November 01, 2012

Draghi is just desperately kicking the can down the road

Sir, Michael Steen ends his report “Draghi expands role in fight to save euro” November 1, quoting Jörg Krämer, Commerzbank’s chief economist saying “If there is a breakthrough, the history books will write about Draghi as the hero who gave the reforms time to work”. I truly cannot understand what fundamental reforms he refers to. 

What caused this crisis was that banks, by means of very low capital requirements, were given too large incentives to acquire huge exposures to “The Infallible”, like to Greece, triple-A rated and real estate, and therefore too large disincentives to lend to “The Risky”, like the small businesses and entrepreneurs. And¸ given that bank capital is becoming scarcer day by day, the distortions those capital requirements produce are only increasing. 

To save the euro, Europe and America alike, it is not enough to save the banks you must save the economy, and that is not done by discriminating against "The Risky". This Mr. Draghi seems not to have understood at all and so to me he is not saving anything, he is just desperately kicking the can down the road.