There are issues much more important for the future of the euro and the EU than who becomes Draghi’s successor at ECB

Sir, Wolfgang Münchau holds that “Draghi’s successor needs intellectual curiosity and a willingness to admit errors” “How not to select the next ECB president” June 3.

Of course, that should be a sine qua non quality of all candidates. The real problem though is that anyone chosen to become the new president of ECB could get trapped in a web of groupthink, and solidarity requirements, which impede the admittance of the mistakes.

Therefore, before choosing the next president some questions vital to the future of the euro and EU need to be made, not only to denounce mistakes, but to listen what the candidates have to say about it.

For instance if I was a newly elected first time European Union parliamentarian, at the first opportunity given I would ask: 

Fellow parliamentarians: I have heard rumors that even though all the Eurozone sovereigns take on debt denominated in a currency that de facto is not their own domestic printable one; their debts, for the purpose of the risk weighted bank capital requirements, have been assigned a 0% risk weight by European authorities. Is this true or not?

If true does that 0% risk weight, when compared to a 100% risk weight of us European citizens not translate into a subsidy of the Eurozone sovereigns’ bank borrowings or in fact of all Europe's sovereigns?

If so does that not distort the allocation of bank credit in the sense that sovereigns, like Greece, might get too much credit and the citizens, like European entrepreneurs, get too little? And if so would that not signify some regulators, behind our backs, have imposed an unabridged statism on our European Union?

If so, does that not mean that some Eurozone sovereign could run up so much debt they would be seriously tempted to abandon the euro and thereby perhaps endanger our European Union?

Colleagues, I do not know who should answer us these questions, but the candidates to succeed Mario Draghi as president of ECB, should they not at least give us their opinions on it?

@PerKurowski

More than between left and right, the division is between tax paying citizens and witting or unwitting possible redistribution profiteers

Sir, Wolfgang Münchau writes, “Liberal democracy is in decline for a reason. Liberal regimes have proved incapable, of solving problems that arose directly from liberal policies like tax cuts, fiscal consolidation and deregulation: persistent financial instability and its economic consequences” “The future belongs to the left, not the right” February 25.

The risk weighted capital requirements placed on top of any natural risk aversion distorts the allocation of bank credit in favor of what is perceived as safe and against what’s perceived as risky, has nothing to do with liberal policies. The risk weights of 0% the sovereign and 100% the citizens, just puts crony statism on steroids.

Münchau also “The euro, too, was a liberal fair-weather construction.” That could be but when EU authorities assigned a 0% risk weight to all public debt of eurozone sovereigns, denominated in a currency that is not their domestic (printable) one no one could call that a liberal construction. It was idiotically dooming the euro to failure.

Sir, I feel left or right labels do not really define what we citizen are up against. Our real adversaries are those I have come to call redistribution profiteers. In my home land Venezuela, where the central governments some years has received 97% of all export revenues, that is easy to see. But even in the rest of the world that is happening, unfortunately without being sufficiently understood. Much of it is the result of citizens lacking the most basic societal information, namely how much their central and local government receive in income, from all taxes, per citizen. 

Of course taxes are needed but such per citizen data, published regularly, would also put pressure on improving the day-to-day quality of government bureaucracy. I mean we want our taxes to be spent well. Don’t we?

PS. As a self declared radical of the middle, or extremist of the center, I feel the best hope we now have to improve our societies is by means of an unconditional universal basic income. That UBI should be 100% paid for, be large enough to help all reach up to jobs in the real economy and be small enough so as not allow anyone to stay in bed.

@PerKurowski

The crisis of modern liberalism is caused more by authoritarian besserwisser distortions than by market forces.

Sir, Wolfgang Münchau writes: Margaret Thatcher’s successful brand of entrepreneurial capitalism in the UK in the 1980s… Through the sale of council houses, she turned tenants into property owners.”, “The crisis of modern liberalism is down to market forces” December 25.

True, but later immense injections of liquidity, ultralow interest rates, and extreme preferential risk weighted capital requirements for banks when financing the purchase of houses, has helped turn houses from being just homes into being investment assets. That of course has left all those who do not own these investment assets, even further behind.

