January 29, 2015

FT, what about the moral responsibility of journalists of telling it like it is with Greece’s debt?

Sir, your FT reporters write: “Germany and France warned Greece not to expect taxpayers in other countries to pick up the tab for its policy decisions” “Berlin and Paris rebuff debt forgiveness call”, January 29.

The most important reason for such attitude is that Greece’s debt problem is primarily attributed to Greece and to banks. If Europe was really made aware of the role their bank regulators had causing this mess, European would be able to understand better why Europe at large need to share much more in the responsibilities of providing solutions.

In this respect I need to repeat, to all of your journalists, what I commented to you Sir and to Martin Wolf, just two days ago. 

Had it not been for the fact that European regulators allowed banks to hold little or even zero equity against loans to sovereigns, like Greece; which tempted banks with extraordinary expected risk-adjusted returns on equity when lending to sovereigns, like to Greece, then banks would never ever have lent so much money to Greece.

What about the moral responsibility of bank regulators of not distorting the allocation of bank credit? What about the moral responsibility of journalists of telling it like it is?

I am sure that if this truth really comes out Greece’s debt problem could be looked at in a much more understanding light… and perhaps would allow Greece, in a first stage, to restructure all its debts in terms appropriate to the risk-profile regulators held it to fit… something like that of Germany’s.

What would Greece’s debt profile look like if it received terms like 30 years at 1 percent?

Europe is caught in a bank regulation trap set up by the Basel Committee and the Financial Stability Board

Sir, I refer to Ralph Atkins’ and Michael Mackenzie’s “Caught in a debt trap” January 29.

They write “Crisis-fighting actions by central banks have not only sent yields on government debt to lows not previously seen in recent history but many of them are negative. Across much of Europe, investors are actually paying for the privilege of lending money to governments in some cases.”

Indeed, but little can be concluded from that without referencing the regulatory trap in which banks have been caught.

In Europe banks represent by far the most important part of how liquidity is transmitted to the real economy. And Europe’s equity scarce banks, because of tightening equity requirements, for instance by means of the leverage ratio, while the risk-weighted equity requirements are still in place, are being forced to take cover, more and more, in what regulators have denominated to be safe havens… with deposits at central banks and debts of “infallible sovereigns” being the safest of those.

And so banks, at gunpoint, are forced to accept negative rates on their deposits with central banks or incest in low yielding sovereigns. And so what we see is not a market expressing its free will, but a market that is competing with banks subject to distorting regulations.

If Mario Draghi had not been the Chairman of the Financial Stability Board, and might therefore be too reluctant to concede how disastrous current bank regulations are, then perhaps the recent stress tests of European banks would have included an analysis of what was not on their balance sheets. And that would have pointed squarely to the lack of lending to the “risky” small businesses and entrepreneurs… those tough risk-takers Europe needs to get going now when the going is tough.

I still believe bank regulators did it all because of sheer group-think derived stupidity but, if not, they should be… well, I leave that to you.

January 28, 2015

With central banks ok with banks leveraging 60 times plus with loans to Greece, the sky seems the limit for gold prices

Sir, Jamie Chisholm in “Trading Post” January 28 writes: “There has been much talk recently about how investors are growing fearful that central banks are becoming a source of uncertainty rather than suppressors of volatility… It’s a view that… along with a large swath of global debt sporting negative yield, is bolstering demand for gold”

Of course, how could it be different? The irresponsibility and or stupidity of central bankers are the most important drivers of gold prices.

Here we have central banks that first, when regulators imposed Basel I, had no problem with the fact that banks needed to hold so much less equity when lending to sovereigns than when lending to citizens; and then when Basel II arrived in 2004, had no concerns with how segmenting the private sector into the AAArisktocracy and “the risky” could distort the allocation of bank credit to the real economy.

With central bankers like that, the sky seems the limit for gold prices.

What would make a Negro slave on a cotton plantation in 1800 America, not feel being discriminated against?

Sir, I refer to Luke Johnson’s valedictory essay for the FT “A farewell after eight years championing founders” January 28.

The following Johnson writes is extraordinary: “I believe independent ownership of business assets is incredibly important if we want a vibrant economy. Founders possess animal spirits and optimism that contribute disproportionately to innovation, job creation and tax generation. They are the essential ingredient for a more prosperous society, together with the rule of law and sound property rights. These inventors, mavericks and would-be tycoons exist to take risks most of us seek to avoid in our careers.

Start-ups renew industry and society, and pioneer and implement new technology that established institutions shun, because it would upset their cosy oligopolies. Crony capitalists — whose annual conference was held last week in Davos — are not entrepreneurs, but corporate managers who hate free markets and the idea of proper competition, while squandering most of their time on office politics and games of patronage.”

How extremely sad then that Luke Johnson completely missed out on how bank regulators, with Basel I favoring the “infallible sovereigns”, and with Basel II favoring the AAArisktocracy… impeded the fair access to bank credit of his “risky” risk-taking entrepreneurs.

What is it that makes those who should most see a distortion and discrimination in order to fight it, not seeing it?

There will probably be a tragicomedy musical named “Mario” in our grandchildrens' future

Sir, John Kay does the debate on the economy a great favor by helping to place “deflation” in a wider perspective than that of being a definitive falling over the precipice point; and which amazingly has so many mature men running around like scared chickens, “History is the antidote to fear of falling prices”, January 28.

I am sure that in due time, the living in times of the deflation monster, as well as the banking in times of the Basel Committee, will provide great comedy and drama material for films and musicals… as we had “Evita” our grandchildren will probably have their “Mario”.

What about the moral responsibility of telling the whole truth about Greece’s debts?

Sir, Martin Wolf writes: ”Done correctly, debt reduction would benefit Greece and the rest of the Eurozone... Unfortunately, reaching such an agreement may be impossible… moralistic propositions in particular get in the way…[one being] that the Greeks borrowed the money and so are duty bound to pay it back, how ever much it costs them… The truth, however, is that creditors have a moral responsibility to lend wisely. If they fail to do due diligence on their borrowers, they deserve what is going to happen” “Greek debt and a default of statesmanship” January 28.

The problem with that is that it does not contain “the whole truth and nothing but the truth.” Had it not been for the fact that European regulators allowed banks to hold little or even zero equity against loans to sovereigns, like Greece; which tempted banks with extraordinary expected risk-adjusted returns on equity when lending to sovereigns, like to Greece, then banks would never ever have lent so much money to Greece.

What about the moral responsibility of bank regulators of not distorting the allocation of bank credit? What about the moral responsibility of journalists of telling it like it is?

I am sure that if this truth really comes out Greece’s debt problem could be looked at in a much more understanding light… and perhaps would allow Greece, in a first stage, to restructure all its debts in terms appropriate to the risk-profile regulators held it to fit… something like that of Germany’s.

What would Greece’s debt profile look like if it received terms like 30 years at 1 percent?

January 27, 2015

Restructure all Greece’s debt, in terms Germany would offer if it wanted to restructure its own public debt

Sir, I refer to Reza Moghadam’s “Halve the debt and keep the eurozone together” January 27.

I am convinced that much of the excessiveness of Greece’s public debt was a direct result of stupid European bank regulations. These allowed banks to hold minimum or no equity at all against loans to Greece, as if Greece was just as safe as for instance Germany; all which caused too tempting risk-adjusted returns on bank equity when lending to Greece. 

