October 08, 2015

Stimulus, stimulus and more stimulus? Lawrence Summers, FT, IMF, can’t you see the economy has been made frigid?

The world has been given fiscal deficits, massive liquidity injections with the QEs, and extraordinary low rates… and all we get is a blah economic response. I know why, but most decision makers (including journalists) do not. That is because as Lawrence Summers explains the “policymakers… ignore adverse market signals [that] are inconsistent with their preconceptions”. “FT Big Read: Global Economy: The case for expansion”. October 8.

So here is the why… for the umpteenth time:

Bank regulators, Basel Committee, FSB, Fed, IMF, FDIC and others, by imposing as the pillar of their regulations loony portfolio invariant credit-risk weighted capital requirements, gave banks a risk-taking antiaphrodisiac, meaning an ingredient that kills the libido, the opposite effect caused by Viagra or Cialis. And it is not that banks needed it; they were already quite adverse to ex ante perceived credit risks. Ask Mark Twain.

And boy have the adverse market signals been ignored. All assets that caused the crisis were, as is usual with bank crises, those that were perceived or declared safe, like AAA rated securities and loans to sovereigns like Greece, and that banks, in this case, on top of it all, were allowed to hold against basically no capital at all. And having banks been given the incentives to go to safe havens by the risk adverse regulators, experts now even call it “excessive risk-taking” when, as a result, banks ended up in dangerously overpopulated safe havens.

And all those “risky” bays where SMEs and entrepreneurs reside, and which could provide much growth, they are left, equally dangerous, highly unexplored. When have you seen a stress test of a bank’s balance sheet that has included looking at what should have been on it?

So No! Professor Summers… and you all! Before giving Lawre economy more stimulus first rid banks of this regulatory antiaphrodisiac… and, thereafter, give them perhaps even some aphrodisiac in order to increase their willingness to take risks on projects that can help the sustainability of planet earth or the creation of the jobs our children and grandchildren will need.

@PerKurowski ©  J

Scrap credit risk weighted capital requirements for banks and base it on sustainability and job creation instead.

Sir, I refer to David Pitt-Watson’s “‘Fossilist’ finance is proving a hindrance to the ‘clean trillion’” October 8. Again, for the umpteenth time, I make a suggestion that has steadfastly been ignored by FT. I am sorry, to be repetitive, but if that is what it will take, that is what I will be.

Intro: The pillar of current bank regulations is the credit risk weighted capital requirements. More perceived risk more capital and less perceived risk less capital. That so as to serve as an inducement to stay away from what is risky allows banks to earn much higher risk adjusted returns on “safe” assets than on “risky” assets. And that is one utterly purposeless and dangerous piece of regulation.

Purposeless, because of course the perceived credit risk has not one iota to do with if the credit is going to be used for a good societal purpose. There is not one word that defines the purpose of banks in all current regulations.

Dangerous, because it tempts banks to build up excessive exposures, against little capital, precisely with those assets that can cause major bank crises, that what is perceived as safe. What is perceived as “risky” takes care of itself with high risk premiums and low exposures.

And so Sir, it should be clear that current regulations also constitute a major hindrance to the ‘clean trillion’… just like they for instance by impeding the fair access to bank credit of “The Risky”, like SMEs and entrepreneurs also constitute a major hindrance for job creation. 

And so here again is my proposal:

First, scrap those regulations and set the same capital requirement against all assets, so as not to distort the allocation of bank credit. Initially, considering the sorry state of the economy, what is probably required is diminishing the capital requirements for what is risky, to about the level of capital banks already have against all assets.

Then, and only then, and after having clearly explained why, lower slightly the capital requirements against assets that can obtain very good ratings in terms of how they assist sustainability and how they can help create jobs for the next generation. That would allow banks to earn more, on what we all are glad they can earn more.

PS. Since David Watson is an executive fellow of finance a London Business School, I want to inform him that from mid 1979 until mid 1980 I took their Corporate Finance Evening Course.

@PerKurowski ©  J

October 07, 2015

The Basel Committee for Banking Supervision’s engineers… where did they graduate? They sure can’t be any real engineers

Sir, Andrew Hill, when reviewing Greg Ip’s book “Foolproof” writes: “Ip is scrupulous about not favouring one side or the other in the tug-of-war between what he calls “engineers”, always tempted to step in, and “ecologists”, who prefer to stay flexible for fear of unintended consequences of man-made intervention.” “The foolishness of attempting to make everything foolproof” October 8.

In a formal statement I delivered as an Executive Director at the World Bank in 2003 I wrote: "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.” And so according to Ip’s definition I would definitely classify as an ecologist”

But that’s too simplistic, often the “unintended consequences of man-made intervention” do not really result from actions by engineers, but from actions of those who should never have been allowed to call themselves engineers.

