Thursday, January 15, 2015

Excuse me Mme. Lagarde, but you and the IMF, are so astonishingly wrong

Christine Lagarde, the Managing Director of the International Monetary Fund, in a speech titled Three “Rosetta Moments” for the Global Economy in 2015 delivered January 15, 2015 stated:

“If there is one lesson from the Great Recession, it is that you cannot have sustainable economic growth without a sustainable financial sector.”

Sincerely, excuse me Mme. Lagarde, but you are so astonishingly 180 degrees wrong.

Current difficulties derive directly from the fact that bank regulators, trying to bring stability, sustainability, to the banks, concocted portfolio invariant credit risk weighted equity requirements. And these allowed banks to earn much much higher risk adjusted returns on equity when lending to the “infallible sovereigns”, the housing sector and to members of the AAArisktocracy than when lending to “the risky”.

And so, as should have been expected, because it is always excessive exposures to what is perceived ex ante as absolutely safe that causes bank crises, we ended up with excessive banks exposures, against much too little bank equity, to AAA rated securities, to the real estate sector (Spain) and to sovereigns like Greece.

And so, as should also have been expected, because banks naturally search to maximize their risk-adjusted returns on equity, the banks abandoned those who are most in need of credit, those same our real economy most need to have access to bank credit, namely “the risky” small businesses and entrepreneurs.

And all this simply because regulators obnoxiously regulated our banks without defining a purpose for these any different from just being safe and convenient mattresses in which to stash away our money.

Mme Lagarde: If there is one lesson from the Great Recession, it is that you cannot have a sustainable financial sector without sustainable economic growth.

We hear all the time about the need to save taxpayer, but to save taxpayers by reducing even more their taxable earnings, sounds about as silly as can be.

Mme Lagarde states: “we must complete the agenda on financial sector reform”. Absolutely, but not by having the same regulators, taking us with their Basel III on even more shady and curvy roads, in the same dumb direction.

PS. Mme Lagarde, this is not the first time I comment on this to you... for example: