Forget the liquidity trap, Europe is mostly trapped in a regulatory trap.

Sir, Martin Sandbu opines that “we should take issue with the idea monetary policy has done as much as it can”, “Central bankers are ensnared in a trap of their own imagination” November 3.

And Sandbu believes ECB must “buy anything – but whatever you do, buy something” in order to get inflation going, in order to make real interest rates negative… “if that is what the economy needs fully to employ its resources”.

That sounds desperate and extremely dangerous… because that sounds like a recipe not necessarily for getting inflation going, but for the markets to lose their trust in the ECB, but more importantly so in the Euro.

But of course central bankers are ensnared in a trap, not even of their own imagination, but of their own doing.

Forget about liquidity trap when the real problem is a regulatory trap that stops liquidity from going to where it should be going in the absence of the trap… and current credit-risk-weighted capital requirements for banks do just that.

Sandbu writes that ECB “typically changes the money supply by offering loans to banks rather than buying financial assets – making monetary expansion dependent on banks’ willingness to take up the offer.”

So? Why does not ECB better push regulators into using a simple non-distortive leverage equity ratio for all banks independent of their assets… and then inject billions in preferred shares into the European banks? Those shares could have a clause making them redeemable in 30 years time.

That way, the day after, banks could at least again lend to the medium and small businesses, entrepreneurs and start-ups, something they cannot currently do because of an outright stupid suicidal bank regulation.