In that respect, if I were negotiating on behalf of Greece, I would start out by requesting that Greece’s debt should be restructured in terms that are compatible with having been set up as an “absolutely safe”. In other words, all Greece’s debt, in terms Germany would offer if it wanted to restructure its own public debt. Then if a haircut is still needed, it would be much smaller.

The World Bank’s bias against banks taking risks hurts the poor they want to help.

Sir, I refer to Michael Holman’s “The World Bank fails to credit the intelligence of the world’s poor” January 27.

It discusses the results of a very much commendable study carried out by the World Bank, when trying to establish how the bias of its professionals’ might influence the assistance it provides.

Holman concludes: “The consequences of bias are profound. The poorest in the world may be doubly burdened. Not only do they fight a daily battle against poverty. They may well have to cope with policies of well-meaning aid donors that owe more to the bias of those who frame them, than to the knowledge of those who are supposed to benefit from them.”

Indeed, that happens. As an Executive Director of the World Bank 2002-2004, and also from all what I later read in many of its reports, I concluded that one of the most dangerous biases of the World Bank, is its bias towards risk aversion. That is reflected primarily by its inability to criticize those Basel Committee bank regulations that are based on credit-risk-weighted equity requirements.

It is truly ironically that the world’s premier development bank, which should be the first to understand that risk-taking is the oxygen of any development, keeps mum on regulations which allow banks to earn much higher risk adjusted returns on equity when financing what is perceived as safe, mostly the history, than what is perceived as “risky”, mostly the future.

That is mindboggling sad. Of course banks need to take risks, like lending to small businesses and entrepreneurs. You must allow the animal-spirit resources to work with. And that is why the society must lend some support to bank depositors, for when the risk-taken by a bank might become excessive.

To support banks instructed to avoid risks as much as possible, seems to me an exercise in futility that should have a chance to enter the Guinness book of records. 

PS. As an example, in April 2003, when discussing the World Bank’s Strategic Framework 2004-2006 at the Executive Board, I urged: “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."

“Stay indoors where it is safe children, outside is much too risky” Nanny Basel Committee

Sir, Professor Jeff Frank refers to “driving with one foot on the throttle and the other on the brake” when explaining how QE “hasn’t done much for the real economy but has increased stock market prices and the wealth of the 1 per cent”, “‘Bold move’ will be to withdraw the money later” January 27.

I fully agree with Professor Frank’s analysis and conclusions. I would clarify though that “the brake” he refers to, is the “risk-weighed equity requirements for banks”, and which makes it impossible for equity strapped banks to reach out to the real economy.

Think of our banks as children instructed by their nannies to stay indoors all time, because out there it is much too risky.

Again, for the umpteenth time, the silly risk aversion of our bank nannies is bringing our economies down.

January 26, 2015

“The Risky” Greeks and Germans, should ally to request from both of their governments, a vital structural reform.

Sir Tony Barber and Kerin Hope write that “Greek banks rely on the European Central Bank for favourable funding arrangements, which the ECB has warned it will halt without a new agreement between Athens and its creditors” “Greek leftists’ victory throws down challenge to euro establishment”, January 26.

And I just wanted to ask: “Who do small Greek businesses and entrepreneurs rely on for their funding arrangements, if Greek banks are precluded from lending to them, as a result of the credit-risk-weighted equity requirements imposed by the Basel Committee?

It is also reported that “Germany’s central bank president Jens Weidmann said last night he hoped the new Greek government would continue to tackle its structural problems”.

In this respect I can only hope that the “risky” Greeks form an alliance with the likewise perceived “risky” German small businesses and entrepreneurs, in order to require from both of their governments, the structural reform that ends the current odious discrimination against “The Risky” when accessing bank credit.

Europe, without cleaning up your bank regulations, all what ECB, Brussels and governments do, is useless and dangerous.

Sir, we have bank regulators allowing banks to hold much less equity when lending to a sovereign, than when lending to a small businesses or an entrepreneur; and we have ECB planning to buy up more sovereign debt.

That evidences a public policy based on the assumption that government bureaucrats know better how to invest in an effective way for the economy, and for the society, other people’s money, than what small businesses and entrepreneurs can do when pursuing their own dreams. That is truly a shaky ground on which to salvage the future, of for instance Europe.

And all that nonsense derives from that utterly absurd belief that governments, sovereigns, are less risky, because they have the capacity to tax its own people or to print money.

Sir, whether you stimulate the economy in Europe with ECB’s planned QEs, helicopter drops of money on citizens, or fiscal deficits, does not really matter, neither will work; as long as you have regulations that hinder credit from going freely to where it is most wanted and needed.

And therefore it is so hard for me to understand how Wolfgang Münchau (and You, and most other) can suggest, or evaluate programs, without referring to the need to correct this fundamental flaw, “An imperfect compromise for the Eurozone” January 26.

PS. Münchau writes “Germany’s retirement system — where pensions are not invested in the stock market, but in low-yielding government bonds — is not equipped for an environment in which interest rates are at zero for long periods”. Does he think that system to be better prepared if ECB is too successful fighting deflation?

January 23, 2015

Sadly small businesses, entrepreneurs, and unemployed, have little reason to celebrate ECB’s/Draghi’s QEs.

Sir, Martin Wolf divides the opposition to ECB’s/Draghi’s QEs into those who think this “takes the pressure off governments to deploy expansionary fiscal policies” and those “who think QE is close to being an invention of the devil…hyperinflation… and that it will lift the pressure on governments to [structural] reform”, “Draghi’s bold promise to do what it takes for as long as it takes” January 23.

Wolf does so mainly because he believes that “the eurozone did not fall into a slump because supply-side problems suddenly became worse. It faltered because demand collapsed.”

I don’t think so. I am certain that had it not been for the Basel Accords credit-risk-weighted capital requirements, made worse by means of some ideological weightings in favor of government borrowings, the preceding debt-fueled anticipation of consumption boom might not have happened, but neither the “slump”.

Why is it so hard for Martin Wolf to understand that if banks had to hold as much equity against assets like loans to sovereigns, AAArisktocracy and real-estate, than what they are required to hold when lending to the “risky” small businesses and entrepreneurs, all our economies would be much sturdier.

In July 2012 Martin Wolf wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." And yet he does not comprehend what I really meant with that, namely, if so, then… how risky can a borrower perceived as risky really be?

I perfectly understand why the markets and asset holders celebrate Draghi’s announcements. I just wish it were the small businesses and entrepreneurs, and consequentially the unemployed, who had the real reason to celebrate.

Getting rid of those odiously discriminating and distorting credit risk weighted equity requirements for banks and having the ECB put the €1tn in as temporary equity in Europe’s banks, well that would be something really bold, and something which all could celebrate.

January 22, 2015

Sir, is it not high time FT abandons its “Après nous le deluge" mode?

Sir, of the letters I wrote and which you published, before I was censored for the given reason that I wrote too many letters, that which gets the most attention in my blog is the one titled “Long-term benefits of a hard landing”.

In that letter I argued Why not try to go for a big immediate adjustment and get it over with? … This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.”

How sad it is that almost eight years later, after having basically wasted QE’s, Paul Serfaty still finds a valid reason to end his letter with “Bite the bullet. Reprice the assets. Write off the unpayable debt. Smite the unwary. Start again with a new confidence that there is an upside”, “QE monster has regulators and markets alike transfixed” January 22.

Sir, look back at what your columnists have written over the last eight years, and you will find that most of it has to do with kicking the can down the road, by means of QEs, fiscal deficits and much other… all having us climb ever higher, that mountain of excessive liquidity, unsafe excessive price of “safe assets” and excessive sovereign debt, from which we must come down from, sooner or later.

Frankly Sir, is it not high time FT abandons its “Après nous le deluge” mode?

January 21, 2015

Martin Wolf: How risky to the banking system can a borrower perceived as risky really be?

Sir, I refer to Martin Wolf’s “Chronic economic and political ills defy easy cure” January 21.

Of course! It is impossible to cure current problems if you are not even able to acknowledge, how the current credit risk weighted equity requirements for banks distort the allocation of credit to the real economy.

Wolf writes: “The leverage — ratio of assets to equity — of many large global banks is about 25 to 1, which is bound to make them vulnerable…  Moreover the lack of transparency of [bank’s] balance sheets remains daunting. In a complex global financial system, the ability of participants to understand balance sheets is limited. This tends to generate cycles of overwhelming risk-affection followed by panic-induced aversion. The low real returns on safe assets tend to exacerbate the intensity of the affection and so the extent of the aversion.”

But, if you know that 25 to 1 leveraged equity strapped banks must hold much more equity against assets perceived as risky, than against assets perceived as “absolutely safe”, like sovereigns and the AAArisktocracy, then it should not be hard to understand that instead, it is the following which happens: 

Overwhelming exposures to what is perceived, or made to be perceived as absolutely not risky, are created; followed by panic-induced realizations that something of what was perceived ex ante as absolutely safe turned out to be not so safe, and ate up what little bank equity there was; which causes a rush to add more exposure to what is perceived as absolutely safe. And round and round we go, until all our banks end up holding the last remaining “absolutely safe” asset… whichever that happens to be.

If Martin Wolf wants to makes really good use of his stay in Davos, and is not afraid to ruffle some feathers, including his own, he should walk around and ask as many he can: How risky to the banking system can a borrower perceived as risky really be?


An excessive risk aversion, an “Après nous le deluge”, is the bequest of what kind of generation?

Sir, I refer to John Kay’s “Inequality is the bequest of an unequal generation” January 21. To it, I would like to add the following:

Our forefathers’ central banks and bank regulators, unless they lived in dictatorships or in communist lands, never told banks who to lend or not to lend. And as a consequence banks took many risks that have played out right for us.

Our generation on the contrary, represented by the Basel Committee, by means of credit risk weighted equity requirements, are de facto instructing banks to stay away from what is perceived risky and to favor the access to bank credit of the “infallible” sovereigns, the AAArisktocracy and the housing sector. 

John Kay, that sissy and perfectly useless risk-aversion, and which like in neon lights screams out “Après nous le deluge”, makes us what kind of generation? 

I am sure that our grandchildren are going to pay dearly for our banks not lending sufficiently and in fair terms to small businesses and entrepreneurs... and once they understand what happened they will not be kind on the current generation of bank regulators.

We citizens need an international tribunal where we can have our odious sovereign debts recognized as odious credits.

Sir I refer to Ricardo Hausmann’s “Venezuela’s economic collapse owes a debt to China” January 21. It reflects much of what I have been writing for years as a columnist in Venezuela… before I was censured in July 2014

Hausmann writes: “the debt was never authorised by the Venezuelan parliament due to the specious argument that it was not debt, but “finance”, because it was not to be paid in dollars but in oil. As a consequence, spending the money was never part of the national budget, thus escaping all forms of control and bypassing oil-revenue sharing rules, which would have transferred part of the income to opposition state and local governments.”

He is absolutely right but, it is even worse than that, since Venezuela’s Constitution explicitly prohibits encumbering not extracted oil that way.

And so now the real question is: In the future, when these odious credits from China are declared odious debts not to be paid, how much is the rest of the world going to support us Venezuelans?

Should there not exist an international tribunal were citizens can go and have their grievances on odious debts be recognized as odious credits? I mean we could be talking about much more than China.

Governments, stop holding the regulatory gun against equity strapped banks, and give the real economy a chance

Sir, Martin Wolf holds that “the Eurozone may fail, not because of irresponsible profligacy but rather because of pathological frugality”, “Bolder steps from Europe’s central bankers”, January 21.

And with “frugality” Wolf basically means governments, in this case especially Germany, not taking advantage of extraordinary low rates, “virtually free money”, to pump up their economies by means of fiscal deficits.

If Wolf and I had a project made viable by someone offering some extraordinarily generous financing terms, we would take the loans and go ahead, without the slightest remorse of us, the small fish, taking advantage of the huge market.

But when governments, in much by their own doings finds extraordinarily advantageous financial conditions on its borrowings, it should never forget that much of those advantages fall on the back of large groups of its own constituencies… who will now for years be collecting insufficient interests on their savings.

If Wolf were 30 year old, how much would he want his broker to allocate to the financing of German infrastructure at 1.1 percent for 30 years?

Currently regulators require banks to hold much more equity when lending to small business and entrepreneurs than when lending to sovereigns. That is like the governments holding the gun on equity strapped banks, telling them “give us, not them, the money!”

Why is it so hard for Wolf to understand that the whole banking system has effectively been sequestered by means of the: “You banks, I the government will support you, but only if you support me”.

Why not allow banks to finance what without the regulatory distortions would be financed, and have the governments wait until the citizens have made their pretax earnings to tax them… instead of taxing them in advance… in such a non-transparent way?

Basel Committee, Financial Stability Board, you are dangerously devoid of any common sense

Sir, I refer to Lucy Kellaway’s courageous and important “How insecurity and preening kill corporate common sense” January 19.

Kellaway, from a conversation “with a man who used to be one of the most senior bankers in the UK”, deducts: “Complexity mostly destroyed what little common sense there used to be and regulation has outlawed the rest. Try understanding any bank’s annual report. It cannot be done. Even the senior bankers who put the figures together admit as much. Worse still, try to comprehend Solvency II. If there is anyone reading this who fully grasps the fiendish vicissitudes of these new capital requirements for insurers, I’d like to hear from them.”

And I call it “courageous” because with that she actually implies that her colleagues write about nonsense as if it made sense; or that they do not dare to show they do not understand whether it is nonsense or not.

And I call it “important” because truths need to come out, and powerful nonsense manufacturers brought down, if our children and grandchildren are to stand a chance.

Hear us out you the members of the Basel Committee and Financial Stability Board… little is as stupid and dangerous as the current portfolio-invariant-credit-risk-weighted-equity requirements for banks you concocted. Not only do these not make our banks safer but, worse yet, these distort the allocation of credit to the real economy.

Answer us: How risky can borrowers perceived as risky really be for the banking system? Is it no so that what is really risky for the banking system is what is perceived and treated as “absolutely safe”?

I dare you to debate me on that wherever and whenever. If you feel more comfortable with some support, you can even bring along any FT journalist fan of yours you wish… and I will bring along Lucy Kellaway.

Today’s “risk-free-rates”, are not real risk free rates but subsidized risk free rates!

Sir, I refer to Amin Rajan’s “Portfolio theory has hypnotised asset managers” January 19.

Rajan, referring to Pascal Blanqué’s book “Essays in Positive Investment Management” writes:

“In practice, from 1999 to 2009, US 10-year Treasury bonds not only outperformed risky assets such as equities, their actual returns were also well above the expected ones. In fact, government bonds have violated every tenet of conventional investment wisdom over the past 30 years…

So what is the solution? The author is at pains to point out that there is no silver bullet. Our current knowledge of how markets operate is very limited. There is a crying need for more research and debate.”

