Do we have a banking system with banks as they are supposed to be?

Sir, I refer to your “Non-bank lenders will bear brunt of credit crisis”, March 25

John Augustus Shedd (1859–1928) opined: “A ship in harbor is safe, but that is not what ships are for”

But bank regulators paid banks with lower capital requirements to stay safe, thereby overcrowding “safe” harbors. As a result, those who had real reasons to stay in safe harbors, like many non-bank lenders, and were less prepared to do so, like many non-bank lenders, had then to take to the risky oceans.

You opine “we are in a better place today because regulators forced greater protections on the banking system” What greater protection? A measly 3% leverage ratio supposed to cover for misperceptions of risks, like 2008’s AAA rated, and unexpected dangers, like coronavirus? You’ve got to be joking.

You quote Ben Bernanke “If you do not have a banking system, you do not have an economy.” Sir, do we really have a banking system with banks as the bank’s we used to know, or as banks are supposed to be?

I mean, with zero bank capital requirements against loans to the government and eight percent against loans to citizens you do not have a free market economy, you have financial communism.

With lower bank capital requirements for residential mortgages than for loans to the entrepreneurs or SMEs, those who can create the jobs needed in order to service utilities and mortgages, you will not have a functional economy, and houses have morphed from being affordable homes into being the main risky-investment of way too many families.

Sir, for the umpteenth time the Basel Committee’s risk weighted bank capital requirements: guarantees especially large bank crisis, caused by especially large exposures held against especially little capital to assets perceived as especially safe, but one of which suddenly one turns out as especially unsafe.

If John A. Shedd was alive today he might have opined: “A ship is safer on the oceans than staying in  a safe harbor, which might become dangerously overcrowded.”

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

Bank regulations placed populist socialism on steroids, but neo-class-wars represent challenges

Sir, David McWilliams writes:“Mr Bernanke’s unorthodox “cash for trash” scheme, otherwise known as quantitative easing, drove up asset prices, left baby boomers comfortable, but the millennials with a fragile stake in the society they are supposed to build… spawning a new generation of socialists. Soaring asset prices, particularly property prices, drive a wedge between those who depend on wages for their income and those who depend on rents and dividends “‘Cash for trash’ was the father of millennial socialism”, March 2.

I agree. With QEs central banks renounced to all possible cleansing benefits a hard landing could provide, and decided to kick the can forward. But that is not the whole story. 

By distorting the allocation of bank credit with risk weighted capital requirements, which much favored the “safer” present/properties over the riskier future/ventures, it was de facto bank regulators who caused the crisis.

As a brief background, after Basel II in 2004, for all European banks and for US investment banks, the following were the standardized allowed leverages for banks: a) for loans to sovereigns rated AAA-AA the sky was the limit; b) 62.5 times when holding AAA rated securities; c) 62.5 times when holding any asset, no matter how risky, if it had a default guarantee issued by an AAA rated entity, like AIG; d) 35.7 times when holding residential mortgages and e) 12.5 times when lending to unrated entrepreneurs or SMEs.

The 2008 crisis was caused, exclusively, by excessive bank exposures to assets perceived as safe, and that could be held against the least of capital. In US and Europe it was the b, c, d and e assets, and a bit later in Europe, sovereigns, like Greece, that not withstanding it did not have an AAA rating, not withstanding it was taking on debt in euros, which de facto is not their domestic printable one, was assigned by EU authorities a risk weight of 0%.

After the crisis, with Basel III, some new capital regulations were introduced, notoriously a minimum leverage ratio, but the distortions produced by the risk weighted capital requirements are still alive and kicking a lot on the margin, there were it means the most.

As a consequence the can has been kicked forward in precisely the same wrong direction from where it came. Therefore, the day it begins to roll back on us, it could be so much worse.

McWilliams opines: “One battle ground for the new politics is the urban property market”. Indeed, there is a de facto class war going on between those who want their houses to be great investment assets too, and those who simply want to afford to own a home. Just as there is a de facto new class war between those who want higher minimum wages and those unemployed who want any job.

