December 31, 2007
December 29, 2007
December 22, 2007
You must be fully aware that even with much worse lending standards there would have been no subprime debacle at all had the credit rating agencies not blessed the securities backed with these mortgages with their prime credit ratings, and so I must ask why you do not make the real problem part of the solution?
You also mention the risk of over-regulation, but Sir, is not in fact the appointment of the credit rating agencies as the supreme risk overseers in the financial markets the mother of all over-regulations? I believe mortgage bankers are quite capable at handling their job so why not let them get back at it again and get rid of those who fouled it all up?
December 21, 2007
December 19, 2007
I fully agree that we will have to count on human ingenuity to save our descendants from the dark ages that already lurk close (hugo chávez), but to that end we also need to keep on believing that goodness and badness does not add to a zero-sum human condition
It is when the bank regulators themselves start acting like God that they really set us up for the big systemic disasters.
December 18, 2007
If there is anything rational for the regulators to do now it would be to swallow their pride and require the same percentage of capital for all credits; give the banks some time to orderly adjust to this; and let the markets price the risk of the banks, for instance by forcing the banks to issue subordinated debt as was suggested by the Shadow Financial Regulatory Committee back in 2000.
To top it up, based “the bigger they are the harder they fall” I would also add some additional progressive capital requirements or insurance payment based on size.
If do this is of course a major operation that gives a totally new meaning to central-bank cooperation though I am not really sure I would like to be on the European side of the bargain. That said if risk adverse central bankers think that the conditions are serious enough to warrant this, why on earth do they not recommend their respective governments to proceed with much more targeted fiscal support measures that can perhaps be better explained to the taxpayer?
I for one would always prefer my government helping directly the mortgage holders who I can at least identify as the beneficiary, than having it give support through the purchase of some debt collateralized with mortgages, where I won’t have a clue whom they are truly benefiting, and the authorities will have to plead blissful ignorance.
December 14, 2007
When the bank regulators by means of the Basle Accord decided to drive risks (and creative destruction) out of banks, and imposed their exclusively risk based minimum capital requirements on the banks, they drove in fact banking business out of banks. When they simultaneously also appointed the credit rating agencies as their Blackwater type overseers of risks they also drove bankers out of banks.
The current turmoil is therefore much more a consequence of a Frankenstein’s not so intelligently meddling with the banks and Darwin has nothing to do with it that is unless of course you refer to the bank regulators themselves.
December 13, 2007
Having said when you in “The charge of the central banks” December 13, mention that “the cavalry has arrived” let us pray they brought with them the right ammunition as the enemy has not yet been completely identified.
For instance, besides liquidity injections I would suggest the central banks now give the banks sufficient time to adjust their capital ratios for past sins. What is the need for having all the banks run simultaneously to find more capital just because they have now discovered a fire that has been burning for quite some time?… to add panic to panic does not seem the best of co-ordinations.
Finally, let me say a word about the conditions of the battlefields. The current plans to have the subprime mortgage sector freeze the interest rates amount only to an aspirin and no solution. The only thing that can really make solvent the markets is turning the subprime into prime; like by having the government buy those houses at adjusted prices, financed by the current lenders, and leased out to the current owners turned into tenants and giving these a repurchase option at a price that would hold the taxpayer harmless.
Since in gross earnings the emigrants/immigrants definitely represent one of the major economies in the world, they (and the global corporations) are really the ones who should next be empowered with Chairs at the Executive Boards of the World Bank and the International Monetary Fund.
December 12, 2007
The appointment of the credit rating agencies to lead the way and yet believing in that the free market would operate freely would be laughable if not for the consequences.
I pray Wolf’s article opens up an urgent debate since our bank regulators are currently, among others with Basel II, just digging deeper and deeper in the hole where we find ourselves.
All is not bad news though. One good thing that could come out of this awakening is to allow banks to be banks again. In many developing countries where the banks because of the risk adverseness introduced by the bank regulators from Basel through their minimum capital requirement formulas, are more and more financing the “risk-free” public sector and the securitized-consumers, and less and less the more risky but yet vital entrepreneurs, and so the comeback of more traditional banking is urgently needed.
Sir your editorial “Dark side of the hunt for energy” December 12 is really questionable on the grounds that the US energy consumption is seven times that of China on a per capita basis, and there is nothing to tell us that energy should be allocated on a first come first served basis.
