September 20, 2012

In the “Home of the Brave” the banks should not be induced to play it foolishly safe

Sir, James Bullard writes that after the large shock suffered by the US 2008 and 2009 “Patience is required to meet the Fed’s dual mandate”, of containing inflation and promoting employment September 20. 

It appears that Mr. Bullard believes that shock to be exogenous. I on the contrary am sure that the mega-shock was the natural result of capital requirements for banks based on perceived risks, which dramatically distorted the economy, in the US and in Europe. 

And those capital requirements are still distorting and do still discriminate against the “risky”, like the small businesses and the entrepreneurs… and, let's be honest, who can expect generating a new generation of jobs that way? 

No, if the Fed was truly serious about fighting unemployment, then it would requests that the capital requirements for banks had more to do with that objective, like basing it on potential-of-job-creation ratings, instead of on purposeless credit risk ratings, most especially since the perceived credit risks are already cleared for by the banks with other means. 

No, if the “Home of the Brave” wants to get out of a downward spiral, it cannot allow bank regulators to continue to induce the banks to play it foolishly safe. To do so, that would indeed be to inflict permanent damage on the US economy (and exactly the same, or even more, goes for Europe).