November 29, 2017

Ms. Janet Yellen, like other recent bank regulators who have just faded away, will leave the Fed without answering THE QUESTION

Sir, you write: “The Federal Reserve can take some blame for failing to see risks building up in the years preceding the global financial crisis. But perhaps more than any other major policymaking institution in the world, the Fed has acquitted itself well in the decade since”, “The unfortunate exit of an exemplary Fed chair”, November 29.

As you might suspect, I profoundly disagree. The Federal Reserve has yet not understood (or has been willing to acknowledge it) the fact that the “risks building up in the years preceding the global financial crisis” were a direct consequence of the distortions introduced by bank regulations, primarily Basel II, 2004.

If you allow banks to leverage almost limitless when lending to sovereigns, (like European banks lending to Greece); when financing residential housing; and over 60 times to one just because a human fallible rating agency has issued an AAA rating, that crisis, just had to happen.

And since capital requirements for banks have remained higher for what is perceived as risky than for what is perceived, decreed or concocted as safe, that odious distortion wasted most of the stimulus quantitative easing and low interest could have provided.

Over the last decade, how many SMEs and entrepreneurs have not gained access to that life changing opportunity of a bank credit, only because of these odiously discriminating regulations? Who can believe that America would have been able to develop as it did, if these regulations had been in place since the time of the pilgrims?

And now Janet Yellen, like other regulators have done in the recent past, will leave the Fed without answering us why banks should hold the most of capital against what is perceived as risky, when it is when something perceived very safe turns out very risky, that one would really like banks to have the most of it.

Sir, thanks for all the help you have given me over the last decade, forwarding that question without fear and without favour.