August 04, 2013

IMF does not understand the strongest headwind affecting sturdy economic growth and employment in Spain, and in Europe

Sir, I refer to Tobias Buck’s reporting “Spain’s return to growth will not ease jobless rate, says IMF”, August 3. 

Our economies have been torpedoed by bank regulations which allow banks to hold much less capital-equity for what is perceived as “safe” than for what is perceived as “risky”. And the effect of that is to allow banks to earn much higher expected risk-adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”. And that completely distorts the allocation of bank credit in the real economy making it unreal.

And before this distortion is eliminated the chances to generate jobs in any sustainable way, in Spain or in any other country for that matter, are truly slim.

The big difference, between for instance Germany and Spain, is that Germany is still living on old risk-taking and has not yet had its safe-havens dangerously overpopulated, or is at least in blissful ignorance of it, while Spain has wasted away their banks financing “absolutely safe” real estate and ignoring lending to small businesses and entrepreneurs.

That the IMF has not been able to understand and much less raise their objections to this strong headwind against sturdy economic growth, created by dumb bank regulators, should shame its current professionals.