January 25, 2017

Is the “permissive consensus” that allowed dumb hubris-inflated elites to regulate banks over? Doesn’t look like it

Sir, Emmanuel Macron, a candidate for the French presidency writes “The permissive consensus that allowed Europe to be governed by the elite for the elite is over” “Europe holds its destiny in its own hands”.

Starting 1988 regulators introduced risk weighted capital requirements for banks, and in the process inexplicably decided on such outlandish risk weights as 0% for the Sovereign 20% for the AAA-risktocracy, 100% for We the People, and 150% for those poor bastards rated below BB-, those who of course already had their access to bank credit basically reduced to nothing.

With that the regulators introduced statism and a risk aversion that now have banks no longer financing the riskier future, only refinancing the safer past and present. And all that for nothing, since it is never what is perceived ex ante as risky that causes any bank crises. That dishonor belongs to unexpected events, to criminal behavior, or to something ex ante perceived as very safe turning out, ex post, as being very risky.

Macron writes: “The French people did not emancipate themselves from absolute monarchy in 1789 with the declaration that “the principle of any sovereignty lies primarily in the nation”. True emancipation arrived in 1792, when citizens across France rose up to defend the revolution against foreign kings.” Macron is probably not aware of that, thanks to experts, French banks can now hold much less capital when lending to many foreign sovereigns than when lending to French SMEs and entrepreneurs.

But those crazily failed bank regulators keep on regulating, as if nothing, and still captured by a monstrously large confirmation bias. For instance this week Mario Draghi, the former chair of the Financial Stability Board, the current chair of the Group of Governors and Head of Supervision in the Basel Committee for Banking Supervision, ranked in 2015 by Fortune as the as the world's second greatest leader; without the blinking of an eye gratefully received the (bit obscure) “Premio Camillo Cavour” 2016, for services to Italy and Europe.

Would Italy and Europe be in its current difficulties had their “safe” sovereigns and their “risky” SMEs and entrepreneurs have had the same risk-weight? Absolutely not!

PS. Sir, ponder on that perhaps your own permissiveness on these regulations, perhaps out of a wrong sense of solidarity or awe with experts, helped cause the 2007/08 crisis, and the slow economic growth thereafter; that which (much much more than Russians hackers) has led to Donald Trump becoming president. How do you feel about that?