October 10, 2013

Tony Barber. No! Hercules would want to have nothing to do, with most of the “eurozone´s crisis-fighters”

Sir, Tony Barber holds that “Fixing the eurozone is a labour worthy of Hercules” October 10, and that, “If he were alive today, Hercules would have much sympathy with the eurozone´s crisis-fighters”. I very much doubt it!

First Hercules would now that fixing the eurozone will be the labour not of big time hero stars like him, but of millions of citizens, “The Risky” toiling away in medium and small businesses, and as risk-taking entrepreneurs.

Second, he would have little sympathy with the eurozone´s crisis fighters because in essence these include precisely those who believed themselves to be Hercules and decided they could, with risk-weighted capital requirements, manage the risks for all of the banks in the eurozone… and caused its crisis.

Mario Draghi, for example, as Chairman for many years of the Financial Stability Board, the only herculean lifting he helped doing, was lifting the bank leverages to the sky, for instance by finding it perfectly normal that banks from all over Europe, including little Cyprus, could lend to the Greek government holding only 1.6 percent in capital, in other words leveraging their bank equity 62.5 times to 1.

Instead Hercules would suggest allowing the capital requirements for banks, on exposures to “The Risky”, to be the same, or even slightly less, than on exposures to “The Infallible”.

And this because he would understand that regulators should not react to the same ex ante perceived risks that the banks have already reacted to, with interest rates, size of exposures and other terms.

And this because he would understand that, you cannot afford bank regulations which hinder the risk-taking necessary to win any war. Europe will not survive if European banks, for senseless regulatory reasons, end up holding only sovereign debts, even if all that is German debt.

And what do I mean with “Or even slightly less capital”? Yes because “The Risky” never ever poses any real systemic threat to banks, only the false members of “The Infallible” do that.

Europeans… go and pray in your churches, “God make us daring!” and then throw out those impostors who want you to believe them Hercules.