Is Europe going from being unintentionally murdered, to suicide, and now to euthanasia?

Sir, Paul de Grauwe writes that if financial stability is to be maintained, a central bank needs to be the lender of last resort to banks and government “because the sovereigns and the banks hold each other in a deadly embrace”, “Stop this guerilla campaign against ECB policy” October 23. 

Yes, but, what if the financial instability was also caused by that same “embrace”? 

I know, and I trust de Grauwe by now also knows (he should) that, had not bank regulators imposed capital requirements which allowed banks to hold very little sometimes even zero capital when lending to European sovereigns, members of “The Infallible”, while at the same time requiring these to hold 8 percent in capital when lending to European small businesses and entrepreneurs, members of “The Risky”, the current eurozone crisis would not have been close as severe as it is. 

And so I wonder whether this regulatory absolute failure needs not to be discussed first, and a plan how to remedy it designed, before ECB assists. Otherwise it just seems to present the characteristics of an unintentional murder, by regulators, muting into a suicide, by sovereigns, kicking the can down the road, and now then muting into a case of euthanasia, by the ECB 

PS. Don´t worry, I am not giving up on making the bank regulatory establishment (and FT) understand… and confess.

The Champions of the Basel Committee

Sir there is not one regulator capable to stand up and with a straight face look us into our eyes and tell us why a Sovereign rated A to A+, like Greece was from mid 2000 to late 2009, were risk-weighted 20% which allowed banks to lend it with a capital requirement of only 1.6 percent in equity meaning being able to leverage 62.5 to 1, while the small business in our neighborhood was risk-weighted 100%, meaning for banks, 8 percent in equity and 12.5 to 1 in leverage.

But luckily for those regulators, they will never be asked those questions, as long as they can count on Champions like Martin Wolf, Paul de Grauwe, and so many others, insisting on blaming just the private financial sector, “Governments up the stakes in their fight with markets”, May 12. How long will it take to hear a proposal to define all European sovereigns as de-jure rated AAA, so that they can be risk-weighted at zero percent, so that banks do not require any capital at all when lending to them, so that their leverage can be infinite?

The rating agencies credibility is not a result of any market

Sir Paul De Grauwe is right suggesting to alert the investors with a label that says “Warning: rating agencies can do you harm” January 23; as you know I have been advocating precisely that for years. But, when De Grauwe expresses surprise that the rating agencies are still around, even after having failed so miserably, he forgets that who put them in power and keep them there were the financial regulators and not the market. As long as “if they’re good enough for the Basel Committee they’re good enough for you” reigns, the markets cannot free themselves from these dangerous agents of systemic risk.

http://teawithft.blogspot.com/2007/08/we-need-to-attach-warning-message-to.html

It is a myth that the financial markets were freed

Sir Paul de Grauwe writes “Cherished myths have fallen victim to economic reality” July 23 and mentions as one of the fallen that the “financial markets have to be freed from the shackles of government control”. This is simply wrong. The current crisis can be directly blamed on the fact that the regulators shackled the banks and many investors to some government appointed few outsourced risk overseers, the credit rating agencies, and these later led the banks, the investors and the regulators over the subprime mortgage precipice. To make it worse, these shackles are still being fully enforced.

It’s not just abiut the targets but also about how you throw the darts

Sir, Paul de Grauwe opines that “Central banks should prick asset bubbles”, November 2, and though that might be right in terms of monetary policies, whether the central banks throw their darts at inflation targets or assets bubbles, does not excuse them from acting with wisdom when regulating the banks.

When the regulators imposed their minimum capital requirements on the banks based exclusively on risk assessments performed by their commissars or Blackstone type subcontractors, the credit rating agencies, they should have known a reaction would follow. First that many assets deemed more risky by the banks than what the appraisers thought them to be, would probably stay in their balance sheets while all those assets deemed less risky than appraised, would find new balance sheets where to hide out .

Second that the credit rating agencies would turn into the mother of all the systemic risk builders and contagion agents allowing profitable arbitration in risks, mostly through securitization mechanisms. Let us remember that all this subprime mortgages mess would have had no chance of going global, had it not been for the banks being able to sell the mortgages because the credit rating agencies provide these with AAA travelling documents.