June 23, 2018

Regulators gave banks great incentives to smoke around drum barrels marked “empty”, and to stay away from drums marked “full”.

Gillian Tett writes “before 2008 the big banks spent a great deal of time fretting about issues that seemed obviously risky — hedge funds or highly leveraged companies — but tended to ignore anything that seemed safe or boring, such as AAArated mortgage-backed securities” “What the Hopi culture teaches us about risk” June 23.

Sir, if you go to my TeaWithFT blog and click on Gillian Tett, you will find that over the years I must have written her at least 100 letters explaining that what is perceived as risky, drums marked “full”, is never as dangerous than what’s perceived as safe, drums named “empty”. 

But, if a 70 year old paper by US fire-safety inspector Benjamin Lee Whorf, based a lot on Hopi Native American culture, is more convincing to Ms. Tett than my arguments, so be it.

My real complaint though is that Ms. Tett only refers to what bankers did, and does not mention the fact that bank regulators, on top of it all, with their risk weighted capital requirements, allowed banks to smoke (leverage) much more around drums named “empty”, than around drums named “full”. 

So when Ms. Tett writes: “In theory, this danger has now receded: banks have been trained to take a more holistic view of risk and to question whether even AAA ratings are always safe”, let us not forget that with Basel II, regulators allowed bank to leverage a mindboggling 62.5 times if only an AAA to AA rating was present. Since that besserwisser regulatory mentality still prevails, and risk weighting derived incentives still exists, unfortunately I do not share the hope that dangers have receded. New dangerous “absolutely safe” always lurk around the corners.

And Sir, come on, we have European central bankers who told banks “You can smoke as much as you like around that 0% risk weighted drum named Greece”; and they have still not been made accountable for that… and, between you and I, you FT is not entirely without blame for that.

PS. The sad complement to this analysis is that what regulators decreed as drums marked “full”, and made banks stay away from, includes entrepreneurs and SMEs, something which must erode the dynamism of the economy. 


June 22, 2018

How can banks price risks correctly when regulators interfere and alter the payouts?

Sir, Gillian Tett writes: “If you peer into the weeds of global finance, you will see peculiarities sprouting all over the place… there is [a] pessimistic explanation: years of ultra-loose monetary policy have made investors so complacent that they are mis-pricing risk.” “Markets appear calm but are behaving abnormally” June 22.

Years of ultra-loose monetary policy, QEs or asset purchase program have indeed distorted the markets so there has to be much mis-pricing going on. But that’s not all.

The expected winnings (the dividends or payouts times the odds of winning) is exactly the same for all possible bets in a game of roulette. This is why roulette functions as a game. The credit markets with all the signals read and emitted, by all its many participants, givers and takers, continuously work towards equal payouts. And achieving these is what an efficient credit allocation is all about. 

But what if someone altered the payouts in roulette, like the regulators, with their risk-weighted capital requirements for banks did in the market of bank credit, how long would roulette survive as game?

Sir, just remember the 0% risk weight assigned by European central bankers to Greece. Those allowed banks immense leveraging and see such ROE payout possibilities that it went overboard lending to Greece; just in the same way Greece went overboard borrowing too much. 

And what about mispricing the risk of securities with a 20% risk weight in Basel II, which allowed banks to leverage 62.5 times only because some human fallible rating agencies had assigned these an AAA to AA rating? Frankly, is not the current bunch of bank regulators the mother of all mispricers ever?

So, to blame the investors, markets, banks for mispricing risks while blithely ignoring the regulatory (and other) distortions that exists is irresponsible; and could only be understood in terms of wanting to favour bank regulators… something which you hold in your motto you do not. 

Sir, let’s get rid of as many distortions as possible, so as to let investors, markets, and our banks stand a decent chance to do a good job allocating credit. The future of our grandchildren depends on it.

For a starter, and though the road there is full of difficulties, we must get back to one single capital requirement (8-15%) for banks, so that these can leverage the same against absolutely all assets.


June 21, 2018

Is the Eurozone intent on once again give Greece's government a much lower risk weight than that assigned to a Greek entreprenuer?

Sir, Jim Brunsden writes: “Eurozone finance ministers are poised to give Greece debt relief —The plan is to help convince investors that Greece is ready to return to markets when its bailout programme expires in August.” “Creditors set to reach agreement over Athens debt deal” June 21.

That sure does sounds scary if the “convincing of the investors” once again includes giving the Greek government, for the purpose of the capital requirements of banks, a lower risk weight than it merits. That would be sheer cruelty.

Let us never forget (though the statists have classified it as something that should not be named) that it was the insane 0% risk weight assigned to Greece by European central bankers that got that country into its so tragic difficulties.

In my opinion the Greeks (or at least Yanis Varoufakis) should have taken those central bankers to the European Court of Justice long time ago. Imagine what would have happened to a credit-rating agency had it assigned such 0% risk weight to Greece?


June 20, 2018

Do we not need a Martin Act to crack down on regulators who dare regulate banks without having a clear idea about what they are doing?

Sir, Brooke Masters writes “global banks and other big financial services groups have lived in fear of an old New York state anti-fraud law. The Martin Act has been used to crack down on biased Wall Street research, insurance bid-rigging and “dark pools” said to mislead traders, among many things” “Loosening the law that haunts bankers puts us at risk” June 20.

Great! But why is there not anything similar when for instance European regulators and central bankers assign a 0% risk weight to Greece. Of course they must have known Greece was not worth it, no sovereign is, and yet they went ahead. And the final consequence of that have been horrible sufferings resulting from excessive public debt, but without the slightest indication of holding those responsible for it accountable.

Yes “The US system relies on fears of prosecution and giant fines to help keep banks and insurers honest”, but what do we have to keep technocrats from regulating when they obviously have no idea about what they are doing… like for instance when they think that what is ex ante perceived as risky poses ex post more dangers to our bank system than what is ex ante perceived as risky.


Way too little has been done in 20 years to counter the Eurozone losing its foreign exchange adjustment tool.

Sir, Martin Wolf writes: “Andreas Kluth wrote in Handelsblatt Global this month: ‘A common currency was supposed to unite Europeans. Instead, it increasingly divides them.’ He is right” “The Italian challenge to the eurozone” June 20. 

Of course he is!In 1998, on the eve of the Euro, in an Op-ed titled “Burning the bridges in Europe” I wrote: 

“The Dollar is backed by a solidly unified political entity, i.e. the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

So clearly “All of this was predicted” Yes, but why has so little been done about it? Why have EU technocrats instead wasted their time on so many other minutiae?

What I did not foresee though, really because I had no idea of it, was that with the risk weighted capital requirements for banks, that which assigned a risk weight of 0% to sovereigns and 100% to citizens, fatal distortions in the allocation of bank credit were introduced, causing “high level of public debt” and making it all so much harder on the eurozone.


June 19, 2018

A major difficulty for EU is that what caused the last crisis, and attempts against its economic dynamism, shall not be named

Sir, Judy Dempsey writes that Merkel’s “conservative bloc would not buy into an agreement that would require Germany to spend more to bail out badly run economies” “Macron and Merkel will struggle to present a united front” June 19.

