QE is a drug that has been applied by the Fed in an emergency without going through any FDA type testing procedures

Sir, Barry Eichengreen considers that “The Fed’s monetary tweak is a tempest in a teapot” December 20.

But, considering the fact that the monthly reduction of $10bn in QE gets so much more attention than the $75bn that the Fed will keep on injecting in the economy, in a quite distortive way, all on the long side of the market, all for the treasury and the housing sector, then perhaps a teapot being in a tempest, could be a more adequate simile.

Eichengreen also holds that “the central bank has signaled that it is not prepared to return to normal times until a normal economy has returned”. Sorry, then we might never get there. 

A normal economy will not return until regulators stop using risk weighted capital requirements for banks. Because these allow banks to earn much higher risk-adjusted returns on equity financing the infallible sovereigns and the AAAristocracy than when financing the “risky” medium and small businesses, entrepreneurs and start-up, they do the facto guarantee the market to be abnormal.

And Eichengreen ends by referring to Hippocrates… “It has at least done no harm” What? Is that not something yet to be seen?

More than a new normal, stagnation has been decreed, by risk adverse regulators, as the new structural standard.

Sir, Lawrence Summers writes “The risk of financial instability provides yet another reason why pre-empting structural stagnation is so profoundly important”, “Why stagnation might prove to be the new normal” December 16. 

And I do not know what to say to that. It was precisely well intended but horribly executed efforts to avoid financial instability which basically has decreed stagnation as the new standard.

When regulators risk-weighted capital requirements for banks, they allowed banks to earn much higher expected risk adjusted returns on assets perceived as “absolutely safe”, than on assets perceived as “risky”.

And that translates into bank credit, one of the most important drivers of growth, not going any longer go to finance the “risky” future, but only to refinance the “safer” past.

And how you can avoid stagnation with that kind of misplaced risk-aversion beats me.

Does Professor Summers really believe that the economies of West would have become what they are with that kind of bank regulations?

Any economy growth based solely on “easy money”, and not based on astute risk-taking, is doomed to solely become froth on the surface.

And all for nothing as the current financial instability has, as usual, been created by excessive bank exposures to what was officially perceived as “absolutely safe”, like AAA-rated bonds, real estate in Spain, loans to Greece etc.