April 23, 2014

When fighting inequality, before redistributing, eliminate some of its worst man-made causes.

Sir, on the front page you label Martin Wolf’s “A more equal society will not hinder growth” as “Robin Hood’s economy” April 23. Just in case, and since so many have recently been mixing up Robin Hood with the Sheriff of Nottingham, let us be clear in that Robin Hood indeed helped the poor, but he was not a tax collector for King John… much the contrary.

Many years ago in an op-ed, I wrote that since justice lies on a never ending continuum, which made it hard to know where you find yourself, the most effective way to fight for justice was by attacking the much easier identifiable injustices. In the same vein, since it is hard to define what equality we need, before the grave, it is better to combat the most egregious sources of inequality.

Right now many economic injustices firmly anchored in what is known as rent extraction or crony capitalism are important inequality drivers. Trying to make up for the bad results, by for instance a tax on wealth, without correcting those drivers will lead to even more inequality.

There are many man-made causes for inequality. Two of those that I have been proposing to end are:

First: It makes no sense if we want to make our capitalism vigorous that the usually ample profits obtained under the protection of a patent, or through the power of an extravagant market share, should be taxed at the same rate, that those more meager profits resulting from having to compete naked and unprotected in the market. As a result the capital accumulation of “the protected” will be higher than that of “the unprotected” with very dire long term implications to the dynamism of capitalism.

Second: It makes no sense whatsoever to allow banks to obtain higher risk-adjusted returns on equity when lending to “the infallible” than when lending to “the risky”. And that is the direct result of those so obnoxious risk-weighted capital requirements. Robin Hood would never agree with allowing banks to lend, in risk-adjusted terms, more favorably to the “infallible sovereign” or to the AAAristocracy than when lending to a “risky” Sherwood Forest entrepreneur.

Again, let us be sure that we fight inequality by reducing its causes, not by increasing the profits of the intermediaries in redistribution, the merchants of inequality reduction.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

April 22, 2014

Mr. Jacques de Larosiėre. You are not telling the truth and nothing but the truth

Sir, I refer to Jacques de Larosiėre’s “Securitised debt could give Europe’s economy the kiss of life” April 22. Yeah, but he must mean a “kiss of life” for the financial intermediaries.

Securitization is the process whereby you lend at the highest possible rate, achievable by convincing the borrower of how risky he is, and then resell it discounted at the lowest possible rate, achievable by convincing the investor of how safe the borrower is…. so neither investors nor borrowers stand to benefit much.

For instance, a $300.000 - 11% - 30 years mortgage to the subprime sector, when it was resold discounted at 6%, yielded the intermediaries a tidy immediate profit of $210.000!

And de Larosiėre ends stating “Reviving the market for securitized loans is the fastest way to bring Europe’s credit shortage to an end”. Not so! The only sustainable way to devolve sanity into the European bank credit markets, is to get rid of those capital requirements which allow banks to earn much higher risk-adjusted returns on equity when lending to the “safe” than when lending to the risky”

Who not an “infallible sovereign”, or a member of the AAAristocracy, can compete for bank credit under such circumstances?

Europe, start by getting rid of all those working on Basel III, they are too busy covering up for their fatal mistake of Basel II.

April 21, 2014

When banks earn higher risk adjusted returns on equity financing houses than financing the creation of jobs… something is wrong.

Sir, Congressman John Delaney writes “A significant contributor to the financial crisis was the governments mispricing of risk” “A pragmatic plan to free the mortgage market from Washington” April 21.

That is not exactly so. First, it is never the role of the government to correctly price risks, but to insure there are sufficient defenses for when the market and banks fail to correctly price risk… in other words, to care more for the unexpected than about the expected. And, while doing so, it is also definitely not the role of the government to distort the markets… something which unfortunately it has been doing lately.

With those risk-weighted capital requirements that have been so much in vogue lately among regulators, by allowing banks to hold much less capital against what is perceived as “safe”, which does not mean it will be safe, than against what is perceived as “risky”, which does not mean it has to be risky, regulators have allowed banks to earn higher returns on equity when lending to the safe than when lending to the risky… and of course that distorts. For instance it allows banks to earn more financing the houses than financing the riskier creation of jobs needed to pay for those houses.

When Congressman Delaney so correctly writes to remove “the harmful distortion that government involvement causes” I just wish he knew more about the mother of all regulatory distortions.

April 19, 2014

Regulators, accept gallantly you messed it all up with the risk-weighted capital requirements for banks. And amend these... please!

Sir I refer to John Dizard’s “Brussels spends too little time on reforms that could help SMEs” April 19.

Decades ago someone, I do not remember who, commented on how a board would take much less time deciding on a several million dollar technically difficult investment, than on the amount to be spent on serving coffee during their meetings.

So when John Dizard writes that “so much time gets spent on minor issues, such as high speed trading, and so little on incremental reforms that could actually ease the credit crunch for SMEs” we might have to revise that theory. The lengthiest discussions would not seem to relate to issues that board members most know about, but on issues that collectively they least know about, and where no one has the guts to display ignorance.

The risk-weighted capital requirements for banks, of Basel II and Basel III discriminate directly against the access to bank credit, in risk adjusted competitive terms, of the SMEs. It is as easy as that. The regulators should dare to admit that and make amends for it… fast. The future of the western world, the Judeo-Christian civilization, much depends on it.

April 17, 2014

Regulator’s attempt to hold back the financial tide is worse than futile, it is outright dangerous.

Sir, Robert Jenkins holds that “Regulator’s attempt to hold back the financial tide are futile” April 17.

“Futile”? No! Much worse! Outright dangerous! By building higher levels (higher capital requirements) where they and the banks perceive the risks as higher, they fuel the strength of the storm that will, as it always has done in banking, hit the shores perceived as absolutely safe, causing flooding and much sufferings.

It is not, as it translated into a permission to run a 33 to 1 debt equity ratio, that the 3 percent leverage ratio is clearly insufficient What’s worse is that by keeping the risk weights, those which leverage the negative results of perceiving the risks insufficiently, or excessively, the regulators evidence that they still believe themselves to be, the King Canute risk managers of the world.

But that of course could have to do with the fact that most of their subjects, like FT, are too subservient to allow voice to those who question their sanity.

PS. Risk-weighting: “Most humans suffer from this intellectual weakness: to believe that because a word is there, it must stand for something; because a word is there, something real must correspond to the word… As if lines scribbled by chance by a fool would have to be always a solvable rebus!Fritz Mauthner.

April 16, 2014

If I was a young unemployed European I would ask Michel Barnier to parade down European avenues wearing a cone of shame.

Sir, I refer to Alex Barker’s and Phillip Stafford’s “Six ways Europe’s financial sector is meant to mend its ways” April 16.

I am not impressed. Because in Europe, the regulators still allows a bank to hold much less capital (equity) if it lends to “the infallible” meaning sovereigns, real estate or AAAristocracy, than when lending to the “risky” meaning medium and small businesses, entrepreneurs and start-ups.

And so in Europe, regulators seem yet not have been able to understand this allows banks to earn much higher risk adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.

And so in Europe, regulators still distort the allocation of credit to the real economy; that distortion that created the crisis, too much lending to Greece, real estate in Spain, AAA rated securities; that distortion that causes too little lending, in competitive terms, to those who could create the next generation of decent European jobs. 

And so, as I see it, Europe has not even started to mend its ways


If I was a young unemployed European I would ask Michel Barnier and his Basel Committee and Financial Stability Board colleagues to parade down European avenues wearing dunce caps – meaning cones of shame.