Have Merkel’s “conservative bloc” been told that their bank regulators assigned a risk weight of 0% to Greece and so that therefore Greece got way too much money?

Have Merkel’s “conservative bloc” been told that their regulators require banks to hold more capital against loans to German unrated entrepreneurs, than against loans to any EU sovereign?

Sir, I am sure that if central bankers and regulators were hauled in front of some really independent authority, and asked to comprehensibly explain so much of the crazy things their risk weighted capital requirements for banks entail, that would help clear the air and lead to much more constructive discussions in the EU about its future.

Who knows, perhaps such real discussions that would at long last hold some EU technocrats accountable, could even tempt a reversal of Brexit.


Capital requirements for banks based on how much “distressed debts” hedge funds raise money?

Sir, Joe Rennison’s and Lindsay Fortado’s “Distressed debt tempts investors in anticipation of the next downturn”, June 19, raises the following question:

Could an index that tracks how “US hedge funds specialising in distressed debt are raising money in anticipation [of] the next economic downturn” be useful to base bank capital requirements on? 

At least it should be much better than current regulations, which allow banks to build up dangerous exposures to what is perceived as safe, against especially low capital requirements, especially when a Jason Mudrick, founder of $1.9bn Mudrick Capital can state “This economy is roaring right now”


June 18, 2018

It is the run of banks to what is perceived, decreed or concocted as safe that is scary

Sir, you opine: “If there was ever a moment for bankers to take on too much risk, thereby planting the seeds of a nasty downturn, it is now”, “The unsettling return of bullish investment banks” June 18.

Given current regulation a more exact phrasing of “to take on much risk” would be “to build up risky exposures to assets that are perceived (houses), decreed (sovereigns) or concocted (AAA rated securities) as safe against the least capital possible” 

When you write: “there are other indications of a cyclical top. Assets remain expensive worldwide, and in the US business confidence is at a peak, unemployment is very low and tax cuts have delivered a big fiscal stimulus”… you are describing a world in which the regulators with their risk weighted capital requirements, more than warning the banks are spelling out a go ahead. Their countercyclical capital requirements when leaving in place the distortions of risk weighing are a joke. 

Bank crisis never result from exposures to what is ex ante perceived as risky but only from exposures to something perceived as safe. By allowing those risky sized exposures to build up against especially little capital, the regulators have set bank crises on steroids.

The regulator’s tiny countercyclical capital requirements are, when leaving in place the distortions of risk weighing, just a joke. 

If only banks went for much more of the truly “risky”, like loans to entrepreneurs or SMEs. Those exposures would of course also be hurt in a crisis but, meanwhile, they could at least help our economies to move forward in a more dynamic way. Risk-taking is the oxygen of development. God make us daring!


Optimally the utilities’ long-term views should result from their local connections.

Sir, Jonathan Ford describes in very clear terms why “private equity firms shouldn’t own regulated utilities, full stop. In very long-term businesses providing essential services, investors should have time horizons to match.” “Why private equity investors and utilities should not mix” June 17.

But there is more to this issue. In 2000, Electricidad de Caracas, EdC, the electrical utility of Caracas, Venezuela, that had been founded and managed by a local family for 105 years, was sold off to a big time international player, AES. I was in shock, and so I wrote in several Op-Eds

Not only would we lose the natural accountability of the management that exists when these are your neighbors and suffer the same service failings that you do; but it would also take that company out of the hands of electrical engineers and place it into the hands of financial engineers. 

Yes, the new owners proceeded to sell assets, repurchase shares, take up new loans and pay out dividends, leveraging the company up to the tilt… and many needed investments were delayed.

While EdC was being negotiated I wrote: "From my local electrical distributor, what I'm interested in seeing are good engineers with colorful helmets, accompanied by competent accountants with simple calculators, which only serve to add and subtract. I do not like to observe the presence of lawyers, financiers, brokers, publicists and other professionals little or nothing related to bring me the light home…. I get very scared when I hear terms like ‘unfriendly takeovers’ ‘poison pills’ and ‘golden parachutes’.”

To that I should have added “And I absolutely want my neighbors to hold management control and a clear majority of shares in that company.”

PS. The EdC story had an even sadder ending. In 2007, after trying to negotiate tariffs with a loony government, AES withdrew. Unfortunately, the Local that stood up to forcibly repurchase it, was Pdvsa… and you probably know what happens to anything that is in the hands of the current Pdvsa.


June 17, 2018

FT, that what is perceived risky is as dangerous to banks than what is perceived as safe, is not a “roughly right analysis”

Sir, you write: “The world may not return to what was normal before the global financial crisis… Still, consumers, investors and businesses should take some comfort that the central banks of the world’s biggest market economies have roughly the right analysis of where they are and how they might react in a downturn.” “Central banks correctly go their separate ways” June 16.

No way! With their continuous support of the risk weighted capital requirements for banks, central bankers evidence they have not understood “where they are know”. They are not “roughly right” but totally wrong. What can generate those excessive exposures that can endanger bank systems is not what is ex ante perceived as risky, but what is ex ante perceived as safe. 

Certainly central bankers the regulators did not commit this mistake on purpose, but the fact remains that they have produced much suffering; just think what their 0% risk weighting did to Greece. To hold then somewhat accountable, should we parade them down the D.C. Mall wearing dunce caps?


June 12, 2018

Europe (and the rest of the world) needs to get rid of the distortions produced by QEs and risk weighted capital requirements for banks.

Sir, Karen Ward, discussing ECB’s asset purchase programme writes: “It’s very hard to get the population to worry about government borrowing when interest rates seem impervious to how much the government wants to borrow”… “to truly put the European economy on a long-term sustainable footing it may be time for the ECB to step back and let the market do its job”… “Bond vigilantes are an essential part of the micro economy and vital for a thriving macro economy” “Investors should resist urge to run for the hills if ECB calls time on asset purchases” June 12.

Absolutely! Right on the dot! But besides suspending the distorting asset purchase program, there is also much need for to eliminate the risk weighted capital requirements for banks, that which so much and so uselessly distorts the allocation of bank credit to the economy.

PS. “Mario Draghi, ECB’s president, is under pressure to provide guidance” Forget it! Draghi is one of those regulators who decided to assign a 0% risk weights to sovereigns like Greece, and thereby helped to cause the crisis. Therefore Draghi should be prohibited to provide any further guidance.


June 08, 2018

The euro did not derive from a union but was used to build a union, and that still poses great-unresolved challenges.

Sir, I refer to Philip Stephens’“Trump, Italy and the threat to Germany” June 8.

Stephens writes: “Germany has been a “taker” — importing stability from neighbors and allies.” Indeed, but Germany has also imported the economic weaknesses from neighbors benefitting from a euro lower than what it would be if responding solely to Germany.

Yes, “The euro did not cause Italy’s economic ills, but it does close off the old escape route of devaluation”, except of course for those economies that, on the margin are the strongest, e.g. Germany.