For the time being the old and new socialists on the scene have not been forced to take sides in these wars, as they still gather that going after the filthy rich will suffice to become elected. But the more voters realize that what the wealthy have is not money but assets, and that converting those assets into redistributable money can have serious unexpected consequences for the value of assets, some of which could trickle down on every one… that day redistribution driven populism will lose some power.

Hear this question: “Do you want us young to afford houses or do you want our parents’ houses to be worth more? Make up you mind, you cannot serve both.”

@PerKurowski

Don’t help bank regulators get away from being held accountable for their mistakes by politicizing the issue.

Sir, Gillian Tett commenting on Ben Bernanke, Henry Paulson and Timothy Geithner comments on the 10-year anniversary of the Lehman Brothers collapse writes:“Critics on the right complain that markets have been hopelessly distorted by government meddling” “European banks still have post-crisis repairs to do” July 20.

Frankly, you do not have to be from “the right” to “complain that markets have been hopelessly distorted by government meddling”

In 1988 bank regulators, based the risk weighted capital requirements for banks they were introducing on the nonsense that what was perceived as risky was more dangerous to our bank system than what was perceived as safe. With that they dangerously distorted the allocation of credit to the economy… and caused the crisis.

Would the Lehman Brothers have suffered the same collapse had not the SEC authorized it in 2004 to follow Basel II rules, and it could therefore (just like the European banks) leverage 62.5 times with securities backed with subprime mortgages, if these counted with an AAA to AA rating issued by human fallible credit rating agencies. Of course no!

But here we are a decade later and this major flaw of current bank regulations is not even discussed. What especially excessive exposures to something perceived decreed or concocted as safe are banks in Europe, America and elsewhere building up only because of especially low capital requirements, and which will guarantee, sooner or later, especially large crises? That should be the concern.

But, come to think of it, it could be that Ben Bernanke, Henry Paulson, Timothy Geithner and Gillian Tett, still believe in the story the Basel Committee told them, perhaps because they want so much to believe that a fairy could make banks safe and still be able to serve the economy. 

@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 ©

Bernanke, what bank risks? Motorcycles are riskier than cars but yet more die in cars than in motorcycle accidents.

Sir, I refer to Martin Wolf’s FT lunch with Ben Bernanke “Hostility and hyperinflation” October 24. Bernanke states that “the Federal Reserve was originally set up primarily to address financial panics, not do monetary policy”.

And so Martin Wolf asks: The late Hyman Minsky, I point out, argued that “stability destabilises”. So did the very notion of a “great moderation” cause the imprudent behaviour?

And to which Bernanke replies: “individually rational behaviour can be collectively irrational. And that’s why the regulators have to do what they can to constrain individual behaviour, so that it doesn’t lead to collectively irrational outcomes.”

At which point, had I been invited to the lunch, I would have observed and asked the following:

Banks respond to the credit risk in a risk-adverse way. More risk higher interest rates and lower exposures – lower risk lower interest rates and larger exposures.

Bank regulators also use their credit risk weighted capital requirements for banks in a risk adverse way, namely more risk more capital less risk less capital.

So Mr. Bernanke, and you too Mr. Wolf, is it not so that by reacting to credit risk in the same way banks do the regulators, instead of constraining individual behavior, potentiate individual behaviour? What they would have answered to that is anyone’s guess.

And when Bernanke states: “the amount of [bank] capital you should hold depends on the kind of assets and the kind of businesses you have. And if it’s a fixed leverage ratio, then you’re going to have every incentive to load up on risk.” I would again have impolitely interrupted to ask: Mr. to load up on what risks? Driving motorcycles is by far more risky than going by cars… but those who go by car and suffer mortal accidents still surpass by far those who die riding motorcycles.

Mr. Bernanke, if you happen to read this, may I invite you to a debate, perhaps moderated by Mr. Wolf? In that debate you would defend the current portfolio invariant only-on-expected-credit-risk weighted capital requirements for banks; and I would defend an 8 to 10 percent capital requirements against all assets, to cover for unexpected losses, solely based on the risk of regulators not knowing what they are doing.

@PerKurowski ©

Ben Bernanke: “The Courage to Act” - in the midst of a sissy regulatory aversion against banks taking credit risks?

Sir, I refer to Sam Fleming’s comment on Ben Bernanke’s book “The Courage to Act”, “Bernanke attacks Capitol Hill over crisis role” October 6.