Sir if not necessarily “the most” I would absolutely agree with Mr Karel Volckaert opinion that employee compensation is a very telling risk profile indicator when it comes to banks and the financial system in general, December 12. In this respect I also think it behoves us that all the institutions awarded the franchise of “last recourse protection” have employee incentives plans that are based on the medium and long term results, ten years, and not just the next quarter.
December 11, 2007
If the dollar is really in problems and there are no other currencies willing or able to shoulder its weakness, offering to the trillions of dollars existing in the financial oceans the possibility of converting them into the Special Drawing Rights currency baskets and of which $34bn of value are currently swimming around in the bathtub of the International Monetary Fund, does not seem a solution that carries enough punch. This is something that Bergsten recognizes, but only after he has made his case for radical and insufficient solutions.
Also hearing that the funds would be recycled into the same securities currently offered and that the funds gold holdings of (only) $80bn could provide additional backing, just makes me want to cry more… and perhaps run for the gold myself.
The fact is that if you cannot diversify yourself out of a currency into other currencies then the fault might not lie with the initial weak currency but with all of them and, if so, then you diversify yourself into assets, and then you might realize that the US is not so weak after all, at least if they decide doing something about their weaknesses, like raising the taxes on their petrol/gas consumption to European levels.
You see sometimes the most important assets of a nation are not so apparent because they live in that hazy world of public policies that could be corrected. The US in their gasoline consumption and in their health sector has a world of this type of hidden assets just waiting to be taken to the market.
Since most of this movements are occurring not really because problems appeared but more so because problems were discovered, I cannot understand why the regulators cannot give the banks some time and leeway to rebuild their capital and thereby allow them to help out containing a crisis for which, if it is allowed to snowball, there is not enough capital to take care of the avalanche anyhow.
Sir let me take the opportunity of Mr Tommasso Padoa-Schioppa, Italy’s economy and finance minister telling that “Europe needs a single financial rule book” December 11, to piggyback a request that in that rule book there should also be a clear and explicit wording about what to do with the subsidiaries of the European banks in developing countries in times of crisis.
December 08, 2007
Much better would be an alternative whereby the US government helped these subprime mortgages deserve prime rates. That this would cost the taxpayers additional money is ludicrous; just wait to see how not solving the problems right will cost the taxpayers money by other means, perhaps as an outright recession.
Personally I favour the idea that the US government, just as it sometimes can buy oil for a Strategic Petroleum Reserve, should offer to buy outright 2.000.000 of the houses currently involved with subprime loans; at a price well below the current outstanding mortgages, a one shot capital loss; financed by the current mortgage holder at government rates; and giving the current debtor a option to repurchase his house in a couple of years at a price that would keep the tax-payer from being harmed.
December 07, 2007
Initial funds will be placed in the Bank of South and rapidly withdrawn by each investor for their own favourite projects and thereafter,with its role reduced to paying the salaries of some bureaucrats, it will most probably linger unproductively forever and ever. Could not the south benefit from a Bank of South? Of course, but not from a Bank against the North.
That is indeed a totally valid argument but, if we are going to avoid even worse systemic financial crisis in the future, we must also dare to reach further yet and raise the issue that the policymaking-regulators are also to be blamed for having empowered the credit rating agencies too much.
December 05, 2007
Sir David Pitt-Watson tells us that the “Lessons of the credit crisis are not just for regulators” December 5, and of course he is right, who argues the opposite? But when it comes to accountability it might be important to state that this should also be applicable to regulators.
Pitt-Watson mentions that “To be assured that these loans were credit worthy the market passed on this accountability and responsibility to credit rating agencies” but he forgets that, in the case of the banks for example, it was actually the regulators, by means of how they calculate the minimum capital requirements, that basically ordered the banks to make the credit rating agencies their pipers, and I have not yet heard the first regulator being fired, paying a fine, or even named and shamed for doing a crazy thing like that. On the contrary they seem all to be fine and dandy and ready to help out again…with our taxes.
Since we also so frequently hear references to the concept that our economy has become more knowledge-based, should we not, if only out of modesty, start to downplay that illusion?
Having been an Executive Director of the World Bank a couple of years ago I was of course bombarded with the concept of the Knowledge Bank, then and now my reaction was the same… “Forget your tons of knowledge and please give me a gram of wisdom!”
Although this basic premise sounds right, and should be right, unfortunately it is not right, and so if we sit for that fright and that easy way out to happen, we will all chop down our last tree, just the way we did on Easter Island.