Therefore I cannot agree with Münchau’s conclusion that liberalism is failing because of market forces. At least in this case the distortions are not caused by market forces, but by regulators and central bankers who have insufficient idea about what they’re doing. Of course, if crony statism forms part of market forces, which perhaps de facto it sadly could be, then I would be wrong.

When Münchau finally opines, “Any system that leaves behind 60 per cent of households will eventually fail” that is not necessarily so. The world is plagued by examples by how such systems have too often proven to be even more resilient than those who do not. On a small model scale, just look at how Venezuela’s current regime has been able to hang on to power for at least a decade more than it should have been able to.

@PerKurowski

EU authorities, assigning Italy, like Greece, a super duper investment grade status, are the original sinners.

Sir, Wolfgang Münchau writes,“The main instrument of coercion in the eurozone is not its fiscal rules, but the power of the European Central Bank to withdraw funding from national banks. This is not a discretionary power, but one that is automatically triggered once a country‘s sovereign debt loses investment grade status. If the banks have large holdings of their home countries’ debt, as is the case in Italy, they are setting themselves up for failure if their governments run an unsound fiscal policy” “Italy is setting itself up for a monumental fiscal failure” October 29.

“Triggered once a country‘s sovereign debt loses investment grade status”? Should in the first place Italy have gotten the super-duper investment grade status assigned to it by EU authorities? By mean of “sovereign debt preferences” they assigned it a 0% risk, which allow banks to hold Italian public debt against zero capital? Italy’s like Greece’s like many other and perhaps all other sovereign, the main problem is not losing that status but having been awarded it. 

And even if your 0% risk weight would be based on the nation being able, in nominal terms, to repay 100% of its debt, using the printer, the hard truth for Italy, and for all other eurozone countries is that though eurozone investors holding sovereign debt denominated in euros have the right to consider holding assets in their domestic currency, the eurozone sovereigns who owe such debt do not have  an absolute right to consider they owe it in their domestic currency.

In a 2002 Op-ed titled “The Riskiness of Country Risk” I wrote, “If the risk of a given country is underestimated it will most assuredly be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line.” That, which hit Greece, now awaits Italy, courtesy of EU.

Sir, it is not obsessive me again. September 2013, in FT, Jens Weidmann, the president of the Deutsche Bundesbank begged, “Stop encouraging banks to buy government debt”. What has EU done about that? Nada! 

Münchau ends with “The eurozone’s dysfunctionality has many origins. It would be unfair to blame it all on Italy. The rise in Italian spreads is evidence that the eurozone crisis never ended. It just fell dormant for a while.”

That is entirely correct, the saddest part though is that the challenges posed by the euro were known, from the get-go.

Sir, as I’ve told you many times before, it is truly mind-boggling how in all the overheated Brexit/Remain discussions that divide Britain, so little attention has been given to the EUs own very delicate conditions.

@PerKurowski

Does Britain still have sufficient resolve capacity? If yes, perhaps a no-deal Brexit could be a good time to exercise that muscle.

Sir, Wolfgang Münchau though he states“If the UK were to crash out of the EU I doubt the bloc’s leaders would sit down to negotiate” he also a bit contradictory opines“the EU has a much lower political pain threshold for a hard Brexit.” “A no-deal Brexit creeps closer” September 24.

Even though the debates on Brexit seem to have been politically skewed to only mention Britain suffering from Brexit, in any which shape it comes, I agree with Münchau on that the EU could also suffer a lot of political pain.

I am not a Brit. Way back I spent a year in London practicing at a now sadly extinct merchant bank, and studying at London Business School and London School of Economics. I have also had English corporations as clients, and of course I have many good friends there. So let me say the following from the heart.

If Britain has the needed resolve capacity to take on a no-deal Brexit then, having to use it could help to strengthen its resolve capacity for the many other probably even larger challenges awaiting them and all of us around the corner. If Britain does not have it, then accommodating to EU wishes, will de facto also weaken its general inventory of resolve capacity.

