August 01, 2015

What happens with the fighting spirit of humans, if you outsource soldiering to robot soldiers and drones?

Today FT-Magazine, published in England and not in the US, included an edited version of the following letter I sent them related to an article that did appear in the US. It is somewhat strange since my letter, as you will be able to see, was foremost directed to the US.

Like drones, robots also present challenges to the national psyche of their users (“Robot soldiers”, July 18/19) – the possibility of a diminishing human fighting spirit hiding behind drones and robots. 

I think it is hard to visualise the same type of national “good feeling”, with homecoming parades and memorials, when scientists and mechanical engineers have done the real fighting. And what will be more important for the advancement of a military career in the future: knowledge about robots or knowledge about your men? Will the traditional drill sergeant just become a figure featured in History channel documentaries? 

What keeps me coming back to these issues is that 70 years ago my father was freed from a concentration camp in Germany by courageous American boots on the ground… not by drones or robots. 

Per Kurowski 
Rockville, Maryland, US

Sometimes seemingly unnecessary navel-gazing research is necessary; like when bank regulators ignore what’s obvious.

Sir, I refer to Tim Harford’s “Worming our way to the truth” August 1.

Let me see if I understand it. The issue at hand is about research on whether “deworming treatments produce not just health benefits but educational ones, because healthier children were able to attend school and flourish while in class. The treatments [according to WHO around $0.22 per year per child] are cracking value for money. Third, there are useful spillovers: when a school full of children is treated for worms, the parasites became less prevalent, so infection rates in nearby schools also fell.”

Honestly, does Harford really need research to draw that conclusion? As long as the deworming treatments did good deworming what they were supposed to deworm and nothing more, could he ever think of a different result? To me it certainly looks like unnecessary navel-gazing research.

But then again, as there are cases where even “experts” draw absolutely wrong conclusions, sometimes navel-gazing research might be important. For instance in the case of bank regulations it should be clear what is perceived as safe has the greatest potential of producing those unexpected losses against which banks should hold capital. Nonetheless regulators thought differently and allowed banks to hold much less capital against what is ex ante perceived as safe than against what is perceived as risky. And we sure all would have benefitted had they researched what really causes real major bank crises. As is our banks are now dangerously overpopulating the safe havens against little capital, which is precisely the stuff that major bank crises are made off.

Also any development economist that does not understand how dangerous it is for the future of any economy to favor the allocation of bank credit to what is perceived as safe is not worthy of his title as he more than anyone should know that risk-taking is the oxygen of any development.


@PerKurowski

July 31, 2015

Risk weights of 0% government and 100% private sector… in “The Land of the Free and the Home of the Brave”?

Sir, Gillian Tett writes: “Every nation needs a unifying idea. Americans love to see themselves as champions of free markets and entrepreneurial zeal — and have long been more welcoming to entrepreneurs than has most of the western world”, “The land of free markets, tied down by red tape”, July 31.

And Tett gives some examples business regulations that show how “champions of free markets and entrepreneurial zeal” might not be completely applicable to the America of today. I have a much more extreme example:

In 1988 the US signed up the Basel Accord, which for the purpose of setting the capital requirements for banks, defined the risk-weights to be zero percent for the government, because it is considered safe, and 100 percent when lending for the private sector, because it is considered risky. That clearly distorts the allocation of bank credit in favor of the government and against the private sector.

So could Gillian Tett, or anyone else, please explain to me how that fits the notion of “The Land of the Free and the Home of the Brave”?

@PerKurowski

In the movie “Mission Impossible: Rogue Bank Regulators”, FT could play a leading role.

Sir, Nigel Andrews, when reviewing “Mission: Impossible — Rogue Nation” and because someone there says “Today is the day the IMF’s luck runs out” mentions this “Sounds like a case for the Financial Times”, “Fantastic nonsense of a mission implausible” July 31.

Clearly it not, since there “the Impossible Missions Force puts its lives on the line to combat The Syndicate, a group of global agents/ spies gone terrorist”

But what if the next Mission Impossible movie had team Cruise fighting against those rogue statist regulators who, for purposes of determining the capital requirements for banks, imposed risk weights of 100 percent on the private sector and zero percent on the government? That would surely be case for the Financial Times. In fact then FT, with its silence about the distortions those regulations cause in the allocation of bank credit to the real economy, could even have the right to ask for a leading role in the film. Now if FT gets that role, I wonder who would play you, The Editor, and who Martin Wolf?

Of course, since there are so many expert technocrats/bureaucrats that play a prominent role in the Basel Accord incident, the production would be star studded. Because there are so many “Chauncey Gardiner" characters in the plot, it is truly unfortunate Peter Sellers is not with us any longer. Can you imagine him as Mario Draghi?







July 29, 2015

Why do John Kay and his colleagues cover up bank regulators’ prominent role in creating the Greek tragedy?

Sir, John Kay writes: “For every foolish borrower there is usually a foolish lender. The Greek crisis is not simply the result of Athens’ inept public administration but also of an extensive carry trade on eurozone convergence by northern European banks, notably in France and Germany, which obtained short-term profits by matching northern eurozone liabilities with southern eurozone assets.” “What St Luke would say to Schäuble” July 29.