In the absence of QEs and TARP, would Piketty have written the same “Capital in the Twenty-First Century”?

Sir, I refer to Martin Wolf’s review of Thomas Piketty’s, “Capital in the Twenty-First Century” April 15.

First, I need to make two disclaimers. I have not read the book and, as suddenly references to it exploded on the web, I must confess I first thought of it as a too pushy publisher campaign, and I have not been able to free myself from that impression. From the little I have read of it, that in significance it is going to be up there with Hayek’s “The Road to Serfdom”?… no way Jose. 

Now if I could only make two questions on Piketty’s book these would be:

Would Piketty have written the same Capital in the Twenty-First Century in the absence of QEs and TARP which obviously helped to keep the wealth… or if profits derived from protected intellectual rights had been taxed at a higher rate that profits derived from competing naked in the market?

Where does Piketty think all inherited but dissipated wealth has gone? Is he unaware of the real difficulties of keeping the value of an inheritance?

The economic impact of a “too big to fail" bank's” failure is monstrous, even if it had 100% equity.

Sir, I refer to Martin Wolf’s “‘Too big to fail’ is too big to ignore” April 16.

Wolf, like many, questions whether a 5 percent leverage ratio, and which translated into layman terms signifies a 19 to 1 debt to equity ratio, can be enough. Of course not!

That said the fact remains that if a monstrously big bank fails, in terms of its overall economic impact, whether it has 100% equity or 100% debt, is sort of marginal… wealth destroyed is wealth destroyed no matter how its financed. Clearly, the distribution of a loss matters but, for instance, would the world be sustainably better off, if it the one percenter’s lost all they had?

And so, out of three recommendations the IMF makes, just like Wolf I think the most important is to “reduce the probabilities of distress”.

And how is that done? As you well know in my opinion that requires committing to the dustbin of bad memories, the risk-weighing of capital requirements for banks.

The risk-weighing means that banks earn different risk-adjusted returns on equity on different assets, and this distorts all common sense out of the overall important credit allocation function of the banks.

Even worse, the current system guarantees that banks will have especially little capital when they encounter those icebergs which have always sunk bank systems, when cruising in waters perceived as “absolutely safe”.

And, here is a reminder. It does not matter whether the too big to fail banks allocates 100% correctly its resources, if the rest of the banking system doesn’t, since that way, the well behaved too big to fail, will anyhow go down, sooner or later, because there is no such thing as a stable banking system in a lousy and unstable real economy.

What current regulators do not understand is that making the banks safe begins by not distorting the allocation of credit, which they do!

The real losses of a banks, except perhaps for interest rates mismatch, do not occur on the liabilities and equity side of the balance, but on the asset side  

PS. With relation to the subsidies of TBTF banks there is some inconsistency, as some could argue that a subsidy could be necessary to keep these from failing. And even if labeled TBTF, banks are little or not subsidized at all by the markets, could that not be an indication of how fallible markets believe their rescuers to be?

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

April 15, 2014

Yes, “whatever it takes”… as long as we do not have to admit our mistake

Sir, you write about Mario Draghi and Mark Carney, the past and the current chair of the Financial Stability Board, supporting asset securities, as a mean to “revive lending to small businesses still struggling to borrow from banks, “Bundled debt will quicken recovery”, April 15.

It would make much more sense to just reduce the capital requirements banks need to hold when lending to small businesses, based on the fact that “risky” small businesses, when compared to “infallible” sovereigns and members of the AAAristocracy, pose an almost nonexistent risk to the banking system.

But no, we can’t have that, because that would mean that they as regulators would have to admit to the mistake they made with the risk based capital requirements for banks and which they have managed to keep hushed up for many years now.

Yes Sir, the small businesses might receive more credit through securitization, but not at lower interests, the high margins will, as always, remain there in order to feed the securities packaging apparatus.

PS. Regulators, the capital (equity) you should require the banks to have is against unexpected losses, not against expected losses.

April 14, 2014

What bankers do regulators expect to tell their shareholders, “we should go for lower risk adjusted returns”?

John Authers argues that “Push to beat rivals overtakes good economic sense” April 14. Of course it does!

That is why banks, while the illusion of safety persists, must primarily lend to or invest in what is perceived as absolutely safe, because there is where regulators allow them to hold the least capital, and so there is where they can earn the highest risk-adjusted rates of return they need in order to compete with other bankers doing the same… and this even when they all know that long term it all amounts to pure lunacy. 

And if they do not do so, the risk for the banker to be kicked out, or for his bank to be bought out, is just too large... Regulators, it is as easy as that!

If there is no great improvement on the youth unemployment front, Greece has no choice but to default.

Sir, Wolfgang Münchau writes that “This could be the moment for Greece to default” April 14. But when reading that “the rate of its youth unemployment in 2013 stood at 60.4 percent”, unless there has been much true progress on this front lately, the question would seem to be whether Greece has any other option.

When Münchau asks “who in their right mind is going to make a long term investment in a country with unsustainable long term debt?”, let us not forget that the most important long term investors in Greece are and should always be, the Greek youth.

By the way, as Münchau mentions “a new currency”, if I was a young unemployed Greek debating about staying or not staying in my country, I would run if what they come up with is for Greece to institute a new Drachma.

When deconcentrating power beware of that you do not just concentrate it somewhere else.

Sir, no distribution on earth can do as much to combat inequality, as the fight against too much power concentration, whether that happens in the government or in the market. And so Yes! Edward Luce is completely correct when he writes that “The power of US cable barons must be challenged” April 14, good for him!

But, I would personally have left out the term “baron”, which because its association to “robber” shows a bit of unnecessary ill will; and before sort of favoring “municipal broadband” solutions I would like to be completely sure that a Great-National-Municipal-Broadband network is entirely ruled out, since when deconcentrating power you really want to avoid concentrating it somewhere else.

April 13, 2014

Banks need to be made more useful, meaning less distorted when allocating credit to the real economy

Sir, I refer to your “Banks should be made more solid” April 12.

Like you I welcome the introduction of the “leverage ratio” which will require banks to hold capital against assets, independently of perceived risk. And like you I am astonished banks could argue that a 5% leverage ratio, which in essence translates into an authorized 19 to 1 debt equity ratio, is too much for them… of course, arguing that a 3% leverage ratio, a 32 to 1 debt equity ratio is too much, blows anyone´s mind.

But, unfortunately, the regulators, as tyrannical experts, unable to admit to their mistakes, intend to keep in place a layer of risk-weighted capital requirements, and so the regulatory distortions will only continue.

I believe that much better for all, would be to make certain that a leverage ratio really applies to all assets, and abolish to just being bad memories, those risk-weighted capital requirements which only serve to amplify the negative consequences of insufficiently, and of excessively, perceived risks.

Of course, in the long term, once the real economy has recovered, regulators should try for banks to reach an 8% leverage ratio, that which is equivalent to the capital requirements established in Basel II for a 100% risk weighted asset.

As an aide memoire, the dangers the distortions in credit allocation produced by risk weighting are:

For the stability of the banking system, as it produces larger exposures than what should ordinarily exist, to what is erroneously perceived as “safe”, and then, when the real ex post risk reveals itself, banks stand there with less safety capital than what they ordinarily would have.

For the real economy, by causing many borrowers who are not perceived as that safe but who would ordinarily merit having access to bank credit, in competitive terms, to be denied it.

One question I dare John Authers not to pass over.