All that is made worse by the fact that in many ways many of EU’s “successes” seem more the result of heavy marketing by the European Commission, than grounded on real results. For me that EU has not been able in twenty years to really tackle the challenges posed by the euro; and that after its own authorities assigned a risk weight of 0% to Greece, it left that nation to pay on its own for the over-indebtedness that had to result, makes it clear that something very serious is amiss in the EU. In fact, when I see some of its promo material such as regulating the entrance fees to a monastery in Romania I have even caught myself thinking of a Banana Union.

At the time of the Winter Olympics, I was blown away when I saw the enthusiasm of Italy’s Soffia Goggia singing her national anthem after getting a gold medal. Surely few would sing the European anthem that way. And though I know, after looking it up on the web, that Maryland USA, were I live, has an anthem I have never ever heard it.

Sir, creating a Union is something that also needs a lot of heart put into it. Do those hearts exist sufficiently in Britain or in Europe? If the answer is no, then perhaps it would not be contrary for Britain to exercise some of its resolve capacity now. Like with any other muscle, if you do not use it you lose it. 

@PerKurowski

Anyone jumping ship on the delusion that risk-weighted capital requirements make banks safer and economies better, has a better chance to survive

Sir, Wolfgang Münchau discusses many delusions held by both Brexiters and Remainers, and argues correctly: “To make the best of Brexit, the UK will need to embrace a more entrepreneurial and innovative economy” “An old-fashioned economy heads towards a downfall” November 20.

But when he writes: “For Brexit to succeed the UK will end up becoming more — dare I say it — European”, I disagree.

That because when Münchau holds that Britain “has an entrepreneurial culture to build on”, that is unfortunately no longer the case. No country with an active “entrepreneurial culture” would ever have allowed the de facto anti entrepreneurial risk-weighted capital requirements for banks.

Sir, if I had to choose between a Britain that did not hold back its risk takers, and one that was comfortably living off a larger European market then, if thinking about my grandchildren, I would without any doubt prefer the first one.

As I see it the European Union, governed by unelected risk adverse technocrats, who like old soviet central planners paint from their desks roads to the future, is doomed to fail… and that no matter how much “Universities… work more closely with industry”. In that Europe, the faster you jump ships the better.

If I were a British citizen I would instead be calling out to Europe proposing a different EU. Who knows what answer I would get from Poland, Italy, Spain, Portugal and others? Why for instance should they stay with those who most benefit from a Euro made weaker by the weaker?

PS. For those who do not know me in the context of any European Union and Euro debate, perhaps the following Op-Ed could help as an introduction. 

https://perkurowski.blogspot.com/1998/11/burning-bridges-in-europe.html

@PerKurowski

If kicking the can forward does not come with changing what caused the crisis, it will roll back and trample you

Sir, Wolfgang Münchau writes: “Herein lies the true tragedy of the ECB asset purchases… the ECB may never be able to stop them’, “An ailing eurozone still requires extreme treatment” October 30.

Europe is extremely dependent on bank lending and with the risk weighted capital requirements for banks regulators have hindered banks from lending to what the economy most need banks to lend to, namely small and medium sized businesses and entrepreneurs.

Their risk weights for their capital requirements says it all: sovereigns 0%, AAA rated 20%, mortgages on residential houses 35% and the SMEs and entrepreneurs 100%.

Did those perceived as risky SMEs and entrepreneurs cause the crisis? Of course not! They never do.

And keeping in place that same regulatory discrimination against the risky, has guaranteed that most stimuli imbedded in the ECB purchases of assets has not been able to go to where it could most help the economy. Ergo, Europe has a weak economy.

PS. Long term benefits from a hard landing

@PerKurowski

Much current radical uncertainty is the result of radical statism and of radical bank regulatory idiocy

Sir, I refer to Wolfgang Münchau’s “Welcome to the age of radical uncertainty” June 19.

He writes: “The victory of capitalism over communism was the single most formative event for many of today’s commentators and analysts like myself.”