Knowing they were benefitting unduly from the euro was perhaps the reason why the ordinarily much more disciplined Bundesbank Germans supported that insane notion of assigning, for the purpose of the capital requirements for banks, a risk weight of 0% to euro partners like Greece. For a while growing public indebtedness hid the costs of a stronger than suited for the weaker economies euro, but that lifeline has now clearly run out of steam.

What should the eurozone do know in order to survive? The answer must be finding a sustainable solution to the immense challenge that existed from the very start, when elites decided to build a union based on the euro instead of having a euro derived from a union.

Americans dream as American. How many Europeans dream as European?

June 07, 2018

Instead of Andreas Georgiou, Greek courts should prosecute those who assigned Greece a 0% risk weight

Sir, Ulrich Baumgartner, Eduard Brau, Warren Coats and otherformer senior staff of the IMF launch a spirited defense of Mr Andreas Georgiou. They write that Georgiou, a respected authority in statistics, has been pursued relentlessly during seven years with lawsuit after lawsuit, for “bringing harm to Greece and dereliction of duty by refusing to falsify the figures.” “Greece should not hound man who refused to falsify the figures” June 7.

What “Georgiou and his Greek staff, helped by international experts” did was to produce corrections, “which showed a much bleaker picture than the earlier data, were vetted by Eurostat and accepted by the European Central Bank, the EU and the IMF as the basis for major financing.”

Amazing! If anything the courts should prosecute all those European central bankers and regulators who, for the purpose of their risk weighted capital requirements for banks, and knowing it did not merit it, assigned a 0% risk weight to Greece. Had it not been for that the governments of Greece would not have been able to build up that gargantuan level of public debt that was the primary cause of its crisis.

Since IMF, with its silence on it, has de facto endorsed that 0% risk weight, perhaps those here defending Mr Andreas Georgiou should start with a mea culpa. The world would very much appreciate that. It is way overdue.

Just imagine what would happen to a credit-rating agency if it was proven that it had knowingly assigned an undeserved an AAA rating?

What if a credit rating agency had knowingly assigned an undeserved AAA rating? European central bankers assigned an even worse 0% risk weight to Greece, which doomed Greece to excessive public debt… and they have yet not been held accountable for it in the slightest.


June 06, 2018

To make banks safer, stop allowing besserwisser regulators distort the allocation of credit.

Sir, Martin Wolf writes: “147 individual national banking crises occurred between 1970 and 2011. These crises … were colossally expensive, in terms of lost output, increased public debt and, not least, political credibility” “Why the Swiss should vote for ‘Vollgeld’” June 7.

Sir, in the years before those crises, did the economy grow in the same way? No one seems to be interested in the quality of the booms, as they are all too fixated on the damages of the busts. John Kenneth Galbraith, in his “ Money: Whence it came, where it went” (1975) wrote: “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

Wolf writes: “it is often easiest for banks to justify lending more just when they should lend less, because lending creates credit booms and asset-price bubbles, notably in property.” But Wolf, probably being one of those “insiders” Yanis Varoufakis refers to in his “Adults in the room”, refuses to point out how regulators, by allowing banks to leverage much more with “safe” residential mortgages, than for instance with loans to “risky” entrepreneurs, helped feed the property bubble.

The regulators, when interfering with their capital requirements for banks based on the ex ante perceived risks that would usually be cleared for solely by the market, obfuscate market signals, and thereby distort the allocation of bank credit making the economy weaker and the bank system riskier… and there is no way around that! 

PS. Does an ordinary British citizen know, for instance, that their bank regulators allows banks to hold much less capital against loans to Germany than against loans to British entrepreneurs? Sir, don’t you think they have a right to know that? Or is it a case of the risk-weights that shall not be named?


Yes, cities can be great, but these can also be dangerous bombs in the making.

Sir, Edward Luce writes about how trying to attract big companies like Amazon to the cities might make it harder on the poor in the city. “Beauty contest reveals ugly truths” June 6.

Yes, of course, the weaker, the poorer, they will always be relatively more squeezed by any development that occurs in cramp conditions where there will be a fight for space.

But it is when Luce quotes Richard Florida with, “America’s most dynamic cities have played right into the company’s hands, rushing to subsidise one of the world’s largest corporations rather than building up their own economic capacities.” where the real discussion should start.

Why would a city want to bet so much of its future on so few actors as would here be the case with Amazon? Have they not seen what happened to Motor City Detroit? If you want to use incentives to attract jobs, which is of course to start “a race to the bottom”, why bet all on a number, would you not be better off diversifying your bets? 

If I was responsible for a city, one of the first things I would be doing is to analyze how its riskiness would be rated compared to other cities? For instance, what are the chances that suddenly another city offers your city’s wealthy, the possibility of moving to a place that has not accumulated impossibly high debts that will need to be served, supposedly primarily by them?

And, if your city faces a financial crash, what would be ones’ first priorities, to help the poor, or to make sure the rich do not leave without being substituted for by other rich?

PS. Luce writes: “Big fund managers… are putting cash into global urban real estate portfolios. As a result, property prices are becoming a function of global capital movements rather than local economic conditions”

Again, for the umpteenth time, what initially feeds high property prices is the inordinate ease of access to financing it, provided among others by regulators allowing banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs. 

The fund managers are just following the results of it… when that regulation-easing plan begins to be reversed, which will happen sooner or later, they run the risk of being left holding the bag. 


June 02, 2018

If you want real profound gender diversity at company boards, think of nominating housemothers

Sir, Daniel Thomas discusses the issue of having more women on corporate boards “Shareholders can do more to bring about boardroom diversity”, June 2.

More than a decade ago, as an Executive Director at the World Bank, I told my colleagues “We all have, more or less, quite similar backgrounds. If we were by means of a lottery substitute a plumber and a nurse, for two of us directors at the board, I am sure we would have a much wiser board”. I do not remember what my colleagues replied… or if they did.

Now, hearing the currently so frequent demand for more gender diversification, I feel the same. Having women educated similarly to the men they are to substitute for, brings much less diversity into the boardroom than what could be expected. 

If you want deeper meaning gender diversification, then invite housemothers to work some hours as board directors. The challenges mothers have to confront in their daily routines are way often much harder and much different from those that their then men board colleagues face.

Also, as an economist, to guarantee more gender income equality, start by arguing for parents, most usually women, to be remunerated for their socially so important work of taking care of their children or elderly. Unfortunately housemothers, just as the unemployed, do not have unions to take care of their interests. 


To salvage the European Union, its authorities must be held responsible for the travails of Italy, Greece and other.

Sir, with respect to what’s happening in Italy you write: “The guardians of the single currency failed to mend the roof while the sun was shining… Even if disaster has been averted on this occasion, the economic and political fragility of the eurozone remain all too clear” “Italy sets a stress test for the eurozone, again” June 2.

True. From the very start, soon 20 years ago, it must have been clear for all the proponents of the Euro that adopting it, meant for all countries using it giving up the possibility of adapt to different economic circumstances through foreign exchange rates adjustments.