Sir, when markets finally get to understand that the interest rates sovereigns are paying, is not just a consequence of their perceived “infallibility”, but also a result of them having awarded themselves regulatory subsidies… it might be too late… and all hell might break loose.

Here is the story. In the early 90s with Basel I, and then with Basel II, and currently with Basel III, banks need to hold very little or no equity at all when lending to the sovereigns, especially when compared to what they are required to hold when lending to “risky” citizens.

And that means: the more problem loans eats up bank equity; and the more regulators require banks to hold more equity; and even the more bank are fined (which eats into their equity)… the more will the banks de facto be forced to hold sovereigns.

Current US Treasury bond rates, those usually used as “risk-free-rates”, are not real risk free rates but subsidized free rates!

January 19, 2015

ECB’s Draghi’s “whatever it takes”, should be the subscription of hundred’s of billions in new European bank equity.

Sir, I refer to Wolfgang Münchau’s “Why the ECB should not water down a QE program” January 19.

But why would you pour QE on the Eurozone if, as Münchau says, it “is sick”? Should you not first figure out what it is that Europe needs? 

And it foremost needs, first to get rid of bank regulations that distort the allocation of bank credit in the economy; and then of course its banks would need immense amounts of fresh equity in order to be able to lend.

And so, let the Basel Committee decree, effective almost immediately, that banks need to hold for instance 8 percent in equity against any assets, including against loans to all infallible sovereigns, including against loans to the AAArisktocracy, and then have the ECB to be willing to subscribe all bank equity it takes.

ECB should, during some years, refrain from using any voting rights of that equity; and begin selling it to the market some years from now… unless of course banks offer to repurchase their own shares earlier. 

Is that legally or politically possible? I have no idea but that is what most would help Europe... as is pure QE cannot really be watered down, since to begin with it already basically is water.

January 17, 2015

Basel Committee, Financial Stability Board: Hear hear… Tim Harford’s "The Power of saying ‘NO’"

Sir, hear hear… Tim Harford’s, “The Power of saying ‘no’”, January 17.

“Please, please, dear bank regulator, allow us lower equity requirements on these ultra safe exposures and we promise that will stay away from what’s risky”

Absolutely NOT! The real bank crises have always occurred when something ex ante was considered as “absolutely safe” so I will not run the risk of next time that happens, you will, because of me, stand there with your pants down and no equity. Copy: finance.historians@gmail.com

Absolutely NOT! If I allow this, then I will not be able to look into the eyes of all those small businesses and entrepreneurs, who will be denied credit as a result of favoring the AAArisktocracy; or into the eyes of all those young unemployed, who could become a lost generation if I did so. Copy: risky.borrowers@gmail.com unemployed.youth@gmail.com

PS. But, unfortunately, bank regulators did not have it in them to say “NO!” to bankers.

For Basel IV should we not expect equity requirements for banks based on regulation and central banks risks?


Sir, I refer to John Authers’ “Lessons to be leant from Switzerland doffing its cap” January 17.

Whatever, this really places the fact that regulators and central banks impose credit-risk-weighted equity requirements for banks, when they themselves are the source of so much risks, in a totally new perspective.

Frankly, it must be much easier for banks to clear for credit risks by means of interest rates, size of exposure and other contractual terms than what it can be for them to clear for regulatory and central bank risks.

And so for Basel IV, we must now expect equity requirements for banks based on regulation and central banks risks… what a conflict of interest for regulators and central banks! That might indeed seriously affect the friendly collegiality that reins in their mutual admiration club.

Basel Committee, do we now need trustworthiness of central banks ratings?

Financial Stability Board, what trustworthiness ratings would you assign to Draghi-ECB or to Carney-BoE?

American Founding Fathers never suspected bank regulatory power to be delegated or outsourced to a Committee in Basel.

Sir, I refer to Gary Silverman’s “Wasting Dimon’s time is the way we do things” January 17.

With respect to the complaints of Dimon about having to cope with too many regulators, Silverman deems this to be “as American as apple pie”; argues that the founders “believed the survival of a popular government depended on keeping any particular faction from growing too powerful”; and quotes James Madison with: “The constant aim, is to divide and arrange the several offices in such a manner as that each may be a check on the other”.

So is the reason why they delegated or outsourced so much of the American bank regulatory discussions and powers into a Basel Committee for Banking Supervision, that some wanted to escape from such checking-on-each-other?

I say this because frankly, the credit risk weighted equity requirements for banks concocted by the Basel Committee, and which so much favors the bank borrowings of the sovereign and the AAArisktocracy, over the bank borrowings of its “risky” not-rated citizens… in the home of the brave seems to be as un-American as can be.

Should the founding fathers have been more aware of this possibility and been more explicit in prohibiting it?


Other related links:

Bank regulators and central bankers owe Greece and Germany some explanations and apologies.

Sir, I refer to Gillian Tett recounting what happened in a meeting of central bankers last year in Switzerland, “Why Europe owes a debt to history” January 17.

It says: “To many Germans and other northern Europeans present, it seemed outrageous – if not immoral – for anyone to suggest that Greece’s debts be written off… ‘How can you forgive debt when a country has an official retirement age of 50?’ an official said”.

That is absolutely the wrong question, the right being: “How on earth could you lend so much to a country that has an official retirement age of 50?”

By means of allowing banks to lend to sovereigns holding much less equity than when lending to citizens, the whole Basel Accord… I, II and III, have been inducing banks to lend too much to “infallible” sovereigns.

Basel II of June 2004 explicitly stated that, if a bank lent to a sovereign rated as Greece was at that time, it needed to hold only 1.6 percent in equity against such loans; meaning that it could leverage its equity more than 60 to 1; meaning that if it thought it could make just half of a percent margin onthose loan, it would be able to obtain more than 30 percent return on equity a year. 

I have heard that reality was even worse than Basel II, as seemingly European banks were allowed to lend to Greece, and the other European sovereigns, against zero capital… meaning infinite leverage… meaning infinite expected returns on equity.

Clearly without such regulatory lunacy Greece, and other sovereigns, would never ever have been able to rack up so much debt. Therefore it is bank regulators and central bankers who owe Greece and Germany some serious explanations and, foremost, many truly sincere apologies… to say the least.

Let us hear those mandarins telling Europe “Forgive us, we had no idea of what we were doing”... and then let’s see if Europe forgives them... their sin of hubris.

The other side of odious debt is odious credit.

January 16, 2015

When will we stop investing with so much power not so much caring whimsy central bank bureaucrats, to try to bet against the markets... with our money?

Sir, back in the eighties, in Venezuela, some friends and I purchased one year of the harvest of many mango trees. When time came, with much love and care, we send each mango beautifully wrapped, first class freight, prepaid in Pounds, very expensive, on British Airways to Harrods. The mangoes were a success! “We’ve made it!”… Forget it!

The same day we got paid in London, back in Caracas, a big shot in the government decided that the value of the Bolivar was too low, and instructed our Central Bank to do what it could in order to revalue it, about 20 percent. And down went the Bolivars per US Dollar, and so down went the Bolivars per Pound, and so we were unable to recover our investment. Had we exported a few more mangoes, I would have lost my shirt.

And that is why my heart goes out to all those who make efforts and take risks, and then see those efforts turn into nothing, only because of the excessive powers accumulated by some whimsy central bankers who, at their desks, care little to nothing about the real-real economy… only about their GDP growths, their deflations… or whatever monster is in fashion... and go and bet against the market... with our money.

