July 31, 2015

Risk weights of 0% government and 100% private sector… in “The Land of the Free and the Home of the Brave”?

Sir, Gillian Tett writes: “Every nation needs a unifying idea. Americans love to see themselves as champions of free markets and entrepreneurial zeal — and have long been more welcoming to entrepreneurs than has most of the western world”, “The land of free markets, tied down by red tape”, July 31.

And Tett gives some examples business regulations that show how “champions of free markets and entrepreneurial zeal” might not be completely applicable to the America of today. I have a much more extreme example:

In 1988 the US signed up the Basel Accord, which for the purpose of setting the capital requirements for banks, defined the risk-weights to be zero percent for the government, because it is considered safe, and 100 percent when lending for the private sector, because it is considered risky. That clearly distorts the allocation of bank credit in favor of the government and against the private sector.

So could Gillian Tett, or anyone else, please explain to me how that fits the notion of “The Land of the Free and the Home of the Brave”?