoring. 

Before you get the regulatory distortions out of the way, the discussions, for instance of fiscal multipliers, is just a huge waste of time.

Europe and America, do not discriminate against your economic growth engines, or you will stall and fall.

Sir, Wolfgang Münchau in “What not to worry about in the eurozone crisis” November 19 declares that the first of his worries “is the impact of austerity on growth”. I completely agree, but what most worries me is not any fiscal or monetary austerity to which Münchau would refer to, but to the risk-taking austerity that has been introduced into our banking system by capital requirements that are much lower on exposures to “The Infallible” than to exposures to “The Risky”. 

That regulation, especially in times of severe scarcity of bank capital, is stopping all access to bank credit for those officially perceived as risky, like small businesses and entrepreneurs; and channeling all bank funding to fewer and fewer quite unproductive safe-havens, so much so that these havens are also becoming dangerously overpopulated. 

If the eurozone, the whole Europe and America too, want to save their economies they’ve got to rid themselves of this regulatory discrimination against some of their most fundamental growth engines and understand that without considerable risk-taking, they will stall and fall.

Martin Wolf, it is the risk-taking austerity we’ve really got to be scared of

Sir, Martin Wolf writes that “Europe is stuck on life support” February 1, and concludes that only shifts in competitiveness between the members will give the latter the opportunity to survive disconnected. Who would not agree, the issue is how to achieve that. It starts by better understanding what caused this mess we’re in and, in that debate, much more important than discussing the dangers of fiscal austerity, is realizing the dangers of risk-taking austerity.

The banks, courtesy of the Basel regulations and the capital requirements based on perceived risk, have now all been painted into the corner of what is officially perceived as not-risky, and where of course any real shifts in competitiveness do not normally reside.

Take for instance Italy, in many ways it has survived in spite of its governments, and, nonetheless any European bank is currently required to have much more capital when lending to an Italian small businesses or entrepreneur than when lending to the Sovereign Italy.

Mr. Wolf, at this moment, much more than a Heinrich Brüning, who we really must fear, are the sissies in the Basel Committee, in the Financial Stability Board and in the UK’s own FSA.