I people knew it was very dangerous to smoke, I people was never offered an easy way out, it took two years of hell, but I people did it because the opportunity costs of not quitting, namely the nagging from wife and daughters, was just too big for any macho man to endure. In similar fashion many governments have managed to come up with ways of how to impose very high petrol taxes on their voters just because the incentives of fiscal earnings were very high.
And so, what is truly needed to get results on climate change is to align the incentives and empower the agents of change. For instance if you want to reduce the use of cars in the US, which is an environmental must, let local authorities auction off public transport monopolies and thereby enlist bus manufacturers and bus drivers in the army fighting climate change.
Wives and daughters (leaders of the world)… get us working on the climate change… you like heat even less than we do.
December 04, 2007
Protectionism: Full fledged competition in a globalized world would have eroded the profitability of many companies had we not awarded them the protection of intellectual property rights, and invested some serious money in making that shield mean something. Can you imagine Microsoft in a world where efficient software copiers are free to roam?
Therefore since most of labor have not been furnished similar new protections, and some old ones have in fact been taken away, it should not come as a surprise that the share of labor income as a percentage of GDP is dropping, and that this is, certainly and rightly, creating a source of conflict.
So what’s to be done? There are only two choices? Either we award to labor similar protections which would set us all on a de-globalization route, a lose-lose proposition; or we must require that the beneficiaries of intellectual property rights give back some extra of their quasi-monopoly based extra earnings to the society. As an absolute minimum, this should represent the direct cost of enforcing and defending their rights. Is this protectionism? No at all!
Review of existing trade agreements: Absolutely. In some of the US bilateral agreement some prohibitions were imposed on developing countries because at the time they were considered as appropriate, but hindsight has led to other conclusions and so these clauses need to be revisited. For instance some US trade agreements prohibit any restrictions on capital movement even though now these restrictions are deemed quite good at taking away some of the excessive volatility that the waters of the global financial oceans can have on local bathtubs.
Energy and environment: “the most important thing is getting the US focused on energy efficiency, on clean renewable energy, combating global warming on raising gas mileage etc.” Just like the recent Nobel price recipient Hillary Clinton does not have the courage of spelling out what is primarily needed to really alter the energy and environment realities in the US, namely a substantial tax on gasoline consumption.
Housing crisis: Just like the US can sometimes use a Strategic Petroleum Reserve I would suggest the government buying a large amount of the houses currently involved with subprime loans; at a price below the current outstanding mortgage; financed by the current mortgage holder; and giving the current debtor a option to repurchase his house in a couple of years at a price that would keep the tax-payer form being harmed. That’s what I would do… but then again I am no PhD and so I could be wrong
December 03, 2007
December 01, 2007
I just wonder whether if someone had previously set a maximum limit to how much of a Citigroup could be sold to middle east countries before being blocked similar to how the takeover of some US ports were one would not have been able to generate that scarcity value that could have led the investor to gladly fork out at least twice what they paid for those shares.
Sincerely, in these days when we read of billions of run away losses in a world that has no idea where to invest, one could believe that the shares of the bank that never sleeps in the US and that is one of those that has seemingly become too large to fail should be worth a bit more.
The poor in developing countries frequently face no other choice than to emigrate to richer countries in order to survive physically but many alienated and frustrated citizens of developed countries do not really have the choice to emigrate somewhere else in order to survive emotionally, and perhaps they should have.
For instance if these dead boys had had the option of selling whatever French citizen’s rights they had to a foreigner truly interested in coming to France and with that money could have financed their resettlement to Morocco or Senegal perhaps we could have solved the problems on two fronts.
Clearly it is not as easy as that but the world needs to find new and different ways to fight violence originated from deep sentiments of alienation with other means than violence.
November 30, 2007
November 28, 2007
Wolf also mentions Henry Kaufmann’s suggestion to submit to special intense scrutiny banks that are deemed “to big to fail”. As the failure of any of this to big to fail banks would clearly have much worse consequences for the world than a little Northern Rock has I have always suggested that the best way to insure us against the putting all the eggs into the same basket risk is a small progressive tax on the size of banks. We might lose out on some of the economies of scale, but then again we have always been told that you can’t have the cake and eat it too.
November 25, 2007
The other thing we need to do fast is to start to comprehend the real significance of systemic errors in a globalized environment. What brought us here and what could have happened if this subprime mess had had two more years of build-up before exploiting? Let us shiver at the idea and start doing something about it. Please reign in our bank regulators and their commissars the credit rating agencies. Without them, this would not have occurred.
