As you well know I suffer a self-confessed obsession with denouncing the distortion that the credit risk weighted capital requirements for banks produce in the allocation of credit to the real economy. Martin Wolf, though he does not confess it, suffers a similar obsession, with ignoring that distortion.
Here Wolf refers again to “the major governments are able to borrow at zero or even negative real interest rates, long term”. And Wolf refuses to notice that sovereigns, with the low capital requirements they generate for the banks, have been declared by regulators to be preferential bank borrowers. And that is especially important when bank equity is scarce.
If you force the banks to hold the same capital against sovereigns than what they are required to hold against loans to SMEs and entrepreneurs, then you would know what the non-subsidized borrowing rates of governments really are.
Or if you allow the banks to hold the same capital against loans to SMEs and entrepreneurs than what they are required to hold against sovereigns and other preferential borrowers, then you would see investments increase. And that without increasing significantly the risk of banks, since loans to “risky” SMEs and entrepreneurs never cause major crises.
Wolf refers to the “lunatic…austerity obsession”. No! What’s really lunatic is the regulators’ risk weighing obsession… as if they were Gods.
Wolf should ask the following, for instance to Adair Turner whom he references:
How many bank loans to SMEs and entrepreneurs have not been awarded in America and Europe during the last decade only because of the risk weighted capital requirements for banks, ten thousands, hundred thousands, millions?
And so of course we might need helicopter money, that at least would be much better than QEs’ money redirectioned by bank regulators; but more, much more than that, we urgently need bank regulators who understand the concept of: “A ship in harbor is safe, but that is not what ships are for.” (John Augustus Shedd, 1850-1926)
PS. And that would also be the best way to dent inequality: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own.” J.K. Galbraith’s “Money: Whence it came where it went” 1975
@PerKurowski ©
Source:
http://teawithft.blogspot.com/2016/02/martin-wolf-much-more-than-helicopter.html
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