QE-forever cycle of fiscal stimulus, with current bank regulations, can only generate a dangerously obese economy.

Sir, Satyajit Das opines that “QE-forever cycle of fiscal stimulus won’t generate a recovery” August 2.

He is absolutely right! A recovery, to be for real, to be sustainable, requires a dose of risk-taking, which is currently being negated as a result of the risk-weighted capital requirements for banks. Allowing banks to leverage more with what is perceived as safe, than with what is perceived as risky, allows banks to earn higher risk-adjusted returns on equity with what is perceived as safe than with what is perceived as risky… with expected consequences.

And credit to what is safe, mostly refinancing the safer past, provides mostly carbs to the economy, which results in flabby obesity. It is credit to the riskier future that can provide the best proteins an economy needs to grow muscular and sustainable.

And for sure, the negative rates, a subsidy for "the safe" doing something with money, is a clear expression of how obese our economies have already become.

PS. A brief memo on some monstrous mistakes of current bank capital requirements.

@PerKurowski ©

With their credit risk weighted capital requirements for banks, regulators doomed our economies to obese growth.

Sir, you refer to growth in the US and hold that the “bearish case for the US rests on the travails in China, and events in the oil market, conspiring to expose “The small but serious threat of a US recession” February 6.

You, as you have done the last decades, simplistically suppose all economic growth is equal. But, the truth is we can have obese economic growth, based on carbohydrates, such a financing consumption, housing and refinancing the safer past; or we can have muscular economic growth, based on proteins, such as taking risks on SMEs and entrepreneurs. And guess which one of these is the sustainable growth?

Ever since regulators, with their credit risk weighted capital requirements, set the banks on a credit risk aversion path, all growth we have perceived has been of the not sustainable obese type.

So no! Whatever happens in China, or with the oil price, if the US, and Europe, insist on having the same failed bank regulators regulating their banks, their economies will go downhill more sooner than later.

You quote Bill Dudley, president of the New York Federal, as noting, in your face, “credit conditions have already tightened as risk aversion has caused a selloff of risky assets.

Dudley should be ashamed. As one of the regulatory community he must know that regulators, long time ago, de facto gave banks the incentives they needed to avoid creating “risky” assets. They made bankers’ wet dreams, that of making the highest expected risk adjusted profits when financing what was perceived as the safest, come true.

@PerKurowski ©