April 06, 2011

To rebalance the flows we need to rebalance the regulations.

Sir, Martin Wolf in “Waiting for the great rebalancing”, April 6, writes about “an ‘uphill’ flow from poor to rich countries, predominantly into supposedly safe assets”. According to Wolf, Mervyn King, the governor of the Bank of England, explains the flow as resulting from “export promotions… a decision to accumulate foreign reserves… and the combination of low levels of financial development with inadequate social safety nets”.

May I suggest that Mr. King, perhaps because of some conflict of interest, left out the most important explanation, namely the incredible push the importance the credit ratings got, when the regulators based the capital requirements for banks on these. All over the world there was only one message going out loud and clear, which was that the credit rating agencies knew what they were doing, and that if you want lower risk you should better follow their triple-A ratings. That the AAA ratings are highly correlated with rich countries, well that is a quite different issue.

Let us hope now that whatever rebalancing must come will include the rebalancing of the regulations of banks, so as to get rid of that arbitrary discrimination in favor of those who are perceived as not-risky and who are already more than sufficiently favored by the markets.