November 21, 2007
Having said that and since Wolf juggles around with some percentages of growth, and views with some tremor the possibility of a “growth recession” in the US, I would also like to add that, sooner or later, we need also to start looking more in detail at the sustainability and the quality of growth.
I am spending this Thursday of Thanksgiving in New York and I have just been informed that in order for my wife and daughter to access the real bargains during Black Friday I need to go with them to the stores when they open…at 5AM in the morning. Since that cannot be a sign of good growth, if some growth recession could help me from having to go shopping at 4 am next year, well then bring it on.
November 19, 2007
November 16, 2007
November 15, 2007
November 12, 2007
November 10, 2007
After the dollar gave up the last appearances of gold backing in 1971 (Guha might have only been a child then) the world basically accepted a system based on the capacity of their governments, or politicians, to guarantee some sort of financial discipline and which so clearly amounted to an act of faith that it was made explicit by including the "In God we trust" on the currency.
In this respect if the markets come to completely lose their trust in the word of the US governments and their politicians this does not necessarily imply that they will have more trust in the word of other governments or politicians but it could in fact lead them to lose their confidence in all of them, at which point the dollar-yen-yuan-euro value becomes utterly irrelevant, leading to a global scramble for assets to barter, at any price, and perhaps having the prices of the shares on Wall Street quoted in ounces of gold.
November 09, 2007
Where do they get the powers from to give this sort of instructions while simultaneously telling us that they are only giving opinions and which in terms of the First Amendment means they are not responsible for anything? Perhaps the best we can do is for all regulators to give immediate orders to the market to ignore anything the credit rating agencies say and then take it from there.
November 07, 2007
Plender refers to how through the minimum capital requirement calculations imposed a regulated arbitrage opportunity was created that forced and stimulated the creation of a parallel financial world that ended up much more difficult to comprehend. To this we would also add the fact that when the regulators then appointed the credit rating agencies as their frontline commissars, then really they set the table for the systemic risks to build up.
Also when Plender asks “whether top executives, let alone non-executives, can really understand the risks being run in such large, complex [financial] institutions”, worrisome as that might be, much worse is having to ask whether our bank regulators really know what they are up to.
From this perspective Ricardo Hausmann "Biofuels can match oil production" November 7, and that has 95 countries investing billions of billions in cultivating 700m of acres just in order to cap the price setting capacity of OPEC seems to say the least an astonishing proposition. The question to ask Hausmann is what he will do with those 700m acres when oil having been at last given such a real price floor really starts the pumps. Why don't you give OPEC a price floor without having to go into the environmental and economic nightmare of cultivating 700m of acres that will have to be subsidized in the future and that we pray will not include the Amazon?
November 05, 2007
November 02, 2007
When the regulators imposed their minimum capital requirements on the banks based exclusively on risk assessments performed by their commissars or Blackstone type subcontractors, the credit rating agencies, they should have known a reaction would follow. First that many assets deemed more risky by the banks than what the appraisers thought them to be, would probably stay in their balance sheets while all those assets deemed less risky than appraised, would find new balance sheets where to hide out .
Second that the credit rating agencies would turn into the mother of all the systemic risk builders and contagion agents allowing profitable arbitration in risks, mostly through securitization mechanisms. Let us remember that all this subprime mortgages mess would have had no chance of going global, had it not been for the banks being able to sell the mortgages because the credit rating agencies provide these with AAA travelling documents.
Personally what I most favour, everywhere, is massive temporary worker programs so as to allow for the market to cover its short term needs without necessarily forcing the society to enter into long terms commitments. To make these temporary programs more feasible I am currently investigating the use of private insurance companies to guarantee compliance (going back home) instead of putting the burden on already overly stretched migration authorities.
The main obstacle to the development of temporary worker programs lies ironically in the arrogance of developed countries believing that anyone who gets there wants to stay there forever. So instead of making good livable room for all your temporary needs what you are getting is more and more permanent fixtures.
November 01, 2007
At this moment when we are suddenly faced with the possibilities that all the bank regulator’s risk adverseness might anyhow have come to naught, before digging deeper in the hole where we find ourselves fighting the risks, is it not time to take a step back and discuss again what it is we really want our commercial banks to do for us? I mean, if it is only to act as a safe mattress for our retail deposits then it would seem that could be taken cared of by authorizing them only to lend to the lender of last resort; but which of course would leave us with what to do about the growth and the distribution of opportunities.