Sir, John Authers in “Four questions markets should not pass over” April 12, includes the following two: “Why are Treasury yields falling, when all other times when the Federal Reserve has prepared to raise interest rates, they have risen?” and “Why can Greece successfully borrow on the markets once more, when it is barely two years since it partially defaulted and nearly left the euro?”.

In response I would ask John Authers to respond: Could the fact that banks need to hold basically zero capital against those two assets, while they must hold 7 to 8 percent against any assets perceived as “risky”, have anything to do with it?

April 11, 2014

Are car loans with adequate risk premiums to "risky" citizens really riskier than loans to “infallible” sovereigns?

Sir Gillian Tett, jogging our memory with the problems of mortgages linked to subprime borrowers, expresses concern for that subprime, even so called “deep subprime” car loans have been growing too much lately, “American subprime lending is back on the road” April 11. Poor her, she need not to worry, these loans are completely different from those loans that were so badly awarded because they could be dressed up in AAA clothing.

But she is indeed right when stating that “cheap money has a nasty habit of creating distortions in unexpected places”. Just look at all those of her colleagues who now suggest government should take advantage of extraordinarily low costs of finance in order to do so much more. That ignores that the cost of those currently so low interest rates, in much a direct result of the fact that banks do not need to hold much capital against loans to the “infallible” sovereigns, will most likely be paid by the lenders in the future, by one or another sort of financial repression.

No Martin Wolf, excessive trust in the government is the real dangerous delusion of the ignorant.

Sir, Martin Wolf writes: “The authorities can affect the lending decisions of banks by regulatory means – capital requirements, liquidity requirements, funding rules and so forth. The justification for such regulation is that bank lending creates spillovers, or ‘externalities’. Thus, if many banks lend against the same activity – property purchase for example… [it] might lead to a market crash, a financial crisis and a deep recession.” “Fear of hyperinflation is a delusion of the ignorant”, April 11.

Oh boy has Martin Wolf got things wrong! Who created the “externalities” that caused the recent crisis? Would there have been so many bad property loans dressed up in AAA clothing, or bad loans to Greece, had regulators required banks to hold as much capital against these assets as what they needed to hold when lending to for instance a small business? Of course not! No Wolf, I assure you, excessive trust in the government is not only the real delusion of the ignorant, and it’s also extremely hazardous to his wellbeing.

I am sure waiting for his explanation of why it would be better to leave the creation of money, and presumably the channeling of it, in the hands of the state and not in the hands of properly regulated and not distorted private profit seeking businesses. Why do I get so often get the feeling that Martin Wolf is a closet communist?

PS. Sir as always, I will not be copying Martin Wolf with this comment since he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

April 10, 2014

When restructuring the World Bank you might want to start even higher than its presidency.

Sir, I refer to your editorial “Restructuring hell at the World Bank”, April 10.

You end it stating “If there is a silver lining to the bank’s turmoil, it is this: the Bretton Woods Institutions belong to the world. From now on, they must be headed by the best people available”

Not so fast! When presenting my book Voice and Noise, May 2006, in which I reflected on my experiences as an Executive Director of the World Bank, 2002-2004 this is what I said:

“Although we proudly name ourselves the World Bank, the fact is that we are more of a “Pieces of the World Bank”, with 24 Executive Director representing parochial interests. As a consequence I sadly had to conclude in that the World itself, call it Mother earth if you want, in these times of globalization, is in fact the Bank’s most underrepresented constituency.

This needs to be fixed, urgently, as we need to be able to stimulate a profoundly shared ownership for the long-term needs of our planet, if we want to survive as a truly civilized society, worthy of the name civilization. As I see it, adding a couple of truly independent seven-year-term Executive Directors, whose role would be to think about the world of our grandchildren, way beyond the 2015 of the Millennium Development Goals—could be what the World Bank most needs now.”

And Sir, I still stand by that. 

The way the World Bank’s Executive Directors are nominated by ministries does not guarantee the existence of sufficient intellectual and independent diversity at the Board. And that is the number one condition that needs to be satisfied in order for any international finance institution, to become something more than a well intended mutual admiration club, run by an also well intended management in natural pursuit of their own and perhaps even more parochial objectives.

PS. I have been asked by a representative of the civil society, whatever that now means, to add here some straight to the point explanations I have been given. And so here they are

“I guarantee that if one Joe the Plumber or one Nancy the Nurse, selected through lottery from 25 plumbers or 25 nurses, substituted for one of the 25 current executive directors, chosen also by lottery, we would have a 75% chance of ending up with a more commonsense and wise Board of Executive Directors at the World Bank, and less than a 1% chance to end up with something meaningfully worse.

“If the Basel Committee for Banking Supervision (or perhaps the IMF) had counted with one biologist or an expert in the contagion of diseases, they would never ever have introduced something as dumb as the risk-weighted capital requirements for banks which, besides distorting the allocation of bank credit, amplify dramatically the consequences of any insufficient or any excessive ex ante perception of risk. And the world would have been saved from the current crisis. The ongoing intellectual incest is so bad that even 7 years after the outburst of the crisis they still do not realize what they have done.

“With reference to William Easterly’s 'The tyranny of experts' the real nightmare is to be in the hands of a group of similar experts on the same subject.”

“One of the best ways to control for the dangers of group-think is to subject the group to the authority of some who are guaranteed not to belong to the group.”

April 09, 2014

More than sovereign credit ratings we might need sovereign ethic ratings.

Sir, last week in an Op-Ed I published in Venezuela titled “Creditors of Venezuela, read our Constitution!” I wrote: “In the same way there are international conventions that help foreign investors to collect what governments duly owe them, there should be agreements that help citizens not to be saddled with the payment of debts incurred by governments who violate their constitutions.”

That is exactly what should happen to those that Michael Holman refers to in “Investors in corrupt ‘new Africa’ repeat old errors”, April 9.

Neither creditors nor investors should receive any help to enforce their commercial rights if it can be proven they did not fulfill their moral duties of making reasonable sure human rights violations and acts of corruption were present. More than sovereign credit ratings we might need sovereign ethic ratings...and to make these count.

Because of regulatory subsidies, banks are taking over what remains of safe havens, leaving other in the arms of risk.

Sir, John Plender writes about an “extraordinary demand for unsafe assets”, “Time is running out for the central bank riggers”, April 9.

It is not that it explains it all but, besides the quantitative easing that Plender mentions, much is caused by the fact that banks have been subsidized, by means of extraordinarily low capital requirements, to populate (overpopulate - dangerously) the ever scarcer safe havens.

Where pension funds and small time investors in need of maximum security used to go, that’s where the banks are today. What are now us normal risk avoiders to do? How can you compete with banks for a real positive rate, in what seems safe, if banks are allowed to leverage 20-30 times when going there?

April 08, 2014

Mario Draghi’s ‘whatever it takes’ does not contain what it takes to save Europe’s economy

Sir I refer to Gideon Rachman’s “‘Whatever it takes’ may not be enough to save the euro” April 8. I do not opine about the euro or even Europe, but since I am sure that Mario Draghi’s “whatever it takes” does not include getting rid of the risk-based capital requirements for banks that so distorts the allocation of credit, I know it will at least not save the European economy.

Unfortunately, Mr. Draghi, like so many other, seems unable to admit to this monstrous regulatory mistake that he, as a chairman of the Financial Stability Board, have endorsed for many years… and that’s what it would take to stand a fighting chance.

As is European banks are to drown in increasingly dangerous excessive exposures to "infallible sovereigns", the housing sector and the AAAristocracy, while the job creating medium and small businesses, entrepreneurs and start-ups, are like old soldiers fading away because of the lack of bank credit.

