April 25, 2014

Strip bank regulators of their power to play Masters of the Universe

Sir Martin Wolf writes “Our financial system is so unstable because the state first allowed it to create almost all the money in the economy, and was then forced to insure it when performing that function”… and it is this Wolf wants to fix with “Strip private banks of their power to create money” April 25.

Nope! And it amazes me that Martin Wolf, in April 2014, still does not get it. What really messed up the whole banking sector were the regulators allowing banks to hold such minimal levels of capital against assets that banks ended up with 50 to 1 Debt to Equity ratios, and that they decided to differentiate the capital requirements based on perceived risks already cleared for, which of course distorted all common sense out of the credit allocation of banks.

In that respect my counterproposal would be to “Strip bank regulators of their power to play Masters of the Universe”. A simple 8-10 percent capital requirement for banks, against any asset, no exclusions, and reaching that goal in a pragmatic way that does not hurt the economy, sounds immensely better than handing over 100% of money creation to the State.

Yes we must solve the problem of the too big to fail banks… but not by placing all our trust in a never too big to fail State. (Is Wolf a closet communist?)

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.