From the book he quotes “The Fed can support overall job growth during an economic recovery, but it has no power to address the quality of education, the pace of technological innovation, and other factors that determine if the jobs being created are good jobs with high wages.”

There is an Equal Access to Education Act. Suppose there were some few agencies that rate the qualifications of a student to make it meritoriously; and suppose universities used these ratings during their pre-screening process. What would America say if the Department of Education ordered these Education Worthy ratings to be considered once again in the final selection… and with double importance?

There is an Equal Credit Opportunity Act (Regulation B). Bankers already consider credit risks when setting interest rates and deciding on the size of exposure, among others the information provided by credit ratings. But then bank supervisors decided, by means of the Basel Accord in 1988 and its subsequent revisions, that the capital banks would be required to hold, were also to be based on exactly the same credit risk perceptions. 

That of course meant that anyone who was perceived “risky” from a credit point of view would be considered doubly risky, while anyone perceived “safe” would be considered doubly safe. And of course that has completely distorted the allocation of bank credit and thereby hindered job creation and, by keeping a lid on opportunities, helped cause more inequality.

On this odious discrimination against fair access to bank credit, Ben Bernanke has kept absolute silence. Most probably he did so completely unwittingly, but that is not a valid excuse for a chairman of the Federal Reserve. But of course he is far from being the only one to blame.

To top it up Bernanke names his book “Courage to act”; when the last decades have been signed by a sissy regulatory aversion to credit risk... as if avoiding taking the credit risks that helped the country to become what it is, has now become the only purpose of banks… in the Home of the Brave. Hah! 

With bank regulations like these, clearly the “American economy will fall tragically short of its extraordinary potential”. 

By the way, regulators assigner a zero risk weight to the Sovereign (the government), while the private sector, that one were most citizens that make up a Sovereign usually work, got a 100 percent risk weight. Anybody who does not find that strange, harbors a statist heart and mind.

I can hear all the SMEs and entrepreneurs who thanks to bank regulations never got their chance rocking away:

You ain’t nothing but a statist… scheming all the time.

You ain’t nothing but a statist… scheming all the time.

You ain’t never created something… and you sure ain’t no friend of mine.

PS. Courage is involved when taking calculated risks, not when taking desperate measures. 

@PerKurowski © J

Though capable Giants could be great at smoothing over a crisis, the not so capable could help more getting over it.

“How lucky could you be that you have a guy who spent his life studying the Great Depression [Bernanke], combined with a guy who’d spent almost his whole life working on every global financial crisis for the previous 20 years and was a genuine markets guy [Geithner], combined with somebody who had been chief executive and chairman of one of the top investment banks in the world [Paulson, in the leadership positions they were in during the biggest financial crisis of the century”

Sir, that is what James Gorman, “the Morgan Stanley boss”, tells Tom Braithwaite during his “Lunch with the FT”, “Banking is sexy, creative and dynamic” May 23. I first wince a little bit about the “genuine markets guy” since we really did not see a lot of genuine market solutions but, what really comes to my mind, is the following.

What if instead of these Giants, there would instead have been some perfectly inept in their government positions? It would clearly have been a much harder and harsher landing… but could it no be that in such case we would have gotten over the crisis faster and more completely? As is the experts might be experts smoothing things out during a crisis but perhaps not in solving it. As is we still live with much overhang in terms of huge government borrowings, QEs to reverse, the permanence of some actors the world could have been better off getting rid of, and the same source of distortion that caused the crisis, the credit risk weighted capital requirements for banks.

In August 2006 FT published a letter I sent it titled “Long-term benefits of a hard landing”, and year after year I find more reasons to argue for that. Sir, had there been a harder landing don’t you think that the system would for instance have cleansed itself more of “$22.5m” CEOs annual pay packages?

The smoothing of a crisis, though nice for some, creates its own victims… Our young, with lousy employment perspectives, could well be the victims of the capable Giant's guiding and smoothing hands. 

http://teawithft.blogspot.com/2006/08/long-term-benefits-of-hard-landing.html

@PerKurowski

How long would roulette remain a valid game under a Basel Committee for Gaming Supervision?

