Sir, Axel Merk writes “sustainable growth comes from pricing credit correctly according to the risk profile of the borrowers, not merely cheap credit”, “The missing fear factor will return to haunt Yellen”, July 10.
Absolutely… but how do banks do that when they also must price credit according to the capital requirements ordained by the regulators for different borrowers? Impossible!
And Merk also refers to that “Forward-looking indicators, such as the yield curve, are less reliable as the Fed itself has actively managed those gauges”. Yes and here also by means of the risk-weighted capital requirements for banks, which being the smallest or even zero for “infallible” sovereign debts, has helped to convert treasury bills and bonds into a proxy of a subsidized risk-free rate.