And a Germany would benefit with a too weak for it Euro, and others, like Italy and Greece would suffer a too strong for them Euro.

What have the Eurozone authorities done to meet that challenge? Way too little! They busied themselves with all other type of lower priority issues and outright minutia. Worse yet, they also stupidly silenced the full disequilibrium signals that the interest rates on the Euro members’ public debt level could send the markets by assigning to all a 0% risk weight. Something that made the sun seem shine brighter than what it really did!

Fabio Panetta, the Deputy Governor of the Bank of Italy in a speech in London in February 2018, with respect to the possibility of raising the capital requirements on sovereign debt had the temerity to say: “The problem of high public debt should be addressed by Governments directly, with determination. It should not be improperly tackled with prudential regulation.”

If I were an Italian or a Greek, given a chance I would have told (shouted) him: 

“With your 0% risk weighing you regulators imprudently created temptations for our politicians to be able to take on much more public debt at much lower rates than would otherwise have been the case, and now you argue they should have been able to resist such temptations? Just the same way you argue that banks should have resisted the temptations to leverage over 60 times with assets that carried an AAA rating? Have you and your colleagues no shame?” 

Sir, while regulators keep on giving banks more incentives to finance the “safer” present consumption than the future “riskier” production, the chances for Europe (and America) to get out of its problems lie, at least in the case of Italy, as so many times before, in the strength of its economia sommerza.


May 31, 2018

Let’s make sure that environmental, social and governance investing does not just signify ESG profiteering, or access to indulgences for paying worse sins.

Sir, John Authers writes: “On the side of the devil, ESG offers a rebranding for an unpopular industry, an excuse for data providers to crunch a lot of data and then charge for it” “Pressure for ESG presents fund management chiefs with a moral dilemma” May 31.

That is right on the dot. In all these political correct issues, what is by far the most present is the profit motive for those preaching it... morality is much absent

In terms of defending the environment, I would much rather prefer a huge revenue neutral carbon tax, meaning all its revenues paid out in equal shares to all its citizens, than having the climate change fight profiteers gaming the fight and taking their cut. It is sufficiently difficult and expensive as is.

And in terms of “social” it is much better to use all potential profits to help fund a Universal Basic Income than to help fund the social fighters.

But what really upsets me is that good governance is on the list of good socially conscious investments. Much better, much clearer, would be to make sure bad governance is never ever financed.

Let me be absolutely clear. I would much rather prefer a Goldman Sachs’ Lloyd Blankfein being socially sanctioned, never ever more invited to a party in New York, for helping to finance a human rights violating regime like Venezuela’s Maduro’s, than allowing him to be able to purchase indulgencies to pay for his sins, by (profitably) financing some other “good” guys.


May 30, 2018

“Co-operate more” is often argued by multilateral technocrats only for them to interfere more

Sir, Martin Wolf writes: “Countries that contain substantial populations in relative domestic decline are consumed by the politics of rage. Yet, if progress is to be sustained and the dangers are to be managed, peaceful co-operation is necessary” and he ends with “Am I optimistic that the world will rise to the challenge? The answer is: No”, “The world’s progress brings new challenges” May 30.

I am not optimistic either. In 1998 in an Op-Ed: “History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”, and in 1999: what “scares me the most, is [what] could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”. 

And with the risk weighted capital requirements that distorts the allocation of bank credit to the real economy, the peacefully cooperating regulators in the Basel Committee realized my worst fears.

And that horrendous mistake, which included assigning risk weights of 0% to sovereigns, like Greece and Italy, and which brought us the 2007/08 crisis, and that is to blame for much of the stagnation in productivity, is not yet even discussed. There’s a total lack of transparency and accountability among those that Yanis Varoufakis rightly holds belong to a network of insiders.

Why? As Varoufakis explains in his “Adults in the room” journalists, I would argue like Martin Wolf, are also “appended, however unconsciously, to a network of insiders… [and] This is how networks of power control the flow of information.”

Wolf also refers to Kishore Mahbubani, the author of “Has the West Lost It?” arguing: “The lesson the west — above all, the US — must learn is… to interfere far less and co-operate far more [with] multilateral rules and agreements. It cannot run the world. It needs to stop its arrogant and usually foolish interventionism.” 

But again: The worst “arrogant and foolish interventionism”, that which really has the West really losing it, as it put banker’s risk aversion on steroids, is what was concocted by the Basel Committee for Banking Supervision. And its interference is like a cancer tumor that keeps on growing thousand of pages a year.

A call to “co-operate more” is always justified but, when cooperating, let us not ignore that is precisely what multilateral technocrats often ask for, only in order for them to do more besserwisser interference.

The best multilateral agreement we now could have with respect of our banks, is to set one capital requirement against all assets, a one pager regulation, and then carefully manage the process of getting the banks from here to there, while minimizing the hurting.

PS. The best way to fight pollution, climate change [and inequality], is by means of a carbon tax with all its revenues shared out to citizens. But, since that does not allow for interesting profit opportunities that could be captured, and that could be ruled, the intervention profiteers much prefer the Paris accord on climate change.


May 28, 2018

To integrate migrants in Sweden might have to begin with helping Swedes valuing their heritage (their Swedness) more.

Sir, Richard Milne’s reports Ulf Kristersson (Moderate party) told the Financial Times that integrating the hundreds of thousands of immigrants in Sweden was a “really tricky thing,”“Swedish poll favourite eyes welfare change to integrate migrants” May 28.

Over the weekend I was in Sweden visiting family. There I had a chance to sit down and chat with the priest of the parish where the cemetery in which my parents are buried. After hearing her lamenting, discreetly, I said: Indeed, if you do not teach your children about the historical importance of the Church for Sweden’s development, it is hard to see them take due interest of it. 

Two years ago, the only girl wearing a typical Swedish national dress in the “folkpark” where we danced around the Midsummer pole, was my Canadian granddaughter. It was sad. Of course, to integrate migrants to something not given sufficient importance is a tricky affair. In Sweden, when it comes to swearing, even the “fan” I knew has been pulverized by the “shit”. 

Perhaps Sweden needs to look at itself more in terms of a cultural profitable business franchise, and have its universities analyze how much Swedes and migrants would be losing if Sweden got rid of its originalities and went neutrally global. To start out they could try calculating what its Swedish heritage has meant to bring cohesion and strength to the marketing strategy of an IKEA.

But perhaps that’s not politically correct. I wonder if a university in UK has dared estimating the added value in pounds to Britain, of the recent Meghan and Harry wedding. Surely many billions! Instead you have a Bank of England giving you the cost of Brexit, £900 per family.


May 26, 2018

Current bank regulations express much more than Brexit, a dangerous payday-loan mood.

Sir, Tim Harford refers to “the payday-loan mood it is displaying in its Brexit negotiations. No gain is too small, no price too great, as long as the bill comes later.” “Want to solve a problem? Just wait” May 26.

