May 06, 2015

What keeps the very competent Martin Wolf from commenting on the mother of all regulatory distortions?

Sir, I refer to Martin Wolf’s “Why neither main party is competent” May 7. He sure gives a depressing outlook for the UK. In it he writes about a “disturbingly weak and unbalanced recovery, not a strong, healthy one.”

But, as I have explained to him in hundreds of letters over the last decade, if regulators insist on discriminating against banks lending to those perceived as risky, favoring so much the lending to those perceived as safe, there simply cannot be a strong and balanced recovery. By allowing banks to earn higher risk-adjusted returns on equity on what is perceived as “safe” than on what is perceived as “risky”, that is precisely what their current credit-risk-weighted equity requirements for banks do.

That regulation distorts the allocation of bank credit to the real economy. It caused the crisis, and it stops us from getting out of it. Since risk-taking is the oxygen of all development, and since we got more than enough with our own natural risk aversion, we really cannot afford regulators from layering on theirs.

Wolf seems to begin to reflect on this the mother of all regulatory distortions, like when he states that neither Labour or Tory-led governments “showed healthy scepticism about financial services”; and opines “The time has surely come to shift the focus from the obsession with fiscal deficits and debt. These were neither the cause of the crisis nor the solution.”

But no! Wolf does not get there, and I do not think it is incompetence on his side. Sir, have you any clue of the reason for why your chief economic commentator keeps mum on it? Should you not also be slightly concerned about it?