But however foolish bank lender can be, they can be made even more foolish by their regulators. For instance, between June 2004 and November 2009, because of Basel II and Greece’s credit ratings, banks were allowed to leverage their equity, and the support they received by means of deposit guarantees and similar, 62.5 times to 1 when lending to the government of Greece, while being limited to a 12.5 times to 1 when lending to German, French or Greek SMEs or entrepreneurs. 

And John Kay knows that without those regulatory incentives, based on some foolish aversion of credit risk, banks would never ever have lent to Greece as much as they did. And so the question is why does John Kay cover up for the regulators by hushing this up?

And speaking about crazy risk aversion, besides St Luke, John Kay could do well reading St Mathew, 25:14-30.

14 “It will be like a man going on a journey, who called his servants and entrusted his wealth to them. 15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 “Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 “His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest. 28 “‘So take the bag of gold from him and give it to the one who has ten bags. 29 For whoever has will be given more, and they will have abundance. Whoever does not have, even what they have will be taken from them. 30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’

The incentives provided by the Basel Committee, more perceived risk more capital – less perceived risk less capital, clearly instructed the bank servants not to behave according to the Parable of the Talents.

PS. It is clear that the ability to which Mathew 25:15 refers to has nothing to do with the ability of repaying the funds but with growing the funds by putting it to good use. In other words: the efficient allocation of bank credit.

PS. And, from what we read, perhaps Pope Francis would also do well pondering a bit more about that parable.

PS. By the way, should the servant St Matthew refers to, refuse to lend at negative rates?

PS. When John Kay mentions ordoliberalism, I must say that I cannot understand how anyone remotely connected to that economic thinking, could accept the distortions in the allocation of bank credit created by current bank regulations.

@PerKurowski

July 27, 2015

The best Sovereign Debt Restructuring Mechanism (SDRM) is the one that most reduces the need for it.

Sir I refer to your discussions about a “holy grail… a sovereign debt restructuring mechanism (SDRM) — a bankruptcy procedure for states.” “To err is human, to forgive is statesmanlike”. July 27

Even though I agree with the need for a SDRM, we citizens need to be very alert to how it is designed. Bank regulation’s bureaucrats/technocrats, behind our backs, have already given public borrowings an enormous unearned/undue advantage, by allowing banks to hold much less capital against public debt than what they are required to hold against private sector debt. 

If on top of that we now also make it easier for government bureaucrats/technocrats, hiding behind the mantle of “sovereignty”, to get out of the debt they contracted, then we have really messed things up for ourselves.

In this respect I believe any acceptable SDRM should begin with:

First and foremost by eliminating all incentives that can help governments contract too much debt.

And then by defining clearly what, when compared to ordinary credit to the public sector, should be  deemed as odious credit. For instance, credit not awarded in a transparent way, or awarded when it was clear that the resulting debt might not be sustainable, and was therefore of speculative nature, should not receive the same treatment in a SDRM, as public credit awarded transparently and when there was no doubt about the sovereigns capacity to serve it.

Let us be very clear about that the best SDRM is the one that reduces the need for it.

And of course it is human to err… but that does not mean that bank regulators should not admit their mistakes and be held accountable for it. Pseudo-statesmen forgiving behind curtains their own mistakes... really?

How can you ask creditors, or taxpayers, to take a hit on Greece, while pardoning, even promoting, bank regulators?

@PerKurowski

July 26, 2015

FT, have you envisioned that in the future you might now have to apologize Japanese style for your omissions?

Sir, you write “The FT has thrived, and continues to thrive, in an age of global economic interdependence defined by the free movement of capital, goods and people and instant digital communication”, “A new future for the FT, without fear or favour” July 26.

What free movement of capital? Is not bank credit one of the most important means by which capital moves around? And when bank regulators allow banks to leverage more on some assets than on other, based on perceived credit risks, something which clearly distorts the allocation of bank credit, is that not a capital control?

Let me recap for you what I have been arguing for over a decade, for now with over 1.900 letters to you, and which have basically been ignored. 

Regulators first decided that banks should hold 8 percent in capital against asset… no problems with that. But, in 1988, with the Basel Accord (Basel I), in order to determine how much of that basic capital banks should hold against different assets, regulators set the risk weight for loans to the governments of OECD at zero percent, and the risk weight for loans to the private sector at 100 percent.

That meant banks could lend to governments against no equity of their own (8% x 0%), and had to hold 8 percent (8% x 100%) when lending to the private sector. What did that mean?

That meant banks could leverage their equity and the support they received from tax payers, like with deposit guarantees, unlimited times when lending to governments, and only 12.5 times to 1 when lending to the private sector.

That meant banks could obtain much higher risk adjusted returns on equity when lending to governments than when lending to the private sector, or; that the dollars in net interest margins paid to banks by governments are worth much more than the same dollars paid to banks by the private sector.

And that meant banks lend more and at lower rates to governments, and less at higher rates to the private sector, than what they would relatively have done in the absence of these regulations.

That implies bank regulators believe governments present less credit risk than the private sector… as if governments do not depend on the private sector… as if governments don’t default in so many ways, like for instance by means of inflation, requests for higher taxes or outright haircuts.

And of course that must mean regulators believe government bureaucrats can use bank credit much more efficiently than the private sector.

