September 08, 2014

For carpet bombing to work everything must have a chance of being hit.

Sir, Wolfgang Münchau writes “even if we disagree on the precise causes of the present downturn, we can still find a common and effective policy response”. “What Draghi must do next to fix Europe’s economy” September 8.

Yes that could be possible, but only if the real cause for the downturns was among the causes being disagreed on. But it is not!

The pillar of current bank regulations, as Münchau should know by now, is the credit risk-weighted capital requirements, those which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky.

And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main Street.

And so when Münchau, with respect to different choices of how liquidity could best be provided in Europe, concludes that “carpet bombing would be much safer bet”, something with which agree, that is currently impossible. For it to happen the bombs would have to be allowed to also hit those perceived as being more risky than others in terms of credit risks.