Sir, roulette is a game where absolutely all bets produce exactly the same expected financial payout; in this case a small loss since the house wins when the zero comes up. What would happen if regulations forced casino to increase the payout for “safer” bets, like betting on a color, than for “riskier” bets, like betting on a number? Easy, the game of roulette (and the casinos) would not be sustainable.

But, to forcefully alter the payouts and introduce a disequilibrium, is exactly what bank regulators have done by allowing banks to leverage much more their equity, and the support they receive from taxpayers, with assets perceived as safe than with assets perceived as risky.

The result will be too much betting on what’s perceived as safe, and too little betting on what perceived as risky; something that of course makes the financial sector and the economy unsustainable.

Unfortunately, the IMF, the Basel Committee, the Financial Stability Board; and experts like Lawrence Summers, Ben Bernanke, Paul Krugman, and Martin Wolf, none of them wants to acknowledge the risk-adverse distortions in the allocation of bank credit to the real economy, that the current bank regulations produce.

And, without considering that, then the whole discussion to which Martin Wolf refers to in “An economic future that may never brighten” April 15, becomes incomplete and unproductive… or in franker terms… nonsensical.

@PerKurowski

Blind to effects of risk weighted equity requirements for banks, Summers-Bernanke do not understand what’s happening

Sir, Wolfgang Münchau refers to discrepancies between Lawrence Summers and Ben Bernanke about the deep causes of the economic slowdown, “Macroeconomists need new tools to challenge consensus”, April13.

Both Summers and Bernanke, like most or perhaps all other famous economists, Münchau included, fail to consider the dramatic consequences of the new bank regulations that came into effect in the early 1990s with Basel I, and which really exploded with Basel II in 2004.

Before the advent of risk-weighted equity requirements, banks could be leveraged differently. But, whatever their leverage was at a particular moment, it was de facto applied to all bank assets, independently of their respective credit risk. That meant banks evaluated credits solely on the basis of the risk-adjusted net margins these were expected to produce; since those margins would contribute in the same way to generate the returns on bank equity. Those were the days of relative fair-access for all to bank credit.

When credit-risk-weighted equity requirements were introduced this resulted in that the risk-adjusted margins produced different risk-adjusted returns on equity, depending on how many times regulators allowed these to be leveraged. And that marked the beginning of the current ear of unfair access to bank credit. Those perceived as “safe” would have better risk-adjusted access to bank credit than those perceived as “risky”.

In practical terms those perceived as “safe” would get too much ban credit at too easy terms, while those perceived as “risky” would get too little bank credit at relatively too harsh terms. 

And of course this dramatically distorted the allocation of bank credit to the real economy and has made many traditional macroeconomic assumption irrelevant. 

And of course any economist unaware of the Great Distortion, or not wanting or daring to consider its implications, has no idea of what is really going on.

@PerKurowski

Amir Sufi, FT, anyone… how do you explain Ben Bernanke’s change of mind?

Sir, I refer to Amir Sufi’s “Bernanke’s failed mortgage application exposes the flaw in banking” October 14.

In it Sufi refers to “research in 1983 by Ben Bernanke, former chairman of the Federal Reserve, who in studying the Great Depression argued that banks have a unique ability to intermediate credit, because of the valuable information they gather and hold. As he put it, ‘the real service performed by the banking system is the differentiation between good and bad borrowers’”.

Now, please, can someone explain to me how someone who describes banks that way, can then later agree with destroying banks powers of allocating credit in the economy with the introduction of the credit risk weighted capital requirements for banks? Did Bernanke, and his colleagues not understand that would distort it all?

And just look at how stupid it was all done. Banks, when setting interest rates and deciding on the size of exposures, considered to quite a lot of extent the credit risk information present in credit ratings. But then came the regulators and also considered the same credit ratings setting the capital requirements. That signified that credit ratings were excessively considered, and we know that something even perfect, if considered excessively becomes wrong.

And of course, what Amir Sufi writes: “the very thing that banks are meant to do well businesses to lend to, so that they can grow, invest, hire employees and boost local economies – has fallen by the wayside” … they do mortgages instead. Well that just had to happen. Compare the equity requirements for a bank giving a mortgage, so that someone can buy a house, compared to what it needs to hold when lending to a small business, which could give the house owner a job so as to be able to afford the mortgage and the utilities.