Sir, the dumb and sissy bank regulators of the Basel Committee, pose a bigger threat to Europe than let us say about 10 Russian Putins put together.

What the World Bank most needs to do in order to end poverty.

Sir, I refer to Robin Harding´s article on the restructuring program of the World Bank that is currently being executed by its president Jim Yong Kim, “Man on a mission”, April 8.

I do not know much of the program but, as a former Executive Director of the World Bank, 2002-2004, I do know that whatever it contains, much more important for the bank’s quest of ending poverty, would be for it to speak out loud and clear against the risk based capital requirements for banks that have invaded current regulations.

The net effect of those capital requirements is to allow banks to earn much more risk-adjusted return on their equity on exposures deemed as “absolutely safe”, than on exposures deemed as “risky”. And as you can understand this is something which dramatically distorts the allocation of bank credit in the real economy.

By in that way favoring the access to bank credit of the “infallible”, these capital requirements add a new layer of discrimination against “the risky” poor developing countries, the World Bank´s most important constituency… and, within all countries alike, against “the risky” medium and small businesses, entrepreneurs and start-ups.

In short the world´s premier development bank needs to remind regulators of the fact that risk-taking is the oxygen of any development… and that there is in fact no chance whatsoever to fight poverty, or even to sustain an economy, in a risk free way.

And the World Bank, in its quest, should also be able to enlist the help of their neighbor the IMF, by reminding the world´s premier financial stability watchdog of the fact that major bank crises never result because of excessive bank exposures to what is perceived as “risky”, these always result, no exceptions, from excessive exposures to assets which were ex ante perceived as “absolutely safe”, but turned out not to be.

PS. This is not new. In April 2003, as an Executive Director, in a formal written comment on the World Bank‘s strategic framework 2004-06 I stated:

"Basel dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. Once again, the World Bank seems to be the only suitable existing organization to assume such a role."

PS. Also, though I am not a banker or a regulator, the following which I formally stated at the Board in October 2004, should serve as evidence that I might know something of what I am talking about:

“Phrases such as “absolute risk-free arbitrage income opportunities” should be banned in our Knowledge Bank. I believe that much of the world’s financial markets are currently being dangerously overstretched though an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

April 07, 2014

If Wolfgang Münchau is right, is it not better for Italy to default and get it over with?

Sir, Wolfgang Münchau writes that “no matter what Mr Renzi achieves [Italy] would be headed for certain default if the eurozone’s future inflation rate were to fall from a previous average of 2 per cent to 1 percent”, “Europe’s new boys face a tough fight on austerity”, April 7.

If Italy defaulting or not depends on Europe producing inflation is true, which I hope it is not, since it seems to convey the bad message that Italians are not the masters of their own future, would it not be better for Italy to default, clear the air, and start afresh? I mean this because arguing that Italy needs inflation to repay its debt, is to say that Italy will actually, de facto, default, through inflation, in real terms, on all those holding Italian debt.

And I also say these because Münchau writes that he “fails to see how the alternative can be made to work” that of a “primary surplus – before interest payments –of at least 5 percent on average for 20 years”.

To kick-start growth we need foremost to get rid of regulatory distortions

Sir, again: Allowing banks to hold different capital against different assets, because of perceived risks which have already been cleared for through by other means, translates directly into banks earning different risk adjusted returns on equity for different assets.

And Sir, again, I argue that this dangerously distorts the allocation of bank credit to the real economy.

And on this, and on other problems closely related to current bank regulations, I have written way over 1.000 letters to FT. With the exception of “Free us from imprudent risk-aversion”, an article which Martin Wolf kindly allowed me to publish on the Economist Forum blog, my argument has been silenced.

Why? No matter how obnoxious, impolite or in need of deodorant I might seem to you… is it ethical of FT to ignore my arguments?

And I believe that it partly is because of you having censored my argument, that now, more than six years into the crisis, we have Professor Lawrence Summers, in reference to the world’s primary strategy of easy money”, explaining that this is among other “to place pressure on return-seeking investors to take increased risk”, “What the world must do to kick-start growth” April 7.

Wrong! The pressure, at least for banks, is for these to take cover in “absolutely safe” assets and which, thanks to the regulator, are those which provide them with better risk-adjusted returns.

Thanks to these mindboggling bad regulations, the banks of the world are building up dangerously large exposures to what is perceived as “absolutely safe”, while at the same time holding, what for the real economy is equally dangerous, way too small exposures to what is perceived as “risky”.

If there is anything the world must do to kick-start growth that is getting rid of those incentives which stands in the way of banks lending to the “risky” medium and small businesses, entrepreneurs and start-ups.

April 06, 2014

We must stop bank regulators from building a long-term jobless trap

Sir, a banker stands in front of two doors, one is “the infallible” the other is “the risky” Until not so long ago he would take any of the doors which provided him with the highest expected risk adjusted return on equity, considering the interest rates, the size of exposure and all other contractual terms.

Not any longer. After regulators, with their risk based capital requirements, allowed the banker to put in much less equity when he opened “the infallible” door than when he opened “the risky” door, very rarely does he enter the risky door, because very rarely will those behind that door be able to provide him with risk adjusted ROEs as high as those borrowers behind “the infallible” door.

And unfortunately the truth is that much, or perhaps even most, of that kind of sheer dumb luck the economy must have in order to find new long-term employment opportunities, hides behind “the risky” door.

And that Sir is what I most miss in Tim Harford’s “The long-term jobless trap” April 5. If you allow bank regulators to introduce dumb and almost sissy risk aversion into the banking sector, you are actually allowing them to build a long-term jobless trap… where many are bound to fall into, sooner or later.

After taxing the social capital wealth represented by Facebook followers, do we then tax FT’s social capital?

Sir, I am pleasantly surprised you dared to publish Hans Byström’s creative and provocative proposal of taxing the social capital wealth represented by the followers on Facebook, “Tax the socially wealthy too!” April 5. I mean from that there is very little distance to taxing the immense social capital wealth of the Financial Times, with its influential editor and columnists, and its many readers.

If that tax on FT could be used, for instance to increase the voice of a smalltime blogger like me, that would definitely help to combat what at least I perceive to be a monumental unjust inequity. 

That said, and even if he comes from my own Alma Mater, Lund University in Sweden, I must argue with Professor Byström. What he holds to be social capital, number of followers, is just sort of gross earnings. Since all followers at Facebook do not necessarily have an equity interest in your well being, they might just as well represent liabilities, the final net social capital from being followed in Facebook can in fact also be enormously negative. A tax credit?

April 05, 2014

Europe, before aiming at the dragon with unconventional QE, go back to conventional bank regulations which do not distort.

Sir, I refer to your “Taking aim at the dragon of deflation” in which you so much favor QEs of any kind, even if you would have to, quite shamelessly, twist the obvious intentions of European law, April 5.

Deflation is a much a result of retrenchment, retrenchment in much a result of risk aversion, and Europe’s current risk aversion very much the result of capital requirements for banks, which allow these to earn higher risk-adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.

Those highly unconventional bank regulations are poisoning Europe and so, before digging Europe further down into the ground, with for example QEs, you must return to conventional bank regulations that do not distort the allocation of bank credit to the real economy.

April 04, 2014

By taxing more the profits derived from patents you might, on the margin, reduce conflicts between true inventors and trolls.

