April 24, 2013

Martin Wolf, monetary profligacy should not be an article of faith either

Sir, Martin Wolf, insists in that because those “for room for maneuver, such as the US and even the UK” because they did not create stimulate enough the economy the “recovery has been even weaker and so the long run cost of the recession far greater than was necessary”, “Austerity loses an article of faith” April 24.

And to back up his arguments Wolf uses foremost the fact that UK, after reaching a net public debt of 240 per cent of gross domestic debt level, something that most probably most public sector lenders were blissfully unaware of, managed to work down the debt load, thanks to the industrial revolution.

Mr. Martin Wolf, let me just ask you the following four questions:

Where is today’s industrial revolution? 

Do you really think that back then the UK had regulators who gave banks extraordinary incentives to avoid taking risks? No matter what Carmen Reinhart and Kenneth Rogoff hold, in this sense, this time is indeed different.

What soaring private and public debt which led to the crisis was not the direct result of minuscule capital requirements for the banks required for the “absolutely safe”?

Finally what are we supposed to recover to, to the skewed economy we had before? Just so that house prices go up and banks earn 30 percent on their equity?

In October 2009, Martin Wolf kindly published in his Economist Forum my “Free us from imprudent risk-aversion” and I still hold, more than ever that it contains the explanation for what brought us the current crisis and what stops us from getting out of it.

Before we correct the incredibly dumb regulatory bias against risk-taking, any stimulus will just eat up any scarce stimulus space we have, for absolutely no good reason at all. 

Would the US not still be treading water had their QE’s been twice as large?

Again, and as I read Mr. Wolf’s arguments, to me, day by day he is becoming, more and more, a worthy representative of those baby-boomers with an “après mois le deluge” philosophy. As a grandfather, I should try to stop him.