FT argues IMF should be listened to because of its consistency, but fails to apply the criteria to others.

Sir, in “The Solomonic advice of the IMF”, October 12, though you accept that IMF “like most other forecasters has been proved over-optimistic on the strength of the recovery” you still argue that its advice deserves a serious hearing, primarily because of its “consistency”. 

Now I have, as you know, very consistently, argued from before the crisis that regulators were dooming us to a crisis, even in FT, and then that there was no way of recovering any sturdy and sustainable economic growth with bank regulations that discriminate in favor of what is ex-ante perceived as not risky, “The Infallibles”, and against “The Risky”, the small businesses and entrepreneurs. 

And from what I see, read and hear, the reigning majority of IMF economists, have still no complete idea about how we got into this mess, and so, clearly, much less a complete idea on how to get us out of the mess. 

But still, I do not get any brownie points for consistency, because that is not really what it is all about, and so my arguments are silenced by FT, consistently

By the way "Solomonic": “Exhibiting or requiring the wisdom of Solomon in making difficult decisions”, come on, I respect IMF, though I sure hope they would be smarter, but is that not taking it all a bit too far?

Gillian Tett does just no get it!

Sir, Gillian Tett writes “Stern sermons and looser rules won’t get banks lending more” October 12. She does, not or wants not to really get it. 

It is simply not just a question of banks lending “more”, or having these as an alternate QE money injection in the economy so to say, but, primarily, to get the banks to lend better, in terms of what the economy most needs. That is known as searching for a more “efficient economic resource allocation”. 

Right now, because of capital requirements (plus now, to make it worse, also liquidity requirements) which are based on ex-ante perceived risks, and made stricter by the big scarcity lack of bank equity, banks tend to lend to “The Infallible” and avoid lending to “The Risky”. The latter include of course the small businesses and entrepreneurs. 

And so, what the British regulators are currently doing, at long last, thank God, with their “quietly loosening bank rules”, is discreetly trying to reduce the regulatory discrimination against “The Risky”. That it is hard for them to be too forthright about it is sort of understandable, because that would signify having to admit how stupidly they behaved earlier.

Frankly, on the face of it, it would seem to me that Gillian Tett could learn much more about banker behaviour from Mark Twain than from Phil Coffey.

You’ve got to be kidding. Did you really hope the economy could recover sturdily without banks taking risks on the “risky”?

Sir, FT’s Special Report, World Economy, October 12, subtitles “Hopes turn to fear and uncertainty”. 

But it was regulatory risk-adverseness that saddled our banks with excessive exposures to what was ex ante officially perceived as not risky, because that required much less capital than lending to the risky, which set off this crisis. In other words, there was an excessive regulatory fear of the “risky”. 

And so what “hopes” do you refer to? That we could get out of this monstrous economic imbroglio by continuing having fearful regulators telling the banks to avoid more than ever taking a chance on those perceived as “The risky” and concentrate all their lending on “The Infallibles”? While government simultaneously injected money in the economy as there was no end to it? You’ve got to be kidding! Did you really hope that would work? 

No. Hope means understanding the need for risks and being willing to take these. While your banks are governed by regulators with a sick attitude toward risk, we are simply doomed. 

That the “world economy was hamstrung by uncertainty, which was preventing companies from investing” as Olivier Blanchard of the IMF says, sounds like a cruel joke to me. Just consider how much bank regulators have hamstrung the banks from lending to the risky small businesses and entrepreneurs, by, in times of huge scarcity of bank equity, requiring the banks to hold much more equity when doing so, than when lending to infallible sovereigns. 

And FT has not been willing to call out the sissines of that! “Uncertainty”? Ha! As if economic growth could be turned into a riskless affair? Where did you, and the banks regulators you seemingly so much admire, get such a crazy idea?

The banks are made to jump from one huge pro-cyclicality to another.

Sir, Ben McLannahan reports, “IMF sounds alarm on Japanese lenders”, October 11, and this as a result of “domestic bank holdings of government bonds in the country could rise to a third of their total assets within five years now”.

I do not get it! Is it not what they wanted? They must obviously have understood that this would be only the natural consequence of allowing the banks to hold basically no capital at all against exposures to “The Infallible”, while at the same time requiring them to hold around 8 percent in capital when lending to “The Risky”, like the small businesses and entrepreneurs.

But, I am indeed worried, because it means that precisely at the moment the public sector might be hit by higher borrowing cost, will be precisely the moment they will need to bail out the banks because of their losses on public bonds. 

The article also states “Japan’s interest rates have been kept low in recent years by strong support from the banks”, but that must be a typo. I guess they meant “strong support from the bank regulators”. 

Indeed it would seem like the regulators are intent on having our banks jumping from one huge pro-cyclicality to another.

European parliamentarians, why do you allow the eurosceptics to give only their side of the story?

Sir, Guy Verhofstadt and Daniel Cohn-Bendit write that “Eurosceptics are shamelessly exploiting the economic crisis to misrepresent and undermine the EU”, “Europe needs to renew its vows for federal union” October 10. 

But, gentlemen, European parliamentarians, why do you allow them to do so? It was primarily crazy bank regulations which allowed the banks to give credit to “the infallibles” with zero or very little capital, which created the monstrous debts and bank exposures that have caused this crisis. 

Had the banks needed to have as much capital when lending to someone AAA-rated, a European sovereigns, or Spanish real estate sector, as what they were required to have when lending to a small European businesses and entrepreneurs, this crisis that now threatens Europe, would not have happened. It is as easy as that! And your silence on that is deafening.

Stop discriminating in favor of “The Infallibles” and against “The Risky”

Sir, Martin Wolf, in “Lessons of history on public debt” October 10, draws the conclusion “that fiscal consolidation is impossible without a supportive monetary environment, with ultra low real interest rates and a buoyant economy”. 

But what if a too supportive environment was what caused the high levels of debt? The fact that banks needed to hold almost no capital at all when lending to the infallibles, be they the AAA-rated, European sovereigns, or Spanish real estate sector, is clearly what caused all the excessive leverages. 

And so the most important decision that needs to be taken is whether we are to trust the buoyant economy to result from government actions or from private initiatives. If the latter, regulators must stop their shameful discrimination against small businesses and entrepreneurs when accessing bank credit, only on account on these being perceived as more risky than "the infallibles". 

But that would of course require for instance that the Martin Wolfs of this world get to understand how the capital requirements for banks really distorted our economies, and that, they seems incapable or unwilling to do. I wonder why? Could it be they prefer the governments to do the lifting?