As a bank regulator, Bernanke is neither a good nor a humble engineer

Sir, Edward Luce writes “Bernanke: a good engineer who knows his own limits” March 11. I am absolutely sure Ben Bernanke has many good attributes and he most probably acted as good as anyone could, as a central banker, in order to kick the can of a serious recession down the road; because we all know that is the most we can considered achieved, at least for the time being.

But, if are going to have a chance of economic growth vigorous enough to absorb all the QE´s and then some of the fiscal deficits still to come, we need even better and even humbler bank regulating engineers.

I say this because it is quite clear, at least from what we could read in the recently released transcripts of the Federal Open Market Committee of 2007, that this particular engineer, Bernanke, was not even aware of or did not understand how capital requirements for banks, based on credit information already digested by the markets and the banks, causes immense distortions.

And those distortions, more capital when lending to "The Risky" than when lending to "The Infallible", is making it much harder than usual to access bank credit, for those extremely important economic agents who act on the margins of the real economy, and who almost as a norm belong to "The Risky".

Current bank regulators, with their not so humble expectations of being able to deliver “safe” bank lending are helping to turn the world into a more dangerous place. Their bank diet, which promotes bank lending to the AAAristocracy and to the “infallible” sovereigns, and constrains lending to "The Risky", can only cause economic obesity and none of the vigor and sturdiness we need.

And that Mr. Bernanke seems unable to understand, just like Edward Luce, and just like you Sir.

“Helicopter Ben”? We wish! At this moment it seems more like "Drone-with-a-bad-guidance-system Ben"

If the helicopter is to be piloted by a bank regulator you must absolutely keep it on the ground.

Sir, John Kay gives us the image of a central bank governor flying across the country in a helicopter, a “deranged grin on his face as he showers money on a grateful populace”, “…and the argument for keeping the chopper on the ground”, February 13. 

That image is great but wrong. Inasmuch the central banker also believes himself to be a Basel inspired bank regulator, he would only shower money on the financial aaaristocracy, like the AAA to AA rated securities or the “infallible” sovereigns, and avoid like pest giving any money to “The Risky” populace.

The most important argument for keeping the chopper on the ground is that it would be much more useful to eliminate the capital requirements for banks which discriminate based on the perceived risk of the assets of the banks, and not on the risk of the banks. That would allow banks to once again perform their vital social function of allocating economic resources in as an efficient way as possible.

If that cannot be done, because that would require the bank regulators to be sufficiently courageous as to admit they were totally wrong, the helicopter might be our best possibility, but that only as long as no bank regulator is piloting it.

PS. No Mr. Martin Wolf, our banks are not terminally ill, and we don’t have to go communist

But, if dropping money on the real economy, don’t let Lord Turner or any of his regulatory colleagues pilot the helicopter

Sir I refer to your “Helicopter lessons” February 6, where you analyze some favorable comments made by Adair Turner on “helicopter money”, meaning “putting newly minted cash irreversibly into the economy". In it you write giving “cash to the private sector rather than to the public treasury [has] the advantage it keeps intact market discipline on budgetary choices”.

You are absolutely right. But in the same vein let me also remind you that if you drop money on the economy by helicopter, make really sure this one is not piloted by Lord Turner, or any other of his bank regulating chums. I say this because these are those who have seen it as their mission in life to make certain that banks only lend to “The Infallible” and not to “The Risky”

And when doing so, they seem to never care about the fact that bank exposures to “The Risky” have never been large enough to create a major bank crisis, only excessive exposure to “The Infallible” do that; and neither do they want to listen to that “The Risky” include many who make a living on the margins of the real economy, and who extremely important for making it moving forward, so that this one does not stall and fall, and bring all of us down, including the banks.

The regulatory distortion produced by these runaway regulators, is directly responsible for that our banks can no longer perform an efficient allocation of economic resources.

Do not let Lord Turner, FSA, FSB, or any bank regulator set the flight plan for a helicopter drop.

Sir in “Helicopter money”, October 14, you refer to Adair Turner, Lord Turner, head of Financial Service Authority suggesting the “helicopter drops” of newly minted money something you define as the “nuclear option” of monetary policy. He should be ashamed. 

The only reason we very well might now need a general helicopter dropping of money, is because all huge moneys previously injected were dropped in the wrong spot. Lord Turner, FSA, and their regulatory colleagues made certain, by means of their sissy capital requirements for banks based on perceived risk that all new money got routed towards “The Infallible”, and none of it to “The Risky”, like to the small businesses and entrepreneurs who could have put it to so much better use. 

If there is to be a helicopter drop, please don’t let regulators set the flight plan, I trust any helicopter pilot to do that much better on his own. 

A “nuclear option”? Forget it! Here the real nuclear device used, was that AAA-bomb bank regulators exploded in the midst of our financial system.

PS. My 2019 letter to the Financial Stability Board 

How can bank regulators think we are going to be safer by overpopulating safe havens?

Sir, Sir Samuel Brittan, August 31, from his desk, urges, “Come on Bernanke, fire up the helicopter engines”, and drop some money on the economy, without it having to go through the banking system. 

What a lovely idea, but, unfortunately, that money would too soon get trapped in the banks, and where current regulations would only make it available, as carbs to those perceived as not risky to grow more obese on, and not to those considered “risky”, like our small businesses and entrepreneurs, as proteins for muscle growth. 

And so, No! Before you do anything, be it QEs, fiscal deficits, or helicopter droppings, make sure you get rid of that silly regulatory discrimination against “risk”, and which is present in the current capital requirements for banks. That discrimination is placed on top of all other discriminations based on risk, and those we know, are not that few, especially in these uncertain times. 

Come on Bernanke, and all you other regulators, we are not going to be safer by overpopulating the currently safe havens… and if there are to be any helicopter droppings, please, be enablers, and make sure these happen over what is perceived as risky land.

Here is when I started, got hooked, on the subject of bank regulations 

My 2019 letter to the Financial Stability Board

Have your pick Bernanke, deflation or inflation, as long as you make it brief

Sir in “‘Helicopter Ben’ confronts the challenge of a lifetime” Martin Wolf, December 17, describes the very real dilemma of having to choose between ruthless deflation and ruthless inflation. The best thing to do in such circumstances is to stop thinking about how to get back to where we were and start thinking on where we want to be tomorrow. For instance in the case of our commercial banks it would be great if for a change we start thinking about what is their purpose; and we also need to remember that we have a climate change crisis proceeding simultaneously and where we won’t even have the choice of picking between deflation or inflation.

Also since in reality neither deflation nor inflation are bad things per se, if they occur instantaneously and do not prolong themselves in time, we should perhaps concentrate more on finding ways to clear out all irreversible losses instead of trying to hide them. For instance in the case of the US automobile industry it must be obvious that any infusion of fresh public funds should only happen after its restructuring.

Martin Wolf suspects “the result will ultimately not be deflation but unexpectedly high inflation, though probably many years hence” and I am not so sure of his timeframe. If markets start believing that the US is going all out for inflation, a lack of confidence, propagated at modern speeds, could bring us hyper-inflation in days or hours.

The world lost confidence because never before had it been told to trust some few so much and been so let down. Let us now rebuild that trust that allows us to wake up and feel like singing “Oh it’s a wonderful morning!”