October 12, 2012

The worst austerity is the regulatory risk-taking-austerity imposed on banks.

Sir, Claire Jones and Peter Spiegel report that “German finance minister criticizes Lagarde call to ease up on austerity”, October 12.

Sincerely, it would sure do all those present at the IMF and World Bank Meetings in Tokyo much good to discuss the “austerity” that hurts the most. I refer to that of the risk-taking-austerity which results from current capital requirements for banks based on ex-ante perceived risk.

Those risk-taking austere regulations caused the crisis, by giving banks extraordinary incentives to lend to “The Infallible” and avoid lending to “The Risky”, the small businesses and entrepreneurs. 

And at this moment of extremely scarce capital, those regulations, and now made even worse because of liquidity requirements based on the same perceived risk, are discriminating more than ever against The Risky, and completely locking them out from having access to bank credit in competitive terms.

How on earth do they think we can get out of this economic mess they helped to place us in without the help of “The Risky”?