At the blog Learning From Dogs where I write from time to time, fellow author Per Kurowski, who has a deep understanding of the global financial system, made a comment that I thought YAL readers might find interesting. Granted, it might be useful to view the original post for some context, but the comment can be understood in its own right as an interesting point of view on global finance. Kurowski writes:
Here is a question on financial regulations, only for the brave.
Currently the financial regulators in the Basel Committee requires the bank to hold 8 percent when lending to unrated small businesses and entrepreneurs but only 1.6 percent when lending to triple A rated clients.
What would have happened if exactly the opposite capital requirements had been imposed? The banks having to hold instead 8 percent in capital when lending to triple-A rated clients and only 1.6 percent when lending to unrated small businesses and entrepreneurs.
It would most surely have created problems, any regulatory discrimination does, but I hold that a crisis as large as the current one would not have happened… since no gigantic financial crisis has ever resulted from excessive lending to those who are perceived as risky, they have always resulted from excessive lending to those who are perceived as not risky.
We could also have had a lot more jobs, since almost always the next-generation of decent sustainable jobs is to be found among the current small businesses and entrepreneurs.
Our biggest financial systemic risk is without any doubt our financial regulators.