How do we get out of this? That is not easy, but we must. Without the services provided by the traditional banks of the past, it will be very difficult for our economies to remain vital and sturdy.

Ben Bernanke’s joke, will quite probably end up being on him.

Sir, Robin Harding reports: “Bernanke’ joke [‘The problem with QE is it works in practice but it doesn’t work in theory’] underscores questions on QE’s efficacy” October 13.

The joke might be on Bernanke because, as is, one could say it is just the opposite, QE might have worked, in theory, if in practice all the stimulus it provided, had not been channeled to where it was least needed.

As happened credit-risk weighted capital requirements for banks have blocked the way for QE liquidity reaching “the risky”, all those SMEs and entrepreneurs who could have helped to put some new sting into the economy.

As I see it we now have wasted a QE, and there is little we can do about that, so let us wait until QE has been soaked up, if it is ever going to be soaked up, to make any final evaluation of how the Fed and Bernanke did… let’s cross our fingers they did not too bad.

We must indeed fret the possibility of some fundamental lack of character at the Federal Reserve

Sir, Henny Sender makes a well argued call in “The Federal Reserve must not linger too long on QE exit” July 5; concluding with opining that “The Fed wants to have its cake and eat it too”, and asking “Might it be that the Fed has everything in reverse?" It is truly scary stuff! 

On August 23, 2006, you published a letter I sent titled “Long-term benefits of a hard landing”. Therein I wrote:

“Sir, While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.

Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.

This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”

And now Sir, soon eight years later, we can only observe how the Federal Reserve, even when facing clear evidence all what their liquidity injections and low rates have achieved is increasing or maintaining value of existent assets, and little or nothing has it done for the creation of any new real economy… are unwilling to cut the losses short, and keep placing more and more bets on the table… with our money!

Sincerely, no matter how we look at the Greenspan-Bernanke and incipient Yellen era at the Fed, we have reasons to fret the existence of some fundamental lack of character.

PS. Of course, when it comes to banks, the regulators have already evidenced plenty lack of character with their phobia against “the risky”. And so now they also have our banks placing ever larger bets on what is “safe”, blithely ignoring that in roulette, as in so many other aspects of life, you can equally lose by playing it too safe.

The distortive risk weighted capital requirements for banks will haunt Ben Bernanke and Martin Wolf

Sir, Martin Wolf writes that contemporary “banks are constrained not by reserves but by their perception of risk and rewards of additional lending”, “Model of a modern central banker” January 22.

That is indeed so, but Wolf forgot to include that banks are also constrained by capital requirements, and by how the regulators’ perceptions of risks are transmitted by means of the risk-weighting of these.

When Wolf comments “An active an enterprising financial system creates risk, often by raising leverage dramatically in good times” he is ignoring the fact that the extreme high bank leverages of now, are actually leverages that were and are authorized by the regulators… and since banking itself is much about leveraging, banks must go to where they can earn the highest-risk adjusted returns on equity… which is usually where the capital requirements are the smallest.

And that created the distortions which not only produced the crisis when allowing investment banks and European banks to leverage immensely on AAA rated securities, and “infallible sovereigns”, but it also hindered the liquidity provided by for instance quantitative easing from reaching those who could do the most with it… like the medium and small businesses, entrepreneurs and start-ups. 

Ben Bernanke has most certainly done good things as a central banker, and Martin Wolf has definitely written great pieces as a journalist, but I do believe that history will hold their silence about this source of distortion seriously against them… and this even if they plead ignorance about it.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Ben Bernanke did not do well, because he has not understood how current bank regulations distort.

In banking, what is perceived as “absolutely safe” has always access to the largest loans, at the lowest interest rates and easiest other terms. And that is why all bank crises have resulted from excessive exposures to what was ex ante believed as absolutely safe but that, ex post, turned out not to be.

In the same vein what is perceived as “risky” always receives the smallest loans, at the highest interest rates and harshest other terms. And that is why no bank crisis has ever resulted from excessive exposures to what was ex ante believed as risky.

