April 07, 2014

To kick-start growth we need foremost to get rid of regulatory distortions

Sir, again: Allowing banks to hold different capital against different assets, because of perceived risks which have already been cleared for through by other means, translates directly into banks earning different risk adjusted returns on equity for different assets.

And Sir, again, I argue that this dangerously distorts the allocation of bank credit to the real economy.

And on this, and on other problems closely related to current bank regulations, I have written way over 1.000 letters to FT. With the exception of “Free us from imprudent risk-aversion”, an article which Martin Wolf kindly allowed me to publish on the Economist Forum blog, my argument has been silenced.

Why? No matter how obnoxious, impolite or in need of deodorant I might seem to you… is it ethical of FT to ignore my arguments?

And I believe that it partly is because of you having censored my argument, that now, more than six years into the crisis, we have Professor Lawrence Summers, in reference to the world’s primary strategy of easy money”, explaining that this is among other “to place pressure on return-seeking investors to take increased risk”, “What the world must do to kick-start growth” April 7.

Wrong! The pressure, at least for banks, is for these to take cover in “absolutely safe” assets and which, thanks to the regulator, are those which provide them with better risk-adjusted returns.

Thanks to these mindboggling bad regulations, the banks of the world are building up dangerously large exposures to what is perceived as “absolutely safe”, while at the same time holding, what for the real economy is equally dangerous, way too small exposures to what is perceived as “risky”.

If there is anything the world must do to kick-start growth that is getting rid of those incentives which stands in the way of banks lending to the “risky” medium and small businesses, entrepreneurs and start-ups.