A dense bank regulatory feedback loop infected western world’s economies with a dangerous risk aversion

Sir, Gillian Tett writes “Dense feedback loops have heightened risk of contagion” July 12.

And I ask could there possibly be any dense feedback loop that could cause contagion more than stupid bank regulations?

When nations decide they are going to live on yesterday´s risk taking, and avoid the risk taking they would need for a tomorrow, they are simply treating themselves as cash-cows, and they can only go down, down, down.

And this is precisely what happens when regulators do as they now do, which is to allow banks to hold much less capital when lending to “The Infallible” (many of the “risky” of yesterday) than when lending to “The Risky” (potentially the “infallible” of tomorrow); and that means banks will earn much higher expected risk-adjusted returns on equity when lending to The Infallible, the sovereigns and the AAAristocracy, than when lending to The Risky, the small and medium businesses and entrepreneurs.

And you can imagine what that does to the access to bank credit of The Risky.

And of course, helping too much what is perceived as infallible, and which is therefore already sufficiently attractive, will only put it at risk of turning into something extremely risky.

As I see it, the Basel Committee for Banking Supervision, is committing high treason against the economies of the western civilization, and which have obviously become what they are thanks to a lot of risk-taking by their banks.

God make us daring!

This is a mark to the markets anticipation of a crisis crisis

Sir Wolfgang Münchau tells us that “Central bankers cannot stop this contagion” March 10 and he is right; how could they?... when no one is really sure about what is going on in that no mans land between the primary financial asset such as a subprime mortgages or municipal loans and their final expression in the financial markets in the form of some type of sliced and diced derivative contract.

For instance Münchau speaks about a “hugely contagious solvency crisis … spilling over into municipal debt, corporate debt” though we have yet to see any significant municipal or corporate debt defaults. This is not a mark to market crisis; it is more a mark to the market’s anticipation of a crisis crisis.

Therefore, central bankers should stop throwing real money at anything virtual that hurts, like blindfolded children trying to hit a piñata; and carefully keep their monetary munitions for the many real world problems that could break out down the line… like those very real subprime mortgages that have already started to default.

We are keeping away the minor tremors that keep the big earthquakes away.

Sir nothing, nothing, nothing of the current financial turmoil would have occurred if the credit rating agencies, empowered by the bank regulators to signal that it is possible to measure risks objectively, had not spread around the subprime virus. Of course using the credit rating agencies in the short tem can be something very good and expedient but in the longer run it can only lead to major disasters as the number of questioners are silenced. In my country, Venezuela, whenever there is a small tremor people applaud as these keep the major earthquakes away. Unfortunately, our current bank regulations seem more destined to keep the minor tremors away and it behoves all of us to do something about it.