Now why on earth would regulators believe such crazy things?

They might be communists or statists, or it all might just be some good old hanky-panky scheming going on between bureaucrat and technocrat colleagues.

Whatever, they are surely sinking our economies and we should absolutely not bet our children’s future on such bank regulations.

And why on earth should a newspaper like FT who proclaims itself without fear and favor, keep mum on something extremely important like this? I dare you to answer that.

Sir, have you envisioned that in the near future you might now have to apologize for this omission in Japanese style?

@PerKurowski

July 23, 2015

There’s a curious silence about the odious distortion the Basel Committees' credit-risk-weighted capital requirements produces

Sir, suppose Martin Wolf owned an unrated SME, and Per Kurowski was the CFO of an AAA rated corporation, and both wanted to obtain bank credit for their company. 

Traditionally, naturally, before the Basel Committee’s risk-weighted capital requirements existed, because of clear differences in the perceived credit risk, Per Kurowski would be able to negotiate much more credit, and at much lower interest rates for his AAA rated corporation, when compared to what Martin Wolf could do for his unrated SME.

But now, because regulators decided banks also need to hold more capital when lending to Wolf’s SME than when lending to Kurowski’s AAA corporation, the differences in the amounts of credit obtained and the interest rates charged would be even larger. In other words Wolf’s SME, relative to Kurowski’s AAA, would obtain even less credit, and would need to pay even higher interest rates, than in the absence of these credit risk-weighted capital requirements.

Of course Kurowski does not complain that his AAA rated corporation has access to even more credit at even cheaper rates, and consequentially he himself to larger bonuses.

And of course banks, as a consequence of having to hold little capital and therefore be able to leverage hugely when lending to Kurowski’s AAA rated corporation, do not complain about being able to earn higher risk-adjusted returns on equity when lending to Kurowski’s AAA rated corporation. In fact obtaining the highest risk adjusted returns on equity for what is perceived as safe, sounds like a banker’s dream come true.

But Martin Wolf should of course be furious that bank regulators deny his SME fair access to bank credit.

And of course anyone who calls himself a progressive should be furious against this odious regulatory discrimination that denies fair access to the opportunity of bank credit to those who already find it hard enough to obtain bank credit. That clearly promotes inequality.

And of course anyone who calls himself a free markets defender should be furious about this odious regulatory distortion of the allocation of bank credit to the real economy.

But curiously, Martin Wolf as a journalist, FT, progressives and free market defendants, they all keep mum about it. Is it not a strange world?

July 22, 2015

FT, if regulators tell banks: “Blow the ‘safe’ balloons, not the risky”, which balloons are more likely to explode?

Sir, John Plender writes about “the bubble in (so-called) risk-free assets. In March, a third of eurozone government bonds had negative nominal yields. This was unprecedented. It reflected an acute shortage of sovereign debt for use as collateral after the European Central Bank’s resort to quantitative easing, which involves buying government bonds…official intervention created a distortion that drove a wedge between prices and fundamental reality. “Detecting a bubble in advance is not so hard — when you try” July 22.

That is indeed correct, but it obliges the questions of:

Why is it so hard for John Plender, FT, and most other to understand that credit-risk weighted capital requirements for banks, like QEs, represent an official intervention that distorts the allocation of bank credit?

Why do John Plender, FT, and most other, seemingly want to ignore that those capital requirements guarantee “safe” havens to become overpopulated and “risky” bays underexplored?

When banks have thousand of balloons they could blow credit into and regulator tell them in which they can blow easier, it should be easy to predict which balloons might grow too large and explode.

@PerKurowski

July 21, 2015

In relative terms, banks finance too much house buying, and too little the job creation needed to serve the mortgages.

Sir, Kate Allen reports: “Last year the BoE introduced tougher mortgage lending rules and warned that a possible resurgence in the country’s pre-credit crunch house price boom risked derailing Britain’s economic recovery’ “ECB easing raises fears on house price bubble” July 21.

But what BoE is not mentioning or doing a lot about, is the fact that allowing banks to hold less equity financing mortgages, than when financing for instance SMEs, means that banks will perceive they can obtain higher risk-adjusted returns on equity when financing mortgages than when financing SMEs; which means banks will, relatively, finance too much mortgages and too little SMEs… or as I prefer to phrase it… too much house buying and too little jobs with which serve the resulting mortgages… and the utilities.

@PerKurowski

Until regulators also worry about what’s not on banks’ balance sheets, banks will not serve the economy well.

Sir, Tony Barber writes: Greece’s “economy also cries out for liquidity, bank credit for businesses and investment that will generate jobs, promote growth and alleviate the social crisis.” “Love and hate between Greece and the west” July 20.

And I have to ask: How is that supposed to happen with bank regulations that gives banks incentives based exclusively on avoiding credit risks? Just look at current stress tests concerned solely with the risk of what’s on balance sheets while ignoring all the loans that should be there, had the regulators not distorted everything.

Getting rid of the credit risk based capital requirements for banks is important for Greece… and for the whole western world. But how difficult it is to do that when there are so many vested interest in ignoring the distortions these cause in the allocation of bank credit to the real economy.

