December 08, 2017

If bitcoin poses no threat because it’s perceived risky, why agree with regulations that hold lending to entrepreneurs is dangerous because they are risky?

Sir, I refer to your “Do not worry about bitcoin — at least not yet” December 8.

Of course while bitcoin are perceived risky they pose no major danger. What I cannot understand though is why you do not extend that same reasoning to bank regulations?

What if suddenly bitcoin holdings were suddenly in terms of safety rated AAA by credit rating agencies, and regulators allowed banks to leverage over 60 times with these? That would make these bitcoin really dangerous, as happened when Basel II allowed banks to leverage with AAA rated securities.

That leads me to comment: “A flawed blue print for reform of the Eurozone” also of December 8.

Sir, if it were up to me I would not allow any expert technocrats to come even close to any institution in the Eurozone, before having received a satisfactory answer on why their regulators want banks to hold the most capital against what is perceived as risky. As I see it, it is when something ex ante perceived very safe ex-post turns out to be very risky, that we would like our banks to hold the most of it.

For instance would you like your banks regulated by those who assigned sovereign Greece a 0% risk weights and German entrepreneurs 100% and thereby caused German banks to lend more to Greece than to their local entrepreneurs? I sure would not!


The Basel Committee’s bank regulators being replaced by an algorithm could be the best that could happen.

Sir, I refer to Gillian Tett’s “Self-driving finance could turn into a runaway train”, December 8.

Well human-driven banks are now not doing so well either. 

Any algorithm currently making credit decisions for a bank would do so based on maximizing risk-adjusted returns on equity, based on perceived risks of assets and on regulatory bank capital requirements regulations.

Where would it get the risk perceptions? Currently credit ratings… Who knows if in the future algorithms would also take over the credit rating functions… if these have not already done so?

Where would it get the capital requirements? Currently it get those from the Basel Committee’s standardized risk weights, or if the algorithm works for a sophisticated bank, from its own risk models.

So, if the algorithm does its job well, and works for a sophisticated banks, it would seem that in order to obtain the highest risk adjusted return on equity, its priority has to be creating the risk model that minimizes the capital requirement.

And if it works for a bank that uses the standardized risk weights, then it is clear it would not waste its time with what carries a 100% risk weight, like an entrepreneur, but concentrate entirely on those with much lower risk weights, sovereign 0%, AAA rated 20%, residential mortgages 35%.

So, with the risk weighted capital requirements it is clear that whether the banker is a human or an algorithm, we can forget about savvy loan officers… they will all be equity minimizers.

Of course, an entrepreneur can always offer to pay sufficiently high interest rates to overcome the regulatory handicap. But, would doing so not make him even more risky? With current regulatory risk aversion we should cry for the future real economy of our children.

Sir, in 2003, at the World Bank’s Executive Board (before Nassim Nicholas Taleb had appeared on the scene to discuss fragility) I stated: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

So, I guess you can you imagine how much I fret us humans falling into the hands of a final conquering algorithm.

Or having to suffer the consequences of the systemic risks resulting from banks using fewer and fewer human bankers… with probably higher bonuses to the remainders.

By the way since the replaced bankers used to pay taxes, will we at least be able to tax those algorithms?

But, come to think of it, if an algorithm substituted for bank regulators that could be great news. I mean any half-decent algorithm would be able to figure out that what is really risky for our bank system is not what is perceived as risky but what is perceived as safe.

And any half-decent algorithm would also require an answer to the question of “What is the purpose of banks?” And I suppose no regulator would dare tell it, “Only to make the maximum risk adjusted returns on equity” 


December 06, 2017

Some might see Donald Trump’s bankruptcies as a weakness, but others, especially in America, as a symbol of go-get-it strength.

Laura Noonan, Patrick Jenkins and Olaf Storbeck write: “Deutsche Bank has been one of Mr Trump’s longest-standing and most supportive lenders, extending him hundreds of millions of dollars in credit for real estate deals and other ventures despite his history of bankruptcies.” “Deutsche Bank hands over Trump files to Mueller probe of Russian influence” December 6.

Sir, the way it is phrased might reflect some profound cultural differences. Is it really “despite Trump’s history of bankruptcies”, or could it precisely because of it, that Deutsche Bank could be interested, as that would indicate business opportunities?

Let me quote the following from “The Wisdom of Finance” by Mihir A. Desai, 2017, Chapter Seven “Failing Forward”:

“Until 1800 [in America], borrowers who could not service their debts were moral failures. As a consequence, imprisonment was common for debtors…

Failure would be redefined away from moral failing or a sin and toward a more natural consequence of risk taking with the 1800 act. [The first bankruptcy law]… the new republic desperately needed risk takers, and punishing them so severely froze commerce in the late 1790. If the young country was to flourish, failure had to be redefined, and the moral stigma associated with it had to be lessened.”

Sir, after current regulators, with their risk weighted capital requirements, for soon three decades now, have exacerbated the normal risk aversion of our bankers… I would argue we currently are also in desperate need of risk takers. God make us daring!


More food for the hungry and less food for the less hungry sounds logical and decent, that is unless the hungry are obese and the less hungry anorexic.

Sir, Martin Wolf writes: “More equity capital would make banks less fragile.” “Fix the roof while the sun is shining” December 6.

That is only true as long as we get rid of the distorting risk weighted capital requirements for banks. Though “more risk more capital - less risk less capital” sounds logical, that is unless “The Safe” get too much credit and “The Risky” too little. If that happens, both banks and the economy will end up more fragile.

Wolf writes: “The world economy is enjoying a synchronised recovery. But it will prove unsustainable if investment does not pick up, especially in high-income economies. Debt mountains also threaten the recovery’s sustainability”. Let me comment on that this way:

First: “a synchronised recovery” is a way to generous description of what is mostly a QE high that has just helped kick the crisis can down the road.

Second: The investments most lacking in the “unsustainable if investment does not pick up” part, is that of entrepreneurs and SMEs, those which have seen their access to bank credit curtailed by regulators. It is high time we leave the safer but riskier present and get back to the riskier but safer future.

