Capital standards are critical to the stability of any financial system. However, whether such standards are better achieved by markets rather than political entities merits more attention than the Nov. 1 editorial “Sweet Basel?” suggested.
Today’s financial system has been compromised by a massive array of past government interventions that have steadily weakened market disciplines of imprudent financial activities.
And now we have Basel III, an effort to impose a universal standard as to what constitutes “capital adequacy.” This is worrisome, given that earlier Basel accounting rules classified sovereign debt as “risk-free.”
The greatest moral hazard is the belief that political agencies are more prudent financial risk managers than those whose investment decisions bear directly on them. Assets are inherently complex. What something will be worth in the future is not something that anyone can easily predict. When consumers, investors, shareholders and others risk their funds on their expectations, that scrutiny is far more likely to be accurate.
Fred Smith, Washington
The writer is president of the Competitive Enterprise Institute.