October 29, 2007
In my country, whenever some one goes out in real life believing too much in the tools he takes with him or having too much power for the knowledge he possesses, we usually refer to him as a “monkey with a razorblade”. May I suggest that too many monkeys with razorblades have joined the professionals?
If you really want to avoid a subprime future in mortgages or any other sector it is clear that the first thing you need is to remove the quasi-regulatory role of the rating agencies since the fact remains that the better the credit rating agencies might get at what they are doing, the greater their capacity of leading us down the precipice of ever larger systemic risks.
October 26, 2007
Missed in the current debate is the fact that bank regulators have over the last two decades imposed through their minimum capital requirements a quite severe regulatory arbitrated bias against what is perceived as risk; and which has altered the flow of funds away from entrepreneurs into consumer financing; and which has clearly affected development as such; and unfortunately now it seems that all of these sacrifices have come to naught, when we are discovering that risks never left town but just went into hiding.
When now the banking regulators might be tempted to dig even further in the hole they find themselves in, let us hope they remember to put a cap on the amount of sacrifices a society can afford to do just in order to get itself a safe financial mattress where to put the retail deposits.
For instance Harford mentions a smoking permit that would require a doctor’s signature, which essentially signifies a job opportunity. Although I could discuss whether the smoking permit should instead of a doctors signature require an economist to approve it instead to attest to the need of reaching an equilibrium between the individual’s and the society’s utility functions, what most struck me was the job generating capacity a really proactive Supernanny could have, especially if he wants to take advantage of our current technological advances.
For instance using Skype Supernanny should make it obligatory to consult daily with an expert if the chosen tie really matches the shirt. Live on line checking on whether we are brushing our teeth correctly should also be able to generate some very decent and useful teeth brushing supervisors jobs. Now as we of course do not want to impose too much on the personal freedom of choice of people one could also auction out a certain number of permits that would allow to smoke, to wear unmatched ties and to sloppily brush your teeth.
October 17, 2007
October 15, 2007
October 12, 2007
Of course a bank should be able to repay his deposits and that is why bank regulators in Basle are using risk to establish the minimum capital requirements. But a bank’s function is not only to be able to return the deposits but also to help promote growth and development and to assist the society in the distribution of opportunities. Otherwise a mattress would suffice.
In this respect, besides the credit rating agencies, we perhaps should also be thinking of incorporating the criteria of development rating agencies and opportunity distribution rating agencies into the capital requirements of a bank. Only then would we be able to start talking about really fundamental values.
It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope but it is a real tragedy when developing countries copycats it and falls into the trap of calling it quits.
October 10, 2007
October 09, 2007
By their minimum capital requirements methodology what Basel has primarily managed is to introduce a layer of regulatory arbitrated bias against risks and, long term, I do not know of any nation or continent that has been well served per se by more risk adverseness.
Yes it might be true that Basle has been able to reduce in the financial system what Alan Greenspan recently has referred to as the “benign turbulence”, but this could just have the effect of providing more stimulus to the camouflage or the hiding of the risks in other places than the commercial banks’ balance sheets, resulting in less transparency and the possibility of a dangerous accumulation of risks that could end in some real malignant turbulence.
He point out though some creative hedging strategies for the baby-boomers such as investing in funeral related activities but, given that market conditions at that moment might lead to an severe increase in counterparty risks, perhaps a more solid strategy is to buy the casket and dig a hole at current prices, and then have a Blackwater guard it so that no other less fortunate boomers jump in.
I myself know that I am a baby-boomer but I can’t seem to be able to relate to anyone of them, although I have been told this is a general condition of the current lot of elderly.
October 05, 2007
Of course once the crisis gets going all subprime creditors are going to pay for it, most especially if they keep on being targeted as the sinners.
October 04, 2007
I mention the above since as we have not yet heard a word from Basle about some flexibility on the minimum capital requirements they imposed on the banks, by perhaps temporarily bringing down the base line from 8% to 7.5%, we should fret about the consequences of the surge in demand for bank capital from having to put assets back on their books and that if not accommodated could upgrade this storm to hurricane.
