RWAs and Scott Sumner on banks
The FT yesterday published a new article on ‘manic regulation’. It comes as a relatively nice surprise given the tone of most of the articles recently. The FT reminds us that in 1980 there was one regulator for 11000 financial workers in the UK, in 2011, one for 300, that Basel 1 was 30 pages-long, and Basel 3 1000. It pleasantly questions whether the excessive regulation put in place at the moment would prevent another financial crisis. Its answer: “History suggests not”.
Something I particularly liked: “The worst thing about the new regime is that the whole system of risk-weights is a nonsense.” I really have to get back to RWAs in a post soon. In my opinion, it is an abomination of financial regulation that needs to be scrapped.
Scott Sumner reiterated his “banks don’t matter” claim. For those who don’t know him, he is the Market Monetarism guru, a new school of thought insisting that a central bank stabilising the growth of nominal GDP by monetary policy would prevent or reduce most crises. Business Insider called him “the blogger who may have just saved the American economy”… Scott and I are both pretty close and pretty far ideologically speaking. He is a classical liberal disliking most government interventions. And while we agree on most subjects, we won’t really agree on monetary policy and banking ones as we have differing economic worldviews. I do agree with him that NGDP targeting would be an improvement on our current monetary policy framework though.
So here Scott claims (in line with his worldview and what he already declared) that the banking system doesn’t matter in order to maintain the economy stable. He doesn’t want to include banks in macro-economic models (I think they are often quite useless anyway…). I don’t agree with him, as you can see from my comments, and from my exchange with two other economic bloggers, Nick Rowe and JP Koning. My point of view is that, in the real world, banks play the role of intermediaries without which the central bank would struggle to influence anything through monetary policy.