And therefore bank regulations, like the current, which allow much lower capital requirements for banks on loans to what is perceived as “absolutely safe” than for loans to what is perceived as “risky” are plain silly and do not make the banking system safe.

And worse, by allowing banks to make higher expected risk-adjusted returns on equity when lending to “The Infallible”, like to the sovereign and the AAAristocracy, than when lending to “The Risky”, like ordinary businesses, these regulations also completely distort the allocation of bank credit within the real economy, making it unreal, with awful consequences.

Sir, and since Ben Bernanke, being the one most responsible for all quantitative easing, has evidently not understood how broken the current financial transmission mechanism is, I cannot agree with the first part of the title of Mike Konczal’s “Bernanke did well, but the Fed must do better” July 30.

But, of course, I wholeheartedly agree with his plea for the Fed to do better... but that should begin by eliminating the regulatory discrimination against perceived credit risks which have already been cleared for in other ways.

Our banks are in the hands of… may I say idiots?

Any bank regulator, looking at all history of bank crises, should be able to observe that, with the exception of outright frauds, all the crises were the result of excessive exposures to something perceived ex ante as “absolutely safe” but that ex post turned out to be very risky.

And so to allow banks to hold minimum capital (equity) against what is ex ante perceived as “absolutely safe” is sort of idiotic.

Sir, Adam Posen w rites “perhaps the new Fed chief’s main challenge will be to design and institutionalise a set of tools for targeted interventions in public and private credit markets”, “After Bernanke, make the unconventional the norm”, July 16.

If so let us pray that the Fed´s new chief is someone who understands how capital requirement regulations have produced extremely miss-targeted interventions in public and private credit markets. If not, chances are, we will all just be dug even much deeper into the hole we are in.

Mr. Posen also writes about “the more complex reality of how monetary policy is transmitted to the whole economy... In the euro area, low interest rates and commitments to government bond market intervention are failing to improve credit conditions for small and medium-sized businesses across southern Europe”.

Complex? Given the fact how current bank regulations discriminate against small and medium sized businesses, on account these being perceived as “risky” something for which they have already been discriminated for, I do not find that to be a “complex reality” but rather a quite simple result that should be expected.

What does Martin Wolf know we don’t? It would seem very important to know

Sir, Martin Wolf holds that the Fed, and especially Bernanke, must be much more careful because “Careless talk may cost the economy” June 26. He is correct, but perhaps we should remember that careless actions might cost the economy even more, but, then again Wolf seems to know something that I, and may I say we don’t.

For instance, banks can lose fortunes by investing in fixed rate long term bonds when interest rates go up (just look at the chart he provides us with) but, in Martin Wolf’s opinion, “This is purely market-risk, not credit risk. That can be managed by a mix of lower leverage and, if necessary, regulatory forbearance.” And at least I just don’t get it.

Also Wolf holds that “It is unlikely that markets would cease to fund systemically significant financial institutions that have only mark–to market losses on safe haven government bonds”… and which must also mean he believes that the market would go on financing those banks at the previous low rates. And again, I don’t get this either.

And, just in case the market would not want to cooperate with the banks, Wolf argues that “the authorities will need to have plans to address such an eventuality”. What plans? To help banks unload all this I don’t could be worthless paper on some others? Or a Quantitative Easing II, the Fed buying those bonds from banks at way above market value? And so again, I am sorry, but I just don’t get this either.

But when Wolf writes “the likely result of a credible exit [of the US quantitative easing program] will be a shift towards assets in the recovering high-income economies”, that I do understand, even though that would normally go under the name of inflation, and that would most likely also be the result of a not-credible exit or even just a “tapering” down.

Since Martin Wolf seems to know so much more at least I would much appreciate if he were to provide us with further clarifications.

By the way, should not someone who can influence opinions as much as Martin Wolf, need to make a disclosure of his own investment portfolio? Perhaps that information could also help to enlighten us all.

Bernanke hangs around to help put out the fire he unwittingly helped to stoke.

Sir, Martin Wolf holds that “America owes a lot to Bernanke” June 5, and indeed I would agree with him, in the sense that one could owe gratitude to someone who unwittingly has lit a fire and hangs around to try to put it out.

