Peter Foster has a nice piece in todayâ€™s Financial Post arguing that the Murdoch affair is obscuring a bigger scandal: the financial profligacy of American and European governments. The extravagant spending of the former is being highlighted by the ongoing negotiations over the debt ceiling, while that of the latter, of course, is being put into sharp relief by Greeceâ€™s budget crisis.
Speaking of the Euro sovereign debt situation, Foster well observes:
This is a crisis not of â€œgreedâ€ but of the European super state, of overbloated welfarism, and of a banking system intertwined with governments …Â
Fosterâ€™s last point about the banking system is worth pondering. As large buyers of government bonds, the commercial banks play a key role in financing the welfare state. Indeed, they are incentivized to do so inasmuch as regulations allow banks to reserve less capital for government bond positions than would otherwise be required for other loans on the asset side of their balance sheets.
The new Basel III regulations arguably enhance this incentive. Basel III, after all, mandates banks to raise the level of shareholder equity relative to risk weighted assets. Now there are two ways of going about this. The obvious way is for a bank to raise equity by issuing new shares. Another way to increase the ratio, however, is by adjusting the denominator â€“ that is, by reducing the riskiness of the loan portfolio (HT: Vincent Fernando at Business Insider) . Since government bonds are viewed as less risky, given the stateâ€™s authority to tax, Â holding a greater proportion of them will lower the risk of the bankâ€™s assets.
Just one of several ways in which high finance serves the cause of big government.