Sir, Richard Waters discusses that delicate issue about a too rigid or too lax patent allocation system and so rightly states “The trouble is, one person’s abusive troll is another’s deserving inventor”, “Tech industry opens a Pandora’s box of patent strife”, April 4.

One way to diminish the conflict might be to reduce, on the margin, the worth of patents and other intellectual protection.

Since some years I have for instance argued that it does not really fair that profits obtained by competing naked in the market, without any safety net, should be taxed at the same rate as profits derived from an activity that has the protection of a patent… especially when the government is expected to spend tax revenues in its protection.

Entrepreneurship is based on the risk-taking which is impeded by dumb and overly sissy bank regulators.

Sir, Daniel Pinto concludes his letter “Entrepreneurship belongs at the heart of western businesses”, April 4, by stating “The west is suffering from a chronic Entrepreneurial Deficit Disorder”.

Indeed and if we understand that entrepreneurship is foremost based on risk taking, and consider that bank regulators, with their risk weighted capital requirements, allow banks to earn much higher risk adjusted returns on equity on “absolutely safe” exposures, than on “risky” exposures, it should not be difficult to understand why the west has entered into a death spiral.

Ms Tett, in the case of “derivatives”, their biggest danger lies in how delightfully sophisticated they sound!

Sir, Gillian Tett writes about “the mortgage credit derivatives that proved so deadly in that credit bubble”, “The female face of the crisis quits the spotlight” April 4.

One of the problems with understanding our way out of this crisis, are all those who wants us to chase anything they cannot explain, like the sophisticated sounding derivatives. And that stands in the way of attacking the real easy straightforward “vanilla” problems which caused the crisis.

As an example, that which “proved so deadly”, were real securities backed up with different tranches of very real though utterly badly awarded mortgages, something which has nothing to do with derivatives. And the reason these securities, if AAA rated, became so attractive they blinded the markets, was that banks, according to Basel II, could hold these against only 1.6 percent in capital… meaning being able to leverage their equity 62.5 time to 1.

Again what had problem loans to Greece, Spain’s real estate sector, Cyprus’ banks and much else to do with derivatives?

Let me try to explain the issue in my words. In derivatives you always have a winner and a loser, and in this sense, with exception made for the very serious counterparty risk, and which in itself is not a derivative risk but a normal credit risk, what derivatives do, is to redistribute the profit and the losses… in other words they are a wash out.

It is only the losses in the values of real assets which can create the real losses which can cause serious recessions. We should never forget that… while we keep allowing our banks to incur into dangerously large exposures to “ultra-safe” real assets… like infallible sovereigns and the AAAristocracy.

April 02, 2014

A positive carry over financing, on zero bank capital… is that not an infinite return on equity?

Sir, I refer to Christopher Thompson´s and Claire Jones´ “Eurozone banks load up on state debt” April 2.

There we find: “The Basel II rules allow regulators to treat sovereign debt as risk free, meaning banks do not have to hold any capital against it” and “Banks were given a chance to borrow at 1 percent from the ECB, invest in sovereign debt… and earn a positive carry.”

Is this not what I have been screaming my heart out over for more than a decade? Like when in November 2004 you published a letter of mine in which I asked… “What will it take before the Basel Committee starts realizing the damage they are doing by favoring so much bank lending to the public sector? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits”

Sincerely, if you are in the hands of bank regulators, or financial journalists, who do not understand that the risk based capital requirements for banks has to produce different risk-adjusted returns on equity, which utterly distorts the allocation of bank credit to the real economy… I have to feel pity for all of us… of the Western World.

April 01, 2014

All triple-A ratings are doomed to be downgraded, sooner or later.

Sir, Ralph Atkins and Keith Fray report “Triple A government debt ratings fall as financial crisis takes toll” April 1. It could not be any other way as all triple A ratings are doomed to be downgraded.

The fact of combining the implied safety of a triple A rating with lower capital requirements for banks when holding such debt guarantees that, sooner or later, those so rated will receive too much debt in too lenient conditions, and will then wake up to a disaster.

In 2002 in an Op-Ed titled “The riskiness of country risk" I wrote: “What a difficult job sovereign credit rating is! If they overdo it and underestimate the risk of a given country, the latter will most assuredly be inundated with fresh loans and will be leveraged to the hilt. The result will be a serious wave of adjustments sometime down the line. If on the contrary, they exaggerate the country’s risk level, it can only result in a reduction in the market value of the national debt, increasing interest expense and making access to international financial markets difficult. The initial mistake will unfortunately turn out to be true, a self-fulfilling prophecy. Any which way, either extreme will cause hunger and human misery.”

March 31, 2014

Democracy goes way beyond the 1% vs. the 99% debate.

Sir, I agree in much with what Edward Luce puts forward in his “America’s democracy is fit for the 1 percent” March 31 but, the issue of undue influence in a democracy, goes much further than the simplistic 1% vs. the 99% debate.

For instance I hold the view that corporate taxes should be zero, since only citizens should be able to wield the influence of paying government bureaucrats their salaries.

And also that 1% too often seems to imply that all those in the 1%, like in the 99%, are alike which we know they aren’t. For instance you would not want to tax the wealthy in order to further benefit the oligarchy, or do you?

Instead of QE, why not an ECB cheque to each European?

Sir, Wolfgang Münchau comes strongly out in favor of a quantitative easing program of well over $1tn… among other “to get banks to sell assets to the ECB, the proceeds of which they would use to lend to companies”, “Central bankers talk far too much and act to little” March 31.

I wonder, with current risk-weighted capital requirements for banks, would that lending to companies really result in a for the real economy efficient way? It would not! For that, better than QEs, is to get rid of those entirely unmerited regulatory distortions against the access to bank credit of “the risky”, medium and small businesses entrepreneurs and start-ups.

And since lately there has been quite some outrage over the unequal distribution of wealth, should we not consider that QE’s, the way they have been designed, are really drivers of inequality? In that case, why not a cheque to every European instead, and then take it from there? Please don’t let anyone fool you, ECB, by buying specific type of assets, is handing out lots of free cash to some few.

Europe needs energy, indeed, but more than electricity human energy, that which is propelled by risk taking.

Sir, Leif Johansson, the chairman of Ericsson and Astra Seneca, when urged by the FT to pick out one issue that needs to be addressed to make Europe more competitive, suggests: “energy; both security of supply but also energy competitiveness especially versus the US”, March 31.

I would agree but, instead of energy represented by electricity, which is what Johansson refers to, I would argue for the need of more human energy… that which is driven by the willingness to take risks.

That human energy is currently being killed by regulations which allow, in Europe more than anywhere else, banks to earn higher risk adjusted returns when lending to the “infallible sovereigns” and the AAAristocracy, than when lending to the “risky” medium and small businesses entrepreneurs and start ups.

Leif Johansson should remember that in the churches of Sweden psalms were often sung imploring “Gud gör oss djärva”, “God make us daring”.

Right now banks in Europe are not financing the risky future, they are just refinancing the safer past… and that Europe, is no way to go.

March 30, 2014

Believing too much in “the power of peace” can be hazardous to the health of your nation.

Sir, I refer to Simon Kuper’s “The surprising power of peace”, March 29.

It is always better to be skeptical and pleasantly surprised by “the power of peace” than naïve and unpleasantly surprised by its weakness. Most Venezuelans, including most of those who strongly protested the previous ways of Venezuela, and thereby perhaps unwittingly helped to open the way for Hugo Chavez, stand today in utter disbelief watching how everything has degenerated. I cannot but reflect on how much better off we could have been if we had believed much much less in “the power of peace”.