The regulatory establishment to which Ben Bernanke, and sometimes also Martin Wolf holds he belongs to, instead of allowing the credits of the banking system to flow freely, imposed the use of an irrigation system with channels whose depths depended on the risk perceived. And of course, as should have been expected, what is perceived as absolutely safe and has much deeper and wide channels, is drowning in credit, and what is perceived as risky, irrigated with narrow and shallow channels, runs dry.

And the reason America is better off than Europe is that it implemented less of the Basel II’s more pronounce depth and width differences between channels.

Europe’s and America’s economies would have been so much better off if their central banks had used a free flying helicopter to drop money on the economy, or, even much better, if the banks had been freed from the distortions the capital requirements based on perceived risk create.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

As a bank regulator, Bernanke is neither a good nor a humble engineer

Sir, Edward Luce writes “Bernanke: a good engineer who knows his own limits” March 11. I am absolutely sure Ben Bernanke has many good attributes and he most probably acted as good as anyone could, as a central banker, in order to kick the can of a serious recession down the road; because we all know that is the most we can considered achieved, at least for the time being.

But, if are going to have a chance of economic growth vigorous enough to absorb all the QE´s and then some of the fiscal deficits still to come, we need even better and even humbler bank regulating engineers.

I say this because it is quite clear, at least from what we could read in the recently released transcripts of the Federal Open Market Committee of 2007, that this particular engineer, Bernanke, was not even aware of or did not understand how capital requirements for banks, based on credit information already digested by the markets and the banks, causes immense distortions.

And those distortions, more capital when lending to "The Risky" than when lending to "The Infallible", is making it much harder than usual to access bank credit, for those extremely important economic agents who act on the margins of the real economy, and who almost as a norm belong to "The Risky".

Current bank regulators, with their not so humble expectations of being able to deliver “safe” bank lending are helping to turn the world into a more dangerous place. Their bank diet, which promotes bank lending to the AAAristocracy and to the “infallible” sovereigns, and constrains lending to "The Risky", can only cause economic obesity and none of the vigor and sturdiness we need.

And that Mr. Bernanke seems unable to understand, just like Edward Luce, and just like you Sir.

“Helicopter Ben”? We wish! At this moment it seems more like "Drone-with-a-bad-guidance-system Ben"

Bernanke might be a great inflation slayer but, in terms of job creation and bank regulations, he is in way over his head.

Sir, I refer to Sebastian Mallaby´s “Bernanke – the rebel with a cause” December 19, where he suggests Bernanke as a runner up to Mario Draghi as FT´s person of the year, also much based on the same machismo of offering to do “whatever it takes”.

That fighting unemployment might be a great cause, no one doubts, but let us not forget that the road to hell is paved with good intentions, just like the road to the current bank crisis was paved with good intentioned capital requirements for banks based on perceived risks.

To me any person who sets out to fight unemployment by injecting liquidity while there are regulations in place that will not allow that liquidity flow freely, but will channel it mostly to what is perceived as “The Infallible”, simply has no idea about what creates jobs in the long term, nor about how to regulate banks, since it is only among “The Infallible” ex-ante, that the ex-post real big disasters occur. 

In order to create a new generation of jobs you simply cannot discriminate against the access to bank credit of “The Risky”, the small and medium businesses and entrepreneurs. And in order to make our banks safer, you simply cannot ignore what “The Risky” contributes when helping to create a more sturdy economy.

And so Ben Bernanke might be a great inflation slaying central banker, but, in terms of job creation and bank regulations, unfortunately, he is in way over his head, just like Mario Draghi.

If you want to see really big time meddling you need not to go to Italian industry.

Sir, Tony Barber makes some good points in “Meddling does Italian industry more harm to good” December 14. 

What a pity Barber cannot find it in himself to make the same point against the really big time meddling regulators who, with their capital requirements for banks based on perceived risk, create regulatory subsidies in favor of “The Infallible” and regulatory taxes against “The Risky”. 

I guess the bank regulators must belong to Barber’s intimate circle, not so the industrial policy bureaucrats. 

By the way, Mario Draghi, FT’s Person of the Year, as well as Ben Bernanke, Lord Turner and other active in regulations of banks, there you have some real big time meddlers, or schemers