Third: The “Debt mountains [that] threaten” are either those for which regulators allow banks to hold much less capital against, like sovereigns and residential mortgages; or those consumer credits at high interest rates that dangerously anticipate consumption and leaves us open to future problems.

Sir, let me again make a comment on Wolf’s recurrent recommendation of “Public investment to improve infrastructure”. He usually argues this in order to take advantage of the very low interest rates. That ignores that those low rates are not real rates but regulatory subsidized rates. If banks had to hold the same capital against loans to sovereign than against loans to citizens, and if also central banks refrained from additional QEs, I guarantee that the interest rates on public debt would be much higher.

Besides, given the fast technological advances, we do not even know what infrastructure will be so much needed in the future so as to be able to repay the loans, instead of just burdening more our grandchildren.


December 03, 2017

When being rightly suspicious about making algorithms powerful let us not ignore that powerful humans could be very dangerous too.

Sir, Tim Harford, agreeing with Hayek holds “Market forces remain a more powerful computer than anything made of silicon.” “Algorithms of the world, do not unite!” December 2.

But when regulators decided to replace the risk assessments of thousands of individual and diverse bankers, with those produced by some few human fallible credit rating agencies; and then allowed banks to increase their bets on these ratings being correct, for instance with Basel II allowing banks to leverage a mindboggling 62.5 times if only an AAA or an AA rating was present, we would have benefitted immensely from having some algorithms indicate them this was pure folly.

Because, in the development of such algorithms, it would not been acceptable to look solely at the risks of bank assets as such, but would have required to consider the risk those assets posed for the banks.

And as a result the algorithms would not have allowed banks to leverage more with safe assets than with risky, that because only assets perceived as very safe can lead to the build up of such excessive exposures that they could endanger the whole bank system, were the credit ratings to turn out wrong.

An Explanatory Note on the Basel II IRB (internal ratings-based) Risk Weight Functions” expresses: “The model [is] portfolio invariant and so the capital required for any given loan does only depend on the risk of that loan and must not depend on the portfolio it is added to.”

And the explicit reason given for that inexplicable simplification was: “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.”

Sir, algorithms are precisely designed to combat such complexities.

Yes, “Facebook and Google have too much power” but so did the regulators; and with their risk weighting of the sovereign with 0% and citizens with 100%, Stalin would have been very proud of them.


December 02, 2017

What cultural insight could anthropologist Gillian Tett, or any neo-Cannibal Club colleague of hers give in order for me to better understand bank regulations that seem so loony?

Sir, Gillian Tett, commenting on Marc Flandreauan economic historian’s 2016 book “Anthropologists in the Stock Exchange”, writes about the “Cannibal Club, a so-called anthropological society that, its members hoped, would explore far-flung cultures in order to uncover what made humans tick” “It is primitive to ignore what links finance and social science” December 2.

When Tett refers to that “By the middle of the 19th century, much debt was turning sour due to defaults, corruption and fraud (some perpetrated by British swindlers who misled investors about opportunities on offer). Sovereign loans in places such as Venezuela kept delivering nasty shocks.” I would then have liked very much to be able to ask those anthropologists whether if all, or any, of those failed financial assets had been ex ante considered risky. 

Today I would also like to ask any neo-Cannibals why they think current bank regulators could want banks to hold more capital against what is perceived as risky? To me that is a mystery. Is it not when something perceived ex ante as very safe turns out ex post as very risky, that one would really like banks to have the most of it?

On Venezuela’s defaults, Tett suggests “thinking about this historical link between capital markets and culture, and between finance and social sciences” I would add the fact that Venezuela’s main export revenues, oil, currently 97% of these are centralized in its government. If that’s not enough to know that things will, sooner or later, go utterly wrong, I do not know what is.


To allow banks to regain public trust and better serve the UK economy, begin by explaining how their regulators distorted banking.

Sir, you write about “the highly concentrated nature of the UK system, which is dominated by a handful of large institutions, with balance sheets skewed towards mortgage lending and other forms of consumer finance” and of a popular resentment of banker’s pay, “Corbyn’s calculated ‘threat’ to the banks”, December 2.

Banks’ balance sheets are skewed towards less-capital or very high risk-premiums, like lending to the sovereign, mortgage lending and other forms of consumer finance

Banks’ balance sheets are skewed away from what requires holding more capital and cannot afford to pay too high rates, like SMEs and entrepreneurs.

If you required banks to hold as much capital for all their assets as they must hold when lending to SMEs and entrepreneurs, then the story would be much different.

If you allowed banks to hold slightly less capital against loans to SMEs and entrepreneurs than against all other assets, that would more than compensate for the lack “of community banks or Sparkassen”; and introduce such economic dynamism that it could more than help you to confront any Brexit difficulties.

If banks needed to hold more capital in general, and therefore needed to compensate shareholders more, then there would be less available space for current abnormal banker bonuses. Ask Sergio Ermotti how much he has to thank regulators for his bonuses.

So, how to ensure that the banking sector can regain public trust and better serve the needs of the UK economy? Sir, why not begin by explaining what the bank regulators have done. We can of course not ask the bankers to explain that.

Oops, but that would mean you would have to explain why you have silenced my soon 2.700 letter to you on this, and that could be too embarrassing for one with your motto.

A brief aide memoire


December 01, 2017

Martin Wolf, a country needs its elites to inspire much more the “possible” than to preach the “impossible”.

Sir, in “Way back Home”, about his World War II days, we hear Rod Stewart singing: “we always kept the laughter and the smile upon our face. In that good-old-fashion British way with pride and faultless grace”.

And then we read Martin Wolf, reciting six impossible, not one possible, and ending with: “The EU holds the cards and it knows it holds the cards…The UK is no longer its 19th-century self, but a second-rank power in decline”, “Six impossible notions about ‘global Britain’’ November 31.

How utterly depressing!

