January 21, 2015

Governments, stop holding the regulatory gun against equity strapped banks, and give the real economy a chance

Sir, Martin Wolf holds that “the Eurozone may fail, not because of irresponsible profligacy but rather because of pathological frugality”, “Bolder steps from Europe’s central bankers”, January 21.

And with “frugality” Wolf basically means governments, in this case especially Germany, not taking advantage of extraordinary low rates, “virtually free money”, to pump up their economies by means of fiscal deficits.

If Wolf and I had a project made viable by someone offering some extraordinarily generous financing terms, we would take the loans and go ahead, without the slightest remorse of us, the small fish, taking advantage of the huge market.

But when governments, in much by their own doings finds extraordinarily advantageous financial conditions on its borrowings, it should never forget that much of those advantages fall on the back of large groups of its own constituencies… who will now for years be collecting insufficient interests on their savings.

If Wolf were 30 year old, how much would he want his broker to allocate to the financing of German infrastructure at 1.1 percent for 30 years?

Currently regulators require banks to hold much more equity when lending to small business and entrepreneurs than when lending to sovereigns. That is like the governments holding the gun on equity strapped banks, telling them “give us, not them, the money!”

Why is it so hard for Wolf to understand that the whole banking system has effectively been sequestered by means of the: “You banks, I the government will support you, but only if you support me”.

Why not allow banks to finance what without the regulatory distortions would be financed, and have the governments wait until the citizens have made their pretax earnings to tax them… instead of taxing them in advance… in such a non-transparent way?