Capitalism is in crisis, being attacked by regulators!

So capitalism is in crisis? Analysis, January 9. Would golf not be in crisis too if the handicap officers assigned more strokes to the good players than to the bad? Would horseracing not disappear if the bad horses had to carry more weight than the good? What would you say about a government that on top of the higher premiums the unhealthy pay, proposes to also tax them because they are riskier? 

The banks are of vital importance for how capitalism functions, and Mark Twain reminded us with his the lending of an umbrella when the sun shines and taking it back when it rains, that bankers might be too risk-adverse. If they were that before, well now they are that a hundred times more. 

Because now, thanks to our ingenious bank regulators, for a bank to finance 100 dollars of what is officially perceived ex-ante as risky, it needs about 8 dollars in capital, but, to finance100 dollars of what is officially perceived ex-ante as not risky, it needs only about 1.6 dollars. 

Which means that when a bank lends to what is officially perceived ex-ante as risky, it can earn the risk and cost adjusted margins of those loans about 12 times for each dollar of bank capital, but, when lending to what is officially perceived ex-ante as not risky, it can earn the risk and cost adjusted margin of those loans more than 60 times for each dollar of bank capital. 

The natural consequence of such stupidity, is that the lending to what ex-ante is officially perceived as risky, like the lending to entrepreneurs and small businesses, is in relative terms made much less interesting for the banks, while the lending to what ex-ante is officially perceived as not risky, like the triple-A rated and infallible sovereigns, is given extraordinary incentives. 

And so the perhaps most important and dynamic participants of capitalism, the small businesses and entrepreneurs, are either not getting bank loans, or having to pay much more for these, all while, what is ex-ante officially perceived as absolutely safe-havens, and therefore already easily attracted cheap funds, are now, ex-post, turning into dangerously overcrowded havens. 

A byproduct of such stupidity is of course also that an allowed bank leverage of more than 60 times, serves as the most potent growth-hormone for the too-big-to-fail banks and of the too-big-to be-decent banker bonuses. 

What to do? Let capitalism be capitalism. Capitalism discriminates sufficiently on its own based on ex-ante perceived risks, so as to need further assistance from the excessively worried nannies in the Basel Committee for Banking Supervision.

More of this in the video