Obviously I was reminded of this incident, when reading about what the Swiss National Bank has been up to, January 16. Where do they get so much power? Are they never held accountable for anything?

For instance, on a related issue you know Sir is very close to my heart, where do these bureaucrats get so much power so as to be able to order banks to have more equity against loans to the risky”, than against loans to the AAArisktocracy? That makes us “risky” mango exporters have less fair access to bank credit, when in fact, at the end of the day, sometimes it is their actions that pose the greatest risks to us?

The regulators, who foolishly gave in to bank-children’s equity pleas, must as responsible parents now help them out.

Sir, Tom Braithwaite and Martin Arnold write: “Together with regulatory and investor pressure for higher returns, universal banks have lost their luster around the world”, “Regulators test the universal banking model”, January 16.

Of course the minimum minimorum equity banks were required to hold against some assets, 1.6 percent of the AAArisktocracy, and even zero in the case of “infallible” sovereigns, served as a potent growth hormone for the too big to fail banks. No doubt about it.

But, the problem is not that imposing, for instance an 8 percent equity requirement against all assets, would fatally wound big banks, or in this case the universal banking model. The real problem is that the journey from here to there would be extremely difficult. But since it really was the regulator, the supposedly responsible parent, who so foolishly gave in to what the children, the banks screamingly wanted, it really should be the regulator who now must assume his responsibilities to help the banks, the children, to adapt to the new much firmer rules of the house.

If only enough of the QE’s had been invested in bank equity, to make up completely for the equity shortfall caused by new requirements, central banks would probably now be reselling those shares to an avid market. That because, for a bank’s shareholders, it is also the journey from here to there that most frightens them. To have less risky bank shares producing lower returns is no problem whatsoever for any normal shareholder.

To sell such bank equity assistance scheme, could indeed be politically nightmarish… but if we want to put some decent order back in the system, in order to avoid our kids and grandchildren becoming a lost generation,  someone has to do it.

FT, what about at least daring to talk about it?

January 15, 2015

JP Morgan Chase, Jamie Dimon, welcome to the club! Small businesses and entrepreneurs have been attacked for years!

Sir Tom Braithwaite reports that, because of proliferation of regulators and legal bills, “Dimon says banks ‘under assault’” January 15

Indeed, no question about it, Dimon is absolutely right, but, as I see it, he has to stand in line with his compliant; at least until all those perceived as “risky” have been able to voice theirs, because they have in fact been under attack for much longer.

In those old days when regulators were very chummy with banks, days of Basel II, banks were allowed to hold very little equity against assets perceived as absolutely safe. And that allowed banks to make risk-adjusted returns on equity, on “safe” exposures, we normal citizens could never even dream of. And, in doing so, the regulators de facto removed all incentives for banks to give credit to “risky” small businesses and entrepreneurs. I can almost hear Jamie Dimon asking his Board “Why should we give loans to a “risky” when doing so we can only leverage JPMorgan Chase’s equity 12 to 1, when giving loans to the AAArisktocracy we can leverage 60 times or even more?”

But, that said, the “risky” and the banks do have a mutual complaint they can raise with respect to the fines or the penalties for bank’s misdeeds. Because, were it not for these, banks could have more equity available that could be leveraged with loans to the risky.

Perhaps judges should listen to them and force all bank fines to be placed in special bank equity accounts, available exclusively to be leveraged lending to small businesses and entrepreneurs… and I am sure all unemployed would also support that motion.

Why is Europe so little appreciative of our more than $300bn non-reimbursable oil price easing?

Sir, I completely agree with Sarah Gordon in that “Worries over deflation have been puffed up by prophets of doom” January 15.

For instance I cannot for the world understand why Europe is so little appreciative of the more than $300bn non-reimbursable easing the recent drop in oil prices represents. ECB’s QEs are to be repaid, not this one.

There we oil suppliers (I am Venezuelan) stand in the door, bearing what is for us very expensive gifts, and we have to hear about nasty suspicions that we want to infect Europe with the virus of deflation. Come on, what are friends for?

European Court of Justice. Beware, ECB's Mario Draghi does not know what he is doing, and if he does, then so much worse!

Sir Ralph Atkins writes “Trust them, they are central bankers… That, in essence, will be the European Court of Justice’s thinking on government bond buying by the European Central Bank” “Short View” January 15.

Trust them? Hah!

“Your Honor, Mario Draghi, the President of the European Central Bank, is the former Chair of the Financial Stability Board. As such he helped to impose on banks equity requirements that limited the leverage of bank equity to about 12 to 1 when lending little to a small European business or entrepreneur, but allowed banks to leverage 60 to 1 and even more when investing in AAA rated securities backed with mortgages awarded to the subprime sector in the USA or lending to such an “infallible sovereign” like Greece.

Your Honor, I am sure that when hearing this you will dismiss as utter nonsense, the claim presented to you, that central bankers know what they are doing.

And if by any chance he really knew that, so much the worse. That would mean he was on purpose discriminating against all european small businesses' and entrepreneurs' rights of having fair access to bank credit ... No wonder there is a shortage of jobs in Europe!

And judge, you won't believe this... now they want to inject more liquidity into the markets with what they call Quantitative Easing... QE... without first removing the regulatory distortions that impedes bank credit to be allocated efficiently in Europe”

When does a subsidy become an outright gift? Hugo Chavez committed an odious economic-policy crime against humanity.

Sir I refer to Andres Schipani’s and John Paul Rathbone’s “Oil’s slide forces Venezuela to rethink subsidies agreed in Chávez glory days” January 15.

The article refers to “About 600,000 bpd of subsidized oil are consumed locally” but, since the local price of gas (petrol) is much less than 1-euro cent per liter, I would consider that to be much more of an outright gift than a subsidy.

The fact that Hugo Chavez gave away more value in gas (petrol) to those who drove cars, than what he spent on all his social programs put together, might be embarrassing for all those on the left for whom Chavez was a hero… but the truth is that, doing so, he committed an odious economic-policy crime against humanity.

Draghi does not deserve independence. The shackles that most need to come off are those of the European economy.

Sir, you write: “the European economy is still dependent on large troubled banks that have little ability or inclination to boost economic activity”, “Draghi fights a battle for independence at the ECB” January 15.

Why cant’ you say it like it is? European banks are instructed, in de facto very clear terms; by means of portfolio invariant credit risk weighted equity requirements, not to care about boosting economic activity, not to finance a risky future, but to stay put financing the safer past.

The best ECB could do to help boost economic activity is to make sure the discrimination against the fair access to credit of small businesses and entrepreneurs is eliminated. But, since that would best be carried out increasing the equity requirements on what is perceived as “safe”, it would leave a tremendous hole in the banks that cannot and would not be filled fast enough by the markets. And that is where the ECB could step in subscribing important amounts of interim bank equity that is resold to the markets over time.

To do so would require explaining how regulators create the problem, and Draghi, as a former Chair of the Financial Stability Board, does not seem a likely candidate for a sufficiently expressed and explained mea culpa.

Action on this front is urgent… think of all the loans that have not been given in Europe, to those Europe most need to have credit, since Basel II was approved in June 2004.

You end concluding that “It is high time the shackles came off” Indeed, but not those of Draghi, or so much those of the ECB, most urgently those of Europe’s economy.

January 14, 2015

"True believers"? No Martin Wolf! Truly brainwashed sickos, is a far as I would go.

