No Martin Wolf, excessive trust in the government is the real dangerous delusion of the ignorant.

Sir, Martin Wolf writes: “The authorities can affect the lending decisions of banks by regulatory means – capital requirements, liquidity requirements, funding rules and so forth. The justification for such regulation is that bank lending creates spillovers, or ‘externalities’. Thus, if many banks lend against the same activity – property purchase for example… [it] might lead to a market crash, a financial crisis and a deep recession.” “Fear of hyperinflation is a delusion of the ignorant”, April 11.

Oh boy has Martin Wolf got things wrong! Who created the “externalities” that caused the recent crisis? Would there have been so many bad property loans dressed up in AAA clothing, or bad loans to Greece, had regulators required banks to hold as much capital against these assets as what they needed to hold when lending to for instance a small business? Of course not! No Wolf, I assure you, excessive trust in the government is not only the real delusion of the ignorant, and it’s also extremely hazardous to his wellbeing.

I am sure waiting for his explanation of why it would be better to leave the creation of money, and presumably the channeling of it, in the hands of the state and not in the hands of properly regulated and not distorted private profit seeking businesses. Why do I get so often get the feeling that Martin Wolf is a closet communist?

PS. Sir as always, I will not be copying Martin Wolf with this comment since he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

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!”