Without eliminating regulatory distortions, neither austerity nor profligacy can help Europe

Sir, Martin Wolf writes: “the hope that [the European countries in crisis] will grow their way out of their difficulties, via eurozone demand and internal balancing, is a fantasy, in the current macroeconomic context”, “The German model is not for export” May 8. 

Wolf’s line of argument, again, points to the “austerians”, as he likes to call them, being wrong. I agree with this. But that does not mean that their opposites, let’s call them the “profligates”, would be right either.

Europe, to stand a chance, and the European youth to find the next generation of jobs, needs to get rid of those distortions which direct bank credit, not based on its productivity, but based on perceived risk-avoidance. And before that is done, I would have to be an “austerian”… since wasting away scarce profligacy space on nothing is just plain stupid.

In fact those regulations are more than stupid they might in fact even signify a crime against humanity.

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

On the Battle between “Austerians” and “Profligarians”

Sir, Martin Wolf refers sort of contemptuously to “austerians”, to whom he holds “a financial crisis is a mark of moral turpitude, to be redeemed only by suffering. “Why the Baltic states are no model” May 1.

But Wolf himself could also with moral turpitude equally be accused of being a “profligarian” in holding that a financial crisis should only be redeemed by just letting the party go on… in the best style of an Après moi, le déluge baby-boomer’s perspective.

Before the worst type of austerity is eliminated, namely that which hinders banks to take the real risks the real economy demands, I find myself definitely to be an “austerian”, because otherwise fiscal and monetary profligacy would just be a waste of fiscal and monetary space.

Now, once the regulatory establishment has come to its senses, God willing, and eliminated the current capital requirements for banks based on risk-weighting for perceived risks which have already been weighted, by means interest rates, amounts of exposure and other terms, then I will gladly think of joining the camp of the profligarians. I said “think” because I would need to be sure regulators really understood how dumb they had been, so as to never again repeat similar nonsense.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all... at least so he thinks.