Wolfgang Schäuble, bank regulators imposed on Europe (and the world) a very dangerous risk taking austerity

Sir, Guy Chazan quotes Wolfgang Schäuble with: “Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too”, “Schäuble says debt and liquidity levels endanger global economy” October 9.

If you put a risk-tax on sports, to cover for the societal costs of injuries, like a10 percent tax on cricket and one of 1 percent on croquet, would you not expect the result being many more playing croquet than cricket, with whatever implications that could have for the society in general.

That “accumulation of more and more liquidity and growth of public and private debt”, is made worse by the fact that this is being so distorted by the risk weighted capital requirements for banks; those which de facto are a subsidy to “The Safe” and a tax on “The Risky.

According to Chazan “Mr Schäuble also warned of risks to stability in the eurozone, particularly those posed by bank balance sheets burdened by the post-crisis legacy of nonperforming loans”. To me it is amazing to observe how regulators seem to concern themselves so much more with the ex ante perceived risks. than with the ex post realities.

And then Jim Brunsden Mehreen Khan and Guy Chazan write that though Wolfgang Schäuble “was an architect of the stringent bailout programmes carried out in Greece and elsewhere during the eurozone’s sovereign debt crisis, he insists the goal was never to impose austerity on Europe”, "Schäuble feels vindicatedby tough reforms in bailout nations"

Schäuble, being a German lawyer, could perhaps be personally excused, but all those economists and other technocrats surrounding him should have informed him that those risk-weighted capital requirements were imposing one of the most dangerous kinds of austerity, that of insufficient risk-taking.

“Insufficient risk-taking?” “Have you gone mad Kurowski?” “Have you not seen all the excessive risk-taking that took and is taking place?”

Not at all, it was, and is, excessive exposures to “The Safe”, like to sovereigns, AAArisktocracy and mortgages that caused the crisis. That’s more excessive risk aversion.

It is also insufficient bank credit to “The Risky” like to SMEs and entrepreneurs that allows so much QE and low interest rates stimuli to go to waste.

Sir, I strongly believe that Mr Wolfgang Schäuble would never pass my litmus test for the initial screening of a central banker or a regulator, but then again neither would you.

@PerKurowski

So now Brussels's technocrats want to issue AAA rated securities backed with European subprime sovereigns? When will they ever learn?

With “subprime sovereigns” I do not intent to classify any sovereign in a derogatory way. I use the term strictly with reference to the fact that for the sovereigns’ creditors being able to collect their credits, some sovereigns seem, are, safer than others.

Sir, Jim Brunsden a Guy Chazan write: “Brussels has called for sovereign debt from across the eurozone to be bundled into a financial instrument and sold to investors as part of a plan aimed at strengthening the single currency area… the move would require regulatory changes to make the securities attractive. One idea would be to grant the bonds the same “zero-risk weighting” that applies to government debt in the EU, which would exempt them [banks] from capital requirements.”... “We see this in the form of preferential regulatory treatment.” “Brussels seeks new asset class of eurozone sovereign debt” June 1.

Amazing! The European Commission has not woken up to the fact that “preferential regulatory treatment” distorts the allocation of bank credit to the real economy, which is one of the prime reasons Europe got into trouble and finds it so hard to grow out of it.

Had banks needed to hold as much capital when lending to sovereigns than when lending to for instance “risky” SMEs and entrepreneurs, Greece would never ever, no matter how much it might have cheated with information, have been able to accumulate such massive amount of sovereign debt.

Were banks required to hold as much capital when lending to sovereigns than when lending to for instance “risky” SMEs and entrepreneurs, then the latter would have found it easier to satisfy their credit needs, and European growth and employment would be higher and foremost much sturdier.

When will the hubris filled obviously statist technocrats in Brussels ever learn? Europe, get rid of them!

“No problem can be solved from the same level of consciousness that created it” Albert Einstein.

@PerKurowski