September 16, 2015
Sir, in reference to what could be "The policy choices of high-income countries” taken in order to weather a slowdown, Martin Wolf writes: “politics has almost universally ruled out fiscal expansion; the intervention rates of central banks are near zero; and, in many high-income economies, private leverage is still quite high. If the slowdown were modest, nothing much might be done. The best response to a big slowdown might be “helicopter money”, created by the central bank to stimulate spending”, “A new Chinese export — recession risk” September 15.
Wolf shies away from commenting on how banks are doing and if they are prepared to help out… or even allowed doing so. Many are screaming for higher capital requirements, which, if imposed, would constrain overall lending, especially the kind of risky lending that is most needed when the going gets tough.
Just look at what happens if a company looses a good credit rating. Then immediately banks are required to hold more capital against loans to that company, which reduces their capacity to lend to others, or even forces them to offload other assets.
Today, next to Wolf’s article, John Kay refers to “Maxwellisation… a process by which the … powerful obstruct criticism of their actions” “The tale of the crook and his obstructive legal legacy”.
Clearly current bank regulations issued by the Basel Committee, not only distort the allocation of bank credit in good times but being extremely pro-cyclical are also unhelpful in slowdowns. The lack of possibilities to question these regulations, which includes FT’s silence… makes us therefore wonder whether we are facing a Maxwellisation process enacted for their benefit by bank and ex bank regulators, and other supposed experts on the subject.
PS. Or is it more like what John Kenneth Galbraith wrote: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”?