February 18, 2015

The most dangerous economic imbalance lies between “the risky” and the “absolutely safe”.

Sir, I fully agree with the title of Martin Wolf’s article of February 18, “Unbalanced hopes for the world economy”; only that for me the current most important and dangerous border of imbalances does not go between currencies or countries, but between what is perceived and has been deemed by regulators as “risky”, and what is perceived and deemed by regulators to be “absolutely safe”.

And so when Wolf refers to “what one saw inside the pre-crisis Eurozone was a combination of low interest rates with a burgeoning of cross-border net lending”, I would ask him to look more closely to where that cross-border lending went to. It was not German banks lending to Greek small businesses or entrepreneurs, against which they would have to hold 8 percent in equity, it was German banks lending to the Greek government against minimum or even zero equity requirements.

And how on earth are you supposed to fix other economic imbalances doing that? Does anyone really believe a Greek bureaucrat does a better job fixing that than a Greek SME or entrepreneur?

And so when Wolf writes “the monetary policies of the ECB will work only if the falling euro promotes a boom in net exports”, something that could perhaps only promote a boom in German exports, the truth is that it will work only if the liquidity of bank credits are allowed to reach the atoms of the economy, the risky, the SME’s and entrepreneurs.

Wolf keeps on insisting with his “big economies suffer chronic demand deficiency syndrome” when as I see it as suffering from a regulatory imposed chronic deficiency of demand hunters.

We must let SMEs and entrepreneurs go out and hunt scaring up the demand, otherwise we will very soon begin to vomit much more of what, supposedly, was “absolutely safe”.

November 2004, in a letter published by FT I wrote: "We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits." I came from a developing country but of course developed countries can undevelop too.