October 10, 2012

Stop discriminating in favor of “The Infallibles” and against “The Risky”

Sir, Martin Wolf, in “Lessons of history on public debt” October 10, draws the conclusion “that fiscal consolidation is impossible without a supportive monetary environment, with ultra low real interest rates and a buoyant economy”. 

But what if a too supportive environment was what caused the high levels of debt? The fact that banks needed to hold almost no capital at all when lending to the infallibles, be they the AAA-rated, European sovereigns, or Spanish real estate sector, is clearly what caused all the excessive leverages. 

And so the most important decision that needs to be taken is whether we are to trust the buoyant economy to result from government actions or from private initiatives. If the latter, regulators must stop their shameful discrimination against small businesses and entrepreneurs when accessing bank credit, only on account on these being perceived as more risky than "the infallibles". 

But that would of course require for instance that the Martin Wolfs of this world get to understand how the capital requirements for banks really distorted our economies, and that, they seems incapable or unwilling to do. I wonder why? Could it be they prefer the governments to do the lifting?