August 27, 2009

Do financial regulators have a legal right to discriminate?

Sir Benjamin Friedman writes that the activity of so many of our young well educated luminaries working in finance “adds no economic value” “Overmighty finance levies a tithe on growth”, August 27. My first question is how does he really know it is because they are well educated and not because they work in a quasi-monopolistic environment? My second, if so are we not to blame professors for it? And third, should the world sue Harvard and other for their teachings?

Of course Friedman has a point but what really levies a financial tithe on growth are the various tolls on financial risk. Regulators for instance order banks to have more equity for clients perceived as more risky, and credit cards financiers are more than happy to have the credit rating scores create the illusion they charge the right level of interests to their customers.

Anyway I would argue that much more important than what the financial sector has earned in profits (before the losses of the crisis are netted out) is to think on what other growth opportunities could have been financed with those trillions of dollars wasted in the housing sector only because some hustlers managed to hustle up some credit ratings made overly important by the regulators.

A question to the Professor, when the regulators impose on the banks an 8 percent capital requirement when lending to unrated citizens and zero if lending to the government... are they not exceeding their mandate? Do they have a legal right to discriminate this way?