We saw when Holland got smacked with the Dutch disease, and instead of just taking it laying down, they forgot about manufacturing, and decided to become the distributors of Europe… (at least that is the version I have been told)

Just days ago, November 29, in “Challenges of a disembodied economy” Martin Wolf discussing Jonathan Haskel’s and Stian Westlake “Capitalism without Capital: The Rise of the Intangible Economy” was illustrating the huge changes the world was going through, when for instance “Apple, the world’s most valuable company, owns virtually no physical assets. It is its intangible assets — integration of design and software into a brand — that create value.” In such a new world, is really the UK dependence on EU the same as previously seen? Does anyone really know what cards one holds nowadays? 

The day after Brexit, Britain will not be very different from EU, it will mostly be sharing the same old and new problems as EU and, unless Britain decides that is not to happen, there is nothing that eliminates the possibility of Britain’s relations with EU being more intensive and better than ever. A divorce, though it might be traumatic, does not mean the divorcees cannot get along splendidly.

Does that mean the Brexit road is easy rosy? Of course not, but there is a vital need for Britain, and for Wolf, to stop lamenting so much, and get down to work at doing the best, not out a bad situation, but out of an for everyone unknown situation.

Like when Rod Stewart’s song ends with hearing Churchill reciting: "We shall fight on the beaches. We shall fight on the landing grounds. We shall fight in the fields, and in the streets. We shall fight in the hills; we shall never surrender." 

PS. To begin with you should reverse having surrendered your banks to dangerous risk aversion, and eliminate the loony risk weighted capital requirements for banks


November 30, 2017

Banks with better capital will not stifle investment and growth. Bank capital requirements that are not neutral to perceived-risks will

Sir, I refer to David Miles, Professor of Financial Economics, Imperial College letter in which he argues that “Better capitalized banks will not stifle investment and growth” November 30.

He is of course right, but with some caveats.

First, it has to be reasonably well capitalized banks since, going overboard on capital requirements, might reduce the margins arising from leveraging and make getting that additional capital (equity) needed quite difficult.

Second, it is a delicate matter of how going from here to there. If you impose some drastic immediate adjustments then you must be prepared to go for instance the Chilean way, where its central bank made some important capital contributions but allowed former shareholders to repay them and buy them out when they could.

But, but, but! If you insist in that capital being risk weighted, it will just not work.

Suppose you want a 100% capitalized bank, but when calculating that 100% you keep on risk weighting the sovereign with 0%. That would mean that a bank would come up with 100% of equity if lending to a 100% risk weighted entrepreneur, but would be allowed to hold zero capital (equity) when lending to the sovereign. Would that just not be 100% top down Stalinism? How much non-governmental jobs could be created that way?

So, if we are to have economic growth, and banking sector stability, much more important than how well capitalized is that they are perceived-risk neutral capitalized. 

Sir, you know how much I have been criticizing current bank regulations, but my first Op-Ed ever, in 1997, was titled “Puritanism in Banking”, and I still think that what we least need is too much of that. God make us daring!

And, since I will try to copy this letter to Professor Miles, I will hereby take this opportunity to ask him whether he has any idea of why regulators want banks to hold the most capital for when something perceived risky turns out risky? Is it not when something perceived ex ante as very safe turns ex post out to be very risky, that one would like banks to have the most of it?


November 29, 2017

What does going from a 10% to a 50% level of distraction signify for full-time employees’ real salaries?

Sir, Sarah O’Connor writes “Males in well-paid full-time employment, earning 2.5 times the median wage, are now working slightly longer hours on average than two decades ago, according to the Resolution Foundation, a think-tank.” “Robots will drive us to rethink the way we distribute work” November 29.

In Bank of England’s “bankunderground" blog we recently read: “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

So if 50% of the time is now spend being distracted, and since those not employed full time are not equally remunerated for distractions, that of “earning 2.5 times the median wage”, could de facto be a serious understatement.

Sir, just think about what going from for instance a 10% to a 50% distraction signifies to full time employees’ real salaries. Fabulous increases!

PS. Robots will not only drive us to rethink the way we distribute work. It also forces us to think about how to create decent and worthy unemployments.


Those who because of scalability can bother us excessively should not be able to do so at a zero marginal cost

Sir, Martin Wolf writes: “Scalability means that an intangible good can be enjoyed by one person without depriving another of its benefits. In an economy where scalability — frequently turbocharged by network effects — is important, some businesses will quickly become huge. These winners may also enjoy huge incumbency advantages.”, “Challenges of a disembodied economy”, November 29.

Indeed, but also look at how a zero marginal cost allows the social media to drown us in such an excessive amount of ads, fake news and irrelevant information, which so dangerously wastes our very limited attention span.

So when Wolf writes “governments must also consider how to tackle the inequalities created by intangibles, one of which (insufficiently emphasised in this book) is the rise of super-dominant companies” let me (not for the first time) suggest the following:

Charge social media, like Goggle and Apple, a very small bothering-tax, like a hundredth of a $ cent, every time they reach out to us with something that does not originate in something specifically allowed by us, like the direct messages from our friends.

That could, at the same time it builds up funding that could be used for a Universal Basic Income scheme, which helps to take the sting out of growing inequalities, reduce dramatically the bothering of us and allowing us more of that so necessary boredom we need for creativity and thoughtfulness, which we humans so specially need now when we have to interact more and more with artificial intelligent robots.


Ms. Janet Yellen, like other recent bank regulators who have just faded away, will leave the Fed without answering THE QUESTION

Sir, you write: “The Federal Reserve can take some blame for failing to see risks building up in the years preceding the global financial crisis. But perhaps more than any other major policymaking institution in the world, the Fed has acquitted itself well in the decade since”, “The unfortunate exit of an exemplary Fed chair”, November 29.

As you might suspect, I profoundly disagree. The Federal Reserve has yet not understood (or has been willing to acknowledge it) the fact that the “risks building up in the years preceding the global financial crisis” were a direct consequence of the distortions introduced by bank regulations, primarily Basel II, 2004.

If you allow banks to leverage almost limitless when lending to sovereigns, (like European banks lending to Greece); when financing residential housing; and over 60 times to one just because a human fallible rating agency has issued an AAA rating, that crisis, just had to happen.

