A positive carry over financing, on zero bank capital… is that not an infinite return on equity?

Sir, I refer to Christopher Thompson´s and Claire Jones´ “Eurozone banks load up on state debt” April 2.

There we find: “The Basel II rules allow regulators to treat sovereign debt as risk free, meaning banks do not have to hold any capital against it” and “Banks were given a chance to borrow at 1 percent from the ECB, invest in sovereign debt… and earn a positive carry.”

Is this not what I have been screaming my heart out over for more than a decade? Like when in November 2004 you published a letter of mine in which I asked… “What will it take before the Basel Committee starts realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits”

Sincerely, if you are in the hands of bank regulators, or financial journalists, who do not understand that the risk based capital requirements for banks has to produce different risk-adjusted returns on equity, which utterly distorts the allocation of bank credit to the real economy… I have to feel pity for all of us… of the Western World.

You can’t explode a bubble and have it too

Sir are we in the future going to have to read Nouriel Roubini’s “The mother of all carry trades faces an inevitable bust” November 2, as another example of how we were warned about the risks? I hope not. First because it does not contain a single word about the what-to-do and also because it ignores that all traders, though aware that yesterday’s results has little to do with tomorrows, just in order to make a living, need to keep the dancing halls open and the public dancing.

In comparison, Wolfgang Münchau’s “We must not be too late with starting the Big Exit”, and which calls for starting to increase the interest rates in the US, is a more valiant effort to face the sad truth that you can’t explode a bubble and have it too.

On the fashion of titles

Sir, John Dizard’s “Where money is lost there are winnings to be made” July 2, is a valuable reflection on the yen carry trade, though I must say the title sounds quite démodé. From what we have been reading lately about mark to markets through models of markets, the titles in vogue are more in the nature of “Where winnings have been made, losses wait to be recorded”.