September 23, 2015

Both leftwingers and free-marketeers got lost in the world of finance, banks and regulations

Sir, Paul Marshall identifies himself as one of “those of us who want free markets to retain their legitimacy” and reacts against that “monetary policy has already extended well beyond its technocratic bounds into the realms of wealth distribution” … because of course that is what Mario Draghi, president of the European Central Bank… is doing [with quantitative easing when] “artificially distorting the bond markets so that the debt-ridden governments of peripheral Europe can continue to enjoy a low cost of capital (the eurozone’s very own Ponzi scheme)”, “Central banks have made the rich richer” September 23.

I agree, but central bankers are assisted in this scheming, by regulators who have allowed banks to hold loans to The Safe, like governments and the AAArisktocracy, against much less capital that what they need to hold when lending to The Risky, for instance SMEs and entrepreneurs.

Paul Marshall also writes: “Quantitative easing, as this policy is known, has bailed out bonus-happy banks and made the rich richer. It is a surprise that the UK opposition party and other leftwingers have not made more of this.” That is correct but in response I would also ask, where were those free-market believers like Paul Marshall when in 1988 the Basel Accord assigned risk weights of zero to sovereigns and 100 percent to the private sector… and completely distorted the free market allocation of bank credit?

As food for thought let me quote from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.” 

With current regulations banks become "bad banks" from lending excessively to the good risks... and that does not sound too egalitarian to me.

PS. Bank regulators need an App to do their job for them. An App developer would at least have asked what is the purpose of a bank and so not have ignored their function of allocating bank credit efficiently to the real economy. An App developer would also know that what is dangerous for the banking system is what is perceived safe... never what is ex ante perceived as risky