And I say this also in reference to George Osborne and Wolfgang Schäuble now recommending a “balanced and proportionate” response to Russia. That sounds a bit like believing too much in “the power of peace”.

How do we rein in runaway obsessions with data, like that of the Basel Committee?

Sir Tim Harford’s article “Big mistake?”, March 29, is just great.

When Harford mentions that “Google’s own search algorithm moved the goalpost when it began automatically suggesting diagnosis when people entered medical symptoms” he refers to the problem of knowing whether the data one looks at is original or is data which has resulted from the looking.

In other words when acting upon the data one interferes with the data. That is for instance what happened in the case of the Big Basel Committee Mistake.

Regulators looked at credit ratings and decided that when these were excellent, banks needed to hold less capital, and so banks then made higher risk adjusted returns on equity, and so the banks naturally rushed in to increase their holdings of these assets… so much that these assets very fast became very dangerous to the banking system as a whole, as in the case of AAA rated securities and Greece.

That to me was perfectly clear would happen when in January 2003 FT published a letter in which I said: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

Unfortunately since there is still little data that shows regulators have fully understood the problem, I wonder how Harford or anyone else suggest we reign in the runaway obsessions with data.

March 29, 2014

When and if taxing the wealthy, because of inequality, remember that governments are part of the problem.

Sir, Thomas Piketty proposes to “Save capitalism from the capitalists by taxing wealth” March 29, and of course there’s nothing wrong with those having the most in society carrying the heaviest load… especially when it comes to finance opportunities.

But, as Piketty also admits, much of the reason for the growing unequal capital is that “the political process [is] so tightly captured by top earners”… and so governments are part of the problem, and can therefore not be trusted with efficiently distributing those revenues.

For instance, if the purpose is to fund education, I can think of many systems whereby funds from the wealthy can go directly to pay for the costs of less wealthy students, with no one getting their hand in the tilt for political or other purposes.

In other words, when redistributing economic wealth, we must make sure we are not increasing excessively the might of wealthy governments, since that can create and even worse sort of inequality, which could endanger capitalism even more.

Personally, before going after the wealthy, I would prefer to tax at a higher rate all those who benefit from special relations… be it monopolies, protected intellectual property or similar… because even in the case of wealth there are some which are better earned than others.

PS. And let me take the opportunity to remind of the need to get rid of that odious opportunity killer, and that odious inequality driver, that risk based bank capital requirements represent… and which of course has nothing to do with capitalism and all to do with regulatory foolishness.

March 28, 2014

On responding to Russia and on Europe’s decline, Churchill and von Bismarck might have differed from Osborne and Schäuble.

Sir George Osborne and Wolfgang Schäuble write about responding to Russia in a “balanced and proportionate way”, “The eurozone cannot dictate Europe´s rules alone” March 28. Is that really enough? Might it not be so that history shows that Europe must respond to Russia in an unbalanced and disproportionate way?

And these two European gentlemen also write that “No one should assume that European decline is inevitable”. No… but it can happen! As long as regulators, with their risk weighted capital requirements allow banks to earn higher risk-adjusted returns on equity when lending to what is perceived as “safe” than when lending to what is perceived as “risky”, its decline is inevitable. In order to have a future Europe must risk continuing opening those risky doors behind which its luck might be hiding.

Sir, do you believe Winston Churchill and Otto von Bismarck would have cosigned George Osborne´ and Wolfgang Schäuble´s article?

March 27, 2014

With respect to increasing bank capital we need banks and regulators to be partners, not enemies.

Sir I refer to Gina Chon and Camilla Hall’s “Fed looks beyond bank’s financial targets” March 27.

As a result of regulators falling for the risk-weights’ trick, banks are now, ate least when compared to pre-Basel Committee history, dramatically undercapitalized. It behooves everyone in the economy to see that capital increased substantially so that bank credit is not unduly blocked.

I have no idea of what the Fed saw in Citibank when performing its stress testing and that caused it to reject its capital plan for dividends and share buybacks, but I do know that if the word “punishment” describes it appropriately, the Fed is on the wrong track.

If the real economy is going to get out of this mess… and it is a mess… the Fed and the banks must be partners in finding lots of new bank capital in a credible way. And bank capital will not be raised sufficiently by mistreating the shareholders of banks… nor by fooling some investors into buying Coco bonds, suspecting the probabilities for these to be converted, are knowingly underrepresented.

In fact the Fed and other regulatory authorities must tread on the issue of Coco bonds with extreme care, less they also be liable for withholding information and misrepresentation. And for this I refer to “Flurry of Coco bonds sends yields tumbling” by Christopher Thompson.

If I buy a Coco today and become converted into a bank shareholder three years from now I guess I cannot complain... but what if that happens three weeks from now?

March 26, 2014

Perhaps Otmar Issing should lower the volume of his preaching to Europe.

Sir, in much I agree with what Otmar Issing writes in “Get your finances in order and stop blaming Germany”, March 26, though perhaps he might not be the best suited to be doing the preaching.

As a former chief economist of ECB Issing should have known that: allowing German banks to lend too much to for instance Spain and Italy, against zero capital, and affecting those German small businesses who do not get credit because when lending to them German banks do need to hold much capital; and which later might cause German bank busts which hurt German taxpayers, could be said being disguised transfers from Germans to Spain and Italy.

When Otmar Issing ends stating “The Eurozone did not fall into a crisis because the initial rules were flawed” he should not forget how flawed bank regulations became, are.

Otmar Issing, for your benefit, here´s an aide-mémoire… Who did the Eurozone in?

$100bn in legal settlements for banks also means $2tn less in bank lending capacity

Sir Richard McGregor and Aaron Stanley write on FT’s first page “Banks hit by $100bn in US legal settlements since crisis” March 26.

If I was a medium or a small business, an entrepreneur or a start-up, starved for bank credit, and if I multiplied that bank capital gone in legal settlements by the allowed leverage implied by in a 5% leverage ratio, 20 times, I would know it means I am $2tn in bank credit capacity further away from having my fund needs satisfied.

If in Europe, with its Basel III 3% leverage ratio, 33 times, I would find myself an even more distant $3.3tn from it.

If Europe (and America) does not free itself from runaway control freaks… game´s over.

Sir, John Kay writes “Regulators will get the blame for the stupidity of crowds” March 26 though what is most urgent in the Western world, so that accountability would mean something is that regulators should be blamed for their own stupidity.

Kay writes “Naivety is as much of a problem as criminality. Most businesses plans read persuasively- until…” Indeed, but rarely have we seen something as naïve as bank regulators who thought and still think that with their trick of risk-weighing the capital requirements, they could produce safe banks without producing dangerous negative ripples in the real economy.

Kay writes about concerns “about the availability of funds to small and medium sized businesses” and holds “The flow of intermediation is blocked by the debris of bank failures”. Wrong! That flow of intermediation of funds is primarily blocked by the fact that regulators require banks to hold more capital against it than against the flow of funds to for instance the “infallible” sovereigns or to the AAAristocracy.

Kay concludes mentioning that there were some institutions which provided “the new P2P lending and equity crowdfunding services… They were called banks.” But, instead of begging for banks to return to what they were, he calls for the regulators to make sure that what´s new should be “operating in a more closely regulated environment”. Frankly!

Let me phrase it the following way. Every time a bank credit in Europe (or America or anywhere else) is not given to a small and medium sized business, only because these cannot provide the banks with a competitive return on equity as a result of higher capital requirements, a door, behind which we could find the luck needed to power our future, has been shut.