Hill writes: “Ip’s timing with Foolproof could not be better, as memories of the 2008 crisis fade.” No! Forget it! The memories of the 2008 crisis will not fade away… they will grow with time… as history starts to understand and acknowledge the Greatest Regulatory Blunder of all times… that of the portfolio invariant credit risk weighted capital requirements for banks.

I have just started to fill up a post on a blog with all the type of stupidities one needed to believe in order to believe that piece of regulations made any sense. It will certainly disclose us as a dumb society, filled with arrogant besserwissers and persons impressed by arrogant besserwissers. (I am sorry Sir if that is going to include all your journalists who kept mum on it)

Hill mentions: “Forest managers now mostly choose to suppress fires rather than letting small areas burn, which could limit more devastating blazes.”

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

@PerKurowski ©  J

Lord Adonis, as your National Commissioner, could do more for UK’s infrastructure by going to Brussels and Basel than staying in London.

Sir, I refer to your “A commission for firing up Britain’s bulldozers” October 7.

You write: “In economic terms, more infrastructure ticks every box. It enhances productivity, while building it also creates jobs. With interest rates near to all-time lows, the financing costs are nothing to fear. Should prudence or ideology demand the use of private instead of public money, there are pension funds crying out for a stable return, if the state bears the construction risk.”

Not so fast! In infrastructure, what could and how it will be financed, in the UK, depends a lot on what the financial regulators think; as they express in their capital requirements for banks and insurance companies. These regulators are in so many ways the real Great Disrupters. 

In fact, your Lord Adonis would be well advised to take a little study trip to Brussels and Basel to learn about all this. In fact you’re your Lord Adonis could well be doing UK’s infrastructure sector much more favors staying there, helping to eliminate the distortions to infrastructure finance that regulators create, than what he could achieve by remaining in London leading the National Infrastructure Commission.

Per Kurowski

@PerKurowski ©  J

World/Germany: Don’t fine Volkswagen for the benefit of those who should have controlled emissions better. Be smarter.

Sir, I refer to Chris Bryant’s “New VW chief signals cost cuts to pay for emissions bill” October 7.

If I were Volkswagen’s new chief executive, I would not accept, laying down, to “slash costs to help to foot the bill for the diesel emission scandal” No way! I would strengthen Volkswagen by making a counteroffer the world could not resists… because of its implications.

I would offer the authorities, in lieu of any fines related to The Scandal, to give to each of VW’s 600.000 employees, and to each of 11.000.000 of VW’s diesel car buyers, for example €1.000 in Volkswagen preferred "green" shares, convertible into ordinary VW shares.

And, if the offer was accepted, I would not waste one € correcting wrongdoings on the past, but instead duplicate the € 11,5bn research budget of last year.  But, that’s just me.

I dare you to find one environmentally concerned, who is not a statist, who would not agree with me.

PS. Volkswagen, don't delay your answer... the faster the better.

@PerKurowski ©  J

To manage risks we are always better free, in God’s hands, than in hands of some hubristic sophisticated besserwissers

Sir, Martin Wolf writes: “Market liquidity is likely to disappear when one needs it most. Building our hopes on its durability is risky. That is correct, but when he argues: “the absence of regulation exacerbated the liquidity boom and subsequent bust”, his implicit message is… that regulators should do something about it. “Beware the liquidity delusion” October 7.

I on the other hand have always worried about that bank regulators, when they act on their own perceptions of credit and liquidity risk, in any sort of complex form, introduce distortions, systemic risks, which can make everything so much worse. 

What feeds our credulity to believe something is more safe just because we perceive that something to be more safe? Is it not so that the safer an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby make that asset really risky?

What feeds our credulity to believe something is more liquid just because we perceive that something to be more liquid? Is it not so that the more liquid an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby at one point make that asset absolutely illiquid… at absolutely the worst moment?

Wolf suggests: “It would be better if investors appreciated the risks of a freeze in market liquidity in riskier financial assets”. Yes, but one must also argue the importance for regulators to appreciate the risks of a freeze in market liquidity for “safe” financial assets. A freeze of those assets would obviously hurt much more. (Like what happened with the AAA rated securities collateralized with mortgages to the subprime sector)

Wolf suggests: “markets characterized more by longer-term commitments, and less by hopes of finding ‘greater fools’ willing to buy at all times, might be better for most of us. This will not be true for all assets — notably government bonds. But it will be true for many private instruments”. Indeed, more long-term commitments could be good, but why does Martin Wolf believe that government bonds could never become a dangerously overpopulated safe haven in which we all got stuck gasping for oxygen? Is it ideology?

