America, warning, industrial policy fertilizes crony statism
Sir, Rana Foroohar argues that America has chosen “to support a debt-driven, two-speed economy rather than one that prioritises income and industry” “Plans for a worker-led economy straddle America’s political divides” June 9.
“Debt-driven” indeed, but that has mostly been by prioritizing the safety of banks and the financing of the government.
In 1988 the Land of the Free and the Home of the Brave signed up to a statist and risk adverse bank regulation system. The Basel Accord favors “the safer present”, for instance lending to the sovereign and financing the purchase of houses, over that of “the riskier future’, like lending to entrepreneurs.
In 1988 when a 0% risk weight was assigned to it, the US debt was $2.6Tn. Now it is $22Tn, and still has a 0% risk weight. And just look at how houses have morphed from being homes into being investment assets.
There’s no doubt the report issued by Marco Rubio, as the chair of the Senate small business committee, is correct in that “the US capital markets had become too self-serving and were no longer helping non-financial business... and that public policy could play a role in directing capital to more productive places — away from Wall Street, and towards Main Street.”
But that does not mean the US, in order to “successfully compete with state-run capitalism” like China, has now to turn to industrial policy and thereby risk being captured by even more crony statism.
Regulators assigned a 20% risk weight to what, because it has an AAA rating could really create dangerous levels of bank exposures, and one or 150% to what is below BB- rated, and which banks do usually not want to touch with a ten feet pole. So why should we believe that governments who appoint such regulators, have better ideas than the market on how to funnel capital to the most productive places, connecting the dots between job creators and education.
Therefore the public policy most urgently needed is that of freeing America (and the rest of the world) from that public policy distortion of the allocation of bank credit, that which builds up dangers to the bank system, and weakens the real economy.
PS. Germany has benefitted immensely from so many eurozone nations helping to keep the euro much more competitive for it than what a Deutsche Mark would be. Therefore it is not really correct to bring up the “success” of Germany as an argument in favor of more state intervention.
@PerKurowski
Posts