March 25, 2014

More than “safer” we need to make our financial system more “functional”

Sir, as an Executive Director in the World Bank, 2002-2004, during the Basel II discussions, with respect to big banks I said: “Knowing that “the larger they are, the harder they fall” if I were regulator, I would be thinking about a progressive tax on size”. 

And, so of course I find Mark Roe’s and Michael Tröge’s proposal of “How to make the financial system safer”, March 25 quite interesting.

That said many questions come to mind.

First, if there is a tax on liabilities, who will pay for it the most, borrowers by means of higher interests, or depositors by means of lower interests?

And, since what equity holders are really out after is high returns on their equity, and these are much obtained through leverage, it would not seem like these taxes would be able to sufficiently substitute for regulations that limits bank leverage.

But the authors also state: “Until now, regulators have largely used command and control mechanisms to make banks safer: requiring them to have more capital, banning or reducing their riskiest activities, and punishing reckless behavior after the fact”. And on that I must comment.

What regulators have NOT done is requiring banks to have more capital to reduce risky activities; what they have done is allowing banks to have very little capital for what was perceived as “absolutely safe” not risky activities… and that is what really has created the big risks.

And so when the authors write that “Banks understandably do not like regulators getting involved in their strategic decisions” it shows they have not yet understood what has been going on.

On the contrary, banks have LOVED regulators for getting more and more involved with their strategic decisions… to such an extent of having even adopted the banks risk models of capital allocation.

No it is we, the not bankers, we who want safe and functional banks, we who do not want the regulators to get involved with banks’ strategic decisions. Let the banks do what they want in order to prepare for any expected risks, and expected losses, because that is truly all they can do.

The regulator’s role on the contrary is to make sure there is some bank capital to take care of the unexpected risks, of the unexpected losses, of the risks of banks not being able to do good strategic decisions, and for that it is almost a sine qua nom, that the regulators stay away as far as possible from the influence of banks.

Right now, as a result of regulators layering their risk perceptions on similar banker’s risk perceptions, we have an unsafe and utterly dysfunctional banking system incapable of allocating credit efficiently to the real economy. And so, before doing anything more creative let us just correct for that.

And also, more than bankers devising “fiendishly complicated transaction to work around the rules”, the reality might be regulators designing innumerable rules for the bankers to work around.

March 24, 2014

What is the use of a perfect banking union among imperfect banks?

Sir, on March 24 you refer to “A highly imperfect banking union”, but leave out what is the most important fact, namely that this union is among imperfect banks. That Eurozone banks and sovereigns remain tightly embraced”, as you subtitle it, has less to do with a flawed union and much more to do with fact that regulators allow banks to lend to the European sovereigns holding much less capital than when lending to other European unrated borrowers.

And such regulations as you should understand, makes it impossible for banks to allocate bank credit efficiently.

FT, you need more journalistic boldness to live up to your motto, “Without fear and without favour”

Sir, again you publish the “Boldness in Business” extra in which you celebrate boldness. And yet you are still not been able to write about that absurdly misguided and extremely dangerous cowardness that has taken over bank regulations.

For the umpteenth time… current risk based capital requirements allow banks to earn much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”.

That not only stops banks from giving adequate access to bank credit to those who most need it, like medium and small businesses, entrepreneurs and start ups, but it also guarantees that banks will, against much too little capital, be building up dangerous exposures to “infallible sovereigns”, to “safe” sectors as housing, and to the AAAristocracy.

What is keeping FT from putting forward this matter for discussion” Might it be some lack of boldness among those who so proudly proclaim “Without fear and without favour”?

March 23, 2014

The risk based capital requirements for banks represent a tragic crossroad of history

Sir, I refer to Simon Kuper’s great description of the assassination in Sarajevo which initiated World War I, “The crossroads of history”, March22. He writes that “you want to shout at Franz Ferdinand across history ‘Get out of town!’“ That was the kind o warning that some of us were shouting out when we saw what was coming at us in Basel II.

Really that day when someone came up with the suggestion that banks would be safer by means of capital requirements based on risks, more risk more capital, less risk less capital, and no one in the inner circle that mattered objected strongly enough … that day the world, especially the Western World, took the wrong path at the crossroads of history.

Not only would this regulation severely distort the allocation of credit to the real economy, but it would also make the bank system much riskier, since we know that all major crises have always resulted from, excessive exposures to what was ex ante considered as “absolutely safe”.

It was bad enough having already allowed banks to hold less capital when lending to the housing sector, since this ignored the fact that a house that comes without a job is really sort of a second class house… but then, allowing banks to earn higher risk adjusted returns on equity on what is perceived as “safe” than on what is perceived as “risky”, that really turned it into an outright criminal history changing event.

Kuper with respect to the Bosniche Post’s late edition “You sense a small local paper struggling to cope with the news story of the century”… and I sense the struggle of the Financial Times to ignore the financial story of the millennium!

Kuper also mentions that one of the two assassins who survived jail, Vaso Cubrilovic, has stated “It wasn’t our intentions to cause a world war”. But, Sir, the amazing fact is that those who were responsible for the Basel II AAA-bomb, those who of course had no intentions of causing us a bank crisis in the world, are still allowed to freely shoot down the prospects of jobs for our youth with their “improved” Basel III.

March 21, 2014

Pray the future which gifted minds will prioritize is that of Venezuela, and not just that of the gifted minds, like Cisneros’.

Sir, Gustavo Cisneros holds that “Vatican diplomacy could be Venezuela’s salvation”, March 21. I wonder how much diplomacy he believes is needed to overcome Venezuela’s original economic sin, namely that all oil revenues flow directly to the government coffers. As is, that income currently signifies around 98 % of all the nation’s exports.

Had oil revenues been shared out directly to the Venezuelan citizens and so that the government worked for them and not the other way round, then Cisneros would also perhaps have seen no reason to enter into a cozy relation with the government which has so discredited him with one half of Venezuela. And then Cisneros might not have been in need to prepare these just in case the wind abruptly changes mass marketed editorials.

“Gifted minds that prioritize the future will build consensus”. Indeed but let the Vatican and all of us pray that the prioritized future refers to Venezuela’s, and not just to that of the gifted minds.


March 17, 2014

Europe, a perfect disunion of useful banks, is much better than a perfect union of useless banks

Sir, Wolfgang Münchau holds that “Europe should say no to a flawed banking union”, March 17.

Indeed, I agree, but not so much for the reasons Münchau holds.

Current risk based capital requirements allow banks to obtain higher risk adjusted returns on equity when lending to the safe than when lending to the risky. And that distorts completely the allocation of bank credit to the real economy. And banks which do not allocate bank credit efficiently are useless banks.

And in reference to bank unions, nothing sounds as systemic dangerous than a perfect union of useless banks. Were regulators to make amends for their mistake, then Europe would anyhow be much better off than today with a perfect disunion of useful banks.

March 15, 2014

Sometimes there is even more homeland business going on outside the borders than within.

Sir, Tim Harford writes “The world economy is far more integrated now. Some of this globalization is independent of national borders…”, “The Business of borders” March 15.

Indeed, in 2007 I estimated the earnings of the emigrants of El Salvador working in the USA, to be 67 percent higher than the GDP produced in El Salvador by those who remained in their country.

March 12, 2014

ECB should foremost help to eliminate, not neutralize, the distortions produced by risk based capital requirements for banks.

Sir I refer to Martin Wolf’s “The spectre of eurozone deflation” March 12. In what can be done about that threat Wolf mentions that “the ECB… should announce a longer-tem refinancing operation to unblock the flow of credit to small and medium sized enterprises”.

