What’s wrong with you FT? Are you daft? How many times do I have to explain it to you?

Sir, in “Three threats to Europe’s recovery” August 10, you write “Europe’s main problem remains in its banking system. Impaired balance sheets are preventing lenders from extending credit to businesses, choking off growth”.

What’s wrong with you? How many times do I have to explain it to you? The real and complete story goes as follows: Impaired balance sheets of banks, facing capital requirements which are much lower for what is perceived as “safe”, than for what is perceived as “risky”, are preventing lenders from extending credit to businesses and choking off growth.

And why are those bank balance sheets impaired? Because they built up too large exposures to what was perceived as risky? No! Because they built up too large exposures to what was ex ante perceived as “absolutely safe” but that ex-post turned out to be risky and so caught them standing there naked, with their pants down, and no capital to speak off.

And I tell you FT, there will never ever be a sustainable sturdy growth in Europe again, as long as bank regulators discriminate in favor of “The Infallible” and against “The Risky”. Europe was not built on dumb risk-aversion but on smart and daring risk-taking, call it reasoned audacity if you want.

Regulators, you can even let Libor be the result of a raffle, but please stop distorting and subsidizing the risk-free rate

Sir, I refer to Tom Braithwaite’s and Brooke Masters’ “Regulators urge speed in replacing the Libor rate” April 26.

By allowing banks to hold much less capital when lending to the “infallible” sovereigns than when lending to “risky” citizens, regulators have completely distorted what is probably the most important reference rate, the borrowing rates of the most solid sovereigns, one of these usually the proxy for the risk-free rate.

And that is why I am amazed about how much attention regulators give to the Libor rate, a rate that really, for its small relative importance, could just as well be the result of a raffle among some quotes, after eliminating some outliers. One day, the winning Libor could be somewhat higher than its true rate, and on that day, Libor based borrowers would pay somewhat more, and investors earn somewhat more; other days the picked Libor could be somewhat lower than its true value and the opposite would hold. But, in the long run, no one is really much harmed.

Could it be that regulators are ashamed of what they have done and are using the Libor incident as a distraction?

And FT too clings to blissful oblivion... Shame on you!

In November 1999, in an Op-Ed in the Daily Journal of Caracas, I wrote the following: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its complete collapse” 

And January 2003, while being an Executive Director of the World Bank (one of 24) you, the Financial Times published a letter I sent you which ended with: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds” 

And in 2007 the Big Bang happened, not because of an A-bomb but because of the AAA-bomb, those capital requirements for banks that orders reasonable bank equity when the perceived risks of default are high, but allow for unreasonably low bank equity when the ex-ante perceived risks are low. 

But now, Sir, in October of 2012, you end the editorial “Markets cling to blissful oblivion” October 6, with “Liquidity… cannot alone fend off the guns trained on our economies”… but you still insist, God knows why, on being oblivious to the fact that the most dangerous gun trained on our economies, are the regulatory distortions caused by capital requirements based on risks, and as weighted by bank regulatory bureaucrats. 

Shame on you!