Professor Hubbard, bad news, the waters you fondly remember, have been contaminated by bank regulators

Sir, Professor Glenn Hubbard wants the US to walk down a narrow path, carefully avoiding the fiscal cliff, so as to reach the “pleasant waters [with] less uncertainty and stronger growth, “How the US should avoid falling off the fiscal cliff”, November 13. And, in doing so, he suggests that the US avoids increasing marginal taxes, which “distort behavior and reduce activity” and go for scaling back tax deductions instead. 

I completely agree with Professor Hubbard, but I have some very bad news for him. Those waters that he so fondly remembers from his youth are not the same waters anymore, they have been contaminated. 

When bank regulators decided to allow banks to hold much less capital against exposures to “The Infallible” than against exposures to “The Risky”, and thereby allowed “The Infallible” to provide the banks with a much higher risk-adjusted rate of return on equity than what “The Risky” could do, they effectively made the banks much more risk-adverse than what they already were. 

And banks, as a consequence, abandoned taking on the traditionally manageable risks we need them to take on, like lending to small businesses and entrepreneurs, “The Risky”, and entered a suicidal path of taking unmanageable exposures to “The Infallible”, and precisely the kind of exposures that have always resulted in a lot of tears. 

And so Professor Hubbard, if you do not want to be unpleasantly surprised when reaching the waters, ask your bank regulators to immediately stop discriminating in favor of those already favored by markets and banks, and against those already discriminated against. 

It is none of a bank regulators’ business to distort the economic resource allocation function of our banks, only because full of hubris they want to fool around playing risk managers for the world. In fact, and as I have said it before, if these bank regulators had done what they did knowingly on purpose, that would represent an act of high treason against our economies, and for which they should be shot.

Was the USA, the Home of the Brave, built based on risk-avoidance?

Sir, Professor Glenn Hubbard presents “A conservative growth agenda for the US economy” July 18. It includes primarily “getting or fiscal house in order and reforming the tax code” the latter because it “discourages work and entrepreneurship… and distorts the allocation of capital.” 

I have no problem with that, but how come no conservative (nor progressive) growth agenda includes getting rid, immediately, of those capital requirements for banks based on perceived risk and which discriminate so odiously discriminate in favor of what is perceived as absolutely not risky (which includes government) and against those perceived as risky, like the small businesses and the entrepreneurs? If anything is distorting bank credit allocation that´s it. Frankly, Professor Hubbard, was the US, “the land of the brave” built based on risk-avoidance? I do not think so! 

In fact these bank regulations are as close to a virus that instills cowardness as can be… and, if I was part of a Homeland Security, I would definitely look into it… as it is an issue of national security.

Get the banks going instead of having them crying over spilled milk.

Sir Glenn Hubbard in “Ways for Obama to energise the economy”, November 20, when mentioning the need to recapitalize our banks so that normal lending returns, leaves out one of the most important adjustments the bank regulators could do. Why does a bank that raised equity according to the minimum capital requirements now have to use extremely scarce new equity to replenish its equity to compensate for the discoveries and down-ratings? This is like crying over spilled milk, when we would all be better off if they used all fresh equity to sustain new business, which is the only business capable of lifting us out from the hole we’re in? For any fresh capital injections, from governments or other sources, the banks should be allowed, if they so wished, to adopt a uniform equity requirement, for instance 6% across the board, lower than the standard 8% target set by Basel, at least for the time being. It is indeed important to stretch out a hand to help those down but it is much more important to provide the support to those going up. And with respect of that helping hand, let us be absolutely clear that the best way of solving the mess with all the lousy outstanding mortgages, for all the parties, is to make sure these mortgages become worthy of the prime ratings they were initially wrongly awarded. If they keep on being subprime they will be so much more expensive for everyone to carry.