Sir, I understand and share many of the concerns that Martin Wolf expresses in “How to share the world with true believers” January 14. That said I would never ever allow terrorist-lunatics to shield themselves behind the excuse of being “true believers”… no matter what.

No! “Truly brainwashed sickos”, is a far as I would go.

Wolf writes: “Appreciate and respond to the frustrations many now feel”… And I ask for what purpose? To help those who feed the sense of frustrations in order to take advantage of the frustrated? No way Jose! Sorry, no way Martin! Behind most true believers, we often find true deceivers.

Wolf writes: “remain true to your beliefs”… Absolutely!

Why are not shares, properties in London, or famous paintings, not included as part of nominal demand?

Sir you hold that “deflation is bad if accompanied by falling nominal demand, and benign otherwise”, “Central bankers steered towards the wrong target” January 14. That sounds about right… (Unless you are an oil supplier of course)

What I cannot understand though is why increasing demand for art, shares and property has nothing to do with increasing nominal demand. In terms of overall purchasing capacity, there is little doubt that the inflation has been much much higher than that reported looking exclusively at a subjectively selected basket of goods.

It is not that I can buy much or any of that luxury, I am no plutocrat… but that does not mean that the distance to my dreams has not increased... dramatically.

Stop bank regulators from pre-acting on ex ante perceived credit risks, and make them think more of all ex post dangers.

Sir, John Kay refers to a chapter in an upcoming book of his titled “The bias to action”; and to that “the bias to immediacy and action is as pervasive in politics as in finance” in order to remind Warren Buffett holds that “The trick is, when there’s nothing to do, do nothing”, “Wisdom for politicians from the Sage of Omaha” January 14.

Well, since John Kay’s book is about finance, I do hope that it includes some reflection on the dangers of even faster trigger action, let’s call it preemptive action bias, and which affected the minds of bank regulators to such an extent, they confused ex ante perceived risks with ex post occurred dangers.

I would say it is impossible to think of assets that banks perceived as “risky” when placed on their balance sheets, which have caused a major bank crisis. But nonetheless, regulators found it prudent to require banks to hold more equity against what is ex ante perceived as risky that against what is ex ante perceived as safe.

Could we please get us some regulators who understand that we need banks to allocate credit correctly to the real economy much more than we need them to avoid taking ex ante perceived credit risks… and could we please get us some regulators who try to focus on what could be all the important ex post risks, and not react solely to the ex ante perceptions of risks.

Europe, urgently, fire Basel Committee’s members; and ask ECB to inject €1tn as equity in Europe’s banks

Sir, Simon Samuel’s mentions as a consequence of Basel III the possibility of a collapse in bank lending in Europe that would dwarf the €1tn or 2€tn of QEs that ECB might carry out, “Withering regulations will make for shriveled banks”, January 14.

Good for him, someone for the inner circle of bank regulators, is finally beginning to speak up on what needed to be said… sort of ages ago. Let us now see if FT also dares to live up to its motto “Without fear and without favour”.

That said the reality is worse than what Simon Samuels describes, because the credit shrinkage he refers to would primarily affect those Europe most needs to have access to bank credit, namely risky small businesses and entrepreneurs, "The Excluded" . And that because the “withering regulations” are still including the portfolio invariant credit risk weighted equity requirements for banks, which operating on the margin, excludes the risky in favor of “the infallible”.

What would I do? Throw the risk-weights out and hope that history forgets our stupidity. Impose a 10 percent equity requirement on all assets, and then, to get us from where Europe’s banks are, because of Basel I, II and III, to where they must be, have the ECB “offer” to subscribe all equity needed to meet those new requirements. ECB should of course commit not to use the voting rights of that bank equity and to resell for instance 10 percent of those shares per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Sir any ECB-QEs, or excessive fiscal stimulus, before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

PS. Sir, if my Tea-with-FT blog post in November last year helped to push Simon Samuel to speak up against other members of their mutual admiration club… then I have been right insisting in sending you the letters you do not welcome or acknowledge.

January 13, 2015

If I could decide, this is what I would tell ECB to do with all Europe’s banks… I think

Sir, Tom Braithwaite writes: “Banks have been forced to become safer and more boring. By closing down the casino, regulators have reduced the chances of disasters”, “Investors might yet long for the days of Dimon’s swagger” January 13.

How on earth does Braithwaite know that? Why are we to believe that regulators, who allowed banks to leverage over 60 times to 1 on exposures to the AAArisktocracy, or even more to exposures to infallible sovereigns like Greece, know anything about reducing the chances of disasters?

Let me just start by reminding him that when playing roulette if you bet pennies more on a safe colors than on risky numbers… you are guaranteed to lose more, in the long run.

How does Braithwaite know that disaster is not happening at this very moment, because that small business or that entrepreneur who could save the economy of tomorrows Europe, is denied fair access to credit because these banks are given incentives to play it safe, to play on colors and avoid the numbers?

Braithwaite quotes Stefan Ingves the Chairman of the Basel Committee on Banking Supervision saying “Leverage is an inherent and essential part of modern banking system” and yet Ingves and his regulatory buddies do not understand that by allowing different leverages for different assets they are de facto imposing capital controls which re-directs the flows of credit to the real economy in many dangerous ways.

Sir, the more I see the urgency of correcting for the regulatory distortion imposed by the Basel Committee, and the risk and difficulties of travelling from here to there in terms of required bank equity, the more I believe we need to:

Impose a 10 percent equity requirement on all assets, and then have the ECB offer to subscribe all equity needed to meet those new requirements. ECB should commit not to use the voting rights of that bank equity and to resell 10 percent of it per year in the market beginning in 3 years.

I have no idea whether that is legally feasible… but if it was my Europe and I could make the decisions, that is what I would probably do… as fast as possible. Any ECB-QEs before correcting what needs to be corrected in Europe’s banks, is just throwing money down the drain.

January 12, 2015

Europe, get rid of risk-weights, impose a 10% leverage ratio, and have ECB's helicopter drop equity on your banks

Sir, Wolfgang Münchau, as a tool to avert deflation in Europe, mentions the possibilities of a sizable QE helicopter drop in Europe, like €10.000 per citizen; and, sort of shamelessly using the tragic recent Paris as an excuse, argues for more fiscal stimulus, “Eurozone needs to act before deflation takes hold” January 12.

And I have to wonder, again, what goes on in his and other columnist minds, when they make suggestions like these, while at the same time they do not seem bothered by that Europe’s banks are ordered not to lend to those perceived as risky, like to small businesses and entrepreneurs. Because that is what de facto happens when regulators allow banks to hold less equity against exposures perceived as safe than against exposures perceived as risky.

What would I do? Perhaps order a 10 percent not risk weighted leverage ratio imposed on all European banks to substitute for all credit risk discriminating equity requirements; and then have the ECB to subscribe and pay in what new bank equity might be needed on a case by case basis, all with a firm-commitment to resell those shares to the market within a given period.

That would not only help to fight deflation, but, much more importantly, it would allow those tough risk-taking agents that the economy needs in order to grow when the going gets tough, to get going again.

January 11, 2015

Some depressions cannot self-correct if what caused them correct. “Deflation” is surrounded by too much mumbo jumbo.

Sir, I refer to John Authers’ “The self-correcting depression and the virtue of deflation”, January 10.

Do I believe in that? You can answer that question yourself by looking at my letter that you published August 2006 titled “Long-term benefits of a hard landing”.

But I do not believe that all depressions can be self-correcting, some needs the primary causes for it to be removed. For instance, there is no way the current depression will self-correct in any sustainable ways without removing those so well intended, but still so utterly dumb, portfolio invariant credit risk weighted equity requirements for banks.

