The most important structural reform needed, is in the hands of central banks and the Basel Committee

Sir, Richard Barwell and Steven Friedman, commenting on David Folkerts-Landau’s “Economic dogma threatens the Eurozone” write: “Mr Folkerts-Landau seems to think the ECB should focus on: politicians delivering structural reforms. Unfortunately, history is rife with examples of politicians delaying hard choices indefinitely, or failing to see the best way out of a deepening crisis” “ECB chose to keep fighting to achieve mandate” May 9.

I do not agree. Mario Draghi is the former chair of the Financial Stability Board and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision. And therefore Draghi is in the position to push, without the help of politicians, for the most important structural reform needed, namely the elimination of the distortions in the allocation of bank credit to the real economy produced by the risk weighing of the capital requirements for banks.

I hereby link to an aide memoire describing why some urgent and serious revisions of current bank regulation are needed.

@PerKurowski ©

France, Italy, listen, there is something more important than “liberalization of closed products and labor markets”

Sir, You correctly refer to “the need to take aim at exactly the right problem…the bureaucratic sclerosis that chokes of innovation and growth”, “The struggle for reform in France and Italy” December 13.

And thereafter you also rightly argue that “demand-side boosts and supply side reforms are complements not substitutes”, and lend your support to structural reforms like the “liberalization of closed products and labor markets” because that would help to overcome “stagnant productivity” which was “a chronic problem well before the global financial crisis”.

But the most fundamental structural reform needed in France and Italy, and at the least in all other Western world economies, is to get rid of the distorting credit-risk-weighted capital requirements for banks, and which block bank credit from reaching where it is most needed in terms of helping the real economy to grow… productively.

And Sir, since you steadfastly keep ignoring that, I guess all those countries would be much better off listening to little me, than to big and so important You.

Europe’s guardians of monetary orthodoxy should fear the printing press, while bank regulatory lunacy persists.

Sir, Reza Moghadam holds that “Europe’s guardians of monetary orthodoxy need not fear the printing press.” December 11.

Moghadam argues that the opposition to printing money” based on the lack of structural reforms is wrong, since “output did not contract at the start of the crisis because of labor and product market regulations – those have been around for decades”. In this he clearly makes a valid point.

But, when even after stating “most European companies rely on banks rather than bond markets for their capital needs”; and that “interest rates for private sector loans have not fallen as much [as yields on sovereigns]; adjusting for lower inflation they have in fact risen” Moghadam goes into a convoluted explanation of how companies, because of higher equity prices, can still benefit from a QE in which ECB buys government bonds… then he clearly shows he has not understood one iota about how current credit risk-weighted capital (equity) requirements for banks distorts the allocation of bank credit to the real economy.

Europe should always be wary of the money “printing press” but, if the printing takes place while the allocation of the resulting liquidity is distorted, then it needs to be truly scared.

Does Lawrence Summers really think risk adverse bureaucrats can deliver “bold reform”?

Sir the pillar of current bank regulations is, as you should know, the credit risk-weighted capital requirements, which allow bank to earn much higher credit risk adjusted returns on equity when lending to what is perceived, ex ante, as absolutely safe, than on what is perceived, ex ante, as risky. And that stops bank credit from flowing freely and fairly to all the medium and small business, entrepreneurs and start-ups. And anyone who does not understand that the economy cannot move forward without that type of credit has never walked on Main street.

And so you can understand how frustrating it is to read Lawrence Summers finding room to include “policies to promote family-friendly work” in his list of needed structural reforms essential to increase productivity, and not including the need of correcting the above mentioned regulatory distortion, “Bold reform is the only answer to secular stagnation” September 7.

“Bold reform” Ha! How can clearly overly risk-adverse bureaucrats carry out that? They only know about throwing money at problems.

PS. As Summers also refers to the need of “infrastructure investments” we should not forget that there is a prior need of making sure those “infrastructure investments” are done efficiently, in terms of costs.

Do we need to use force to make Mario Draghi and ECB to accept urgently needed structural reforms in bank regulations?

Sir, Claire Jones and Peter Spiegel report that ECB’s Mario Draghi has called for Brussels to “Use force to secure economic reform” meaning “structural reforms… they believe would strengthen longer-term growth prospects”, July 10.

ECB should be ashamed of itself. If there is any structural reform that is urgent that is getting rid of those crazy risk-weighted capital requirements for banks which are hindering credit to reach those we most need to have it now, namely medium and small businesses, entrepreneurs and start-ups.

And I guess the main reason for the ECB not to be pushing for that is it would signify Mario Draghi admitting have been part to one of the most monstrous regulatory mistakes ever.

There’s a world of difference between ex ante perceived risks and ex-post realized risks.