Saturday, September 11, 2010

NYT Provides Us with a Good Dose of Financial Propaganda

This morning NYT tells us:

If all goes well, the world will be a slightly safer place after top central bankers and bank regulators emerge Sunday from meetings in Basel, Switzerland.

By agreeing on new rules aimed at preventing financial crises, they will remove a source of uncertainty that has weighed on markets just as concerns about European sovereign debt rise again.

In the long run, if the rules work the way they are supposed to, banks will be much more able to absorb violent market shocks and the world will be less susceptible to the kind of financial crisis it has experienced the last three years...

 Under current rules, banks might hold so-called core Tier 1 capital, the most bulletproof category of reserves, equal to as little as 2 percent of their assets. Analysts at Morgan Stanley expect the regulators to raise the required amount to about 8 percent....

Core Tier 1 is calculated as a percentage of risk-weighted assets, or assets adjusted according to how risky a bank’s portfolio is.
So what are the top notch Level 1 and Level 2 risk-weighted assets. John Carney fills us in:
Right from the start, the way the Basel Committee defined “high-quality liquid assets” was problematic. It included cash and central bank reserves, relatively non-controversial highly liquid assets. But it also included sovereign debt, a move that would inevitably encourage banks to hold more sovereign debt than they otherwise would. This is problematic for two reasons—it created an implicit subsidy for spend-thrift governments and it created the danger of over-exposing banks to sovereign defaults.

Recent amendments to the Bear Stearns Rule have extended this subsidy to Fannie and Freddie. The Basel Committee decided to include the debt of “Government Sponsored Entitites”—bureaucratic code for Fannie and Freddie—in the definition of “high quality liquid assets.” What’s more, it also included mortgage-backed securities guaranteed by Fannie and Freddie in the definition.
Yes, nudging banks into buying the government debt of the PIIGS and junk Freddie and Fannie debt, NYT tells us, is going to make the global banking system stronger. As far as financial propaganda, it generally doesn't get thicker than this.

In truth, Basel III is all about this forcing of banks into government paper of one sort or another. Thus, squeezing out private sector debt borrowing, creating huge moral hazard and making the global system even more vulnerable and top heavy with junk.

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