@PerKurowski

Never have so few central bank and regulatory technocrats done so much damage with pseudoscientific mumbo jumbo.

Sir, James Grant writes: “We live in an age of pseudoscience. The central banks’ forecasting models have failed to predict the future. Quantitative easing and zero per cent interest rates — policy centrepieces of the post-2008 era — have failed to restore what we used to call prosperity.” “Magical thinking divorces markets from reality" July 21.

Absolutely, but that pseudoscience has its roots in other even worse mumbo jumbo, namely the Basel Accord’s credit risk weighted capital requirements for banks.

With these requirements silly regulatory experts thought they could make banks safer, by allowing these to leverage more their equity for what is ex ante perceived as safe than for what is perceived as risky… as if those perceptions were not already cleared for by other means.

That distorted the allocation of bank credit to the real economy… and sent banks to build up against very little capital, huge exposures to what is ex-ante perceived as safe, precisely the material of which major bank crises are made of… and stopped the banks from lending to those most in need of bank credit like SMEs and entrepreneurs.

The quantitative easing and the zero interest could even have been somewhat effective, had only Basel’s regulatory distortions been removed. Unfortunately that would have made it necessary to admit what was done wrong, and since it is basically the same little group of members in a mutual admiration club that are responsible for both QEs zero interests and bank regulations, we can’t have that… can we?

History will be clear about that never before have some so few technocrats done so much damage. And history will of course not be kind to those who having been informed about it, like FT, nevertheless decided to keep mum.

@PerKurowski

Will drones and robot soldiers send the drill sergeants home?

Sir, I refer to Geoff Dyer’s interesting “Robot Soldiers”, FT Magazine July 18.

It is a comprehensive article, except for, like with drones, robots also present challenges to the national psychic of its users. I refer concretely to the possibility of a diminishing fighting spirit of the humans hiding behind drones and robots. And what about in comparison to the fighting spirit of others who cannot do so? What if these others, by for instance a cyber attack, manage to neutralize the drones and robots and it then comes down to a real man to man struggle? 

And I am not joking when I say that it is hard to visualize the same type of national good feelings with homecoming parades and memorials, when scientists and mechanical engineers have done the real fighting.

Also, when Dyer quotes Mary Cummings with “I don’t think we have enough competent people within the government to be able to set up acquisition programmes for autonomous weapons or anything robotic,” it makes one think about what will be more important for the advancement of a military career in the future, knowledge about drones and robots, or knowledge about your men… and the implications of that. Will the traditional drill sergeant just become a figure featured in History Channel documentaries?

I must confess though that what keeps me coming back to these issues is that this year 70 years ago, my father was freed from a concentration camp in Germany by courageous American boots on the ground… not by drones or robots. And the question that keeps popping up it my mind is; will American or other soldiers still have what it takes to free other future imprisoned fathers, if need be?

@PerKurowski

July 20, 2015

Why are regulators only concerned with banks not dying and not with banks living well?

Sir, Barney Jopson writes about Barney Frank discussing the impact of the Dodd-Frank Act and the future of regulation. “Architect of banking reforms says walls will not make the system safer”.

Frank, with respect of having joined the board of Signature Bank, and the resulting references to “the ‘revolving door’ between public office and the private sector” says:

“I reject this snarky premise that . . . I have somehow betrayed my principles by facilitating the operation of a bank that does what banks are supposed to do, which is financial intermediation”

Why is it only now Frank Dodd mentions: “what banks are supposed to do, which is financial intermediation”… in the Dodd-Frank Act there is not a word about that.

The stated purpose of the Dodd-Frank Act is: “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”

Had that Act started out by making clear that the number one priority of a bank is to allocate bank credit efficiently to the real economy, and that this is best achieved by minimizing regulatory distortions, we would most certainly have a much better Dodd-Frank Act.

By the way, “Elizabeth Warren and her band of progressive Democrats” have shown no interest in that either. The fact that banks need to hold much more capital when lending to American unrated SMEs and entrepreneurs, than for instance when lending to some AAA rated sovereigns, has been of no concern to them… or to most other involved with regulations.

@PerKurowski

FT, when have you lately heard a regulator state that allocating credit efficiently is a bank’s most important purpose?

Sir, Jonathan Ford writes “the banking lobby has been relentless in its opposition to reform, seeking to present it in terms of false choices — between growth and safer banks, or between regulation and a successful financial system.” “Relief for banks as Britain puts a leash on its financial watchdog” July 20.

Of course these are false choices… but the fact is that regulators pursuing safer banks are negatively affecting growth. Their credit risk weighted capital requirements for banks distort immensely the allocation of bank credit to the real economy.

And clearly, from what Ford describes, Martin Wheatley of the Financial Conduct Authority saw more his role as an bank inquisitor, and had no concern whatsoever about credit allocation.

Let us hope his successor is willing to include a hefty dose of regulatory mea culpa, and does not just follow in the political convenient track of only holding “bankers publicly accountable for their actions”.

@PerKurowski

July 19, 2015

The Basel Committee, with its bank regulations, represents a dangerous cult gone mainstream.

