June 09, 2010

Lower the capital requirements for banks!

Martin Wolf is absolutely right in warning us that “Fear of the markets must not blind us to deflation’s danger” June 9, but I do not understand on what grounds he believes that government can spend and ease us out of our immense problems. What we have seen until now seems surely to have set us up for something worse and one of the reasons for it is exactly that the “wicked” investors have not “suffered punishment” but been bailed-out.

If we are going to stimulate again this time that stimulus has to be carried out by the private sector. How? As I have proposed for soon two years, by lowering substantially the current capital requirements of banks when lending to small businesses and entrepreneurs. It was the ridiculous low capital requirements to any fancy sovereign and triple-A rated operation that got us into this horrendous mess… what wrong can it be to temporarily allow for lower capital requirements when banks lend to those who stand the best chance to get us out of the mess.

Right now if a bank lends to US-UK-Germany-France government it needs no capital at all and with the proceeds the bureaucrats of those nations can decide what to stimulate and who to finance. Is it no better having the banks decide which General Motors or grocers on the corner should get finance?

Yes we have reasons to distrust the banks, though far from as many some agendas want us to believe, but that does not imply that suddenly governments, magically, are better. I at least trust them less than what I trust banks. In any case if we got to keep on rowing close to the waterfalls of inflation and deflation let us at least make sure we all row in the same direction… hopefully away from them.