February 20, 2013

Mr. Anders Borg, what democratic legitimacy has bank regulators to distort and discriminate, and to be so dumb?

Sir, Richard Milne, in “Sweden attacks bloc fiscal union”, February 20, quotes the Swedish finance minister Anders Borg opining with respect to the European Union, “I do think that you’re overstretching the democracy legitimacy when you’re pushing more resources and more powers to Brussels”.

This is a concern I could identify myself with, but, in that respect, much more worrisome is how the bank regulators in the Basel Committee, and the Financial Stability Board, have adjudicated themselves so much powers so as to decide who our banks should lend to. Let me explain.

In a world free of bank regulators, banks and markets would lend to those borrowers who offered them the highest expected net margins of return, after adjusting for differences in perceived risks and transaction costs. That way they maximize the returns of their shareholder’s capital, simultaneously helping to allocate the financial resources in the most equitable an efficient way, so as to help the real economy grow.

But, that is in an ideal world, because now, in this world, loony bank regulators have told banks that if they lend to those qualified as “The Infallible”, then they are allowed to leverage those net expected margins many many times more than what they can do if they lend to “The Risky. And of course, that completely distorts the resource allocation mechanism.

And it is also highly inequitable, because one dollar or one euro paid in interest by a borrower belonging to “The Infallible” will, as it can be leveraged so many times more, then be worth much more than a dollar or an euro paid in interest by a borrower perceived as “risky”.

Mr. Anders Borg, who authorized the regulators to do such thing, you and your ministers of finance colleagues? Do your other Swedish minister colleagues now that? Does your parliament know that? Do the citizens know that?

PS. By the way, besides distorting and being inequitable, those regulations are plain silly. Never ever have “The Risky” detonated a major bank crisis, that dubious honor belongs exclusively to those falsely perceived as members of “The Infallible”, precisely like in the case of the current crisis; and also because those who operate on the margins of the real economy, and might be best suited to get us out of the crisis, and get our young ones their jobs, are quite often “The Risky”.