Sir, Douglas Coupland writes: “When it comes to the sharing of an ethos, history shows us that the more irrational a shared belief is, the better. The underpinning maths of cultism is that when two people with self-perceived marginalised views meet, they mutually reinforce these beliefs, ratcheting up the craziness until you have a pair of full-blown nutcases” “WE ARE DATA-The future of machine intelligence” July 18.

That, for us the truly rational, describes indeed the real great danger of the Internet; but also of course, for some lonely brain nuts, its real advantages. Before it could take you a lifetime to find a likeminded nut… now you are almost guaranteed to find plenty of them, in seconds, with only a couple of few searches. And, if not, you can always support yourself by using aliases.

But that said, if we include in cultism the following definition: “A usually nonscientific method or regimen claimed by its originator to have exclusive or exceptional power in curing a particular disease.”, then we should never forget that cultism can extend much further than to people with “self-perceived marginalised views”

Take for instance the Basel Committee: Its members designed a totally nonscientific method they thought could contain bank crisis, and managed to impose it worldwide. In other words they made a cult go mainstream… and clearly that has to be more dangerous than any cult exercised on the web.

“Unscientific”? Of course! They based their capital requirements for banks not on empirical evidence about what has caused all major bank crises in history, which is always excessive exposures to something erroneously perceived as safe; but on the perceived credit risks of banks assets, as if the banker was totally oblivious of these perceptions.

“Unscientific”? Of course! To figure out an estimate for the unexpected losses for which they should require banks to hold at least some capital, they used as a proxy the expected losses… entirely ignoring that the potential of unexpected losses for banks that an asset can cause, is always higher the safer that asset is perceived.

@PerKurowski

Yahoo and Bing, if you want us to search with you, instead of with Google, make us an offer we can’t refuse.

Sir, Douglas Coupland writes: “people are perfectly free to use Yahoo or Bing yet they choose to stick with Google and then they get worried about Google having too much power – which is an unusual relationship dynamic, like an old married couple.” “WE ARE DATA-The future of machine intelligence” July 18.

Why should they change? Have Yahoo or Bing really made their case for them delivering better search results? Have we heard them sing: “I can search anything better than you… No, you can't…Yes, I can… No, you can't… Yes, I can! Yes, I can!”?

Google, Facebook, Twitter and many others, by gathering data about us, and using that data to deliver advertising to us, make money on us.

If Yahoo or Bing offered to share part of the revenues with us, and at the same time made clear what are the differences, if any, in the search results compared to Google, I guess many more of us would favor them with our questions. Make us an offer we can’t refuse!

@PerKurowski

July 18, 2015

Does Schäuble know ECB’s Draghi agreed with allowing German banks to leverage over 60 times when lending to Greece?

Sir, Anne-Sylvaine Chassany, James Politi and Peter Spiegel write about “Wolfgang Schäuble, advocating a Greek ‘timeout from the eurozone’ for ‘at least the next five years’ if Athens did not accept the bloc’s exacting conditions for a new bailout”; and of that “Germany puts more onus on stricter rules and control from the centre”. “Fears over German power as Merkel and Schäuble end the good cop, bad cop routine” July 18.

That leads me to question whether Wolfgang Schäuble really knows that rules and control from the centre, in this case by the Basel Committee, allowed German banks, between June 2004 and November 2009, to leverage their capital over 60 times when lending to Greece.

And does Schäuble know that banks in Greece are currently required to hold much less capital when lending to Germany or France, than when lending to Greek SMEs and entrepreneur, so as to help Greece develop the means to be able to at least somewhat serve its monstrous debts?

I ask so because it would seem much more important for Schäuble to request a very long timeout from all ongoing negotiations about the future of Europe, the Eurozone and Greece, of the Basel Committee and of all those who have directly had anything to do with current bank regulations.

And does Schäuble know that Mario Draghi, as a former chair of the Financial Stability Board, is one of those severely compromised bank regulators?

Jesus, though opposing the idle rich, clearly supported entrepreneurship, the heart and soul of good capitalism.

Sir, John Plender, when discussing the pro and cons of capitalism writes “Jesus… had no time for the rich”, “Morality and the money motive” July 18.

That is true but only with respect to the idle rich, and who in reality have also very little to do with capitalism. When it comes to entrepreneurs, as can be read in ‘The Parable of the Talents’, Jesus lends them his full support.

From Matthew 25:14-30 we extract the following: 

14 It will be like a man going on a journey, who called his servants and entrusted his wealth to them.

15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed.

25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed?

27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.

28 “‘So take the bag of gold from him and give it to the one who has ten bags.

29 For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.

30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’

Unfortunately the members of Basel Committee for Banking Supervision have clearly not understood the meaning of that parable. The risk aversion implied by their credit-risk-weighted capital requirements for banks, more-risk-more-capital and less-risk-less-capital, only promotes the immoral idleness of richness.

Plender also writes: “boom and bust, together with severe financial crises, are permanent features of the system”. Indeed, but Plender should never forget that busts, can be horrible or manageable, productive or useless, in much depending on whether it was risk-taking or risk aversion that ruled during the boom.

When true risk taking prevails, dangerous but possibly enormously productive bays will be explored. If instead risk aversion leads the way partner, then the safe havens will become dangerously populated… and, as Plender should know, the financial crisis of 2004 was a direct consequence of the latter.