Current risk weighted capital requirements cause banks to give much more credit to fairly unproductive but “safe” sectors, like housing, and less credit to potentially much more productive but “risky” ends, like loans to entrepreneurs. I would hold that follows a payday loan mood put on steroids… one that in complete violation of that holy intergenerational social contract Edmund Burke spoke about, places a reverse mortgage on our current economy.

Sir, just reflect on that the regulators assigned a 0% risk weight to sovereigns. That can only be justified arguing that the sovereign can only print money to pay back debt expressed in its own currency. Indeed but that spurious argument blithely ignores that printing money to pay back its own debts, is precisely one of the worst misbehaviors of a sovereign, like when Venezuela’ government prints loads of money, among other to serve its own internal debt.

And Harford reminds us: “The world is full of risks. Can anyone guarantee that over the next 300 years both the UK trust fund and country will survive asteroid strikes, thermonuclear war or a deliberately engineered pandemic?”

Indeed, that’s true, but how come then when regulators imposed their risk weighted capital requirements on banks, we decided to naively believe them, instead of asking: Who are you to know what the risks in banking are? And if you do, why are you not then the bankers?


BoE’s FSB' Mark Carney should not be allowed to use Brexit cost estimates to distract us from the distortion of bank credit costs.

Sir, you write: Bank of England’s Mark Carney has come out with a “suggestion that average household incomes are £900 lower than they were expected to be before the Brexit referendum.” “A necessary statement of the obvious from Carney” May 26

But Carney is also chair of the Financial Stability Board, and he therefore belongs to those regulators who do not care one iota about distorting the allocation of bank credit to the real economy, since they are convinced banks will be safer with their risk weightedcapital requirements… all as if the health of the economy is not the most important pillar of a stable bank system.

First try to calculate how much more credit has been given to fairly unproductive but “safe” sectors, like housing, compared to with how much less credit has been given to potentially much more productive but “risky” ends, like loans to entrepreneurs. And then try to come up with a bill for that. Clearly that must have cost and keeps on costing the average household income inBritain, many multiples of £900; and the regulators are not in the least being held accountable for that.

But Sir, since FT has also steadfastly kept silent on the costs of misguided credit allocations, you might also share the same interest in distracting with Brexit 


May 25, 2018

Will the many “General Data Protection Regulation” profiteers help or stand in the way of a better future for our grandchildren?

Sir, Richard Waters writes that “Europe’s new online privacy regime is a gravy train for lawyers and consultants, and it has kept IT departments and compliance officers working late for months [and] it is likely to take an onslaught…from privacy activists” “Brussels forces online reckoning by setting high bar on privacy” May 25.

That raises a question: Will that mean a better future for my grandchildren, or will it just extract value from what has been developed, making what’s to be developed more distant and expensive?

Waters also writes: “One Silicon Valley figure argues: if users were able to capitalise the future value of personal data like this that they will throw off over a lifetime, it would turn out to be one of their most valuable assets”. I have argued a similat the thing with letters sent to FT… but I have also indicated the possibility that all the web and social media added monetary value, could be used to fund a Universal Basic Income, a sort of Human Heritage Dividend.

Personally, scared of some “Big Brother Is Watching You” joint ventures between data gatherers and goverments coming into fruition, I prefer allowing development to run its full course to see where it takes us. 

Sir, I just do not feel sure enough about taking development limiting decisions on behalf of my grandchildren. Do you? 


PS. If social media is to be fined, then have all the fines help to fund Universal Basic Income schemes. What we absolutely do not need, is to have social media (ambulance) chasers, redistribution profiteers, like a European Commission, or similar, capturing these.


The regulatory subsidy of house financing has caused much of the financialization of property markets.

Sir, Gillian Tett writes that since some investors are treating housing more like a tradeable asset, chasing yields around the world… [the] housing market is more “financialised”, [and so] a decade of ultra-loose monetary policy in the west has lifted so many geographically dispersed real estate boats” “New York property jitters herald declines elsewhere” May 25.

Since decades regulators allow banks to leverage much more their equity when financing the purchase of a house than for instance financing an entrepreneur. That means that compared to when banks held the same capital against all assets, which it did during most of its history, they now earn higher expected risk adjusted returns on equity when financing the purchase of a house, than for instance financing an entrepreneur.

Anyone who does not think this directly influences house prices should not be writing about finance.

What could the price of houses be in the absence of this regulatory subsidy? It’s hard to say. A static analysis would clearly yield the answer of much lower (30%?), but a dynamical one could perhaps yield higher prices, as a result of so many more affording houses because of more jobs created by entrepreneurs.

How do we get rid of the distortion? The sad fact is that for the redistribution profiteers it is much more interesting to offer affordable houses than to have more people affording their houses, which of course c'est pas la même chose. 

PS. One question I often ask myself is: nowadays when we finance someone’s purchase of a house how much of its price do we need to finance just because of the subsidized financing?

May 23, 2018

Europe has been way to blasé about how the divisive forces of a common Euro within a not fully integrated Europe could gather strength.

Sir, I refer to Martin Wolf’s “Italy’s new rulers could shake the euro” May 23.

On the eve of the Euro, November 1998, in “Burning the Bridges in Europe” I wrote:

“The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. The Dollar is backed by a solidly unified political entity, i.e. the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.

The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive.”

One could have expected that the fundamental menace that the Euro poses to the EU should have been in the forefront of everyone’s mind, and that much more would have been done to mitigate the dangers. But that has not really happened as its authorities wasted their time in so many other relative minutiae.

But what I never saw or knew when I wrote that article, as I had really nothing to do with bank regulations, was that bomb that was implanted in the middle of Europe, and in much of the rest of the world, that which required banks to hold more capital when lending to the citizens than when lending to the sovereign. That had to cause that excessive public sector indebtedness, which has now set the Euro problematic on steroids.

Sir, looking at what lays in front, one cannot help to think about the possibility that Brexit ends up being for Britain a very timely blessing in disguise.


May 22, 2018

If Europe’s sovereign debt is to be securitized, who’s going to earn those origination and packaging profits?

Sir, with respect to the European Systemic Risk Board —recommendations of pooling, packaging and tranching sovereign bonds from all members of the single currency into synthetic securities you opine: “Having a safe asset proposal in the mix would make it less risky, for example, to introduce a sovereign debt restructuring mechanism or risk weights for banks’ government bond holdings.” “Eurozone ‘safe asset’ is crucial to banking union” May 22.

Once securities with mortgages to the subprime housing sector in the US got a high rating, that allowed the originators of very long, very high interest and very lousily awarded mortgages, to sell these of at very low discount rates, and thereby generate huge immediate profits for them and the packagers. Did this benefit in any way the subprime sector? No! On the contrary… it got much more mortgages that it could reasonably swallow.

In the same vein, let me ask, how are subprime rated nations like Greece to benefit by having its public debt packaged together with higher rated nations like Germany? If its debt is sold off in riskier tranches, then all remains the same. If its debt remains in the safer tranches is there then not a build up of a new crisis?

Sir, what Europe does not need is to try to hide away in some new securities, the regulators’ fatal use of risk weighted capital requirements for banks, that which favored way too much sovereign indebtedness. 