Of course dangers surround us, our financial markets and our banks, all the times; many more than credit and lack of liquidity risks. To manage those risks I am convinced we are better of being free, in God’s hands, than in the hands of some sophisticated besserwissers suffering immense hubris. But that’s just me.

Does this mean I don’t want any regulations? Of course not! But keeping those simple, and essentially considering the unexpected instead of the expected, would go a long way. The expected always finds a way to take care of itself… though I must admit that sometimes that takes strangers going strange ways and using strange tools.

@PerKurowski ©  J

October 06, 2015

The most forceful adblocker is the limited attention span available… and here is an offer on how you can access mine

Sir, Matthew Garrahan, Hannah Kuchler and Robert Cookson write “the latest adblocking software, and programs already available on PCs and laptops, could have ruinous implications for the companies that rely on digital advertising, such as online publishers” “Adblocking threat to marketing industry grows” October 6.

I am perfectly fine with any advertiser who simply tags on a Twitter, Google or Facebook and gets paid for it even if I were bothered is put out of business. We need smart adblocking on our telephone lines too.

But the fact is that the biggest adblocker of them all, is time. There is just so many hours and minutes available per day. And so the whole adblocking technology, instead of being considered a threat, should be good news for the ad industry, since it will permit to separate the good from the bad.

And, since we on the receiving end are in fact the most important participants in all this, let me take this opportunity to once again remind the industry of my offer:

Anyone who following my personal copyrighted preferences feels he has a very special message to me, could begin by paying me a token of good faith, for instance 1US$. If so, I guarantee him the access to my fully devoted attention span, during 30 seconds. For your information my adblocker will be receiving a percentage to be agreed upon of my revenues, and so that it also has an interest in maximizing these.

PS. I just went out to my mailbox. I will need an adblocker there too. My ordinary mail does not fit any longer.

@PerKurowski © J

Most of our resilience capacity has been spent, for no particularly good or sustainable reason

Sir, I refer to Ludger Schuknecht’s “What bankers can teach stimulus-addicted economists” October 6.

Schuknecht writes: “In too many countries debt and public spending are high, and interest rates close to zero… Yet, after decades of attempts to fine-tune the economic cycle by running fiscal deficits and cutting interest rates at times of weak demand, many economies are fragile”

And I ask…why? Could it have something to do with credit risk weighted capital requirements for banks that stops banks from financing the tough we need to get going when the going gets tough… like “risky” SMEs and entrepreneurs?

Schuknecht writes: What governments save, because debt service costs are low, they often spend. Public debt in many countries is now well above 100 per cent of gross domestic product. This would have been unthinkable a decade ago.

And I ask… could it have something to do with this? In November 2004 in a letter published in FT I wrote: “I wonder how many Basel [bank regulation] propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector.”

Schuknecht writes: In too many countries debt and public spending are high, and interest rates close to zero. This leaves little room for effective policy when the next crisis hits — as it surely will.

And I fully agree: Indeed we have spent up most of our resilience capacity… for no particularly sufficiently good and sustainable purpose. 

@PerKurowski ©  J

Ben Bernanke: “The Courage to Act” - in the midst of a sissy regulatory aversion against banks taking credit risks?

Sir, I refer to Sam Fleming’s comment on Ben Bernanke’s book “The Courage to Act”, “Bernanke attacks Capitol Hill over crisis role” October 6.

From the book he quotes “The Fed can support overall job growth during an economic recovery, but it has no power to address the quality of education, the pace of technological innovation, and other factors that determine if the jobs being created are good jobs with high wages.”

There is an Equal Access to Education Act. Suppose there were some few agencies that rate the qualifications of a student to make it meritoriously; and suppose universities used these ratings during their pre-screening process. What would America say if the Department of Education ordered these Education Worthy ratings to be considered once again in the final selection… and with double importance?

There is an Equal Credit Opportunity Act (Regulation B). Bankers already consider credit risks when setting interest rates and deciding on the size of exposure, among others the information provided by credit ratings. But then bank supervisors decided, by means of the Basel Accord in 1988 and its subsequent revisions, that the capital banks would be required to hold, were also to be based on exactly the same credit risk perceptions. 

That of course meant that anyone who was perceived “risky” from a credit point of view would be considered doubly risky, while anyone perceived “safe” would be considered doubly safe. And of course that has completely distorted the allocation of bank credit and thereby hindered job creation and, by keeping a lid on opportunities, helped cause more inequality.

On this odious discrimination against fair access to bank credit, Ben Bernanke has kept absolute silence. Most probably he did so completely unwittingly, but that is not a valid excuse for a chairman of the Federal Reserve. But of course he is far from being the only one to blame.