And neither do I believe in all that mumbo jumbo that is painting deflation as the monster of our times… perhaps only looking to justify doing more of what is working for some though clearly not for all.

January 10, 2015

The most dangerous deflation is that which has happened, big time, in the accountability of bank regulators.

Sir, you write: “The Eurozone cannot go on as it is. Growth is weak to non-existent” and you conclude in that “Deflation risk in Europe leaves no option but QE”, Saturday 10.

Nonsense. If Europe just threw out the windows those portfolio-invariant-credit-risk-weighted-equity-requirements for banks imposed by the Basel Committee; and which effectively blocks the fair access to bank credit of those perceived ex ante as risky, like small businesses and entrepreneurs, much more growth could be achieved; and even the QEs or any fiscal stimulus would have a chance to work better.

What stops this from happening? I am not sure, but one answer could be that admitting to a monstrous mistake could represent a too large embarrassment for the current president of the ECB, the former chairman of the Financial Stability Board… the “Whatever it takes”… (Except for that) Mario Draghi.

To consider what is perceived ex ante as risky to be more risky for the bank system than what is perceived as “absolutely safe” is a huge mistake. And to compound that mistake by allowing different equity requirements for bank assets based on credit risks already cleared for, introduces a distortion in the allocation of bank credit to the real economy, catapults it into being a monumental mistake.

PS. #IamnotFT I dare to think, and say, that expert regulators could succumb to stupid and dangerous group-think

January 09, 2015

“Regression to the mean”, if allowed by politicians and regulators, will take care of the plutocrats, in due time.

Sir, Paul Marshall in “Blame the rise of the plutocrats on politics not capitalism”, January 9, holds that we need Schumpeter much more than Marx.

As you could deduct from my letter “Long-term benefits of hard landing” and which you kindly published, before you decided to name me a persona non-grata at FT, I totally agree with him

I have never been too much concerned by the rise of plutocrats, since I have always figured that, mostly, it was the result of something good… and I have always counted on the “regression toward the mean” theory, aka “reversion to the mean”, or aka “reversion to mediocrity”, to take care of the problem of the same plutocrats reigning into eternity.

But for that “regression to the mean” to happen, anyone that has that in him to be a plutocrat needs to be able to become a plutocrat… and that requires not only fair access to education as Marshall rightly puts forward, but almost foremost fair access to bank credit. And credit-risk weighted capital requirements for banks which operate in favor of those who have made it; and against those risky who have yet not made it, and who probably most of them will fail while trying to make it; blocks that fair access to bank credit.

And then of course, for the “regression to the mean” to happen, losses need to flow freely, and not be contained by QE dams, which quite often help to make the plutocrats even more plutocrats.

PS. There are some other issues related to the rise of plutocrats that need to be more closely looked into. One is intellectual property right. Why should income from a shielded property right be taxed at the same rate than those profits coming from competing bare-naked in the market?

January 08, 2015

Systemic distortion of bank credit allocation, is worse than risks with “global systemically important banks”

In November 1999 I concluded and Op-Ed with: “Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

And in May 2003, then as an Executive Director of the World Bank, addressing many regulators at a workshop, I argued: “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 Sir, of course I agree with John Gapper in that “Regulators are right to cut the biggest banks down to size” January 8.

But that said, why is it that even though Gapper clearly understand the meaning (and cost) of higher capital requirements for banks, he seemingly cannot understand what different capital requirements for different bank borrowers mean.

The “risky”, because their borrowings generate higher capital requirements for banks than the “safe”, are being negated fair access to bank credit.

More important than increasing the capital requirements for those banks like JPMorgan that because of their size pose a “global” systemic risk, it is much more important to get rid of the risk–weighted capital requirements which constitute, not just a risk, but an existent systemic distortion that impedes the efficient allocation of bank credit.

January 07, 2015

The world is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks

Sir, John Plender writes “The Eurozone is being driven towards deflation by a moralistic drive for austerity that does nothing to arrest rising debt as a percentage of GDP because the harder hit economies have shrunk” “World faces threat of a descent into intractable deflation”, January 7.

Wrong! The Eurozone, and others, is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks; and which have these making much higher risk-adjusted returns when lending to the “safe” than when lending to the “risky”.

Since risk-taking is the prime oxygen for any true forward movement, the economic bicycle is stalling and falling; and no QEs or fiscal stimulus could in the medium and long term stop that stop from happening… but only make the awakening worse.

We are in the midst of a slow-motion deep financial crisis that no one dares to speak of.

Sir, Martin Wolf gives a generally positive outlook for 2015 in “An economist’s advice to astrologers” January 7.

That is because he keeps on turning a blind eye to the very dangerous slow motion financial crisis that is occurring, at this very moment, but that for reasons I can’t comprehend seemingly no one dares to name.

And I refer to that primarily as a result of growing general bank capital (equity) requirements, like that derived from Basel III’s leverage ratio, those banks borrowers who because they are perceived as “risky” generate larger regulatory imposed capital requirements on the banks… are getting more and more excluded from having fair access to bank credit.

I do not know if that is going to reflect itself in 2015 but one thing is sure, all the credit negated, or offered in too expensive terms, to small businesses and entrepreneurs during 2015, is going to turn out to be extremely expensive for the economy… and for the job prospects of our youth. 

Wolf’s “chronic demand deficiency syndrome”, created mostly through the anticipation of demand financed with debt, a preempting of future demand, is going to hang over the economy, no doubt about that.

But it is silly risk aversion, expressed in allowing banks to earn higher risk adjusted returns on equity on what is perceived as “safe”, which is the major obstacle for any sturdy economic growth to reassume.

Bank regulators facilitated, even empowered, financiers to turn their back on the forces of equality.

Sir, John Kay writes about how the share of finance professionals in the growing top 1 percent share of all income has grown dramatically, “How financiers turned back the forces of equality" Wednesday 7.

Kay holds that results from “the growth of the finance sector; and the explosion of the remuneration of senior executives”.

To that, at least in the case of banks, and which set the tone for the whole sector, we would have to add: The lower the capital requirements the smaller is the relative importance of shareholders, and so the larger the availability for the remuneration of professionals. And that becomes especially important when the markets perceive, that governments will to a very large degree step in and defend the banks if they run into problems.

And so let’s retitle it. Bank regulators facilitated, even empowered, financiers to turn their back on the forces of equality.

January 06, 2015

What is this nonsense of a free market consensus when all banks are intervened by regulators?

Sir, Gideon Rachman refers to a weakening in the belief in free markets, “shaken by the financial crisis in 2008 and the subsequent Great Recession, as one of the causes of why “The west has lost intellectual self-confidence”, January 6.

What intellectual nonsense is this? What free-market consensus? The banks, since the inception of the Basel Accord with its Basel I in the early 90’s, and really exploding with Basel II in 2004, have been told, by means of risk-weighted capital requirements, that they can earn their highest risk-adjusted returns on equity, by sticking to the safe.

But unfortunately, medium and long-term bank stability can only result from banks allocating credit efficiently to the real economy, not from banks playing it safe.

Effectively the Basel Committee and the Financial Stability Board told their supervised children: “Stay home and play with you laptops and do not go out and take risks, and we will give you goodies”. And the IMF and the World Bank, with their silence, approved of that.

Sir, is not a child told to stay home and not to venture out, a child doomed to lose all his self-confidence, included that of in his own intellect?