What Europe, and the western world need the most is to get rid of that regulation in order to allow banks to again become banks that earn their return on equity by giving loans with calculated risk taking, and not by reducing equity.

A Systemic Risk Board that does not understand the systemic risk bad and intrusive regulations pose is a joke of a Board. 


May 21, 2018

There’s never a wrong time to begin correcting bad bank regulations, such as the current ones.

Sir, Rana Foroohar writes: “Financial crises always start the same way” and refers to “Over-confident financiers [and] lax regulators”, “The wrong time to weaken bank reform” May 21.

The 2007/08 crises resulted from overconfident regulators, those who believed so much in the capacity of credit rating agencies that, if private sector assets were rated AAA to AA, banks were allowed to hold these against only 1.6% in capital, meaning they were allowed to leverage a mindboggling 62.5 times. The financiers on their hand, much more than overconfident, were lax and did not have it in them to resist the temptations of such regulatory generosity.

Sir, just think about how much sufferings and how many unrealized dreams could have been avoided had only the following four simple questions been asked of the Basel Committee’s about their risk weighted capital requirements for banks. 

1. What? Do you really know what the real risks for banks are? If you do, why are you not bankers?

2. What? Don’t you see that allowing banks to leverage differently with different assets will lead to a new not-market-set of risk adjusted returns on equity. Are you not at all concerned this could dangerously distort the allocation of credit to the real economy?

3. What? Do you think that what’s perceived risky, that which bankers adjust to by means of lower exposures and higher risk premiums, is more dangerous to the bank system than what they perceive as safe?

4. What? A 0% risk-weight of sovereigns? That could only be explained by their capacity to print currency in order to get out of debt. But is that not also one of their worst possible misbehaviors?

The saddest part though is that 30 years after that faulty regulation was first introduced with the Basel Accord in 1988, these questions are still waiting for an answer.

Sir, there is never the wrong time to start correcting for such bad regulations. You could argue that the introduction of a leverage ratio is doing that. Indeed, but as long as the risk weighted capital requirements remain these will be influencing credit decisions where it most counts, on the margin.

And it is only getting worse. Foroohar writes “larger banks with assets ranging from $250bn to more than $2tn… will now be able to reclassify municipal bonds as “high quality assets”, making it easier for them to game the liquidity coverage ratio.” What does that signify? Those municipalities will get too much credit in too easy terms… just like Greece.


May 19, 2018

If Remainers want Britain back in EU why do they not make the proposals that would make EU more attractive to other Europeans?

Sir, Tim Harford, with respect to the Brexit referendum writes: “It was always clear that asking an absurdly simple question about an absurdly complicated decision was unlikely to work out well.” “Picking a bread-maker is like choosing a Brexit”, May 19

Really? Was the real problem not more that the “experts” expected a simple answer that agreed with their take on an “absurdly complicated decision”? Sort of like what helped Trump to be elected. 

If Britain has problems with getting out of EU, it would seem that many EU nations have even more ingrained problems with staying in EU… having to live under the ever-growing reaches of an evermore distant European Commission.

This week the European Commission tweeted: “Today, municipalities will be able to apply for €15,000 EU financing to install free wireless internet hotspots in their public space. First-come first-served!” Would that not be a perfect opportunity for Remainers to come out in full force with a “See… that is one of the thousand of examples for why so many in Britain went for Brexit”?

With or without Brexit, Europe will remain, and Britain will be a part of it. Britain could be a leading voice proposing the reforms that would allow Britain to reenter EU. And I am sure they would find much sympathy with others equally fed up with having to live under the thumbs of besserwisser technocrats. 

The best of the Winter Olympics 2018 for me was seeing Sofia Goggia singing her Italian national anthem with such an enthusiasm. There was not one bit of Europe present in her voice… and that is an indication Europe is not going in a European direction.

PS. Just in case you are curious, the worst for me at the WO-2018 was to suffer with Egvenia Medvedeva when not winning gold.


May 18, 2018

Bank regulators have clearly violated that holy social intergenerational contract Edmund Burke wrote about.

Sir, Marin Wolf writing that while “UK has messed up policy in five significant respects: growth; ageing; risk-sharing; housing; and redistribution.” argues that the focus on intergenerational equity is not helpful” “The focus on intergenerational inequity is a delusion” May 18.

In that I do not agree.

For the umpteenth time: The risk weighted capital requirements for banks, that which allow banks to leverage more and thereby earn higher expected risk adjusted returns on equity when financing what’s perceives as safe, like the present economy, houses and sovereigns; over what’s perceived as risky, like the riskier future and the entrepreneurs, is a direct violation of that very core of minimum intergenerational equity that should guide our actions.

And not only will our young pay dearly for it. Those young currently living in the basements of their parents houses will one day shout out: “Now its our turn to live upstairs, you move down to the basement!” And way too many of those elder who possess assets, like houses and shares will, when they really need, find it very hard to convert these into the main-street purchase capacity they hoped for.

I pray it will not come to that, but it is useful for everyone to look at Venezuela where their young are now all fleeing to find better opportunities abroad, while most of the elder are stuck in a society that is rotting. And from boom to bust can happen so fast.


The risk weighted capital requirements doomed our banks to impotence, and our economies to obesity.

Sir, I would like to make some of my own observations on two terms of those exposed by Robert Shrimsley in “Menopause, impotence and other useful economic terms” May 18.

Shrimsley writes: “Impotence: An underperforming economy is distressing for all parties. This kind of dysfunction can be either structural or cyclical or psychological”. 

Indeed but it can also be physiological. When the Basel Committee introduced risk weighted capital requirements for banks they impeded banks from feeling any attraction to what’s perceived as risky, like the entrepreneurs. That has our banks only masturbating by lending to what’s “safe”, like houses and sovereigns… and all the Viagra in the world won’t help. Our only salvation lies in a delicate intervention that removes this regulatory object that causes this ED; so that banks can, little by little, throwing out the equity minimizers and reincorporating some savvy loan officers, learn again to perform their societal duties.

Shrimsley writes: “Obesity: This is an economy…which has given up going to the gym and is too heavily dependent on house price inflation and junk commodities like lightly regulated financial products” 

When regulators told banks that if they only stayed away from what is perceived as risky, what bankers don’t like, like risky entrepreneurs and broccoli; and went for what’s safe, what bankers love, like residential mortgages and ice cream, then they would be rewarded with the chocolate cake of higher expected risk adjusted returns on equity…they guaranteed the economy to become obese.


May 17, 2018

Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 


The not globalized football world, should it not get more out of any Fifa/Uefa deals?

Sir, I refer to Arash Aassoudi’s and Murad Ahmed’s “Fifa’s $25bn shake-up sets up clash with Uefa” May 17.

Out of this $25bn Fifa proposal we read that $2.4bn (4x $600m) will be given “in support to football confederations, national organisations and smaller clubs.” 

That’s less than 10%! In these days in which so much of the richness derived from globalization gets to be concentrated in fewer and fewer hands, should that support of the excluded not be… at least 51%?