September 27, 2007
One of the reasons, or perhaps the only reasons why some of us feel happy about having US GAAP and IFRS living side by side is because that helps to sustain a debate among their respective Standard Boards on matters fraught with such intrinsic difficulties as accountancy. No, let us please hope that we will never have to face one solid cohesive block of standards since who knows what they could contain and there would be no one with sufficient strength to oppose it. For a living example of how much we lose out in benefits from diversity let us just consider all the risks that are beginning to surface as a consequence of having relegated so much of the world’s regulatory power over banks to a single single-minded group in Basel.
September 26, 2007
In this respect what most stand out in the Global Financial Stability Report, September 2007, published by the International Monetary Reform is the absolute reluctance by the bank regulators to accept that they, through their regulations, might indeed have been the largest de-facto suppliers of financial systemic risks. The minimum capital requirements imposed by them on banks around the world and their empowerment of the credit rating agencies as the marines in charge of driving out all risks from banking, no matter what, is the true genesis of the problems we now face.
Am I upset? You bet! When reading IMF admonishing the investors with that they “have an obligation and responsibility to understand the dynamics and liquidity risks associated with the products they buy… and they should not assume that the simple letter provided by the rating agencies show equivalent risks as those for hither asset classes” and blithely ignoring that they themselves use those same simple letters interpreted in very simple ways when imposing rules on the banks is frankly shameful.
In November 2004 the Financial Times published a letter of mine titled “Basel is just a mutual admiration club of fire-fighters trying to avoid a bank crisis at any cost”, where I complained that the regulators were so one-track-minded fighting the risks of banking that they blithely ignored all other issues related to the responsibility of banks, such that perhaps some type of financing could be more beneficial to society and therefore merit taking on more risks. Now, they are not only not delivering on the risk elimination front but worse they are even showing a certain willingness of, though in a hole, to dig deeper.
Alan Beattie in “Master of the Universe (Retired)” September 22, when writing about the memoirs of Alan Greenspan “The age of turbulence” references the central bankers with “They would regard themselves as something like the Jedi Council – an ascetic elite who through innate wisdom and arduous training are entrusted with maintaining order”. Be they the wise and the trained the recent experiences still tells us other humble earthlings that if there is any ounce of wisdom within ourselves we now need to stand up to these bank regulators and ask them, or better yet order them to take a better look at their own role in the mess.
Sir, all of us have of course fully supported the independency of the central banks but if they do not have it in them the character to generate sufficient internal criticism and make the debates public then, unfortunately, because of the many dangers from incest, we perhaps need to revisit this whole independency issue.
September 25, 2007
The above describes perfectly the systemic risks or even the moral hazard that can and will arise from empowering any agent in the market too much and there is no way on earth you can really correct that, and much less so if you insist on doing the ratings by monitoring real life from afar.
I do appreciate the credit ratings efforts and that we should be able to benefit much from their services, but this can only occur if the market is also totally free from not having to use them. Regulators please make the financial flows free again.
September 24, 2007
But what if for example the problems were derived from the fact that the regulator through the use of minimum capital requirement rules had ordered or, somewhat softer, induced the financial institutions to dismantle or, somewhat softer, to scale down their own credit risk departments and follow more the criteria of the credit rating agencies, would the authorities in that case not also have a moral duty to help out?
September 21, 2007
Absolutely, this is where the analysis has to start and so that we can realize as fast as possible that even though it is hard to accept it the sad truth is that our bank regulators are not only themselves in a paranoid schizoid state of mind but they have with all their actions or silences been the worse encouragers of it. Otherwise you tell me, how can you explain that grown up men have harboured such a belief in that they have found a foolproof way to dominate risk and that they could even go to such length as to appoint some agents, the credit rating agencies, to monitor risks for them, as if such thing a thing would be really possible without creating through the feedback enormous systemic risks.
And this is why we now find ourselves in an extremely sensitive situation because more than getting rid of the worst financial agents, which is what you normally do in a bank crisis, here we might first have to get rid of some bank regulators in order not to mess things up even more. I mean I imagine there cannot be anything worse to stimulate a normal paranoid –schizoid state of mind than the presence of a superior paranoid –schizoid state of mind.
First, yes the banks played a role in designing the securitised obligations but what really gave these the radioactive qualities were the prime ratings given to them by the regulator sponsored credit rating agencies. Second, the setting up of special investment vehicles was much a response to the bank regulations coming out from Basel, a response that as the bank regulators let it pass seemed to have been blessed, officially or by ignorance. Third the rescue at the expense of lending would only be true if bank regulators, as they should, since at this moment they serve no real purpose, do not waive some of their minimum capital requirements and thereby do not force the banks to allocate too much capital to harbour the homecoming lost sons.
