Tuesday, October 4, 2016

Why I distrust governments so much, and about which the World Bank and IMF could do a lot.

Sir, as a Venezuelan, I of course distrust completely any government that thinks it can manage, on behalf of its people, 97% of the country’s exports, better than what each citizen could manage his per capita share of the net revenues from those exports. 

But the following comment has to do with a completely different issue and that applies to many more countries than my own, namely: I entirely distrust governments that can allow bank regulators to do what they have done... Here's a short summary of it:

Without defining the purpose of the banks, in a way with which governments and We the People could agree on, the regulators decided that the only role of banks was not to fail. To be a safe mattress in which you could stash away cash. For instance, how they allocated credit to the real economy, did not matter. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926

Then in order to keep banks from failing, without absolutely no empirical research on what makes banks and bank systems fail, they proceeded to impose credit risk weighted capital requirements on banks. More ex ante perceived risk more capital – less risk less capital.

Sheer lunacy! This seriously distorted the allocation of bank credit to the real economy, overpopulating “safe” havens like AAA rated securities and sovereigns like Greece, and for the real economy dangerously underexploring risky but perhaps productive bays, like SMEs.

These regulations, since implemented, have certainly hindered millions of SMEs and entreprenuers to have access to credit who otherwise would have been awarded by banks. No wonder QEs, fiscal deficits and low interests, fail to stimulate the economy.  Now banks finance “safe” basements where jobless kids can live with their parents, but not the risky SMEs, those that could create the jobs that could allow the kids to also become parents themselves.

And all for no good stability purpose at all. Just an example, the risk-weight for the dangerous AAA to AA rated corporate was set to 20%, while that for the absolutely innocuous below BB- rated was determined to be 150%. Motorcycles are clearly riskier than cars, which is why, having the choice of transport, so many more people die in car accidents. “May God defend me from my friends, I can defend myself from my enemies” Voltaire.

To top it up with these regulations the bank regulators helped to decree inequality

So World Bank and IMF, could I at least trust you to take up this with all finance ministers present during the meetings in October 2016? I have asked it of you many times before, but until now, nothing, zilch, nada.

PS. Here is a link to a somewhat expanded description of the horrors of the Basel Committee’s risk weighted capital requirements for banks.

Per Kurowski

A former Executive Director of the World Bank (2002-2004)