Ben Bernanke did not do well, because he has not understood how current bank regulations distort.

In banking, what is perceived as “absolutely safe” has always access to the largest loans, at the lowest interest rates and easiest other terms. And that is why all bank crises have resulted from excessive exposures to what was ex ante believed as absolutely safe but that, ex post, turned out not to be.

In the same vein what is perceived as “risky” always receives the smallest loans, at the highest interest rates and harshest other terms. And that is why no bank crisis has ever resulted from excessive exposures to what was ex ante believed as risky.

And therefore bank regulations, like the current, which allow much lower capital requirements for banks on loans to what is perceived as “absolutely safe” than for loans to what is perceived as “risky” are plain silly and do not make the banking system safe.

And worse, by allowing banks to make higher expected risk-adjusted returns on equity when lending to “The Infallible”, like to the sovereign and the AAAristocracy, than when lending to “The Risky”, like ordinary businesses, these regulations also completely distort the allocation of bank credit within the real economy, making it unreal, with awful consequences.

Sir, and since Ben Bernanke, being the one most responsible for all quantitative easing, has evidently not understood how broken the current financial transmission mechanism is, I cannot agree with the first part of the title of Mike Konczal’s “Bernanke did well, but the Fed must do better” July 30.

But, of course, I wholeheartedly agree with his plea for the Fed to do better... but that should begin by eliminating the regulatory discrimination against perceived credit risks which have already been cleared for in other ways.