And since capital requirements for banks have remained higher for what is perceived as risky than for what is perceived, decreed or concocted as safe, that odious distortion wasted most of the stimulus quantitative easing and low interest could have provided.

Over the last decade, how many SMEs and entrepreneurs have not gained access to that life changing opportunity of a bank credit, only because of these odiously discriminating regulations? Who can believe that America would have been able to develop as it did, if these regulations had been in place since the time of the pilgrims?

And now Janet Yellen, like other regulators have done in the recent past, will leave the Fed without answering us why banks should hold the most of capital against what is perceived as risky, when it is when something perceived very safe turns out very risky, that one would really like banks to have the most of it.

Sir, thanks for all the help you have given me over the last decade, forwarding that question without fear and without favour.


November 28, 2017

Venezuela faces a restructuring between odious creditors and odious debtors, so it behooves us ordinary Venezuelans citizens to intervene and block any odious deals.

Sir, Jonathan Wheatley and Robin Wigglesworth when reporting on the surreal sort of restructuring of Venezuela’s debt by the equally surreal Maduro government write: “Venezuela is already a serial defaulter. It has defaulted on miners, oil companies and other enterprises whose assets it has seized without compensation. It has defaulted on unpaid suppliers to PDVSA, the national oil company. Most seriously, it has defaulted on its people, denying them access to basic foods and medicines, causing an epidemic of weight loss and turning injury or illness into a mortal danger.” “Venezuela bond repayments: dead and alive” November 28.

Sir, the creditors, if they had carried out any minimum due diligence, would have been perfectly aware their financing would not be put to any good use, so for me, all their loans, given only because of juicy risk-premiums or other profit motives, are just odious credits.

And the borrowers, knowing very well they were contracting that debt for no good purposes at all, defines all these borrowings to be odious debts.

So here we are Venezuelans citizens, with children, parents and grandparents dying for lack of food and medicines. Are we now just supposed to sit down and allow this restructuring to happen on whatever odious terms the creditors and the debtors agree on in a petit committee?

No way! As a minimum, for a starter, our General National Assembly not yet in exile needs to authorize our Supreme Court of Justice in exile, to take charge so as to at least determine what could be deemed to be bona fide, dubious, or outright odious credits.


A former Executive Director of the World Bank, for Venezuela (2002-2004)

Andy Haldane, I am an economist too, but I can still not make head or tails out of your bank regulations. Please enlighten me with BoE’s “EconoMe”!

Sir, Chris Giles writes that Bank of England’s chief economist Andy Haldane argues that economists must work harder to help the public understand and accept their message. “If economics or economic policy is elitist and inaccessible to most people, it is not doing its job,” he said. “Economics should be more accessible” November 28.

Absolutely! So please could Haldane explain to me why regulators want banks to hold the most capital for when something perceived risky turns out risky, when it is when something ex ante perceived as very safe ex post turns out to be very risky, that one really would like banks to have the most of it?

The risk weighted capital requirements allow banks to leverage differently different assets, and thereby allow banks to earn different risk adjusted returns on equity on different assets, must distort the allocation of bank credit to the real economy. Some, like for instance “risky” entrepreneurs are paying with less access to credit for the regulators favoring “safe sovereign, AAArisktocracy and house financing. That must not be helpful for creating new jobs. Am I wrong? If am not, why does this seem to be of no concern to regulators?

And talking about favoring, who authorized the economists to suddenly take upon themselves to decide that the risk weight of the sovereign was 0% and that of citizens 100%? Is that not just outrageous statism? Has that not caused governments getting credit at much lower rates that they would otherwise have gotten? Has that not caused governments to take on much more debt than they would otherwise have been able to do?

If Haldane does not know the answers to these questions perhaps he can ask Mark Carney, Mario Draghi, Jaime Caruana or Stefan Ingves.

And if those elite experts can’t provide him with a satisfactory answer, perhaps he should sit down and listen to me. I as one economist to another would willingly explain to him the regulatory lunacy he is involved with. For a first session of that, Haldane could prepare reading THIS:

PS. And at FT you are all also cordially invited. Since you have mostly ignored, and even hushed up my arguments, I know that if Haldane proves me wrong, you will all feel tremendously alleviated.


November 27, 2017

What magical misleading thinking could explain the Basel Committee’s bank regulation idiocy?

I refer to Andrew Hill’s “The magical thinking that misleads managers” November 27.

Sir, what magical misleading thinking could lay behind regulators wanting banks to hold the most capital for when something perceived risky turns out risky, when it really is when something perceived very safe turns out to be very risky, that one would like banks to have the most of it?

“Numerology…mumbo-jumbo”? Well if you read through the Basel Committee’s 2005 “An Explanatory Note on the Basel II IRB (Internal Rating Based) Risk Weight Function”, that could be it.

“Leaps of faith”? Absolutely. Believing that by allowing some few human fallible credit rating agencies to decide instead of millions of eyes, and thereby intrducing the mother of all systemic risks (as I warned in 2003 in a letter published by FT) was effectively one of the greatest centralized leap of faiths ever.

“Throw a coin and make a wish”? Believing that the risk weighted capital requirements would not distorts the allocation of bank credit can only remind me of “Three coins in the fountain”, although in that movie the girls' dreams came true.

“Chants and mantras”? The whole minute by minute growing and expanding Basel Committee’s regulations cannot but be a prime example of that.

“Human sacrifice”? Though they never ever cause a major bank crisis how many millions of entrepreneurs have not been denied the often life changing opportunity of a credit in the name of this so badly understood stability.

“Hero worship”? Just look at all those members of that mutual admiration club of technocrats who are able to promote themselves even in the face of a financial crisis that resulted from allowing banks to leverage so excessively when lending to the 0% risk weighted “infallible” sovereigns, the 20% risk weighted AAArisktocracy and the 35% risk weighted financing of houses?

