The response to monetary stimulus must be different in totally different banking systems

Sir, we have had two complete different worlds of banking.

One when banks decided to whom they would lend to and at what interest rates and what terms, based on what they perceived the credit risks to be.

The other word, the quite recent one, is one in which regulators intrude and distort the allocation of bank credit by declaring that also the bank capital, meaning equity, banks were required to hold should also be based on perceived credit risks.

And that of course increased the risk-adjusted returns on equity for banks when lending to the “absolutely safe” making lending to the risky, like small businesses and entrepreneurs, something much less attractive.

To think that the economy would respond in the same fashion to various economic stimuli with such different bank systems is quite idiotic.

And Sir, that is why, when reading Richard Milne’s “Stockholm syndrome”, November 20, about the Swedish Riksbank’s crisis-fighting measures, and where there is even a reference to 1937, I find that discussion to be so completely out of context.

It states: “‘Sadomonetarist’ rate rises led to a toxic bout of deflation and criticism from economists.”

If anything, in that respect, what we really have is sadistic risk adverse regulations.

Was the Basel Committee, and the Financial Stability Board, created in order to bypass democracies?

Sir, what would be the possibilities of passing a law, in any European parliament, which would dramatically increase banks expected risk-adjusted returns on equity when lending to a sovereign or triple-A rated borrowers, and thereby stop banks from lending to those perceived as more risky, like small and medium businesses and entrepreneurs, or having these pay higher interest rates to make up for a regulatory competitive disadvantage; and all justified with the argument of making banks safer? None I would say… especially if a parliamentarian reminded law makers of the fact that no bank crisis ever has resulted from excessive lending to those perceived as risky, they have all resulted from excessive lending to what was wrongly perceived as absolutely safe.

But that is exactly what the Basel Committee has achieved by imposing their capital requirements for banks based on perceived risk. And this is why I do not agree much with Philip Stephens’ “Do not blame democracy for the rise of the populists” May 10, since democracies should never have allowed their power to be diffused in such a way. Governments and democracies are now in many ways kept hostages by their own creations... and suffering their own Stockholm-syndrome 

Was the Basel Committee and the  created on purpose in order to bypass democracies? I have no answer to that question… sometimes shit just happens. But, who have benefitted from it? Not “the risky”, that’s one thing for sure.

How can I help free FT from its current severe bout of Stockholm syndrome?

Sir, in your “The self-defeating Greek rescue policy”, November 3 you write again about the need to have “banks recapitalized” But again, for the umpteenth time, over soon a decade now, you refuse to approach the question of “Capitalized in order to do what?”. 

The fact is that capitalizing the banks, for these to keep on doing what they did, namely lending or investing excessively in “The Infallible”, because there was where regulators allowed them to earn the highest ex ante risk adjusted returns, and to avoid excessively lending to “The Risky”, like to small businesses and entrepreneurs, because there the overly sissy nanny regulators did not want them to go, then no recapitalization of banks can lead to any sustainable good result, and these will all be just other examples of kicking the can down the road.

It is clear that FT has been hijacked by bank regulators, like Mario Draghi, and is suffering from a severe bout of the Stockholm syndrome that impedes it to criticize what needs to be criticized in harsh terms. How can I help you to free yourself from it?

I sure have tried a lot!