Really? With the Basel Accord of 1988’s risk weights of 0% the Sovereign and 100% citizens, is that not more compatible with communism than with capitalism?

He writes: “The financial crisis turned what outwardly seemed a stable political and financial environment into what mathematicians and physicists would call a “dynamical” system. The main characteristic of such systems is radical uncertainty.”

Really? Did all that start with the financial crisis? What about Basel II of 2004 that with its risk weights and resulting capital requirements distorted the allocation of bank credit to the real economy even more?

He writes “To succeed we need to understand the difference between risks we can calculate, and deep uncertainty that we cannot.”

Indeed, as in the risk of the assets of a bank and the risks of what assets can bring banks and a bank system down. These are not la meme chose. Regulators allowed banks to hold only 1.6 percent of capital against what is rated AAA-AA, that which precisely because of that rating could lead to the build-up of dangerous excessive bank exposures; while requiring banks to hold 12% against below BB- rated assets, that which bankers do not willingly touch even with a ten feet pole?

He writes: “Once we accept that our globalised world has characteristics of a dynamical system, many of our assumptions will fall like dominoes”

Sir, the assumption we most need to fall, urgently, is that regulators know what they are doing. They don’t, they are radically dumb.

Sir, there is a growing problem with the apparent weakening of egos that makes it harder by the day for most to say (including You), “I was wrong!” 

@PerKurowski

The populism of bank regulators like Mario Draghi, has hurt Italy much more than Berlusconi’s

Sir, Wolfgang Münchau, discussing a “centrist populist. Take Silvio Berlusconi”, writes that he “left a legacy of economic devastation. Italy’s economic growth is anaemic, its debt burden too high and the banking system too weak…. The euro-zone lacks a joint government and is premised on economic convergence and rules-based governance. Its survival depends on the absence of populism” "Centre-ground populists pose the real threat" February 27.

Again,Münchau says not a word about that during the last decades nothing has been as destructive for the Western world of our grandchildren, than those hubris filled populist technocrats who with their risk weighted capital requirements, offer us to deliver stable and safe banks… at no cost. 

A 0% risk weight for the sovereign, in this case “safe” Italian politicians and bureaucrats, and a 100 % risk weight for “risky” Italian SMEs and entrepreneurs, could never have produced anything but anaemic growth, and the dangerous overpopulation of some supposedly very safe havens.

When will FT and all its famous columnists understand that denouncing the regulatory distortion in the allocation of bank credit is vital to our future?

@PerKurowski

When and how did the Fed, as a regulator, obtain permission to distort the allocation of bank credit in the US?

Sir, Wolfgang Münchau writes that the letter from Patrick McHenry, the vice-chairman of the US House of Representatives to Janet Yellen, the chair of the Federal “questioned the right of the chair of the Federal Reserve to negotiate financial stability rules “among global bureaucrats in foreign lands without . . . the authority to do so.” “Central bank independence is losing its lustre” February 20.

That is a perfectly valid questions that the Fed, if everything was as it should be, should be able to answer with ease in a very straightforward way.

On February 15, Janet Yellen during an interpellation by the House Financial Services Committee answered with that nothing in the international negotiations is binding on US regulatory agencies, unless it goes through a due rule making process. Does that mean like the US signing up, even promoting agreements like Basel I and Basel II, is just for show and bears little meaning?

But, McHenry’ letter or question during the interpellation would have been so much firmer and direct to the point if he had asked: 

Where did the Federal Reserve obtain the right to, with risk weighted capital requirements for banks, so fundamentally distort the allocation of bank credit to the real economy in America?

Followed up with: Where did the Federal Reserve obtain the right to come up with risk weights such as: Sovereign 0%, AAA-risktocracy 20%, residential houses 35%, We the People, like unrated SMEs and entrepreneurs 100%, and below BB-rated 150%?

Followed up with: Who authorized you to impose risk aversion in the Home of the Brave?

Followed up with: Sovereign 0%, We the People 100%: Who authorized you to impose such statism on the Land of the Free? 

