Friday, January 30, 2015

There was the Western world, tagging along quite nicely, when BAM! in 1988, it got hit by the Basel Accord Asteroid.

The first consequence of the impact, Basel I 1992, was bad enough as it ordained that all bank lending to those designated as “infallible sovereigns”, was to require banks to hold much less equity than any lending against “the risky citizens”

The second impact, Basel II 2004, was even worse because it mandated that all bank lending to those private belonging to the AAArisktocracy was to require banks to hold much less equity than any lending against some lowly unrated citizens.

And that meant that lending to small businesses and entrepreneurs, the driving forces which kept the Western world moving forward, so as not to stall and fall, was not going to be able more to generate banks sufficient risk-adjusted returns on their equity… and so that kind of lending was abandoned.

And now the Western world is drowning in excessively dangerous exposure to what is perceived as absolutely safe, at silly low rates, while no banks are lending to the tough risky risk-takers the Westerns world needs to get going, most especially when the going is tough.

Unless it wakes up fast to what its bank regulators have done to it, the Western world, as we knew it, will be long gone.

If you think Basel III has solved it… forget it, with it we are only being dug deeper in the hole we’re in.