May 25, 2015

The Basel Accord 1988 guaranteed hysteresis, economic Alzheimer. Was it because of regulators’ memory loss or ideology?

Hysteresis can be described as a permanent weakening of the capacity to respond as a consequence of memory loss… a sort of an economic Alzheimer illness.

Sir, Claire Jones mentions that, “Hysteresis’s first brush with economic fame was in 1986, when it was used by Mr Blanchard and Lawrence Summers to explain Europe’s last brush with high joblessness”, “Hysteresis’ returns to Europe as central bank frets over recovery” May 25.

In1988, with the Basel Accord (Basel I), regulators adopted the use of credit-risk-weighted capital (equity) requirements for banks and set the following risk weights: Lending to the government = Zero percent risk weight; and lending to the citizens’ SMEs and entrepreneurs = 100 percent risk weight.

Sir, with regulators displaying such a total loss of memory about the importance of the private sector; or ideologically engaging in such obnoxious manipulation and distortion of the bank-credit markets in favor of the public sector… of course hysteresis had to follow.

The consequences of such hysteresis are indeed nefarious. For instance, in 2012, it already caused me to have to write an Op-Ed titled “We need worthy and decent unemployments”.

But, to have the slightest chance to regain our economies’ memory and vitality, we need to denounce what happened and to remove those who block such efforts… whether for reasons of mental sickness or sick ideology.