The correlation between assets that caused the financial crisis 2007-09 and the lowest bank capital requirements is 1

Sir, Martin Wolf writes, “Since 2013, eurozone output per head has been rising at much the same rate as in the US. The main explanation for this turnround, beyond the normal cyclical forces, has been the determination of the European Central Bank, under Mario Draghi, to do its job properly.” “Creative reform is vital for the eurozone” September 27.

Well the job is clearly not over. Until now what has been achieved is basically to kick the can down the road. I wonder what forthcoming generations will say about Wolf’s “properly” and Mario Draghi’s “whatever it takes”?

The correlation of assets that helped cause the financial crisis 2007-09 and those assets perceived, decreed (Greece) or concocted as safe, meaning those assets that generated the lowest capital requirements for banks is 1. Since Europe and much of the world insist in using the risk-weighted capital requirements for banks that distorts the allocation of bank credit to the real economy, a vital bank regulation reform is still pending.

That this reform has no been carried out is caused by regulators, like Mario Draghi, not wanting to accept, or let it be known, what stupid mistakes they made. And with a little help from their friends they threw the dead cat of the crisis being caused by excessive risk taking by the banks on the table.

Wolf refers to a proposal by Adam Lerrick of the American Enterprise Institute for “a scheme for mitigating the impact of asymmetric fiscal shocks” by means of transferring “yields on government bonds of vulnerable countries rise relative to the stronger ones.” That sounds reasonable, but I would suggest that should have to begin by eliminating the regulatory subsidies to sovereign debt, so that one is really clear about who is strong and who is weak.

@PerKurowski

Yes! Central banks must be made accountable

Sir, Alex J Pollock, of American Enterprise Institute in Washington, asks that “Central banks must be made accountable”, November 13.

Absolutely! I totally agree: “there is zero evidence that these central bankers have superior knowledge, obvious that they have no superior insight into the future, and dubious that they command superior virtue.”

Anyone thinking that by distorting the allocation of bank credit in favor of those perceived as ex ante as safe, and which discriminates against the fair access to bank credit of those perceived as risky, will make the bank system safer, has not the slightest idea about what he is doing.

Not only are bank crises always the result of excessive exposures to what is perceived as safe but turn out to be risky; but also the strength of the real economy is a direct function of banks lending intelligently to those perceived as risky, like to its SMEs and entrepreneurs.

Let me just name some of these failed regulators that should be held accountable: Jaime Caruana, Mario Draghi, Stefan Ingves, Alan Greenspan, Ben Bernanke and Mark Carney.

@PerKurowski ©

What if by lottery some patents are yearly declared null, in order to keep the pharma industry on its toes?

Sir, David Shaywitz writes: “If the pharmaceuticals industry is to remain in the vanguard of science it will have to embrace a far leaner approach, with less bloated bureaucracy”, “Addiction to deals reveals the depth of pharma’s ill” May 2.

Is that really possible in an industry accustomed to working in the protective environment provided by patents? Is it not high time we see to that all that extra money we are asked to pay in order to reward inventions and stimulate new inventions go to that, and not to some other purpose, like the further enrichment of a 0.01% plutocracy?

Perhaps a yearly lottery, by which 5 percent of their patents are declared null, no reasons given, could give these companies more incentives to be on their toes.

Call it a dividend to humanity if you want… in payment for how humanity helped the inventors run the last mile for a patent.

Can we have some more trigger-happy bank regulators please?

Sir, Alex J Pollock, of the American Enterprise Institute, comments on John Kay’s article “The design failures that lead to financial explosions” saying that when Kay holds that “attempt to design a system for zero failure is impractical” that he would suggests it being “a mission impossible”. And as an argument for this, Pollock correctly writes “The greater the belief in their success grows, the higher the probability of their failure becomes.

And I would also have to add that the larger and more dangerous those failures also become.

In 2003 addressing some hundred bank regulators who were learning about what was being planned by some few regulators for Basel II, I said: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

Think tanks are also to be blamed for their lack of thinking

Sir Desmond Lachman from the American Enterprise Institute writes that “Greenspan will have to be called to account for regulatory failings and his interest rate policy” February 20. That might very well be so but others must also recognize their failings in the process. For instance not alerting to the abominable systemic risks that could be created by investing so much power over the financial markets into the hands of the credit rating agencies is more than proof that very little thinking occurred in the think tanks.