May 13, 2018

Central bankers have surely favored government borrowings… and the costs will be horrendous.

Sir, Desmond King reviews and discusses Paul Tucker’s “Unelected Power”, which asks:“To whom are central bankers responsible? How is oversight of their discretionary authority monitored in a democracy? Can central banks remain legitimate as they choose financial winners and losers?

The starting point for Tucker’s questions seems to be when, in September 2008, “Citizens and bankers sat transfixed as Lehman Brothers collapsed, rattling equity and credit markets”.

Wrong! Not that I had any idea of it back then but the genesis of the problems herein referred to seem to me be in 1988 when bank regulators came up with the incredibly hubristic concept of risk weighted capital requirements for banks, as if anyone could measure ex ante the risks that would explode ex post.

From a cv. on the web I see that Paul Tucker worked in 1987 in “the Banking Supervision Division; as part of the 4 person team negotiating the Basle International Capital Convergence Agreement; and assistant to chair of Basle Supervisors Committee”

So when King writes that “Tucker argues that the “most compelling reason” for [central bank independence] is to “enable governments to save paying an inflation risk premium on their debt”, I must ask: “Really Mr. Tucker, does that require risk weighing the sovereigns with 0% while assigning the citizens 100%?” 

That regulatory subsidy causes, sooner or later, governments to take will be getting up too much debt, that which can only be repaid by the printing machine… meaning inflation… meaning tragedies. 

I have not seen anyone holding Sir Paul Tucker accountable.

PS. I dare Paul Tucker, the current chair of the Systemic Risk Council, to give a coherent explanation for why banks should hold more capital against what’s made innocous by being perceived risky, than against what’s perceived safe and therefore carries more dangerous tail risks? The distortion that produces in the allocation of bank credit constitutes, as I see it, a huge systemic risk.


May 07, 2018

Risk weights of 0% the sovereign and 100% to its source of strength, the citizens, is putting the cart before the horse

Sir, I refer to Professor Lawrence Summers’ “The threat of secular stagnation has not gone away” May 7.

Again, for the umpteenth time: Regulators allow banks to hold less capital against what is perceived safe, like houses and friendly sovereigns, than against what is perceived risky, like entrepreneurs. This allows banks to leverage more with the “safer” present economy than with the “riskier” future. 

And this allows banks to earn higher expected risk adjusted returns on equity when financing the “safer” present economy than when financing the riskier future, something which causes banks to give too much credit to the current economy, without giving sufficient credit to the future productive means that could generate a much needed debt repayment capacity. 

This has to result in the “slow productivity growth [and] unsound lending and asset bubbles with potentially serious implications for medium-term stability” which is of such great concern to Professor Summers. Why is this so hard to understand?

Why can renowned professors with so much voice, not be able to also understand that if you assign a risk weight of 0% to the sovereign, and one of 100% to the citizens, those who signify a sovereign’s prime source of strength, you are putting the cart before the horse? Are they too statist or, behaving like sovereigns with an après nous le déluge, just too indifferent about the future. 


May 05, 2018

What if Artificial Intelligence helps predict decently correct Portfolio Variant Bank Capital Requirements?

Sir, Tim Harford refers to “Prediction Machines by Ajay Agrawal, Joshua Gans and Avi Goldfarb [which] argues that we’re starting to enjoy the benefits of a new, low-cost service: predictions. Much of what we call artificial intelligence is best understood as a dirt-cheap prediction. “Cheap innovations often beat magical ones” May 5.

If a credit to a risky borrower is not excessively large, and carries a correct risk premium, it can provide more safety to a bank’s portfolio, than a credit to a borrower perceived as safe.

Unfortunately, and as was stated in “An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions”,“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 so to make up for that difficulty the regulator decided: “In the context of regulatory capital allocation, portfolio invariant allocation schemes are also called ratings-based. This notion stems from the fact that, by portfolio invariance, obligor specific attributes like probability of default, loss given default and exposure at default suffice to determine the capital charges of credit instruments.”

And to justify it they argued that: “essentially only so-called Asymptotic Single Risk Factor (ASRF) models are portfolio invariant (Gordy, 2003).”

But, what if Artificial Intelligence had then allowed bank regulators to make their capital requirements portfolio variant? Many other bad things could of course have happened, but surely AI would have warned against too much exposure being built up with assets perceived (residential mortgages), decreed (sovereigns like Greece) or concocted (AAA rated securities) as safe. And also about too little exposures to what is perceived risky, like loans to entrepreneurs.

The danger is though that since we are clearly not capable to duly question human regulators’ expertize, we could end up questioning even less any Artificial Intelligence’s also quite possible mumbo jumbo. 


May 01, 2018

Sweden got to be an economic powerhouse with its banks financing “risky” entrepreneurs, not by these financing “safer” houses.

Sir, Patrick Jenkins reports: “Nordea has a core equity capital ratio of close to 20 per cent, double that of some European rivals. It can expect lesser capital demands from the ECB” “Nordic noir: the outlook darkens for Sweden’s banks” May 1.

Let us suppose that Nordea has only Basel II’s 35% risk weighted residential mortgages on its books. Then, a 20 percent capital ratio, would translate as having Nordea 7% in equity against all its assets meaning it is leveraged 14.2 times to 1.

So when we then read that in Sweden “house prices have declined 10 per cent since last summer, although in prime Stockholm the slump has been closer to 20 per cent” of course that should be enough to besides giving “Jitters about the sustainability of property prices” causing jitters about its banking sector.

I have a close relation to Sweden in that not only was my mother Swedish but I also spend my most formative years, high school and university there. So it saddens me to see what is happening. Sweden that got to be so strong by its banks financing “risky” entrepreneurs is now getting weaker by its banks mostly financing “safer” assets, like mortgages.

“Sweden’s Financial Supervisory Authority, late last year, proposed Sweden’s Financial rules [that] would mean those taking out new home loans of more than 4.5 times their salary would have to pay off an extra 1 per cent of their mortgage annually.” Are we to be impressed with that?

Stefan Ingves the Governor of Sveriges Riksbank has since 2011 been the Chairman of the Basel Committee for Banking Supervision. Why has he not proposed to stop distorting the banks allocation of credit, by requiring these to hold the same capital when extracting value and placing a reverse mortgage on the “safer” present economy, than when financing the riskier future, that the young Swedes need and deserve is financed?

In Swedish churches there was (is) a psalm (#288) that prays for: “God make us daring”. It would seem Mr Ingves never heard less sang it. 

April 29, 2018

Even perfectly perceived risks, if excessively considered, cause wrong reactions

Sir, John Authers writes that John Locke…when asked if we have an idea of the substance behind our perceptions, answered that we have “no such clear idea at all, and therefore signify nothing by the word substance, but only an uncertain supposition of we know not what”. “Economic reality is hard to fathom after years of distortion” April 28.

And then Authers argues: “Uncertainty is nothing new, particularly about the future. But it is rare for the present to be so hard to perceive as it is now. After a decade of desperate monetary measures to stave off the Great Recession, there is also a reluctance to believe what the markets are telling us, as their signals are distorted.”