To top it up Bernanke names his book “Courage to act”; when the last decades have been signed by a sissy regulatory aversion to credit risk... as if avoiding taking the credit risks that helped the country to become what it is, has now become the only purpose of banks… in the Home of the Brave. Hah! 

With bank regulations like these, clearly the “American economy will fall tragically short of its extraordinary potential”. 

By the way, regulators assigner a zero risk weight to the Sovereign (the government), while the private sector, that one were most citizens that make up a Sovereign usually work, got a 100 percent risk weight. Anybody who does not find that strange, harbors a statist heart and mind.

I can hear all the SMEs and entrepreneurs who thanks to bank regulations never got their chance rocking away:

You ain’t nothing but a statist… scheming all the time.
You ain’t nothing but a statist… scheming all the time.
You ain’t never created something… and you sure ain’t no friend of mine.

@PerKurowski © J

October 05, 2015

Could one sue one’s Alma Mater for a partial valueless education, in order to pay back part of one’s student debts?

Sir, it is hard to know what to do with the so astounding information that Lucy Kellaway provides us with: “Over the past 10 years the 17 valueless companies have outperformed the others in the FTSE 100 Index by about 70 per cent” “Hands up if you can list what your company’s values are” October 5.

First question would have to be to clarify whether those results means valueless as in absence of values, or, hopefully, valueless as in absence of declared values.

The second, if I may, would be to try to figure out how much debt MBA students around the world have taken on, in order to learn about the extreme importance of declaring corporate values. Maybe there is a valuable class action lawsuit against their Alma Maters coming down their way.

@PerKurowski ©  J

Universities, allow imperfect and perhaps even inadequate minds, to have a voice in your classrooms. That's diversity!

My daughter, an art fanatic, on hearing my explanation about the monstrous mistake of credit-risk weighted capital requirements for banks, pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Was she right!

In it Dolnick makes a reference to Francis Fukuyama having heard Daniel Moynihan opining: “There are some mistakes it takes a Ph.D. to make”. And Dolnick also speculates that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that of: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

That is why when now Della Bradshaw reports about “a growing recognition that the world’s intractable problems need business solutions means MBA directors are searching for students with a more diverse background to fill their classrooms” I say: “Way to Go!” “More variety is the spice of classroom life” October 5.

Of course we must inject some confident ordinary minds in the classes in order for these to pose the questions that must be made. My impression is that experts never really try sufficiently to convince other experts of why they are right and others wrong, but they do their utmost when it comes to convincing the non-experts that they are the best experts.

Oh if I only had been in those classes where the minds of sophisticated future bank regulators were trying to estimate unexpected losses in the same direction as those expected losses derived from perceived risks.

My ordinary mind would not have been able to hear such foolishness and keep silence. Don’t you know that out there, in the real world, what is really risky is that what we can wrongly perceive as absolutely safe? I have never heard of a substantial number of persons dying because of bungee jumping. Have you?

As an Executive Director in the World Bank I once 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, universities, please allow for imperfect and even inadequate minds, to also have a voice in your classrooms.

That said, be careful though with what the calls for diversity really means. It could be modern Giuseppe di Lampedusa types wanting to diversify only in order to remain the same.

@PerKurowski ©

Insurance sector: Again loony regulators are trying to cover for unexpected losses by analyzing the expected ones.

Sir, I refer to Alistair Gray’s report on “the capital [insurance companies] must hold against unexpected losses” “Insurers face tough new safety rules” October 5.

In it Gray writes: “A paper to be published quantifies the higher capital requirements for the designated insurers. The size of the hit will depend on each company’s mix of business and how systemically important regulators deem them to be. So-called non-traditional and non-insurance (NTNI) activities carry the largest surcharges, of between 12 per cent and 25 per cent.”

So again we have regulators, like those of banks, who set capital requirements for unexpected losses based on the expected risks they perceive. Loony! Do regulators really think they can perceive risks better than the insurance companies? Is there not a huge risk that both the insurance companies and the regulators will perceive the same risks, and so that there therefore will be an overreaction to these risks, which obviously means a sub-consideration of other risks? And boy, are these regulations just screaming to be gamed?

Also, at a moment that so many want infrastructure projects to be started as a way of reactivating the economy, who of the regulators is thinking about the fact that many of the risky long term projects, often financed by insurance companies… could perhaps not happen only because of wrong and distorting capital requirements.

Where have all humble regulators that know of the importance of not interfering gone? When will they ever learn, when will they ever learn?

Why do they in order to cover for unexpected losses not just set for instance a 10% capital requirement on all assets? Are they scared they would then look like less sophisticated regulators to the general public? If so, God save us from regulators suffering an inferiority complex.

@PerKurowski ©