December 10, 2010

Though aspirin might temporarily lessen the pain, we need a cure

Sir, Martin Wolf believes that it is gentler for the society to have artificial low rates and illusory asset values than adjusting to higher interest rates and more real asset values “Why we have to live with low interest rates”, December 10. He is right inasmuch as the sacrifices are spread out over a longer period, but not necessarily in that the accumulated sacrifices will be less… for instance if the sovereign bubble that pays for the lower interest rates bursts, and takes the currencies down.

What we need to be doing is finding ways to really grow out of the mess and that will just not happen while we insist on using capital requirements for banks that, on top of the risk-premiums already charged by the market, add an arbitrary layer of discrimination against perceived risk of default.

For instance at this particular moment hundreds of billions of bank liquidity are painted into the corner of the bank balances which does not require capital, namely the lending to high rated governments, and no matter how much everyone wants it to happen, that liquidity cannot be translated into loans to small businesses or entrepreneurs, because that would require bank capital for which there is currently no real appetite.

It is truly sad to see that though small businesses and entrepreneurs could help us to get out of the doldrums, there are many influential persons who seemingly prefer that to be a task for government bureaucrats alone.