May 03, 2017

Martin Wolf, how statist must one be in order to find favoring public debt over private sector debt so much normal?

Sir, Martin Wolf, on the first 100 days of President Trump writes: “The good news is that, albeit chaotically, he is governing more as an orthodox post-Reagan Republican than most expected. The bad news is that he is governing more as an orthodox Republican than most expected. This now seems true in all the main policy areas, both domestic and international. It is clearly true in economic policy… deregulation is still an objective.” “America’s pluto-populism laid bare” May 3.

Sir, let us analyze how regulators have “deregulated”.

Bank regulators, for their risk weighted capital requirements for banks, assigned a risk weight of 0% to sovereign debts and one of 100% to citizens’ debts, which allows banks to earn higher risk adjusted returns on sovereign debt; which of course make banks hold more sovereign debt that they otherwise would do.

Bank regulators, for their liquidity requirements, are classifying sovereign debts as the most liquid ones; which of course make banks hold more sovereign debt that they otherwise would do.

Insurance regulators are copycatting bank regulators

To top it up the Fed, with its QEs, has mostly purchased sovereign debts… and will mostly maintain sovereign debt on its inflated balance sheet.

All that clearly favors the Sovereigns’ access to bank credit over that of the citizens.

Such statism must presume, de facto, that government bureaucrats know better what to do with credit than the private sector. That presumption must lead of course to disaster. 

Yet Sir, here is Martin Wolf worried about deregulation that perhaps might make away with all this. Like Jeb Hensarling's proposal of a straight 10% leverage ratio.

Wolf expresses serious concerns about the tax cuts proposed by President Trump, concerns that many of us share. But my worries has more to do with the deficit ad new debt that might result, while Wolf’s probably has much more to do with the wish he so many times has expressed, namely that governments should take advantage of the (artificially low subsidized by regulations) low interest rates in order to do more, like investing in infrastructure.

In a letter published by FT in 2004 I wrote: “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” Clearly that applied to developed countries too.

PS. Sir, dare to ask regulators the questions in this link. You talk about voodoo economics, what about voodoo regulations?