September 21, 2012

Is the financial transmission mechanism muddled? Yes, that is to say the least.

Sir, Gillian Tett writes that the “bigger worry is that the benefits of QE3 are so unclear, because the transmission mechanism is so muddled”, “Beware the high costs and psychology of America’s QE3.” September 21. 

And Tett reports on Richard Fisher, head of the Dallas Fed saying: “Nobody on the [Fed] committee… really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. The very people we wish to stoke consumption and final demand by creating jobs and expanding business investments are not responding to our [Fed] policy initiatives as well as theory suggests”. 

Muddled transmission mechanism indeed! How could it not be so when capital requirements for banks favor so much the lending to those perceived as “not-risky” and thereby discriminates so much against those perceived as “risky”. 

But I know for sure what is at least an absolute sine qua non to get the economy back on track, and that is getting rid of those discrimination based on perceived risks, and which almost amount to a class war waged by the “not-risky” against the “risky. 

It is the action of the “risky” which normally builds the muscles of an economy. Those “not risky” slowly, or fast, over time, most often turn into flabby fat. 

And Gillian Tett should know this after all the letters I have sent to FT, and to her, explaining the above. But, then again, as she recently wrote in “An internet free for all read by none” September 15, “People are clustering into tribes… only reading information that reaffirms their pre-existing social and political world view”, and, since I do not really belong to her mutual adoration tribe, she might not even have read my letters. 

PS. As I am putting together a Stupid Bank Regulations 101, for the benefit of those who like Martin Wolf do not get it, perhaps Gillian Tett would also like to take advantage of it.