May 23, 2016

To drop money on an economy, without cleaning its clogged pipes, is not to give helicopter money a fair chance to work

Sir, Adair Turner the former chairman of the Financial Services Authority writes: “Eight years after the 2008 financial crisis the global economy is still stuck with slow growth, inflation levels that are too low and rising debt burdens. Massive monetary stimulus has failed to generate adequate demand. Money-financed fiscal deficits — more popularly labeled “helicopter money” — seems one of the few policy options left.” “Not too much, not too little — the helicopter drop demands balance” May 22.

What? Should we not first begin by clearly understanding why the stimulus did not work?

Turner writes: “Can we design a regime that will guard against future excess, and that households, companies and financial markets believe will do so. The answer may turn out to be no: and if so we may be stuck for many more years facing low growth, inflation below target, and rising debt levels. But we should at least debate whether the problem can be solved.”

Yes we should really debate! But we should start that debate by questioning the risk weighted capital requirements for banks, those that were first introduced by the regulators almost three decades ago, and later, in 2004, made much more poisonous with Basel II.

And so, just for a starter, I would ask these five questions:

1. Where did you regulator get the idea of being able to regulate our banks without first clearly defining what is the purpose of our banks?

2. Where did you regulator get the idea of giving a risk weight of zero percent to the sovereign, and one of 100 percent to those citizens that define the sovereigns’ strength? Do you really believe bureaucrats know better what to do with other peoples’ money than citizens with their own?

3. Where did you regulator get the idea of assigning a risk weight of 150 percent to those below BB- rated, and only one of 20% to those rated ex ante AAA that you know cause more the major bank crises in the world, when they ex post turn out to be risky?

4. Where did you regulator get the idea that assigning different capital requirements, and thereby different equity leverage possibilities, would not seriously distort the allocation of credit to the real economy?

5. And, where did you regulator get the idea that requiring banks to hold more capital against the risky, would not make it harder for the risky to access bank credit, and thereby increase inequality?

Sir, it is soon a decade since a big bank crisis broke out because of excessive exposures to something that was backed with very little capital, only because it had been perceived, decreed and concocted as safe… and yet that truth is not being discussed. Sorry, that is totally unacceptable. All evidence points to the tragic truth that highly unqualified technocrats are regulating our banks.

I advance the explanation that the previous stimulus had no chance of working because these regulations had clogged some pipes of the economy. And to drop helicopter money on an economy, without cleaning those pipes, is not to give helicopter money even a fair chance to work.

PS. Also, why should we trust the helicopter pilots?

@PerKurowski ©