August 30, 2014

Bad bank regulations in the company of big egos, hidden agendas and lack of accountability have our economies stuck in the doldrums

Sir I refer to Joseph Stiglitz’ review of Martin Wolfs’ recent book “The Shifts and the Shocks” August 29.

Stiglitz writes: “The problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation between those with excess funds and those who need more money, in which scarce savings are allocated to the investments of highest social returns”

Of course that is the problem. A financial system, in which perhaps its biggest agent, the banks, are given immense incentives to lend and invest based on perceived credit risks, something which has absolutely nothing to do with social or economic returns, cannot fulfill its role of intermediation.

But, those immense faulty investments are given, not by any market, but by regulators who, for instance in Basel II, constrained a bank to leverage its equity 12.5 times to 1 when lending little to a small business or entrepreneur, while at the same time allowing banks to invest huge amounts in members of the AAAristocracy, leveraging a mindboggling 62.5 times to 1. 50 times more!

Unfortunately, in a world in which most of the big brass opinion makers carry their own agendas, and which in the case of Martin Wolf and Joseph Stiglitz neither one include the possibility of regulators regulating too much nor regulating too badly, it is difficult for this truth to surface. 

Add to that the fact that regulators themselves, quite naturally, hate their outright stupidity to be known, and stubbornly refuse to answer questions about the distortions their risk-weighted capital requirements produce in the allocation of bank credit, and you will get a better feeling for how stuck in the doldrums our economies are.