To stand a better chance of a sunlit future, we must pour sunlight on the truth.

Sir, Martin Wolf in “There is no sunlit future for the Euro” October 19, writes with respect to the banks holding Greek debt, “Fools who lent money, without asking questions, deserve to share in the pain.” That is undoubtedly true, but not focusing with the same impetus on the role of the regulations in building up Greece’s excessive debt, impedes the truth from coming out. The fact was that during the whole period of Greek debt buildup, banks were authorized, by Basel II, to leverage their capital 62.5 times to 1 when lending to Greece. That meant that banks were able to make immensely higher risk-adjusted returns on equity when lending to Greece as compared for instance when lending to a European entrepreneur; and that mean that Greece was required to pay lower interest than would have been the case without that regulatory interference with the market. 

Why do I after hundreds of ignored letters to the Editor of FT about this, insist on sending them. Simply because I know that the basic level of capital requirements for banks had nothing to do with this crisis, it was the specific capital requirements after the risk-weights that caused it. You might find a solution to a problem without knowing its real cause, but, it is so much easier when that real cause is recognized. So let us start by pouring sunlight on that! 

Wolf makes sensible suggestions for the increase by governments of the capital of banks. But, lowering the capital requirements for banks, especially when these are very high given the current scarcity of bank equity… could provide the same results. I am indeed curious as to why Wolf, who supports increased fiscal spending, even in light of huge public debt and enormous deficits, does not support allowing the banks to do their lending job easier.