Do risk weighted capital requirements for banks promote or kill the animal spirits Lawrence Summers think important?

Sir, Lawrence Summers writes: “Animal spirits are as fickle as they are important”, “A bitter comedown from Trump’s sugar high” January 17.

Question: Does Professor Summers believe that the pillar of our bank regulations since 1988, the risk weighted capital requirements for banks, promotes or kills those animal spirits he thinks important?

As for me I have no doubts it kills it! Giving banks extra incentives to go in pursuit of the safe and abandon the risky just means that what’s decreed, concocted or perceived as safe, will get too much bank credit, at too low interests, while that which is perceived as risky, like SMEs and entrepreneurs, will get too little or in too expensive terms.

If there is any animal spirit left in the banks after that, then surely it is not those of lions but those of hyenas.

P.S. Professor Summers, you who know so much, would you on behalf of bank regulators dare advance some answers to the following questions?

@PerKurowski

What would Luke Johnson, Richard Branson, President Reagan and Lord Keynes say about Basel Committee’s risk aversion?

Sir Luke Johnson refers to that if entrepreneurs such as the Virgin founder, Richard Branson “did not take big gambles, society as a whole would be worse off” “The Virgin Galactic crash and the need for risk-takers” November 5.

And Johnson also writes: “pride and arrogance are required if the status quo is to be challenged with radical new ideas; after all, weak characters give up too soon – harried by regulators, safety obsessives and the overcautious. Change is never easy, but it must be embraced unless we want a life of stagnation and retreat.”

And he quotes President Reagan in that: “The future doesn’t belong to the fainthearted; it belongs to the brave”, and John Maynard Keynes in that: “If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.”

Well contrast all that to the fact that current bank regulators, with their credit-risk-weighted equity requirements, are telling the banks that if they lend to what is perceived as absolutely safe, then they will be able to earn much higher risk adjusted returns on equity than if lending to what is perceived as risky.

I am doing what I can, but FT, how is it that you cannot find it in yourselves to protest regulations that slowly but surely, creating artificial risk-aversion, are killing our economies and perhaps even our civilization?

Hayek and Keynes would have stood arm in arm against different capital requirements for bank assets based on perceived risk.

Sir, we have the world in financial turmoil as a direct consequence of regulators having allowed banks to hold extremely little capital, 1.6 percent or less, when lending or investing in what was officially perceived as “The Infallible” while requiring the banks to hold 8 percent against any exposure to “The Risky”. And yet five years after the crisis outbreak we can still read comments, by for instance Robert Sutherland Smith, that attribute this crisis to a universal banking which was supposedly freed in the “name of Hayekian neoliberalism”, “Bitter harvest of Hayekian neoliberalism”, December 27. 

In “free banking”, though there is of course different capital costs for different risk structures, there is no such thing as different capital requirements based on the perceived risk of the different individual assets of a bank, and Hayek would never ever have approved of such distorting regulatory stupidity. When will the underlying political agendas allow for that to be understood? 

And of course Lord Keynes, and who wrote “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them”; and who was an aggressive and able speculator on his own, would also fiercely have opposed such folly.

But neither would Lord Keynes have agreed with the bank regulators' super potent bubble blowing machine

Sir, Jeffrey Sachs writes “Hayek was prescient: a surge of excessive liquidity can misdirect investments that lead to boom followed by bust” “We must look beyond Keynes to fix our problems” December 18.

Absolutely, but add to that the fact that bank regulators, by means of capital requirements based on perceived risks, also decided to direct, through the banks, most of the excessive liquidity to “The Infallible”, like the AAA rated or prime sovereigns, and you will be able to better understand what an incredible bubble blowing machine has been created, because, of course, there is never a boom and a bust in what is perceived as “risky”, these always happen where it is perceived to be absolutely safe.

But neither should we imply that Lord Keynes would have agreed with what the regulators were up to, he was much too intelligent for that. Anyone who wrote “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them”, cannot have approved of the crazy idea of bank regulators doling out risk-weights in order to determine different capital requirements for banks.

And Keynes, an aggressive speculator in the stock market, who for instance obtained what has been termed as impressive but volatile capital growth of King´s College Chest Fund, knew very well about the importance of risk-taking… definitely not like our bank regulators whose bedroom fantasies are about a world with no risks and absolutely no volatility.

Sir Samuel Britain, here is what Lord Keynes would shout from his grave, if only he could.

Sir, Sir Samuel Britain writes “I have no idea what Keynes would say but I can hear him turning in his grave” “British economic policy echoes Habsburg decline”, November 23.

May I suggest the possibility that Lord Keynes would desperately shout out the following from his grave, if only he could: 

“You fools you have to make banks allocate resources to the most profitable projects which create the most growth which create the most jobs, instead of having these allocating resources to what requires them to hold the least in capital, in order to produce the highest returns on their equity.”

When a nation starts giving more importance to guarding what it has, and to assure their banks lend to “The Infallible”, than about what it can get by allowing their banks to lend to “The Risky”, like small businesses and entrepreneurs, it stalls and falls. The scarcity that currently most threaten our nations is that of pure un-distorted risk-taking.

There’s an economic war raging out there, so we need ministers and bank regulators with vision, not janitors and nannies!

Sir, Josef Joffe’s “Merkel’s case of good politics and bad economics” September 5, makes a solid case for buying gold and go to church and pray (and perhaps buy a gun) 

What can I say? There’s an economic war raging out there and we need our finance ministers and bank regulators to be men of vision, not janitors or nannies! Has anyone seen a Lord Keynes lately? 

Personally, and not as a Lord Keynes by any means, but as a simple consultant with quite a lot of workout experience, on a recent Labor-With-No-Jobs-Day, I thought that the following could be a good idea for Europe and America to explore: 

There is currently a tremendous scarcity of bank capital, and all fresh capital raised is going to plug holes instead of generating the new business needed… and so we are in dire need of traditional bank capital, not that silly modern stuff. 

In this respect I would gladly contemplate granting a 15 years full exoneration from corporate and dividend taxes, to whatever bank capital is raised by a banks that agrees to hold 15 percent in capital against any asset, no matter how safe or risky it might seem. 

There is a world of productive risk-taking waiting out there to get our youngster their generation of good jobs… let’s give them a chance. 

I would love to see 500 billion Euros (dollars) in this type of fresh bank capital...which could be leveraged into over 3 trillion Euros (dollars) in loans which do not discriminate based on perceived risks more than what they should ordinary do in a free market. 

That could mean a fresh start for our economies and a full-stop to that other war our current bank-nannies are waging against the "risky".