That said, the US Congress should also not be allowed to claim too much ignorance about the Basel Committee for Banking Supervision and its regulations, since quite a lot of it has been publicly discussed. Therefore a letter to the House of Representatives could also ask: How come, in the 848 pages of the Dodd-Frank Act, the Basel Committee is not mentioned once?

@PerKurowski

The failure of telling the truth about the role of bank regulators in Greece’s crisis helps create alternative facts.

Sir, Wolfgang Münchau writes: “The Greek crisis is only the most glaring example of failure to tell the truth…When the truth dies, we should not be surprised if alternative facts are put in its place” “A failure to tell the truth imperils Greece” February 2004.

Indeed! I agree with most of what Münchau argues, but first let’s start from the beginning.

When has it been explained to the Greek people that their current travails would never have happened, had some bank regulators not decided, on their own, that banks needed to hold so much less capital when lending to the Greek sovereign, than for instance when lending to American, German or Greek SMEs or entrepreneurs?

And how would they feel if they came to know that many of those who had direct responsibility in that huge regulatory mishap, were still involved in deciding its future?

Sir, how can you work yourself out of a crisis being helped by some interested in hiding vital truths about the cause of the crisis?

@PerKurowski

Why has the Financial Times, and other, kept silence for so long about some obvious mistakes in bank regulations?

Sir, Wolfgang Münchau now finally writes: “We should start making a distinction between the interests of the financial sector and the economy at large”, “Reform the economic system now or the populists will do it” December 19.

Of course we must. I have soon written 2.500 letters to FT, many to Wolfgang Münchau, pointing out the fact that our loony bank regulators did not find it necessary to define the purpose of the banks before regulating these. Their risk weighted capital requirements allow banks to earn higher expected risk adjusted returns on what is perceived as safe, than on what is perceived as risky. That might help bankers’ wet dreams come true, but does clearly not serve the interests of the real economy or even the long-term stability of the banks.

Münchau also writes: “We should not be surprised that people have become sceptical about experts who peddle theories that result in comically wrong predictions and that do not square with the reality they perceive.”

Indeed, why should we trust regulators who “comically” believe that what causes bank crises is what is ex ante perceived as risky?

But Sir, since lack of contestability has allowed these ludicrous regulations to survive for way too long, even after a huge crisis made its mistakes evident, we also need to understand how a qualified media like the Financial Times, and other, can be blinded, or silenced for so long on this issue.

@PerKurowski

It is way overdue FT stops thinking of Brexit solely as a disastrous defeat, and starts exploring its opportunities

Sir, I refer to Wolfgang Münchau’s “The shock that will shift a nation’s business model” October 10.

Indeed it is long way overdue that at least some of you in FT stop the crying and begin thinking about Brexit not as an unqualified defeat/disaster, but as an opportunity.

But let me be clear. When Münchau mentions the need for “a shift in the direction of the UK economy away from transactional capitalism towards a more inclusive version of a free-market economy”, that begins precisely by throwing out the Basel Committee’s risk weighted capital requirements for banks.

That single piece of regulation, which turned banks away from maximizing returns on equity by means of banking, into doing so by means of capital (equity) minimization; and all based on avoiding ex ante perceived, decreed or concocted risks, has been about as damaging to the real economy as anything I can think of.

But Sir, to recognize that after ignoring the literally thousands of letter I have sent you on that subject, would of course require FT to eat loads of humble pie. Are you without fear and without favour enough to do that?

@PerKurowski ©

A “Bye-bye-Basel” that frees Britain from dangerous credit risk aversion, would more than compensate Brexit costs.

Sir, Wolfgang Münchau describes a much constructive position with respect to the possibility of a Brexit. "In the event of Brexit, let Britain go in peace", June 13.

With respect to the long-term consequences of a Brexit, Münchau writes: “There are, of course, a number of specific negative economic effects, but also offsetting ones… Economic theory tells us that the wealth of a country ultimately depends on its skills, resources, and the quality of its policies. It is hard to see how Brexit would change that”

If Brexit would allow Britain to also wave goodbye to those stupidly dangerous credit risk adverse capital requirements for banks imposed by the Basel Committee… then Britain could also recover much of that go get it spirit that once made it an Empire.