Our current bank regulations are not the result of an intellectual process, but only a primitive reaction to the intuition of “safe” is safe “risky” is risky”, not able to differentiate between ex ante and ex post perceptions. 

And I pray the West still has sufficient intellectual self-confidence left, so as to throw these bank regulators out... otherwise next generations are doomed. 

PS. To top it up regulators showed an ideological based pro-sovereign-governments bias and declared those to be infallible.

January 05, 2015

India, to end ‘lazy banking’, you must first get rid of Basel’s bank regulations which orders banks to be ‘lazy’.

Sir, I refer to James Crabtree’s report “Modi promises to end India’s ‘lazy banking’” January 5.

It states that Narendra Modi, India’s prime minister, speaking at a summit of India’s public sector financial institutions, “promised to end the country’s heritage of ‘lazy banking’, a term often used to criticize risk-averse lenders”.

Good for him! But does Modi know that would mean India has to abandon the Basel Committee’s whole approach to bank regulations? 

Basel II and III both have, as their principal pillar, credit-risk weighted capital requirements; which allow banks to earn higher risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky… and which therefore stimulates banks to be risk averse… and lazy.

I sure hope Jayant Sinha and Arvind Panagariya understand the need for India to abandon such regulatory foolishness, which they currently have accepted; and sufficient strength to convince the rest of India of it. If successful, I am sure many in developing and develop countries will be much grateful for them setting the example and leading the way.

During the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I presented a document titled “Are the Basel bank regulations good for development?”. I then argued “Absolutely not! Since then I have become convinced these regulations are even more dangerous than I thought. At that time I had not realized the full effect of these capital requirements had in the risk-adjusted returns on bank equity. 

Those Basel II regulations caused the financial crisis 2007-08; that by driving banks excessively into “safe” segments like AAA rated securities, housing finance and “infallible sovereigns” (Greece) against almost no capital, leverages over 50 to 1. 

And those regulations, Basel II and III, are currently impeding the recovery of many economies precisely because they have ordered banks to be lazy… and not lend to “risky” small businesses and entrepreneurs.

Friends, please never forget, risk-taking is the oxygen of development

The Basel Committee for Banking Supervision needs artificial intelligence, the human one does seemingly not suffice.

Sir it was with much interest, and hope, that I read Richard Waters’ report “Investor rush to artificial intelligence is the real deal” January 5. We sure need it urgently, at least in the Basel Committee for Banking Supervision.

First any reasonably good AI would most certainly not give in to emotions or sole intuitions as the Basel Committee did when for their risk-weighted capital requirements they decided that “risky” was risky and “safe” was safe. AI would see that in fact it is what is perceived as “safe” by bankers that which creates the biggest exposures and as a consequence the biggest dangers, if the ex ante perception turned out ex post to be wrong.

And AI would also be able to impose portfolio variant capital requirements instead of settling for Basel Committee’s “portfolio invariant” because as they admit when in “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” they explain: “Taking into account the actual portfolio composition when determining capital for each loan - as is done in more advanced credit portfolio models - would have been a too complex task for most banks and supervisors alike.”

And AI would also of course have asked about the purpose of the banks before regulating the banks… and therefore we would probably have saved us from the credit risk weightings that so distort the allocation of bank credit to the real economy.

That said we have to be careful though so that AI does not Frankenstein on us and imposes its own preferences (ideologies); like what the Basel Committee did when they decided that their bosses, the governments of the sovereigns, were infallible… and therefore banks did not need to hold any capital (equity) when lending to these.

PS. Perhaps we can have a competition between different AIs to see who comes up with the best proposal for how to regulate banks.

January 03, 2015

Beware of excessive information. (Blissful) ignorance is a potent driver of financial markets and of human activities.


Sir, Tracy Alloway describes the possibility of adding on, as you go along, new pieces of information that will enhance the knowledge of the risks, for instance in securities backed with residential mortgages, “New mutations beckon for system that shares DNA of each loan’s risk” January 3.

And Alloway quotes David Walker of Marketcore saying “This could be very disruptive, because not everybody is for transparency and accountability. Even if they say they are publicly, they may not be privately.”

It is worse than that! If risks were perfectly known, the price of the securities would reflect this and so there would be little profits to be made trading these, and so perhaps there would be no Wall Street. It is imperfect information that has prices zigzagging, which induces market participant to get out of bed in order to sell the not-too-well-perceived risks and buy the not-so-real-safeties.

In other words, ignorance is one of the most potent drivers of financial markets and human activities; and is therefore quite often characterized as quite blissful… at least by the winners.

But the worst that can happen with excessive information, that is when we, because of it, become convinced that we know it all. Like when bank regulators caused our banks to follow excessively the credit risk perceptions issued by some few human fallible credit rating agencies. Clearly some more information (and humility) about our ignorance would have come in handy.

January 02, 2015

We need bank regulators to be more like lions and less like scared of mice kittens.

Sir, Ralph Atkins’ writes that “Across most of the Eurozone governments can borrow at historically low costs” and I wonder whether he is not comparing apples with oranges, “Financial system is a flighty animal in search of its inner lion” January 2.

The low interest costs he sees are not all the costs there are. The current risk weighted capital requirements for banks, which so much favor bank lending to the “infallible sovereigns”, have introduced huge distortions, which guarantee that capital will not be allocated efficiently; and which final costs could be equally humongous.

He should ask a Greek. Had banks needed to hold as much capital when lending to Greece’s government than what they needed to hold when lending to a small Greek business, then Greece would not have suffered such a build up of excessive sovereign debt and would not be in the mess it is in.

Today, in FT’s and Atkins’ Britain the interest rates on Britain’s public debt is being subsidized by many small businesses or entrepreneurs, through by paying higher relative interest rates or by having less access to bank credit… let us pray the costs of that will be manageable.

Sir, Atkins has no business asking the financial system for its inner lion, when so many problems derive from that regulators have turned into kittens so risk adverse they do not even dare to chase mice.

That this kitten has been able to tame the western markets making them lose “much of their lion-like abilities” should evidence the dangers of empowering kittens with too much regulatory powers.

Selling the notion of being able to make banks safe, at no cost, is pure unabridged populism.

Sir, I refer to Tony Barber’s “Renzi is the last hope for the Italian elite” January 2.

In it Barber attacks populism and writes about how important it is for Italy that “Mr Renzi’s reforms of the tax system, labour market, judiciary, public administration, electoral system and much more succeed”.

Again there is no reference to the unabridged populism contained in the notion that you can make banks safe, at no cost.

That populism is imbedded in the current risk-weighted capital requirements for banks; which allow banks to earn much higher risk adjusted returns on their equity on exposures perceived as safe than on exposures perceived as risky; with not one iota of regulatory concern about how useful for the economy such “risky” exposures could be.

These regulations, carried out in the name of saving the taxpayer from having to pay more taxes, is one of the most important obstacles that is hindering the taxpayers from receiving more taxable income.

That regulatory populism is doing as much damage to Italy, the Eurozone, Europe and the Western World as anything else. Without those regulations we might have had a bank crisis, but none as big as the current that resulted from allowing banks to leverage immensely with what was perceive as safe, like “infallible sovereigns” as Greece, members of the AAAristocracy, and the real estate sector in Spain.

If Renzi is not capable of demolish these populist bank regulations, Italy might still make it, but that would only be as a result of the strengthening of la banca sommersa.

FT, supporting the idea that Basel III is making our banks and our economies safer, is to support populists.