FT, Martin Wolf, be brave, dare pickup the lessons of the crisis’s keys lying there under the lamppost.

Martin Wolf in “We still need to learn the real lessons of the crisis” December 20, refers to the search for the keys under the lamppost, only because that is “where the light falls”.

I would hold that with respect to what is currently happening, or not happening, with the economy and the banking sector, the keys have been there under the lamppost, for quite some time. The fact though is that very few seem to be willing to pick these up… and that could be because it would shine light on the sad fact that our magnificent global bank regulators, the Basel Committee and the Financial Stability Board, are just clueless.

Those keys are the risk-weighted capital requirements for banks based on perceived risks; those which allow banks to earn much more risk adjusted return on equity, when lending to the “infallible sovereign” and the AAAristocracy, than when lending to the “risky” like medium and small businesses, entrepreneurs and start-ups.

Those capital requirements being much lower for what was perceived as “absolutely safe” also guaranteed, when shit hit the fan, as always happens, and something ex ante very safe ex post turns out to be very risky, that banks would stand their naked with no capital.

In January 2003, while an Executive Director at the World Bank, FT published a letter in which I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors to be propagated at modern speeds”.

Of course if credit ratings are already being used to determine interest rates, size of exposures, duration and other terms, to re-clear for the same ratings in the capital, condemned banks to overdose on these.

And in November 2004 FT also published another one of my letters which stated “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much lending to the public sector”

And it is still happening, banks are searching for refuge in the arms of sovereigns all the while out the in the real economy those credit needs that could hold the jobs for our youth remain unsatisfied.

No, a world where banks are told not to finance the “risky” future but only refinance the “safer” pasts is in a death spiral. And on imprudent risk aversion I wrote on the FT’s Economists’ Forum blog in October 2009.

And so Martin Wolf, be brave, and pick the keys up! Let’s get rid of those dumb innovative bank regulations the Basel Accord brought us.

PS. Sir, I leave it to you to copy or not Martin Wolf with this. He has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.