Martin Wolf, where do bad credit bubbles grow, in ‘prime’ AAA land, or in ‘highly speculative’ below BB- terrain?

Sir, Martin Wolf writes “The adjustment ahead for a world economy so addicted to credit bubbles is going to be difficult” “This turmoil is the result of the Fed’s blunder” January 13.

Basel II regulations to which most developed emerging and developing markets adhered, set capital requirements for banks of 1.6 percent for what is AAA rated and 12 percent for what is rated below BB-. That means that banks could leverage their equity 62 times when dwelling in AAA land but only about 8 times when daring into below BB- terrain. That means banks would obtain much larger risk adjusted returns on equity when lending to what is AAA rated (or sovereigns) than when lending to what is rated below BB-.

And Martin Wolf has never understood the credit risk aversion that introduced in the regulation of banks, nor does he understand the fact that risk-taking is the oxygen of all development. Currently, because the regulatory distortions credit risk weighted capital requirements produce in the allocation of bank credit, the whole world is submerging.

And that distortion does not provide the banking system with one iota more of stability. It is just the opposite.

Sir, do yourself a favor, give Martin Wolf a call right now and ask him: “Martin what do you think poses more danger for the stability of the banking system, or creates more dangerous credit bubbles, that which is rated ‘prime’, AAA, or that which is rated ‘highly speculative – near default below BB-’?” 

Sir, when compared with the dangers to the world economy of current bank regulations, the .25 percent rate increase by the Fed, is pure chicken shit.

Are there many problems in the emerging markets? Of course there are! It suffices to go back a couple of years and read the many opinions about the ‘marvels’ of emerging markets… especially in light of the almost inexistent interest rates for what was perceived or deemed safe in the developed world.

@PerKurowski ©

When in a panic, think, for a millisecond at least!

Jeffrey Sachs tells us: 1.- Extend swap lines to all main emerging markets. 2.- Have IMF extend low-conditionality loans to all countries that request it. 3.- Discourage big banks from withdrawing credit lines from overseas operations. 4.- China, Japan, and North Korea should undertake a coordinated macroeconomic expansion. 5.- Middle East needs to recycle all their cash. 6.- US and Europe should expand exports credits for low and middle income countries. 7.- US and Europe should follow an expansionary fiscal policy. According to Sachs "At the least it would put a floor on the global contraction that is rapidly gaining strenght. "The best recipe for avoiding a global recession", October 28.

Even if we would accept Sachs very optimistic view on the fiscal outlook as true, we should ask whether this is wasting aspirins or throwing real medicine at the problems? Compare Mr Sachs´ advice with what Michael Skapinker, on the same page tells us that Wal-Mart is doing to enforce ´sustainability, demanding "rigorous environmental and social standards", "An ethics lesson from an unlikely quarter".

The big question becomes then, should we now pull out all the stops in order to regain equilibrium on what might be a path to unsustainability or should we use this crucially decisive moment to provide the incentives to explore other perhaps more sustainable routes? In the panic it is still wise to take a brief time-out and think about what door to use. In fact our world at large is not only looking for an escape door for a financial crisis, it is looking for a door that can lead it to a better place. But, of course, neither do we have all the time to make up our mind… it is burning out there.

Politicians and regulators are the same… they only look out for their own interests.

Sir Erik Berglof and Raghuram Rajan in “Progress in emerging markets is being put at risk” July 18, and as a result of the current crisis that gives oxygen to populism, say that “Many of the actions against the financial sector are proposed in the name of the poor, even though the true beneficiaries are the politicians themselves. Absolutely true, but just in the same vein it can be said that most of the current bank regulations are exclusively the result of regulators only wanting to avoid a crisis on their watch, selfishly not caring a jota about the true development needs of the poor and the not so poor.