November 01, 2012

To break Italy’s, Europe’s and America’s vicious circle, their current central bankers and regulators should resign.

Sir, Giulia Segreti and Guy Dinmore report that “Italy’s central bankers fears ‘vicious circle’” November 1. That is Italy’s Europe’s and America’s problem, that their central bankers are not even aware that they already find themselves in the most vicious financial circle ever, only because of their own bank regulatory doings. That vicious circle goes like this: 

It starts with regulators foolishly trying to avoid bank failures by allowing banks to hold less capital when lending to those perceived as less risky “The Infallible” than when lending to those perceived as “The Risky”. 

That signifies that “The Infallible” will have access to bank credit more generously, cheaper and in easier terms than what would otherwise have been the case. While likewise “The Risky” will have less access to bank credit, will have to pay higher interest and need to accept harsher terms. 

And that signifies that “The Infallible”, like the AAA rated, real estate sector and sovereigns (like Greece) little by little will over-borrow and turn into huge unmanageable risky assets, while “The Risky” like small businesses and entrepreneurs will not be financed, and so there will be little of the new sturdy economic growth, and jobs, they can help to provide. 

And when it explodes there will be less and less safe havens were banks, because of the lack of equity, need to take refuge… and we all know what happens to a safe haven when it gets to be overpopulated. 

So if central banker fears a vicious circle, perhaps the best they can do to break it, is to resign and let a new generation of regulators take over. 

And if little me was one of those regulators, the first thing I would for the time being suggest doing, is to cut in half, at least, the capital requirements for banks when lending to small businesses and entrepreneurs. And that I would do in the perfect knowledge that I need their help to rescue the economy and create jobs, and that “The Risky” have never ever caused a major bank crisis, only “The Infallible” do that when they… sooner or later, always fail.