November 30, 2014

ECB’s Mario Draghi should be stopped from wasting a QE in the Eurozone, even if a straitjacket is needed

Sir, credit risk weighted capital (equity) requirements for banks make banks lend too much to what is perceived as absolutely safe and too little or at too high rates to what is perceived as risky, like to small businesses and entrepreneurs.

And while these regulations remain, banks are not able to allocate credit to the real economy in an efficient way. In such circumstances, in a Eurozone where bank credit is so important, to inject liquidity through a QE or any other similar means, would just be a very dangerous waste of resources.

But to explain that to a former chairman of the Financial Stability Board, one who refuses to understand how wrong the distorting credit risk weighing of bank equity is, is not easy… especially when he receives so much applauses from famous connoisseurs such as you Sir, “Draghi needs support on QE in the eurozone”, November 29.

A sizable QE, in terms of monetary policies, is similar to a nuclear device. Once it detonates it could take years before its dangerous radiation dissipates. And therefore QEs need to be placed in hands of those who would only use these as a last resource and when absolutely sure they would do more good than bad… not in the hands of a Dr Strangelove.

Yippee-ki-yay Europe, here comes QE!