Hill ends arguing that “humble deference to unpredictable and poorly understood outside forces would be healthy”. Indeed, but how is that to happen if public opinion makers, like the Financial Times, refuse to hold the regulators accountable, perhaps because they all like to be seen as part of thei exclusive network... and be invited to Davos.


November 25, 2017

Mr. Tim Harford, so you want an intriguing puzzle that might engage your curiosity? Have I got one for you!

Sir, Tim Harford writes: “Marina Della Giusta and colleagues at the University of Reading recently conducted a linguistic analysis of the tweets of the top 25 academic economists and the top 25 scientists on Twitter and found that the economists tweeted less and had fewer Twitter conversations with strangers. “Economicky words are just plain icky” November 25.

But not only might they tweet less, they might block more. I say that because I have never, as far as I know, been blocked by a scientists, but I sure have been blocked by an economists, the undercover economist Tim Harford.

Why could that have happened? Perhaps because I might have complained too much that Harford, as an economist, shoud also be out there dennouncing one of the most important economic regulatory cock-ups in world history, namely the risk weighted capital requirements for banks.

Harford writes “If we use a surprising fact as an ambush, that will provoke a defensive response; far better to present an intriguing puzzle.”

Okey Mr Harford here is one for you:

Why on earth do regulators want banks to hold the most capital when something ex ante perceived risky turns out risky? Is it not when something perceived very safe turns out ex post to be very risky one would really like banks to have it the most?

PS. But Sir, of course it is not just Tim Harford. You yourself, advertising a “Without fear and without favor”, seemingy do not dare to ask bank regulators where they got the idea of risk weighting the so dangerous AAA rated with a minimum 20%, and those by being rated below BB- made so innocous with a whopping 150%?


November 22, 2017

If Martin Wolf wants to help the poor at the bottom, why does he not help me arguing for getting rid of the risk weighted capital requirements for banks?

Sir, Martin Wolf, morphing into an activist, describes the Republican tax plan as “a determined effort to shift resources from the bottom, middle and even upper middle of the US income distribution towards the very top, combined with big increases in economic insecurity for the great majority”, “The Republican tax plan built for plutocrats”, November 22.

But, since Wolf refuses to discuss the distortions caused by bank regulators, let me here ask him, in quite similar terms: What is the risk weighted capital requirements for banks if not something that stops the “risky” bottom, middle and even upper middle of the US income distribution, from accessing those opportunities of bank credit that could help to propel them upwards?

Day-by-day it is becoming clearer to me that Martin Wolf is just another statist that thinks it is just great that sovereigns are 0% risk weighted and unrated citizens 100%.

I agree of course with Wolf in that “the reductions in corporation tax will [not] lead to a big rise in business investment”. But that, among others, is precisely because the regulators have seriously damaged one of the primary transmission channels of freed resources, namely bank credit.

What is not clear to me though is to what Wolf refers to when arguing that the rich will benefit more from tax cuts. Does he mean in paid US$ in taxes? Because if so I would say it is quite natural that anyone who is paying more $ taxes will pay less taxes when taxes are cut.

We read: “In the more cautious Senate version, households with incomes below $75,000 would be worse off.” Does Wolf want to imply these would now have to pay more in taxes? If so, I am totally on his side on this issue… but I sort of doubt that. $75,000 sounds like a quite normal civil service salary, and you usually don’t go after you own, on any side of the aisle.


True bank regulations should also not be like gambling.

Sir, I refer to Izabella Kaminska’s “True investing is not the same as gambling” November 22.

But Sir, what did bank regulators do with their risk-weighted capital requirements for banks if not gambling? They gambled on that bankers and credit rating agencies would perceive and manage risks correctly…and this even when bank crisis, when not the result of unexpected events, have always resulted from banks having ex ante perceived something as safe, but which ex post turned out to be risky.

Here again are the four possible outcomes of any bank lending:

1. Ex ante perceived safe – ex post turns out safe – “Just what we thought!”

2. Ex ante perceived risky – ex post turns out safe – “What a pleasant surprise! Another entrepreneur who makes it because we are so good bankers.”

3. Ex ante perceived risky – ex post turns out risky: How lucky we only lend little and at high rates to it.

4. Ex ante perceived safe – Ex post turns out risky: “Holy Moly now what do we do? Call the Fed for a new QE?”

The role of a bank regulator would of course be to work solely on the possibilities that banks did not perceive risks correctly or, if they did, did not manage these perceptions correctly.

And in that respect, the safer something is perceived the more dangerous it can become, and the riskier something is perceived the safer it becomes. Just the same reason for why so many more die in car accidents than in motorcycle accidents. 

The saddest part though is that even if bankers or credit rating agencies perceived risks correctly, the final results of all this would be bad. That because any risk, even if perfectly perceived causes the wrong actions, if excessively considered.

Bankers consider perceived credit risk when determining the size of their exposures and the risk premiums they should collect… but there, after 600 years of banking, suddenly the regulators invented that exactly the same perceived risks needed also to be considered in their capital too. And, since then, what is perceived as safe is getting way too easy credit while, what is perceived as risky, like SMEs and entrepreneurs are not getting the credits the real economy need them to get.

Sir, come one, don’t be so scared, live up to your motto of “Without fear and without favor”. Dare request from any regulator, for instance from FSB’s Mark Carney, an explanation for Basel II’s risk weights: that of a meager 20% for the so dangerous AAA rated, and a whopping 150% for the so innocous below BB-


What would you as a bare minimum call creditors knowingly financing a government that in itself constitutes a brutal violation of human rights? Odious?

Sir, John Paul Rathbone, Robin Wigglesworth and Jonathan Wheatley, with respect to the surrealistic debt-restructuring initial steps in Venezuela quote Hans Humes of Greylock Capital, who is forming an investor committee with “Ultimately, there is going to be more money made in Venezuela than even in Argentina”. But the authors also rightly conclude in “The geopolitical and humanitarian consequences are likely to be larger still”, “Caracas plays its last cards” November 22.

Sir, “Food is in short supply” does not even begin to describe the tragedy.