Sir, the saddest part is that we ignore and still allow our bank regulators to apply unchristian immoral risk adverse principles. We should indeed throw out our worthless current bank regulating servants “outside, into the darkness, where there will be weeping and gnashing of teeth”

PS. Odious regulatory credit risk discrimination denies those perceived as risky fair access to bank credit, and is therefore also a great driver of inequality. 

@PerKurowski

July 15, 2015

The “risky”, those who regulators deny fair access to bank credit, might welcome back Dominique Strauss-Kahn.

Sir, Anne-Sylvaine Chassany writes about the possibilities of Dominique Strauss-Kahn entering politics again “The discreet redemption of Strauss-Kahn” July 14.

On October 7 2010, during a Civil Society Town Hall Meeting, I asked the then Managing Director of the IMF Strauss Kahn the following:

“Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

And Strauss-Kahn answered: "Well, the question about requirements, a couple of requirements for banks. You know, it's a very technical question and a very difficult one, but the way you asked the question, which is why there any kind of discrimination against SMEs is an interesting way of looking at that. In fact, there is no reason to have any kind of discrimination. The right thing for the Bank is to know whether or not their borrower is reliable, but you can be as reliable being a small enterprise than not reliable when you're a big company. So this kind of systematic discrimination has, in our view, no reason to be.

I have not been able to publicly obtain such a clear answer on the issue of how those who by being perceived as “risky”, are already naturally discriminated against by bankers, are now also odiously discriminated against by regulators. And so at least all the ex-ante perceived risky borrowers could welcome Strauss-Kahn’s return… as he might speak up for their rights of having a fair access to bank credit.

In case you want to view it, here is the link to the video of the conference. My question is in minute 47:35 and Dominique Strauss-Kahn's answer minute 1:01:05

@PerKurowski

July 14, 2015

Sovereign rights should refer to the nation rights of citizens, and not to the nation rights of government bureaucrats.

Sir Gideon Rachman, in his very clear-eyed and straight talking “Germany’s conditional surrender”, July 14, mentions: “Much of the comment about the loss of Greek sovereignty, in the outline deal just agreed”

“Greek sovereignty”? As I see it “Inalienable sovereign rights" have lately just become a convenient wording for what government bureaucrats consider to be their rights… or statist ideologues consider to be the rights of ever more powerful governments.

The day sovereign rights refers more to the nation rights of the citizens, than to the nation rights of governments, that’s when sovereignty has a chance to get on a real track.

Meanwhile bank regulations that assign a risk weight of zero to government debt, and 100 percent or more to private sector debt, has absolutely nothing to do with any justifiable sovereign rights… much the contrary it has only to do with government bureaucrats' clientelism.

@PerKurowski

If the pro-government-bureaucrats bank regulations are not thrown out, Greece and Germany are doomed to fail

Sir, Wolfgang Münchau asks: “do you really think that an economic reform programme, for which a government has no political mandate, which has been explicitly rejected in a referendum, that has been forced through by sheer political blackmail, can conceivably work? “Brutal creditors have gutted the eurozone project” July 2015.

The answer to that question must be: “When compared to what Mr. Münchau?”

Münchau clearly holds that the Euro has not worked out. I instead, as a fervent enemy of a totalitarian state, believe that nothing can work, where regulators, when setting the capital requirements for banks, can impose risk weights of zero percent on loans to governments and risk weights of 100% or more on loans to the private sector.

Again, had not regulators, between June 2004 and November 2009, allowed banks to leverage their equity 62.5 times when lending to the Greek government, but only 12.5 times when lending to the Greek private sector… the current Greek tragedy, too much government debt, would not be happening. And had Greece not been financed…Greece would not have been able to import as much, for instance from Germany.

Münchau writes: “Once you strip the eurozone of any ambitions for a political and economic union, it changes into a utilitarian project in which member states will coldly weigh the benefits and costs”

But, no matter how strong and real the ambitions for a political and economical union are, if the pro-state pro-government bureaucrats bank regulations are not thrown out, the Eurozone (and other) stand no chance no matter what. If Münchau had a real interest in the prosperity of the Eurozone that is what he should be writing about.

So NO! Mr Münchau, much more than creditors, it was brutish statist bank regulators who denied the Eurozone project the chance to work.

The fact that there are so many interested in ignoring that bad bank regulations helped to cause Greece’s problems, stands in the way of finding a real solution for Greece and for the Eurozone (and for other).

In other words our real problem is with those who should have seen the sky falling in and didn’t… and now don’t want that to be known.

@PerKurowski

July 13, 2015

Are bank regulations and their effects something that is beneath the dignity of financial academicians to study?

Sir, Lawrence Summers writes: “The financial crisis, the great recession and sharp increases in inequality have all properly led to a negative reassessment of the functionality of unfettered free markets.” “Complacency and incrementalism are traps to avoid” July 13.

That is because he, as most of economy/financial academicians, have not had any interest in studying what bank regulators have been up to. Had they done so, and had they understood how current credit-risk-weighted capital requirements for banks distort the allocation of credit to the real economy… they would not speak of “unfettered free markets”… that is unless it is part of their political agenda.