Sir that indicates that Wolf still refuses to acknowledge the fact that credit has been blocked to these borrowers, not by a lack of funds, but because banks are required to hold more capital against loans to them, and this only because regulators decide these are much riskier than loans to the “infallible sovereigns” or to the AAAristocracy, and feel they have the right to intervene and distort.

Well no, until the horrendous regulatory mistake committed by Basel regulations is fully recognized, and a careful plan out of the imbroglio has been executed... any independent ECB effort to neutralize the distortions could make matters worse.

PS. Sir, You decide whether you want to copy Martin Wolf with this or not. I will not since he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

March 08, 2014

The Basel Committee blocks Machievelli´s historical fortunas, while making our mis-fortunas worse.

Sir, Timothy Garton Ash makes reference to “!historical luck, the fortuna that Niccolὸ Machiavelli calls the arbiter of half of the things we do” "States are born by accident but sustained by ardour”, March 8.

That applies directly to what I have in vain been trying to explain to FT for so many years now about what is wrong with current bank regulations.

Capital requirements which allow banks to earn higher risk-adjusted returns on equity when lending to the “safe” than when lending to the “risky”, effectively blocks the access of bank credit to the fortunas the real economy needs to grow and remain sturdy, while at the same time guaranteeing that if a huge mis-fortuna happens, like when an “absolutely safe” suddenly turns out very risky, banks will not have the capital to defend themselves with.

I am sure future historians will write about the period when the Basel Committee castrated our banks and with that our economies, and the elite like the Financial Times kept mum about it.

And what if the captain of the Titanic had unwittingly directly set the course on an iceberg?

Sir, I refer to Tim Harford’s “Let’s have some real-times economics” March 8.

Let’s suppose we have parents who like cookies and chocolate and dislike broccoli and spinach so much they want to make certain their kids eat cookies and chocolate and stay away from broccoli and spinach.

And so, ignoring that kids already share their taste preferences, they reward their children with chocolate if they eat cookies and punish them with spinach if they eat broccoli.

And of course the result is their children grow into a generation much more obese than their parents who, in their younger days have been told to eat broccolis and spinach too.

The above describes the risk-weighted capital requirements that, one way or another, especially since 2004 when Basel II was approved, have distorted the allocation of bank credit to the real economy.

Banks are told that if they lend to the “safe”, something which they already liked, they need to hold less capital and will therefore be rewarded with higher risk-adjusted returns on their equity than if they lend to the “risky”. 

And, as a result, the “infallible sovereigns”, the housing sector and the AAAristocracy receive too much bank credit in too lenient terms; while the “risky” medium and small businesses, entrepreneurs and start-ups receive too little credit in too onerous terms. And as a result the banks grow dangerously obese with “safe” fats and carbohydrates, all while the real economy becomes weakened from the lack of “risky” proteins.

And so, if Harford can express the “frustration of watching… Titanic… The ship is doomed, yet our heroes suspect nothing ”, when reading the recently published transcripts of the Federal Reserve’s Open Market Committee held on September 16 2008, to me it is worse. 

I see no evidence of that, at least with respect to bank regulations, "our heroes" show they knew they were setting the course on an iceberg. Worse yet, they might still not know it, and so our banks and our economies are set on the course of crashing into new icebergs.

March 07, 2014

Why can’t lending to female entrepreneurs be leveraged as much as lending to “infallible” sovereigns?

Sir, Gillian Tett writes about Goldman teaming up with the International Finance Corporation, the private sector lending arm of the World Bank, by putting $50m into a $600m fund that would extend loans to 100.000 cash starved female entrepreneurs, “Goldman discovers that money can buy respect”, March 7.

That represents a 12 to 1 leverage which, when compared to the 33 to 1 leverage Basel III minimum allowed by the 3% leverage ratio, seems extremely small, in relative terms. As I see it there is no doubt that a well diversified portfolio of loans to female (or male) entrepreneurs must be more productive and safer than a portfolio concentrated in loans to some infallible sovereign, to the housing sector or to someone of the AAAristocracy. If so the fund instead of $600m could be $1.650. 

In conclusion, Morgan and the World Bank should be able to do much better for women entrepreneurs by lobbying the Basel Committee… though I do understand that the publicity value of such efforts might not be that large.

March 06, 2014

FT, perhaps you should ask for some time out in order to collect your marbles.

Sir I refer to your “The BoE’s big test is yet to come” March 6.

You write “QE has increased wealth inequality” true, but then, sort of as an excuse, you hold that “some of this inequality is temporary and will be reversed when the monetary support is withdrawn”. A truly astonishing statement that can only be interpreted in the animas of Keynes’ “in the long run we are all dead”.

And then you write: “QE… failed to produce the kind of sharp rebound policy makers had hoped for… The banks have failed to lend to smaller enterprises, which would have helped to spur growth”. True, but then again, as a sort of excuse you hold that “the BoE does not decide what banks… do with their money”. And that Sir you should know by now, at least from my over 1000 letters to FT on the subject, is a completely false statement.

BoE, by approving of different capital requirements for banks for different assets, based on ex ante risk perceptions, allow banks to earn different risk-adjusted returns on equity for different assets… and if you think that does not represent the kind of carrots and sticks that make banks decide what to do with their money, then you might be in need of some time out in order to collect your marbles.

March 05, 2014

Britain, if you had oil revenue power concentrated like in Venezuela, yours could be even more of a ‘malandro’, a hoodlum, nation.

Sir, I refer to 99.99% of what is currently written about Venezuela, like yours “Venezuela: the ‘malandro’ nation” March 5.

If you’d only taken time to really set yourself into the challenges of a country where over 98 percent of all its exports go into government coffers, you would not be writing about a “Hugo Chávez legacy” or the charmlessness of his successor, Nicolas Maduro.

You would probably be writing about the fact that no one, no matter how good intentions he has, no matter how charming he is, no matter how brilliant he might be, should, in the company of some few petrocrats and oilygarchs, have the right to wield such extraordinary powers.

And Andres Schipani titles his report “Venezuela´s poor wait for the revolution to deliver”, which only helps to promote the illusion of something waiting for them at the end of the rainbow. A much better title would be “Venezuela´s ever growing poor keep standing in the wrong line”

No Sir, let me assure you that if your Britain was set up as my Venezuela is, yours might be a much more ´malandro’ nation than mine… suffice to see what happened when some of your kings wielded too much power… and heads rolled!

March 04, 2014

When fighting inequality, in a sustainable way, it is more important to distribute opportunities than to redistribute income.

Sir Jonathan Ostry, a deputy director of the research department of the IMF holds that some recent research indicates that “Redistribution is associated with higher and more durable growth” “We do not have to live with the scourge of inequality” March 4.

Indeed that might be so but, before redistributing income, making sure opportunities are equally distributed, is much more important when fighting inequality, at least in a sustainable way.

For instance there are some ludicrous risk based capital requirements for banks that by favoring the “infallible sovereigns” the housing sector and the AAAristocracy, discriminate against the access to bank credit of “the risky”, mostly the medium and small businesses, the entrepreneurs and start-ups.

Unfortunately, both the World Bank and the IMF have been totally silent on this inequality driver for much too long.

If Ostry really wants to help out, then he should recommend IMF’s research department to look into the reasons for all major bank crisis in history. That research would be extremely helpful, since it would certainly indicate that the Basel Committee for Banking Supervision is going after the wrong “risky”.