Look at Venezuela as a prison. The food and medicines supplies it receives should be more than enough to keep all inmates healthy, but, since the guards have stolen so much of it, many prisoners, many children among them, are dying. And, in order to be able to steal more, the guards also took on huge debts in the name of the prison. And now the original creditors, or those who bought in at a later stage, and who all had all the possibilities of knowing very well what was going on, but that turned a blind eye to it when the interest rates offered by the guards were so irresistibly juicy, they want to be repaid. Will the guards do so? Will the prisoners allow that?

I have for decades called for Venezuela’s oil revenues, lately around 97% of all Venezuela’s exports, to be shared out to all its citizens, as the only way to guard against any odious or just plain dumb exercises of centralized statist power.

So what would happen if now the Venezuelans agree, in a referendum, on doing just that and then proceed to carry out the necessary changes in its constitution; and asks the IMF or the World Bank, with the assistance of other banks, to set up an oil revenue distribution system that keeps all oil exports invoiced in the name of Venezuela’s 30 and so million citizens? I am no lawyer but would a judge in New York approve the embargo of Simoncito’s part of oil, that if received would help to feed and keep Simoncito healthy?

Desperate times calls for desperate solutions, but perhaps some desperate solutions carry the potential of turning into magical solutions. For an oil cursed nation like Venezuela, that might just be what opens up its future to a much better tomorrow.

But the rest of the world could also benefit immensely. We quite frequently hear about the need for a sovereign debt restructuring mechanism, SDRM. If such mechanism started by clearly establishing the fact that most odious debts have its origins in odious credits. There often is prohibition against usury, but even more important for all us citizens all around the world, and especially for those generations of citizens coming after us, to have some sort of mechanism that disincentive the award of odious credits to governments.

In reference to that I am begging Venezuela’s National Assembly to request that Venezuela’s Supreme Court of Justice in exile initiates a process destined to carefully revise the origin of all Venezuela’s credits to see if they can be deemed legitimate or not.


November 21, 2017

Jockeying for position to currently advise Venezuela on its debt restructuring could have serious legal, or at least reputational consequences

Sir, Robin Wigglesworth, with respect to Venezuela’s debt writes: “Any restructuring will be a Herculean task, given US sanctions” “Debt restructuring battle brews over Venezuela” November 21.

It is not only the US sanctions. Since many, or probably most Venezuelan consider those debt origination in odious or at least totally non-transparent credits we have not the faintest trust in that negotiators helping the government to restructure is helping us.

So any negotiator now would have blacklisted himself, for those restructuring negotiations that can only begin in earnest when the Maduro government is gone.

Also I cannot understand that, for instance one of the prime renegotiation advisors you mention like the “mysterious art-loving Mexican billionaire called David Martinez”, can be so naïve so as to believe that the threat of US sanction to Americans will not be extended to anyone substituting for Americans.

In summary you do not advise governments that are violating basic human rights without the possibility of facing very serious consequences for that. As a minimum they should be aware that many of us Venezuelan will, when we can, try to recoup any odious restructuring fees paid to them… and keep them away forever from Venezuela

Personally I am much in favor of the Venezuelan Supreme Court of Justice in exile, requested by the Venezuelan National Assembly, initiates the first stage of any debt restructuring, namely classifying all those debts in bona-fide, dubious or odious. 


If you allow banks to earn higher risk adjusted returns on equity on mortgage lending than when lending to entrepreneurs, bad things will sure ensue

Sir, Jonathan Eley writes: “in the UK…younger people especially are being priced out of the market while their parents and grandparents benefit from decades of above-inflation rises in home values. The ruling Conservatives, traditionally the party of home ownership, now finds itself shunned by millennial voters frustrated by spiralling housing costs” “Why Budget fix will not repair market” November 21.

And among the long list of factors that has distorted the market in favor of houses Eley includes: “Mortgage securitisation facilitated further growth, as did the Basel II reforms cutting the risk weights applied to real estate. This made mortgage lending less capital-intensive for banks.”

This Sir is one of the very few recognitions, by FT journalists, of the fact that risk weighting the capital requirements for banks distorts the allocation of bank credit.

Indeed, Basel I in 1988 assigned a risk weight of 50% to loans fully secured by mortgage on residential property that is rented or is (or is intended to be) occupied by the borrower, and Basel II reduced that to 35%. Both Basel I and II assigned a risk weight of 100% to loans to unrated SMEs or entrepreneurs.

But the real bottom line significance of “mortgage lending [being] less capital-intensive for banks”, is that banks when being allowed to leverage more with mortgages than with loans to SMEs and entrepreneurs, earn higher expected risk adjusted returns on equity with mortgages than with loans to SMEs and entrepreneurs, and will therefore finance houses much much more than SMEs and entrepreneurs, than what they would have done in the absence of this distortion.

As I have written to you in many occasion before, this “causes banks to finance the basements where the kids can live with their parents, but not the necessary job creation required for the kids to be able to become themselves parents in the future.”

And the day the young will look up from their IPhones, and understand what has happened, they could/should become very angry with those regulators that so brazenly violated that holy intergenerational social bond Edmund Burke wrote about.

I can almost hear many millennials some years down the road telling (yelling) their parents “You go down to the basement, it’s now our turn to live upstairs!”

Eley also quotes Greg Davies, a behavioural economist with: “People like houses as an investment because they are tangible. They feel they understand them far more than funds or shares or bonds.”

But the real measurement of the worth of any investment happens the moment you want to convert it into current purchase capacity. In this respect people should think about to whom they could sell their house in the future, at its current real prices.

PS. In June 2017 you published a letter by Chris Watling that refers exactly to this, “Blame Basel capital rules for the UK’s house price bonanza”.

What most surprises me is that regulators don’t even acknowledge they distort, much less discuss it… and that the Financial Times refuses to call the regulators out on this… especially since all that distortion is for no stability purpose at all, much the contrary.

It is clear that no matter its motto of “Without fear and without favor”, FT does not have what it takes to for instance ask Mark Carney of BoE and FSB, to explain the reasoning behind Basel II’s meager risk weight of only 20% to the so dangerous AAA rated and its whopping 150% to the so innocous below BB- rated.


