November 29, 2012

We must rid ourselves of the incredibly vicious regulatory centrifuge that will make our economies implode.

Sir, David Pilling writes about inflation being a tonic that grows the size of the nominal economy and keeps the ratio of public debt to gross domestic product more manageable, “Japan, too, needs outside thinking at its central bank”, November 29. So that's the trap! What a horror story... at least for those who have saved for their retirement investing in government debt.

First the bank regulators appointed by governments, declare that it is so much safer for banks to lend to the government than to lend to a small business and entrepreneur, and so banks need to hold 8 percent in capital when lending to “The Risky Citizen”, but can lend to “The Infallible Sovereign” holding zero or little capital (Basel II).

As a result banks will expect earning a much higher risk-adjusted return on equity when lending to “The Infallible Sovereign” than when lending to “The Risky Citizen”; while some lucky banks will also be able to grow into desirable “too-big-to-fail-banks”, by leveraging their equity more.

And as a natural consequences of this regulation “The Sovereign” gets saddled with too much debt, and since this could threaten its infallibility, they contract “outside thinking”, which suggests to them they use inflation so as to inflate themselves out of the problem.

And simultaneously, the most cooperating courtiers, the “too-big-to-fail banks”, get knighted as Systemic Important Financial Institutions, which will of course allow them to keep up the cycle of lending to the still "infallible sovereign".

What an incredible vicious regulatory centrifuge they invented. It will make our economies implode. Sincerely, I do not think they did it on purpose, because, otherwise, instead of just wanting the regulators out, I would want them shot.