At least when it comes to banks and their allocation of credit to the real economy, the signals are indeed extremely distorted, all as a result of the risk weighted capital requirements.

Bankers perceived credit risks and cleared for these by means of the size of the exposure they accepted and the risk premiums they demanded. But then came regulators and ordered that precisely those same perceived risks, should also be cleared for with the capital requirements.

With that they just ignoredthat any risk, even if perfectly perceived, leads to the wrong actions, if excessively considered.

As a result there are now way too high exposures, at too low risk premiums, to what is perceived as safe (and which therefore contains the fattest dangerous tail risks) and too little exposures, at too high risk premiums, to what is perceived as risky, like entrepreneurs.


April 28, 2018

Few things are as risky as letting besserwisser technocrats operate on their own, without adult supervision.

Sir, Martin Wolf when discussing Mariana Mazzucato’s “The Value of Everything: Making and Taking in the Global Economy” writes: “In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.” “A question of value” April 28.

Indeed. Let me, for the umpteenth time, refer to those odiously stupid risk weighted capital requirements that the Basel Committee and their regulating colleagues imposed on our banks.

Had not residential mortgages been risk-weighted 55% in 1988 and 35% in 2004 while loans to unrated entrepreneurs had to carry a 100% risk weights, the “funded zero-sum competition to buy the existing housing stock at soaring prices” would not have happened.

Had not assets, just because they were given an AAA rating by human fallible credit rating agencies, been risk-weighted only 20%, which with Basel II meant banks could leverage 62.5 times, the whole subprime crisis would not have happened.

Had not Basel II assigned a sovereign then rated like Greece a 20% risk weight, and made worse by European central bankers reducing it to 0%, as it would otherwise look unfair, the Greek tragedy would only be a minor fraction of what happened.

Had not bank regulators intruded our banks would still prefer savvy loan officers over creative equity minimizers.

Had not regulators allowed banks to hold so little equity there would not have been so much extracted value left over to feed the bankers’ bonuses.

Having previously observed Mariana Mazzucato’s love and admiration for big governments, who knows she might even have been a Hugo Chavez fan, I am not surprised she ignores these inconvenient facts. But, for Martin Wolf to keep on minimizing the distortion, that is a totally different issue. 

The US public debt is certainly the financial risk with the fattest tail risk. It was risk weighted 0% in 1988, when its level was $2.6tn. Now it is $21tn, growing and still 0% risk weighted… and so seemingly doomed to become 100% risky. Are we not already helping governments way too much?


April 27, 2018

What kind of tariffs is protectionist Michel Barnier thinking of imposing on banking and financial services provided by the City of London to Europeans?

Sir, Mehreen Khan’s, Jim Brunsden’s and Sofia George Parker’s write thatin reference to that “the EU would have more to lose from cutting off the City of London than Britain would” Michel Barnier said: “This is not what we hear from market participants, and it is not the analysis that we have made ourselves.”“Barnier dismisses UK hopes of special market access for London after Brexit” April 27.

Sir, I must confess that Michel Barnier does not qualify as my favorite EU Brussels technocrat, but with this he certainly proves himself to be a protectionist, completely in the hands of the European financial intermediaries (the aluminum and steel producers) and with little consideration to all those European consumers of financial services that might prefer using the services and the legal framework provided by the City.

What kind of tariffs is Barnier thinking of imposing on banking and financial services? Has Michel Barnier really been authorized to impose on behalf of all the European Unions his will on all Brexit negotiations?

Sincerely, I do not think Barnier has thought this thru. He might be setting off a real European capital flight to London. 


Bank regulators, get rid of risk weighted capital requirements, so that savvy loan officers mean more for banks’ ROE’s, than creative equity minimizers.

Sir, Gillian Tett referring to IMF’s recent warnings about the risks of overheating in risky loan and bonds markets; like “The proportion of US loans with a rating of single B or below (ie risky) rose from 25 per cent in 2007 to 65 per cent last year. And a stunning 75 per cent of all 2017 institutional loans were “covenant lite” writes: “it is possible — and highly probable — that non-banks are taking bigger risks, since they have less historical expertise than banks, and thinner capital buffers.” “The US has picked the wrong time to ease up on banks” April 27.

Yes, with risk weighted capital requirements banks ROE’s began to depend more on maximizing leverage, and so banks sent home many savvy loan officers and hired creative equity minimizers instead. As a result someone else had to serve “the risky”. 

But then Tett warns “Trump-era regulators” with a “it is foolish to be encouraging risky lending right now”. Wrong! It is always foolish to encourage risky lending. 

What Tett does not understand is that “risky lending” has nothing to do with a borrower being risky, and all to do with whether the lending to those perceived risky or those perceived safe, is done in such a way, with adequate exposures and risk premiums, so that the resulting bank portfolio is well balanced. 

The current extremely risky bank lending is the result of way too large exposures, at way too low risk premiums, to what is perceived, decreed or can be concocted as safe; and way too little exposures, at way too high risk premiums, to anything perceived as risky.

What regulators really should do, is to get rid of the risk-weighted capital requirements for banks. Then bank loan officers, those that could also show the non-banks the way would return, for the benefit of both the banks and the real economy.

Why do many bankers hate such possibility? Because high leverage, meaning little equity to serve, is the main driver of their outlandish bonuses. 


Could it be that we so much wish some forecasts to be right, that we are unable to see when they fail?

Sir, Miles Johnson ends his discussion of failing economic forecasts with: “It is not surprising that forecasters continue to get things wrong. What remains remarkable is that those who question the assumptions that underpin their repeatedly failing models are still treated as radicals” “Forecasters’ failings highlight the flaws in our assumptions” April 26.

Regulators, they say, based on some careful research, forecasted that what is perceived as risky is much more dangerous to our bank system than what is perceived as safe. And so they gave us risk weighted capital requirements with instance with Basel II’s risk weight of 20% to what is AAA rated and 150% to what is rated below BB-.

The 2007/08 crisis, caused exclusively by assets that because they were perceived, decreed or concocted as safe, residential mortgages, sovereigns like Greece or AAA rated securities, the banks were allowed to leverage much more with, proved without any doubt how wrong that forecast was. 

And there are many more faults with this regulations that completely distorts the allocation of credit to the real economy.

Yet the assumption that underpin that regulation is not questioned, and if someone does, like I have done persistently for about two decades, I get treated like a radical, or at least as someone obsessed that should not be given much voice. 

For instance FT’s Martin Wolf, even though in 2012 he writes: “Per Kurowski reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk”, in the same breath he holds that “it is essential to recognise that so called ‘risk-weighted’ assets can and will be gamed by both banks and regulators”. That of course means Wolf does not see this regulations as something build upon a fundamentally mistaken principle, but mostly just suffering a kind of technical glitch in its execution.

Why is this so? Perhaps it is because we all want so much our banks to be safe, so when regulators tell us the bank capital requirements are risk-weighted, we so much want that to be true that we don’t even dare contemplate the possibility that, the experts, could be 180 degrees off the mark.