July 15, 2016

An Inclusive Growth Commission has a much more important thing to do than pushing public investments.

Sir, Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management, and the chair of the Inclusive Growth Commission, holds that “when the government’s cost of borrowing has fallen down to below 1 per cent [that] the best response to Brexit would be to boost demand [with] public investments”, “Britain’s chance to show the world how to do stimulus” July 15.

Let me ask the Inclusive Growth Commission chair the following:

What would happen to the already more expensive health insurance premiums of the old or sick, if regulators decided that in order to make insurance companies safer these needed to hold more capital when insuring these “risky” than when insuring the “safe” young and healthy? In relative terms, and compared to the premiums before, the old and the sick would then face even higher premiums than the young and healthy.

And that is what the risk weighted capital requirements for banks do. The ex ante perceived, decreed or concocted as safe will, in relative terms and when compared to “risky” SMEs and entrepreneurs, now pay much lower interest and have much more access to bank credit. In other words regulators  decreed inequality.

And that is bad for growth, and of course bad for inclusion. And since the sovereign, the government, has been decreed infallible, the least risky, and given a risk weight of zero percent, these regulations, paid by the risky, have given statism a great boost.

And so the chair of an Inclusive Growth Commission, would do much more for growth and inclusion fighting for the removal of these regulations, and that so distort the allocation of credit to the real economy.s
Most monetary and fiscal stimulus begins or ends up flowing through the banks and so the real question should be: What would be the borrowing rates of the Sovereign if banks needed to hold as much capital against loans to it, than what they have to hold against loans to unrated citizens?

This regulatory subsidy of public sector borrowings will catch up on us all, sooner or later, as it already did in Greece. When that happens our children and grandchildren will not accept our argusment “Oh but it was so cheap”.