Neoliberalism? Stiglitz, you’ve got to be kidding.

1988, while Ronald Reagan and Margaret Thatcher still governed, bank regulators, the Basel Committee, introduced risk weighted bank capital (equity) requirements with decreed risk weights of 0% government – 100% citizens. 

And now so many nations, including the US, since needing to take on more public debt to be able to service their outstanding public debt, have de facto become zombie nations.

The world has landed up in the hands of a Bureaucracy Autocracy which, as usually all statism does, has a close and friendly working alliance with some big corporations. “You scratch my back and I'll scratch yours.” There’s absolutely no free market or a Washington Consensus there.

Yet, Joseph Stiglitz, amazingly, dares write: “We’ve now had four decades of the neoliberal ‘experiment’,

When Nobel laureate Stiglitz suggests a “progressive capitalism”, why do we not start by asking him what he opines on how all current public debt has trickled down to the economy?

Stiglitz has titled his book “The Road to Freedom”. I’ve lived many decades convinced we are on Friedrich Hayek’s “The Road to Serfdom”. E.g., just see how, during Covid, while not opposing herd immunity, the apparatchiks seemed more interested in advancing herd docility. 

When I hear about e.g., central banks digital currency CBDC, and digital identity cards, I truly fret for the future of my grandchildren. Don’t you?

Bank regulators were contaminated by the virus of totalitarianism

Mario Vargas Llosa in “The Call of the Tribe”, 2023, has a chapter titled Friedrich August von Hayek (1859-1992). It mentions Hayek, in “The Road to Serfdom” 1946, opining “that centralized planning of the economy inevitable undermines the bases of democracy, and that fascism and communism were therefore two expressions of the same phenomenon of totalitarianism. By the same token, all regimes, even those appearing to be free, would be contaminated by the virus of totalitarianism if they sought to control the functioning of the market.”

Paul Volcker in his “Keeping at it” 2018 (valiantly) confessed: “Assets assigned the lowest risk, [1988] for which bank capital [equity] requirements were therefore nonexistent or low, were what had the most political support: sovereign credits & home mortgages… A ‘leverage ratio’ discouraged holdings of low-return government securities”

Bank capital requirements with decreed risk weights 0% Federal Government and 100% We the People; could that have been a "spontaneous evolution of institutions"? NO!

Tell me, is that not about the greatest example of regimes appearing to be free, having been contaminated by the virus of totalitarianism, bringing fascism and communism by stealth?  (What would the Founding Fathers have opined)

All those declaring themselves followers, admirers and promoters of Hayek, how can they have ignored all this, for more than three decades?

On three side issues: 

Regulators allow banks to hold much less capital/equity when financing what’s perceived (or decreed) as “safe” e.g., public debt, residential mortgages and AAA rated, than when financing what’s perceived as “risky” e.g., loans to small businesses and entrepreneurs. I’m sure Hayek would have known, as any economist should have known, that such incentives had to cause dangerously much lending to the “safe”, and weakening too little lending to the “risky”

I’m sure Hayek would also have objected assigning some few human fallible credit rating agencies so much power when determining how much capital/equity banks had to hold against assets.

If asked about bank capital/equity requirements based on what’s perceived as risky being more dangerous to bank systems than what’s perceived as safe, Hayek could have probably asked: What were the large exposures that detonated bank crises built-up with, with assets perceived as risky or with assets perceived as safe?

Just before the Berlin Wall fell, communists, statists, dictators and those who benefit from crony statism, gave the liberal capitalistic free-market world the finger.

The Confession that, seemingly, shall not be acknowledged:

“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. The American 'overall leverage' approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities." Paul A. Volcker, “Keeping at it” 2018.

In 1988, just before the fall of the Berlin Wall in 1989, some communists/statists hacked into the free market capitalist world’s bank regulations. By means of Basel I, and for the purpose of determining the capital requirements for banks, they arranged so that the risk weight for lending to OECD sovereigns was zero percent, the risk weight for lending secured with houses 50 percent, while the risk weight for lending to the private sector was set at 100 percent.

Since the basic capital requirement was set at 8 percent that meant that banks could leverage their capital unlimited times when lending to their sovereign, 25 times (100/4) when financing the purchase of houses and 12.5 times to 1 (100/8) when lending to the private sector, to the citizens.

That doomed bank to lend too much to the governments and too much to the housing sector, and basically to abandon the traditional role of banks, namely to provide credit for the private sector, like to SMEs and entrepreneurs. Of course those from the private sector that were exploiting crony statism, they just loved it. 

That de facto reflected the belief that government bureaucrats, the autocratic bureaucracy, know better what to do with bank credit for which repayment they are not personally responsible for, than for instance e.g., small businesses and entrepreneurs.

And that in turn doomed the liberal free-market and capitalistic economies of the western world.

In a letter published by Financial Times in 2004 I wrote: "Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?”

That the world is suffering under the thumb of neo-liberalism? That is just sad fake-news cover up invented by statists/communists.

How much public debt would have been avoided, or at least priced correctly if banks, when lending to the sovereign, needed to hold that same 8% they were required to hold when lending to the citizens?

Please, for the good of our grandchildren, it might already be too late for our children, help me tear down that wall the Basel Committee built… urgently … Greece was just the tip of the iceberg!

P.S. On that day, all around the world, Bureaucracy Autocracies were empowered. 

P.S. On that day, financial communism was decreed 

P.S. When 1988 regulators assigned America’s debt a 0.00% risk weight, its debt was $2.6 trillion, 50% GDP, now on route to $28 trillion, about 100% GDP, and it still has a 0.00% risk weight. When do you think that weight should increase to 0.001%?

P.S. Are those regulations in accordance with what the Founding Fathers expressed in the US Constitution?

PS. November 2023, there's 34 years since the world went from “Tear Down that Wall” to the “Build Up that Wall” for 34 years.

P.S. If Basel I had been imposed four decades earlier:

Would now John F. Kennedy have wanted to deliver his 1963 “Ich bin ein Berliner” speech?

If the Berlin Wall was still up, would now Ronald Reagan, if still with us, have needed to tell Putin “Tear down this wall!”?

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for bank made so much worse with the introduction of Basel II in 2004.

A letter to the Financial Stability Board

A letter to the IMF titled: "The risk weights are to access to credit, what tariffs are to trade, only more pernicious."

I’ve recently enrolled ChatGPT - OpenAI to assist me in the fight against regulatory communism/fascism.

Here a letter the Washington Post published in August 2023 and that refers to Paul Volcker’s valiant courageous and honorable confession on what happened 1988.

Banks regulators, please, more humility… and also read more Hayek

Friedrich Hayek in his essay of 1945 “The use of knowledge in society” wrote the following: 

“The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. 

The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality. 

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics.” 

And this truth was completely ignored by our current generation of bank regulators, who arrogantly thought themselves capable to act as the risk managers for the whole world, and so haphazardly set their risk-weights which determined the effective capital requirements for banks, based on perceived risks.

Of course that distorted it all and the banking system blew up… but these regulators still think they are up to the task of managing risks… As I see it the only possibility we have to make them humbler, at least for a while, seems to be, unfortunately, humiliating them.