Europe, if you want to avoid death by attrition, you need to trust your bankers more than your bank regulators.

Of course it is tragic when banks collapse because of too much risk taking, usually on something they perceive as absolutely safe. Then, there is a big setback and lot of tears. But, in the long run, because your banks have also taken some constructive risks on those perceived as risky, like medium and small businesses, entrepreneurs and start-ups, net of this setback, you have at least moved forward.

But, when your current bank regulators concocted their capital requirements based on perceived credit risk, not only did they assure that banks will take even larger risky exposures on what was perceived as absolutely safe, but also that your banks would not be taking the sufficient constructive risks on the risky, something which therefore sets your economies on the road of attrition. And, so when the inevitable collapse occurs, when once again something perceived ex ante as absolutely safe turns out ex post to be very risky, not only will the pain be larger, but the setback will also be a net setback.

And Sir, set in this perspective, all usual discussions about what the ECB should or should not do which do not include getting rid of the current bank regulations, like that of for instance Wolfgang Münchau’s “Draghi is running out of legal ways to fix the euro” of August 18, are, forgive the expression, like pissing somewhat outside the pot… excuse me I mean outside the chamber pot.

I cry for you Europeans, if you can’t see where the Basel Committee’s and the Financial Stability Board’s obsessive risk aversion substituting for reasoned audacity is taking you.

Let me be absolutely clear, something else bad might have happened to your banks but absolutely not what happened to them, had there been no risk-weighted capital requirements which allowed banks to earn much higher risk-adjusted returns on their equity on assets like AAA rated securities, infallible sovereigns like Greece or real estate like in Spain.

Let me be absolutely clear, had there been no bank regulations the banks would never, at least knowingly, been allowed by the markets to leverage remotely as much as they were allowed to do by the regulators.