Basel Accord of 1988 indicated risk weights of zero percent for loans to OECD governments and 100 percent for loans to the private sector. That translated into allowing banks to leverage over 60 times when lending to governments and only about 12 times when lending to the private sector. “Unfettered free markets”? You’ve got to be kidding!

Let us break down the components:

1. The financial crisis: All bank assets that turned into major problems had in common that regulators allowed banks to hold these against very little equity.

2. The great recession: Since regulators require capital scarce banks to hold more equity against loans “the when the going gets tough the tough gets going” SMEs and entrepreneurs than against “safe” assets… there is no chance to get out of the recession in a sustainable way.

3. Increases in inequality: By banks, because of these capital requirements, negating opportunities to “the risky” inequality must prosper.

I rest my case ... at least for some minutes J

@PerKurowski

July 12, 2015

Wishful thinking should follow the do-no-harm principle, and the Basel Committee clearly violated it.

Sir, Tim Harford writes about wishful thinking plans having secondary unexpected unwished consequences “Why wishful thinking doesn’t work” July 12.

Yes any wishful thinker should make a declaration before he puts his wishes in action that he has seriously adhered to the principle of do-no-harm.

For instance, the perceived credit risk weighted capital requirements for banks; more-risk-more-capital / less-risk-less-capital, must represent one of the greatest wishful thinking gone wrong.

Bank regulators wishfully thought they could with these bring stability to the banking system, though it is not too clear why did thought they would do that more by saving banks than by hurrying the demise of bad banks. It would have saved us a lot of tears (and jobs) had they, by following the do-no-harm principle, asked themselves the simple following two questions:

Might we dangerously distort the allocation of bank credit the real economy?

Might we send off banks into accumulating excessively some assets that ex ante might have been erroneously perceived as safe, and then when ex post these turn out to be very risky, banks stand there naked with too little capital?

How sad they did not do it… how tragic they still do not do it.

@PerKurowski

July 11, 2015

Europe, with your current bank regulations, the Marshall plan would not have happened, or would not have delivered.

Sir, Gillian Tett writes: “But the worse things become in Europe, the more we need crazy ideas. And not just because we need to laugh, but because jokes reveal what politicians are not discussing: the cognitive and cultural leap that must occur in Europe if the eurozone project is to fly” “An economist’s Club Med Marshall plan” July 11.

When I hold that what is really dangerous for banks, is not what is perceived as risky but what is perceived as safe, and therefore current requirements, more-perceived-risk-more-capital, less-risk-less-capital for banks, are 180 degrees wrong… many laugh but, unfortunately, the cognitive and cultural leap required to really understand its significance, seems way too big.

Can you imagine the US approving a Marshall plan to a Europe that allowed banks to have less capital, meaning to earn higher risk adjusted returns on equity, when lending to the public sector and financing houses than when lending to its private sector? And, if the US had not understood the implications of such regulations and had still approved the plan, can you imagine Europe delivering the same results?

Here is my “crazy” idea for Europe (and for the rest). Throw out the Basel Committee’s credit-risk based regulations and allow banks to hold slightly less capital based on job-creation-potential ratings (and environmental-sustainability-ratings). That way banks could earn higher risk adjusted returns on equity when doing something Europe would like them and need them to do.

@PerKurowski

July 10, 2015

Europe hangs on to blissful ignorance about Greece’s tragedy. Its prime cause was not something especially Greek.

Sir, Philip Stephens argues that Greece exiting the euro would be more costly for Europe than helping it to hold “Europe will pay the price for Greece” July 10.

You know my opinion: Europe is unwittingly already paying the price Greece is paying, by holding on to senseless bank regulations that will only guarantee the dangerous overpopulation of safe havens, and the equally dangerous under exploration of risky but more rewarding beaches.

That is what you get when, instead of capital requirements for banks based on something that could be good, like jobs or like sustainability, you just base them on banks avoiding what is ex ante perceived as risky; and this even when you should know that banks would only go where it is perceived as risky, if risk-premiums are high enough and their exposure limited.

And again I can hear you say: “Nonsense, the crisis resulted from banks taking too much risks?”

And again I ask you: Sir, I dare you to identify just one bank asset that significantly contributed to this crisis, and against which banks were not allowed, by the regulators, to hold very little capital (equity), because it was ex ante perceived as safe?

Those regulations, which so dangerously distort the allocation of bank credit, are weakening the economies. Greece’s economy has already defaulted, too much credit to the public sector and too little to the private sector, if it is not housing.


@PerKurowski

July 09, 2015

OECD: Make capital requirements for banks, instead of on credit ratings, depend on job-creation-potential ratings.

Sir, Sarah O’Connor reports that “OECD warns on ‘chronic’ low pay and job insecurity” July 10.

When you have bank regulations that are solely targeted to avoid those perceived credit risk which are basically already cleared for by bankers, by means of risk premiums and size of exposure; and which care not one iota about the effective allocation of bank credit… you will not be able to generate as much jobs as you otherwise could. It is as simple as that.

If you are really desperate for jobs, then offer banks to be able to hold less capital against loans that have a high potential of job creating ratings, so that banks can obtain higher risk-adjusted returns on their equity financing what you wish they finance.

And, by the way, if you want more planet earth sustainability then equally offer banks to be able to hold less capital against loans that have high sustainability ratings.

