October 02, 2013

Martin Wolf has forfeited his right to preach on budgets, public debt limits and the growth of the real economy

Sir, the whole Western World is flirting with self-destruction as a consequence of having accepted capital requirements for banks based on ex ante perceived risk. These only guarantee dangerous excessive bank exposures to “The Infallible”, like sovereigns, housing and the AAAristocracy; and equally dangerously small exposures to “The Risky”, like to medium and small businesses, entrepreneurs and startups.

Much of the problems of the huge public debt overhang in the USA, and in Europe, are a direct consequence of these regulations. 

I have written, and corresponded on many occasions about this with Martin Wolf. But, since he has deemed it fit to ignore the argument of how these capital requirements distort the allocation of bank credit, I at least feel he has forfeited any right to preach on budgets, public debt limits and the growth of the real economy, like he does in “America flirts with self-destruction”, October 2.

I am not that convinced about the health reform in the USA, since I believe it tackles insufficiently the root problem of excessive costs. Even so I would much rather prefer that the actual line drawn in the sand for any budgetary and debt limit agreement, was the total elimination on any discrimination based on perceived risks; something that should in fact already be prohibited because of the Equal Credit Opportunity Act (Regulation B)

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, since he understands it all… at least so he thinks. For instance I believe Wolf does not understand how subsidized sovereign debt is by these regulations and so in fact, the current public debt level, is considerably higher in real terms. Perhaps Wolf could benefit from reading Jens Weidmann's "Stop encouraging banks to load up on state debt" of October 1.