“Stupidly dangerous”? Yes! First it pushes banks to create excessive exposures to what is ex ante perceived as safe, precisely the stuff major bank crisis are made of; and second it hinder banks from lending sufficiently to “risky” SMEs and entrepreneurs, precisely what makes an economy stall and fall.

@PerKurowski ©

Europe took huge Eurozone risk, but does not dare their banks taking risks on “risky” SMEs and entrepreneurs. Crazy!

Sir, Wolfgang Münchau ends his “The IMF should call Berlin’s bluff over Greece” of May 23 with: “The combination of debt relief, a realistic fiscal trajectory and economic reforms would end the Greek crisis at a stroke”

No way Jose! No Greek crisis can be resolved without resolving the Europe / Eurozone / America / Western World crisis. And that crisis cannot be resolved without, as a minimum, allowing banks to allocate credit more effectively to the real economy.

Sir, I ask, what do you believe the European parliaments would have said if the current Basel bank regulations were presented in the following way to them?

“In order to make banks safer, and allow them to give more credit, we will reduce the capital requirements for banks when they hold what are ex ante perceived safe assets, like residential mortgages, and loans to sovereigns and to those with great credit ratings.

This will mean banks can leverage more their equity with these safe assets, and which results in that banks will earn higher risk adjusted returns on these assets.

You might argue that then banks might not lend sufficiently to the risky SMEs and entrepreneurs. You are right, but, as you must understand, you can’t have the cake and eat it too.”

Would European parliaments have approved? Perhaps, but at least they would have been better informed about the consequences. And those who understand that risk-taking is what keeps an economy moving forward, and has helped Europe to become what it is, could have better alerted about the obese non-muscular growth that would result. “Bye-bye bank credit proteins, hello-hello bank credit carbs!”

Europe risked indeed a lot with the Euro so how sad it does not dare to risk it with its SMEs and entrepreneurs.

PS. By the way it was the Basel Committee that did Greece and others in.

@PerKurowski ©

Mario Draghi, if a nanny, would tell children “Beware of the foul smelling and be kind to the nice giving you candy”

Sir, Wolfgang Münchau comes out in a full-fledged defense of Mario Draghi and ECB against Germany. He argues that had Berlin raised investment spending at home the ECBs´ job of cutting short-term rates to negative levels and buying financial assets, in order to achieve its inflation target would have been easier and it would not have had to cut rates by as much. “The high cost of Germany’s savings culture” May 9.

I will not argue against this but just remind Münchau that no matter how much Germany cooperates, if the resulting stimuli cannot flow to where it can be best used, the whole exercise might just complicate matters more.

And in this respect Draghi is a bank regulator who believes those rated below BB- are more dangerous to the banking system, than those rated AAA... and that should be indicative enough that he, and his regulating colleagues, are simply not up to the job.

@PerKurowski ©

The globalization of idiotic bank regulations caused globalization to go astray

Sir, Wolfgang Münchau writes: “Another shock has been the global financial crisis — a consequence of globalization — and its permanent impact on long-term economic growth.”, “The revenge of globalization’s losers” April 25.

Yes that is the result of idiotic global bank regulations that:

1. Allowed banks to leverage more with assets perceived, decreed or concocted as safe; and thereby make banks earn higher expected risk adjusted returns on equity with these “safe” assets; and thereby gave the incentives that by generating excessive exposures against too little capital, caused the crisis.

2. Require banks to hold more capital against what is perceived as risky, like SMEs and entrepreneurs, and thereby earn less risk-adjusted returns on equity that what they can earn with “the safe”. And obviously such distortion must impact long-term economic growth.

But Wolfgang Münchau seemingly insists in thinking these risk weighted capital requirements are great. Could it be because he sees himself as a soon to be retiree? I say this because the risk aversion implicit in the risk weighing is precisely what a financial advisor would recommend to someone with a much shorter life expectation than young professionals’. 