In short it all has to do with giving banks a purpose different from just silly credit risk avoidance. “Silly”? Yes! Bank capital is to cover for unexpected losses and it is precisely what is considered as absolutely safe from a credit risk perspective that carries the greatest potential of delivering the unexpected.

OECD, has a fundamental and urgent structural reform to do, namely throwing out the credit-risk-weighted capita requirements for banks. That would do much more for the creation of jobs than its worrying and wringing hands. 

PS. And perhaps OECD needs to start thinking about worthy and decent unemployments too.

@PerKurowski

July 08, 2015

The IMF, like a member in good standing of a mutual admiration club, keeps total mum about the mistakes of colleagues.

Sir, Takatoshi Ito writes: “perhaps the IMF cannot be frank with Europe… — its management, after all, is dominated by Europeans” “Someone should have spoken truth to Europe” July 8.

Of course that might influence, but IMF’s silence is more based on the reluctance to criticize other members in their small mutual admiration club of technocrats.

In September 2006 in a letter published in FT I wrote:

“The Fund's problem is that it has now turned into the clubhouse of the "independent" central bankers… Though I agree…that the top job should not be reserved for a European… may I also advance the idea that it should not be reserved for a central banker either?”

And even more directly related to the subsequent events in Greece, in November 2004, in a letter that was also published by FT, I wrote:

“Our bank supervisors in Basel are unwittingly controlling the capital flows in the world….

How many Basel propositions will it take before they start 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.

Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost - even at the cost of growth”

The IMF, as to this moment, has yet not warned in clear and unequivocal terms about the dangerous distortions that credit-risk-weighted capital requirements for banks cause. And that though the evidence is there for all to see. A Greece brought to its knees because of excessive borrowings by its government, and unable to stand up, because of the lack of access to bank finance for its SMEs and entrepreneurs.

@PerKurowski

History, more than blaming Greece for the crisis, might marvel at how Greekish Europe became.

Sir, Martin Wolf, making a case for Eurozone solidarity towards Greece writes: “Blame for the mess lies quite as much with irresponsible (mainly French and German) private lenders…” “If Greece leaves, the euro will be fragile.” July 8.

By now Martin Wolf knows that European banks, between June 2004 and November 2009, were allowed to lend to the government of Greece against only 1.6 percent of capital, which meant they could leverage over 60 times to 1 their equity. And so the first part in that call for solidarity would be much stronger if stated as it really was: “Blame for the mess lies quite as much with irresponsible bank regulators named by Eurozone governments giving irresponsible private lenders incentives to lend too much to Greece…”

But beware, European banks can still lend to most European sovereigns against much less capital than what they are required to hold when lending to the European private sector. And by doing so Europe still implicitly holds bank credit to be more efficiently used by their government bureaucrats, than by their entrepreneurial citizens. And most, including Martin Wolf, keep on turning a blind eye to this absolute lunacy.

Wolf also argues: “Blame for the mess lies [also with] the governments that decided to provide the loans to Greece with which to bail those lenders out. This refinancing was of negligible benefit to Greece”. Since the implication of that is that, instead of private lenders’ shareholders suffering losses from lending to Greece, it is now the Eurozone taxpayers who will… that might provide great political incentive for the Eurozone’s leaders to double down on “solidarity” towards Greece… pushing the can further down the road.

All young Europeans need to learn much from seeing the Greek pensioner’s not being able to cash in their bank cheques. Europe and the euro are fragile, with or without Greece.

@PerKurowski

July 07, 2015

FT: Bullshit! Too many statist and government bureaucrats love the fatal nexus between banks and sovereigns.

Sir, you write: “untangling banks from their national sovereigns has been an EU policy goal ever since a fatal nexus of indebted states and shattered finance threatened the very existence of the single currency.” “ECB should not make a deal harder to reach” July 7.

Bullshit! The fatal nexus between sovereigns and banks was created in 1988 with the Basel Accord (Basel I) when it was decided that the risk-weight of OECD sovereigns was 0%, while the risk-weight for OECD private sectors was 100%. That fatal nexus, when modified in 2004 with Basel II, allowed banks for instance to lend to Greece until November 2009, against only 1.6 percent in capital.

What EU policy goal has stated the need and the will to shatter that fatal nexus? Sir, you must know that fatal nexus has not even been acknowledged… probably because there are too many government bureaucrats who just love and benefit from that statist pro-government nexus… and because newspapers like FT wished to keep mum on it.

@PerKurowski

This is the icebreaker Alexis Tsipras should use with Angela Merkel


Sir, Wolfgang Münchau refers to the new discussions between Greece in Germany and that are to be held in a climate that could not be characterized as friendlier. “A stealthy route to Grexit”, July 7.

As I have argued many times, if I was Alexis Tsipras, as a potent icebreaker, I would tell Angela Merkel: 

“Please don’t just blame Greece. The Basel Committee, between June 2004 and November 2009, allowed banks to leverage their equity and the explicit and implicit support they received from taxpayers 62.5 times when lending to Greece.

That gave European banks irresistible incentives to give Greece loans that by nature are irresistible to most politicians and government bureaucrats.

Had it not been for that dear Angela… we would be sitting here discussing much more pleasant affairs.” 

@PerKurowski