August 13, 2013

Current capital requirements for banks guarantee “The Infallible” lots of credit, while “The Risky” get nothing.

Sir, I refer to Mr. David R Martin’s “Summers’ fiscal mindset makes him the best choice to lead the Fed” August 13.

In his letter Martin writes that “using monetary policy is like spraying a fine mist on a raging fire. Loose money is not directed at any particular sectors”.

That is not true, because in the best of circumstances, with a banking sector that functions, the water will mostly go the where the real economy needs and deserves it most to go. Currently though, because of capital requirements for banks which are much higher for what is perceived as “absolutely safe” than for what is perceived as “risky”, you are actually spraying The Infallible with bank credit, while making sure The Risky remain under extremely arid conditions.

Since I have not seen Lawrence Summers (nor Janet Yellen for that matter) giving any sign he understands the distortions in the real economy these regulations create, I cannot say I agree much with Mr Martin on his favored candidate to chair the Fed.