E China Could Be The Next Basel Victim Or Not

China could indeed be the next Basel victim. After all, Japan was the first victim, and Basel 1 finished off the Japanese economy so that deflation is the norm. And the United States and certain Euro nations were the second victim, a group victim, of Basel 2. So, it is logical to assume that China is next and the Swiss could bring that about by counting old loans as being non performing. Here comes something similar to mark to market, to the banking system near you.

Before discussing a quick review of Basel and China's status, I have held out hope that the new thinking by central banks could really stop this liquidation nonsense. Procyclicality must be looked upon as being a form of liquidation.

I am encouraged by Ben Bernanke's recent statements and by some push by the new Basel to stop procyclical behavior. But so far it is all talk, and now we see this push to make things tough on China gaining momentum, and I just have my doubts that they will change. But it is certainly time for countercyclical action, not just countercyclical talk. 

Even Narayana Kocherlakota doesn't embrace the new thinking. He believes that helicopter money won't provide much of a lift, but he isn't talking about helicopter money at all. He is talking about the government issuing bonds. But real helicopter money is tax breaks or infrastructure financed without the treasury issuing bonds, by Fed base money alone issued one time.

Back to Basel. Japan was an easy target as we look back. But we visit the scene of the Basel crime again, not because we thought something was sinister in the first place. But the procyclical efforts of Basel 2, in impacting the US housing bubble and crash of 2007-2008, and the destruction of real estate markets in Spain and other peripheral nations, formerly known as PIIGS, makes one suspicious about both Basel 1 and 2.

According to Stern Business School, Basel 1 created this risk:

...the failure to differentiate between high quality and low quality commercial credits contributed to a steady increase, over the past decade, in the credit risk of bank loan portfolios...

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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