October 24, 2012
Sir, Martin Wolf opines “A stronger recovery from a steeper plunge is hardly a better outcome than a slower recovery from a milder plunge” and follows it up with “The great achievement of policy was to limit the severity of the post crisis recession”, “A slow convalescence under Obama” October 11.
From it one can only get the sensation that what he wishes for is a sort of “get me a couple of years more at hospital hooked up to life support, and, perhaps, after that, I don´t mind”. In other words an Après Wolf, le deluge.
Wolf completely ignores the cleansing effect that a contraction produces. Since all that has been achieved is kicking the can down the road, no real term contraction has been avoided, and fat and flabbiness, are substituting for muscles and sturdiness day by day.
Again Mr. Wolf, the US did not have a real estate bubble. What it had was its real estate values increased by means of the triple-A bubble which resulted from regulators allowing banks to hold assets so rated against extremely little capital. That has now morphed into banks holding sovereign assets against extremely little capital which, in somewhat colloquial terms, amounts to … just the same shit!
And the reason for it all, are the so distorting financial regulations which, by allowing banks to hold much less capital when lending to “The Infallible” than when lending to “The Risky”, allow banks to earn immensely higher risk-adjusted returns on equity when lending to “The Infallible” than when lending to “The Risky”.
And why are US banks seemingly better than European? Easy, Europe applied that principle much more… it even allowed banks to lend to Greece against only 1.6 percent in wishy-washy capital.
PS. In respect to this letter I would like to refer to a letter I wrote in response to one of your editorials, and which you published before I fell out of favor with you.