November 20, 2017

Anyone jumping ship on the delusion that risk-weighted capital requirements make banks safer and economies better, has a better chance to survive

Sir, Wolfgang Münchau discusses many delusions held by both Brexiters and Remainers, and argues correctly: “To make the best of Brexit, the UK will need to embrace a more entrepreneurial and innovative economy” “An old-fashioned economy heads towards a downfall” November 20.

But when he writes: “For Brexit to succeed the UK will end up becoming more — dare I say it — European”, I disagree.

That because when Münchau holds that Britain “has an entrepreneurial culture to build on”, that is unfortunately no longer the case. No country with an active “entrepreneurial culture” would ever have allowed the de facto anti entrepreneurial risk-weighted capital requirements for banks.

Sir, if I had to choose between a Britain that did not hold back its risk takers, and one that was comfortably living off a larger European market then, if thinking about my grandchildren, I would without any doubt prefer the first one.

As I see it the European Union, governed by unelected risk adverse technocrats, who like old soviet central planners paint from their desks roads to the future, is doomed to fail… and that no matter how much “Universities… work more closely with industry”. In that Europe, the faster you jump ships the better.

If I were a British citizen I would instead be calling out to Europe proposing a different EU. Who knows what answer I would get from Poland, Italy, Spain, Portugal and others? Why for instance should they stay with those who most benefit from a Euro made weaker by the weaker?

PS. For those who do not know me in the context of any European Union and Euro debate, perhaps the following Op-Ed could help as an introduction. 


November 17, 2017

The safest route for UK might be to take to the seas in a leaky boat, abandoning a safe haven that is becoming dangerously overpopulated.

Sir, Martin Wolf writes: “A significant generational divide has opened up. Those aged 22-39 experienced a 10 per cent fall in real earnings between 2007 and 2017. They were also particularly hard hit by the jump in average house prices from 3.6 times annual average earnings 20 years ago to 7.6 times today. Not surprisingly, the proportion of 25-34 year olds taking out a mortgage has fallen sharply, from 53 to 35 per cent.” “A bruising Brexit could shipwreck the British economy” November 17.

Sir, I would argue that has a lot to do with the fact that banks are allowed to leverage much more their equity when financing “safe” home purchases than when for instance financing job creation by means of loans to “risky” SMEs and entrepreneurs.

Because that means banks can earn much higher expected risk adjusted returns on their equity when financing home purchases than when instance financing job creation by means of loans to SMEs and entrepreneurs… and so they do finance much more home purchases than risky job creations.

But Martin Wolf does not think so. He thinks bankers should do what is right, no matter the incentives. I think that is a bit naïve of him.

The way I see it, one of these days all the young living in the basements will tell their parents. “We’ve been cheated. You move down and we move upstairs.”

And it will be hard to argue against that. My generation has surely not lived up to its part of that intergenerational holy social contract Edmund Burke wrote about. 

Wolf ends with “The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck”. No! I would instead hold that its bank regulators made it overstay in a supposedly safe harbor that is therefor rapidly and dangerously becoming overcrowded.

“A ship in harbor is safe, but that is not what ships are for”, John A Shedd.

Sir, I have no idea if Martin Wolf has kids but, if he had, would his kids have grown stronger if he had rewarded them profusely for staying away from what they believe is risky? I don’t think so.


Leonardo da Vinci, smiling, must be harboring great gratitude to the Fed and ECB for helping his Salvator Mundi to become so highly valued.

Sir, I refer to Josh Spero’s and Lauren Leatherby’s “Record price sparks hunt for Da Vinci painting buyer” November 17.

Surely Leonardo da Vinci wherever he find himself must be smiling and extending his deepest gratitude to Fed’s Janet Yellen and ECB’s Mario Draghi for their QEs and ultra low interest rates. That has allowed him see his Salvator Mundi valued at US$ 450 million much earlier than he could have expected.

And Janet Yellen and Mario Draghi and their colleagues must surely be smiling too. Since Dmitry Rybolovlev bought that painting in 2011 for $127.5m, its current price hints at being successful at reaching an inflation rate target they never dared dream of.

The art curious still do not know who the buyer is, but be sure the redistribution profiteers are also looking after these US$ 450 million to find out how that money escaped their franchise.

Since the latter will surely soon again be talking about inequality I take the opportunity to advance my usual question of: How do you morph such a valuable piece of art into street purchasing power again; that can be used for food and medicines, without the assistance of another extremely wealthy?


What if banks could earn their highest expected risk adjusted returns on equity where they are most needed, like in Blackpool?

Sir, I just read Sarah O’Connor’s harrowing description of what is going on in Blackpool “Left behind: can anyone save the towns the economy forgot? FT Magazine, November 16.

It all sounds like Blackpool belonging to what we read more and more about, that termed as scrap land or junk land.

Sir, can we really afford to abandon those places to who knows who or to what knows what? If we do so what truly bad (or good) things could brew there? We might have some unexplored tools to help stop that or at least not to worsen it.

For instance, our banks, by means of the risk weighted capital requirements for banks are currently allowed to leverage more their equity when lending to what is perceived as safe than when lending to what is perceived as risky; and so banks earn higher expected risk adjusted returns on equity on what is perceived as safe than on what is perceived as risky; so banks, naturally, lend much more to what is perceived as safe than to what is perceived as risky.

That is doubly stupid. First because why would you like to help those who are perceived as safe and that because of that already have more access to credit to have even more access to bank credit? Likewise why would you like to cause those who are perceived as risky and who because of that already have less access to credit to have even less access to bank credit? In other words “safe” London earns banks higher ROEs than “risky” Blackpool.

And secondly because from a bank stability point of view you are acting against what history proves, namely that those perceived as safe are a hundred times more dangerous to bank systems than those perceived as risky. In other words London is riskier to the bank system than Blackpool.

