August 12, 2017

The crisis can of ten years ago was kicked down some roads leading to nowhere

Sir, in your “Ten years on, the crisis leaves a dark legacy” of August 12 you rightly write, “A newly minted mortgage-asset securitisation industry had turned the borrowed capital into very liquid but little-understood securities”; but you so wrongly silence the fact that if these securities were just rated AAA to AA, regulators, with their Basel II of 2004, had allowed banks to leverage their capital (equity) an amazing 62.5 times to 1. If banks only obtained a 0.5% percent margin on these, they would earn a 50% return on equity.

And you recount: “The freeze in money markets hit global banks that had [authorized by regulators] leveraged their balance sheets to astonishing levels. They could not bear the strain… The rest — bank bailouts, recession, central bank intervention — is history. The history is unspooling still”

That’s true, but why is that so? The answer, because our baby-boomer leaders, egged on by failed regulators not wanting to understand or confess their mistakes, were to coward to bite the bullet, and so just kicked the can down some roads. Those roads, because of the distortion produced by the risk weighted capital requirements for banks in the allocation of credit to the real economy, lead to nowhere. If we do not completely eliminate this source of distortion, our capitalism, that which has served the Western world so well, will never regain legitimacy again.

You argue, erroneously I believe: “Financial crises end because market prices for tainted assets are established and credit flows again. In this case, only dramatic action by government made that possible.” On the contrary, had the markets been allowed to act, like what I suggested in 2006 with my letter “Long-term benefits of a hard landing”, we would probably already be clearly out of the woods, and the too big to fall banks would not have just grown bigger still.

Besides Sir, what capitalism do you refer to, that in which bank regulators assigned a risk-weight of 0% to the sovereign, and one of 100% to the citizens? To me that sounds pure and unabridged statism. Could it be you all in FT are devout statists, and that is why you have so insistently silenced my arguments?