Thursday, July 9, 2015

Just before the Berlin Wall felt, communists, statists, dictators and those who benefit from crony statism, gave the liberal capitalistic free-market world the finger.

In 1988, just before the fall of the Berlin Wall in 1989, some communists/statists hacked into the free market capitalist world’s bank regulations. By means of Basel I, and for the purpose of determining the capital requirements for banks, they arranged so that the risk weight for lending to OECD sovereigns was zero percent, the risk weight for lending secured with houses 50%, while the risk weight for lending to the private sector was set at 100 percent.

Since the basic capital requirement was set at 8 percent that meant that banks could leverage their capital unlimited times when lending to sovereigns, 25 times (100/4) when financing the purchase of houses and 12.5 times to 1 (100/8) when lending to the private sector... citizens. 

That doomed bank to lend too much to the governments and too much to the housing sector, and basically to abandon the traditional role of banks, namely to provide credit for the private sector, like to SMEs and entrepreneurs. Of course those from the private sector that were exploiting crony statism, they just loved it. 

And that in turn doomed the liberal free-market and capitalistic economies of the western world.

That the world suffers under the thumb of neo-liberalism? That's a sad fake-news cover up they have invented.

How much public debt would have been avoided, or at least priced correctly if banks, when lending to the sovereign, needed to hold that same 8% they were required to hold when lending to the citizen?

Please, for the good of our grandchildren, it might already be too late for our children, help me tear down that wall the Basel Committee built… urgently … Greece was just the tip of the iceberg!

PS. July 2018, there will be 30 years since the world went from “Tear Down that Wall” to the “Build Up that Wall” for 30 years.