If monetary stimulus irrigates swamps and not deserts, it will make all so much worse.
Sir, bank regulators, by allowing banks to hold absolute minimal capital against what was perceived as “absolutely safe”, 1.6 percent or less, effectively injected huge amounts of liquidity in the economy. And precisely because of how these capital requirements were skewed, in favor of “The Infallible” and against “The Risky”, they directed our banks to lend too much, at too low interest rates and in too lenient terms to sovereigns, housing and the AAAristocracy, and too little, at too high rates and in too strict terms to “the medium and small businesses, the entrepreneurs and start-ups.
And with that distortion inflicted on the real economy, they not only created the current crisis but also keep us there. Unfortunately, even though he has assured me that he understands it, Martin Wolf does still not get it. And perhaps that is because this argument might stand in the way of his macroeconomic imbalances explanations. “We still live in Lehman’s shadow” September 18.
And, if now Wolf’s favorite to Fed chairman, Janet Yellen, does not understand that either, and is appointed, and keeps on swamping the swamps and drying the deserts, so help us God.
PS. Sir, jut to remind you again that I am not copying Martin Wolf with this comment. He has asked me not to send him anything more on “distorting bank capital requirements” as he already knows it all… at least so he thinks.
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