So let us suppose we instead based those risk weighted capital requirements, and the distortion they produce, on where we think bank credit could most be needed or most productive. Then we could perhaps arrange it in such a way that a bank lending to an entrepreneur in Blackpool would be allowed to leverage more than when lending to an entrepreneur in London. And then Blackpool could have a better chance to regain some of its former luster or at least not lose it all.


What if the Norwegian citizens had had the chance to manage their own individual oil funds or share of oil revenues?

Sir, I refer to David Sheppard’s “Norway fund to sell off oil shares” November 17

At first sight we are of course all impressed with that the Norwegian Oil Fund has been able to accumulate US$200.000 per Norwegian. 

The question is though, had the Norwegian oil revenues been paid out to and invested directly by the Norwegians, would they in average have more or less than US$200.000, and would the Norwegians, in average, have been stronger citizens as a result of having to take on that responsibility on their own?

And when we read that what we always thought as the Norwegian Oil Fund or the Norwegian Government Petroleum Fund, is now known officially as the Government Pension Fund Global, the natural question we have is if all that money is now only to go to pensioners? If I was a young Norwegian with ideas of my own and in need of capital, I am not sure I would look too favorably at that possibility.

And let’s be honest about the results. Much of it, or perhaps even most of the financial returns obtained, which are perhaps more than the oil proceeds injected, have been direct consequences of US and Europe having kicked the 2007-08 crisis can down the road, injecting huge amount of liquidity with QEs which, together with the ultralow interests maintained, have inflated all financial assets.

Sir, I was appointed the first diversification manager of the Venezuelan Investment Fund created in 1974, basically a fund very similar to the Norwegian Oil Fund. It took me only two weeks to become convinced it would not work, and so I left.

All this sort of centralized accumulations of wealth sooner or later loose contact with the final beneficiaries and with their original purpose and fast (Venezuela) or little by little (Norway) begin functioning more in terms of the wants and needs of those managing it.

When we now start reading about how that Norwegian fund begins to assign more and more value to issues like sustainability and ethics, which of course is good, we do wonder though how much of that is more based on managerial show-off than on a real mandate from its final beneficiaries.

Again, if I was that young Norwegian in need of capital, or just wanted to construct my own retirement nest, I can easily hear me saying… Great, you do all that but, before you start, give me my share. 

And let’s face it. One reason Norway’s government have been able and willing to set aside oil revenues in the fund is that they receive other type of compensations, like gas/petrol consumption taxes. Norway has the highest gas prices in the world, about $2.40 per liter (Venezuela less than $1 cent per liter)

I hear you Sir. “Here is just a Venezuelan being envious of the $200.000”.

Of course I am envious but, believe me when I say, that as a defender of oil revenue sharing, I would much have preferred my fellow citizens to have only a tenth of that amount, but in the process have learned more of how to stand on their own, and freeing themselves from having to depend on redistribution profiteering governments or fund managers.

PS. What about the Norwegian Fund selling off oil shares? Sounds reasonable but their current 6 per cent invested in the oil and gas sector is not that exaggerated either. Can you imagine what the Norwegians would say if Norway runs out of oil and the Fund stands there with no investments in oil?


November 16, 2017

Edward Luce, what do you mean, is Mark Zuckerberg not paying the taxes he should pay, or is he just no taxed enough?

Sir, I come from a nation, Venezuela, where those in power have wasted hundreds of times more fiscal revenues than the amount of taxes citizens might have evaded. So I am no fan of the redistribution profiteers.

Edward Luce writes: “America’s new economy elites tend to cloak their self-interest in righteous language. Talking about values has the collateral benefit of avoiding talking about wealth. If the rich are giving their money away to good causes, such as inner city schools and research into diseases, we should not dwell on taxes. Mr Zuckerberg is not funding any private wars in Africa. He is a good person. The fact that his company pays barely any tax is therefore irrelevant.” “The Zuckerberg delusion” November 16.

What does Luce mean? Is Zuckerberg not paying the taxes he should pay or is he not taxed sufficiently. If the first Zuckerberg should be fined or even go to jail, if the second Luce is close to being defamatory and should suffer some consequences. 

And Luce also holds “The next time Mr Zuckerberg wants to showcase Facebook, he should invest some of his money in an actual place.”

What on earth does Luce mean? That Zuckerberg does not have his money invested in an actual place? That Zuckerberg keeps his wealth all in cash stashed away under his mattress?

I am clearly against how much rents are derived from monopolistic positions, and would of course like to see that kind of rent capturing to be diminished. But I also believe that once wealth has been created, and that wealth has been allocated to different assets, one should not come to the conclusion that redistributing these would actually result in something better.

It is so typical for wealth-redistributors to suggest, like Luce does, that Zuckerberg would do better funding “a newspaper to make up for social media’s destruction of local journalism” without given a single thought to what would then have to be defunded.

What is most conspicuously absent in the aggressive let’s redistribute the wealthiest wealth proposals, is an explanation of how that is done and of what that implies.

For instance, let us assume Mr Zuckerberg has a $200 million dollar Picasso hanging on the wall. How do you convert that painting into food, health services, education or money for the poor, without having to find another wealthy buyer of that Picasso?

And, if you did cash in the $200 million, how much would reach the less wealthy and how much would just enrich the redistribution profiteers… perhaps making them the neo-wealthy?

The fact is that if Zuckerberg had a $200 million dollar Picasso he has, in a sort of voluntary tax, frozen alternative purchasing capacity on his wall. In this case leading for art to be seen as a good investment, and most probably down the line causing some artists down to get some more income for their art. 

But Sir you would also probably agree with Luce in that journalists are worthier than painters. And I don’t hold that against you… because that’s life. Let anyone not wanting to redistribute something more to himself, cash if you are poor and goodwill if you are Zuckerberg, throw the first stone.

PS. I am an ardent defender of a Universal Basic Income because I find that to be the most efficient way to finance, among others, the creation of decent and worthy unemployments. But that redistribution method also needs to be clear on the implications of what is being redistributed. How much would exist in the Frenchman Thomas Piketty’s Paris’ Museum of Louvre, had it not had been for the existence of the odiously wealthy?