July 21, 2015

Never have so few central bank and regulatory technocrats done so much damage with pseudoscientific mumbo jumbo.

Sir, James Grant writes: “We live in an age of pseudoscience. The central banks’ forecasting models have failed to predict the future. Quantitative easing and zero per cent interest rates — policy centrepieces of the post-2008 era — have failed to restore what we used to call prosperity.” “Magical thinking divorces markets from reality" July 21.

Absolutely, but that pseudoscience has its roots in other even worse mumbo jumbo, namely the Basel Accord’s credit risk weighted capital requirements for banks.

With these requirements silly regulatory experts thought they could make banks safer, by allowing these to leverage more their equity for what is ex ante perceived as safe than for what is perceived as risky… as if those perceptions were not already cleared for by other means.

That distorted the allocation of bank credit to the real economy… and sent banks to build up against very little capital, huge exposures to what is ex-ante perceived as safe, precisely the material of which major bank crises are made of… and stopped the banks from lending to those most in need of bank credit like SMEs and entrepreneurs.

The quantitative easing and the zero interest could even have been somewhat effective, had only Basel’s regulatory distortions been removed. Unfortunately that would have made it necessary to admit what was done wrong, and since it is basically the same little group of members in a mutual admiration club that are responsible for both QEs zero interests and bank regulations, we can’t have that… can we?

History will be clear about that never before have some so few technocrats done so much damage. And history will of course not be kind to those who having been informed about it, like FT, nevertheless decided to keep mum.