July 28, 2016
Sir, John Authers writes: “If I report that government bonds are selling for unprecedented low yields, because investors are looking for safe places for their money — both of which are undeniable and unexceptional propositions — abuse follows. Markets are fixed! Yields aren’t really that low!” “Central banks are not the enemy: Monetary policy has stayed too loose for too long: that is a failure of politicians” July 28.
In this context am I abusing when I hold that markets are to a very important extent fixed, only because banks are looking for places for their money that does not require them to hold much capital? I don’t think so!
And Authers writes: “Markets are not efficient, and are often wrong…But they are not part of a political process, and ignoring them is not an option. When they set the price at which we can borrow, or at which we can exchange currency, they create truths we have to live with”
Absolutely, but in this case bank regulators, most from central banks imposed their truths on the market.
Sir, though regulators would love you to do so, do not forget what assets caused the 2007-08 crisis.
Those were what was ex-ante perceived, decreed or concocted as very safe, and which, for that reason only, the regulators allowed banks to hold these assets against very, very little capital.
Assets perceived as risky do no set off major bank crises, that distinction belongs to what is perceived as safe, and that is what our dumb regulators ignored
And what has much stopped the economy from recovering in the face of enormous injections of liquidity? That the liquidity, because of bank regulations, central banks, are not allowed to flow freely by means of bank credit to the “risky”, the SMEs and entrepreneurs.
Of course I would love to trust central banks, but I just can’t. Anyone who comes up with an idiotic and statist idea like that of assigning a risk weight of 0% to the sovereign and 100% to us We The People, is not to be trusted.