Martin Wolf, where do bad credit bubbles grow, in ‘prime’ AAA land, or in ‘highly speculative’ below BB- terrain?

Sir, Martin Wolf writes “The adjustment ahead for a world economy so addicted to credit bubbles is going to be difficult” “This turmoil is the result of the Fed’s blunder” January 13.

Basel II regulations to which most developed emerging and developing markets adhered, set capital requirements for banks of 1.6 percent for what is AAA rated and 12 percent for what is rated below BB-. That means that banks could leverage their equity 62 times when dwelling in AAA land but only about 8 times when daring into below BB- terrain. That means banks would obtain much larger risk adjusted returns on equity when lending to what is AAA rated (or sovereigns) than when lending to what is rated below BB-.

And Martin Wolf has never understood the credit risk aversion that introduced in the regulation of banks, nor does he understand the fact that risk-taking is the oxygen of all development. Currently, because the regulatory distortions credit risk weighted capital requirements produce in the allocation of bank credit, the whole world is submerging.

And that distortion does not provide the banking system with one iota more of stability. It is just the opposite.

Sir, do yourself a favor, give Martin Wolf a call right now and ask him: “Martin what do you think poses more danger for the stability of the banking system, or creates more dangerous credit bubbles, that which is rated ‘prime’, AAA, or that which is rated ‘highly speculative – near default below BB-’?” 

Sir, when compared with the dangers to the world economy of current bank regulations, the .25 percent rate increase by the Fed, is pure chicken shit.

Are there many problems in the emerging markets? Of course there are! It suffices to go back a couple of years and read the many opinions about the ‘marvels’ of emerging markets… especially in light of the almost inexistent interest rates for what was perceived or deemed safe in the developed world.

@PerKurowski ©