February 11, 2010

What is ‘socially desirable’ to regulators can be very ‘socially undesirable’ to us

Sir, Sir Martin Jacomb holds that “views on what activities are ‘socially desirable’ should play no part in the regulatory structure” but fails to see that this is exactly what happens when regulators discriminate bank capital requirements based on what is socially desirable to them as regulators, namely that of reducing the risk of bank default, “Hurried reforms will not get banks lending” February 11.

I ask again, for the umpteenth time, what is socially desirable about banks not defaulting if banks do not perform as society should have reasons to expect? Personally I have always argued that the lack of bank failures points to a lack of needed risk-taking, and to anyone who counters with pointing at the many bank defaults in this crisis I tell them these were not the result of bank failures but of regulatory failures.

If bank regulators had not favoured with some truly minuscule capital requirements those operations that they found ‘socially desirable’ having triple-A ratings; or empowered the credit rating agencies way too much, this very ‘socially undesirable’ crisis would not have happened.

But of course, with Sir Martin Jacomb’s general point on the importance of getting the banks to lend, I totally agree. To me it is truly surrealistic to observe how much leeway we are willing to give government bureaucrats to spend our children’s future taxes, when compared to how much we demand the regulators to rein in the banks.