Nothing is more jolting than to believe in something for
years and years then find out that the exact opposite is true. Well, my friend,
prepare yourself for a jolt because Brian M. Carney brought us the news that Europe
has adopted the Milton Friedman capitalist system and remained in recession for
the past five years compared to an America that adopted the Keynesian
quasi-socialist system and did much better economically.
You can see all this – and a lot more – in the article that
was written by Brian Carney under the title: “What Ails the European Economy”
and the sub-title: “Jacques de Larosiere says post-panic re-regulation put
capital ahead of all other considerations.” It was published in the Wall Street
Journal on March 11, 2014.
To explain what is ailing the European Economy in a
nutshell, de Larosiere (who was governor of the Central Bank of France and later head of a committee in charge
of fixing Europe's banks) spoke about the reforms that took place in Europe then added: “that does not mean that monetary
policy, considered broadly, is loose. Europe
is in the grip of a 'major deleveraging process' driven by 'very tight banking
regulation.'”
He went on to explain that this situation was created by the
fact that the banks were required to increase their capital by massive amounts.
The result is that they began to reject as much as 48 percent of the
applications for loans as opposed to the old normal which was somewhere between
10 and 20 percent.
Another important point came out in the discussion between
the two men. It is that “Europe 's banks
finance three-quarters of the capital needs of the economy. In the US ... bank
lending accounts for just one-quarter of the financing of the economy.” He went
on to explain that this was done through the process of securitization; relied
upon more massively in America
than in Europe . But since the crisis of 2008,
the word has become a dirty word in Europe ,
and the process is almost never used now. Thus, securitization is something he
likes to revive with modifications that will make them less risky to
investors.
Something else came out of the discussion with de Larosiere.
He calls it a paradox because in Europe money seems to be “abundantly created
by central banks … but when we look at the largest definition of money, there
has been no increase … because with one hand, the central banks push money into
the system [but] with the other hand, they take away money.” Well, actually,
the central banks don't take away the money; they require the commercial banks
to increase their capital so as to comply with the Basel III regulations.
But the lesson to be learned here is that the paradox, as de
Larosiere calls it; need not remain a paradox anymore. Once the economy
recovers, the idea of pushing money into the system to continue making it
available cheaply to those who wish to start a business need not be curtailed.
It used to be that the central bank did so to check inflation, but checking
inflation can now be done not by a tight monetary policy brought about by an
increase in the interest rate; it can be done by requiring the banks to
increase their reserves, or better yet, by imposing a tax surcharge that will
be targeted.
To see this more clearly, we recall that if anything, the
bubble examples of the last few years tell us that runaway inflation happens in
the economy because one sector such as the real estate or the securities or the
high tech leads the way and spills over into the rest of the economy. When this
happens, the right thing to do would be to impose a tax surcharge on the
offending sector rather than punish the whole economy with a boost in the
interest rate. Moreover, the money collected by the surcharge can be used by
the government to reduce its debt and prepare itself for whatever contingency
may still result.