March 17, 2015

Bank regulators lost touch with economic fundamentals back in 1988, with their Basel Accord.

John Plender writes: “If the essence of a bubble is that prices lose touch with fundamentals, that is where eurozone sovereign bonds are going. Market participants will be recycling government IOUs into the hands of the central bank regardless of relative risk. At the same time, the central bank-induced search for yield will reach new levels and create new distortions.” “Draghi QE is stoking bond bubble risk” March 17.

Sir, the Basel Accord of July 1988 determined that when banks lent to the private sector then they needed 8 percent equity but, when lending to the central government, they needed cero equity.

And that tilted bank credit towards governments being the constructor of the future, and away from that private sector who had been the principal constructor of the future in the past.

That was a defining moment for our economies, and many of the Eurozone’s current troubles are a direct result of it.

Now since government bureaucrats cannot deliver it, there are less perspectives of future growth, and therefore more need to get a share of what there is… and negative rates, joblessness, the disappearance of annuities, asset bubbles and all what have you, is just part of that struggle.