March 24, 2015

Sir, sorry to be disrespectful but…are you all in FT statists, communists or simply daft?

Sir, Claire Jones, in “Eurozone jobless outlook points up fears of persistent stagnation” March 24 writes of “ECB projections, highlighting deep scars left by the bloc’s financial and debt crisis”. What is wrong with you all? Have I not explained it to you all in hundreds of letters?

Again: It has been more than 25 years since Basel I redirected banks to lend more to the public sector than to the private sector; and more than 10 years since Basel II also within the private sector, redirected banks to lend to those perceived as safe and to avoid the “risky”.

And that means effectively the Basel Accord has ruled that government bureaucrats, because they represent “an absolutely safe borrower”, are more capable to efficiently use bank credit and generate jobs than what the so “risky” SMEs and entrepreneurs can do.

If you really cannot understand what that signifies for the medium and long-term potential of an economy to generate jobs… you are either statists, communists or simply daft… I hope it is the latter.

Jones writes: “ECB believes government can dent unemployment by pressing on with making their labor markets more flexible and competitive.” That would help, but before you get rid of the regulators’ heavy hand guiding where bank credit should go, there’s really little to do. Unfortunately, ECB’s Mario Draghi, as a former Chair of the Financial Stability Board, is one of the guilty of the regulatory distortion… and so there is a reputational conflict.

PS. Do you still not understand that if bank regulations had not been tilted so much in favor of “the infallible sovereigns”, then Greece, no matter how much it shaded its accounts, would not have been able to rack up as much public debt as it did? Do you not know that if European banks had not been allowed to leverage their equity, and the taxpayer support they receive, more than 60 times to 1 when investing in securities that carried an AAA rating, that the subprime crisis might never have happened? And of course that same line of arguments explains much of the mishaps when lending to Icelandic banks or financing real estate in Spain. 

Sir, again, no bank lending to what was not perceived as safe and therefore did not allow banks’ to hold little equity, had anything to do with causing the crisis. Of course, after the crisis has broken out all suffer, and, so unfairly, the innocent “risky” usually suffer most of all. But that has to do with ex-post consequences and not with ex-ante perceptions.