@PerKurowski ©

Sir, would you trust a columnist who refuses to acknowledge what produced Europe’s financial crisis?

Wolfgang Münchau asks: “would you trust with your own security somebody who cannot even contain a medium-sized financial crisis? I personally would not, which is why my own preference is for the Schengen system of passport-free travel to be suspended indefinitely” “A history of errors behind Europe’s many crises” March 28.

Sir, here are some of the Basel II’s risk weights that determined how much of the basic bank capital requirement of 8 percent banks were required to hold against some different exposures:

Loans to sovereigns zero percent; to the AAArisktocracy 20 percent; financing residential housing 35 percent; and loans to ordinary unrated citizens 100 percent

That meant banks could leverage equity unlimited times when lending to sovereigns; 62.5 times to 1 when lending to the AAArisktocracy, 35.7 times when financing residential housing 35.7, and only 12.5 times to 1 when lending to the unrated citizens.

And that allowed banks to earn different risk adjusted returns on equity not based on what the market offered, but much more based on what the regulators dictated.

So forget the Euro, forget bank unions, that distortion of the allocation of bank credit to the real economy had to provoke, more sooner than later, financial crises that will destroy Europe.

And so I ask you Sir, would you trust a FT columnist that steadfastly refuses to acknowledge such facts to opine on anything? I would not!

@PerKurowski ©

Wolfgang Münchau, what has risk weighted capital requirements have to do with the primary functions of banks?

Sir, Wolfgang Münchau writes: “Monetary policies, like the ECB’s quantitative easing program, filter into the real economy through various channels.” “The European Central Bank has lost the plot on inflation” March 14.

That is correct but again, so stubbornly, Münchau refuses to mention the not so unimportant fact that credit risk weighted capital requirements for banks, especially when regulatory compliant bank capital is scarce, seriously distorts the allocation of bank credit to the real economy.

Münchau also refers to ECB’s “targeted longer-term refinancing operations” in somewhat skeptical terms, arguing that there is no evidence of ample demand for loans. But there again I would ask if the lack of demand for bank loans is not a reflection of SMEs and entreprenuers having seen their loan applications so much rejected? And again those rejections are much the result of that kind of “risky” lending generating the highest capital requirements for banks.

Helicopter droppings? Yes but why not eliminate the regulatory distortions that serve no purpose first?

I was recently made aware of a paper written by Hyman P Minsky in October 1994, titled “Financial Instability and the Decline (?) of Banking: Public policy considerations”

In it Minsky describes the two primary functions of banking as supplying the means of payments; and channeling resources into the capital development of the economy.

And so Münchau, unless you disagree with Minsky, let me ask, for the umpteenth time, what has the pillar of current bank regulations, the risk weighted capital requirements, to do with banks fulfilling efficiently those two primary functions?

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

Wolfgang Münchau has not earned the right to now appear as the one demanding “banks to take on more risk”

Sir, Wolfgang Münchau writes “One useful measure that would bring immediate benefits would be purchases of non-performing loans in the banking sector…. The objective should be not to protect bank profits but to get banks to take on more risk” “Eurozone woes demand a much bolder response” March 7.

And he also writes that he favors helicopter droppings over QEs because that “policy would bypass governments and the financial sector. The financial markets would hate it. There is nothing in it for them. But who cares?”

Is he wrong? Of course not! But who is he to now demand that kind of bold action?

Over the years Münchau has kept mum on all letters I sent reminding him of the dangers of credit risk aversion caused by the risk weighted capital requirements for banks, like one in 2007. And equally mum on the letters were I informed him that, because of such risk weighing, the liquidity provided by QEs did not reach where it was most needed by the real economy, like one in 2012

Here is but one example of my many letters to Wolfgang Münchau and that by the way suggests the capitalization he now speaks of.

Sir, you can find many many more letters to Münchau here:

And even though ideas can be dressed up in different words Münchau should be careful. “Never plagiarize. Always attribute” is a simple, clear statement in the Society of Professional Journalists Code of Ethics that leaves no room for ambiguity.

@PerKurowski ©