Start dismantling any forced use of the credit rating agencies, now! If the markets want their services let them say so but do not have the regulators do their marketing for them.
September 20, 2007
Sir I deeply appreciated John Gapper’s “Microsoft problem is close to home” September 20 and where he so valiantly gives voice to the for us layman unthinkable possibility that what has been slowing our computers down is not necessarily bad hardware or virus but Señor Windows himself.
Although I confess still being a bit dizzy, if this was to be right, does Gapper think that I could address the European Commission and ask them to share with me some of the money they collected from Microsoft as a partial reimbursement for all my down time?
Alternatively, since Neelie Kroes, the competition commissioner is caught confessing that he “would like Window’s market share to fall from more than 90 percent to nearer 50 percent” and we can safely assume that he assumes this lack of competition lies at the heart of the problem… would it be better for me to sue the Commission instead for not doing their trust-busting job right?
Do we need a product responsibility and liability legislation that is proportional to the market share? At least in those cases were the society itself by awarding intellectual property rights and investing money in their defences creates some of the possible reasons for a high market share?
September 19, 2007
Having said that it is not without some fear that we citizens would entrust a global agency with the development of any global privacy standards, and that is not simply because we could be scared that these regulations could turn out to be too relaxed but also because, just as well, they could turn too rigid for our own good. We are yet in the infancy of a global information revolution where access breeds its own needs and so perhaps, before letting bureaucrats lose, it would be nice see the industry come up and agree with some proposals of their own, just to see how they look.
Eric Schmidt himself clearly points to the benefits of self regulation The problems with regulations is that they normally entail choosing a path from where it is later hard to backtrack and as an example let us just look at how the banking regulators empowered the credit rating agencies and now do not really know what to do with them.
Clearly Eric Schmidt has his own commercial needs for regulations and we citizens have ours, and they might not be the same, but perhaps both of us could benefit from thinking about that phrase from a Garth Brooks song that goes ”Some of God's greatest gifts are unanswered prayers”
Unfortunately Northern Rock is not the war, it is just a war incident and on top of it only a minor one.
The fact then that Wolf raises so early the questions of whether the disaster could have been prevented, whether the crisis could have been better handled and finally on what to do about it in the future can only be explained in terms of a very human desire of wanting to believe its over, looking to numb those fears that Wolf and so many of us share and that make us “tremble at what may happen”.
Wolf sees the events as an “unwinding of past excesses” sort of like shedding some kilos, while I having been much more sceptical of what has been in the doings see the need to unwind much more than that, among other a bank regulatory system that has placed us on the clear course of fewer and fewer bigger banks, until we hit the very biggest final bank bang. For a brief look ahead, read Saskia Scholtes “Credit turmoil set to benefit big banks”, September 19, where you can read on how central banks are already in despair outsourcing their responsibilities to the banks... while naturally crossing themselves.
Well here we are the day after the Fed announced the “what do the fed know that we do not know” 50bp rate cut to which the market responded with their own “what does the market know that the Fed does not know” too large jump in the value of stock and it all just reminds us about the truth of the Chinese curse “may you live in interesting times”. Now let us all please hurry back to the big bore.
We have some borrowers who qualify as less than top of the heap and have been known as “subprime”. Now to these subprime borrowers you can actually extend very prime quality mortgages but and what has really happened is that you can also be extremely sloppy doing that, and of course it is important to be able to tell the difference. My suggestion is although it becomes a bit lengthy we should really have to refer to our current problem sector as those “subprimely” awarded mortgages to subprime borrowers.
September 18, 2007
Sir, Paul Davies and Gillian Tett in “Moody’s talks of rating reform”, September 18 quote Brian Clarkson, the President and chief operating officer of Moody’s saying “One of the issues we are talking to regulators about is the possibility of creating tools to address liquidity and market issues”. And we can just pray for that the regulators know about the real meaning of “when in a hole, stop digging”.
Once again, I do not have anything against the credit rating agencies refining and improving their mostly already very good products. What I oppose though is that the regulators press the market to use these products, since such a bias will only guarantee the introduction of even more severe systemic risks than those that we have been discovering lately with the sub-primely awarded mortgages to subprime borrowers.
September 17, 2007
Is the coverage in Business Week influenced by the fact that its parent company, McGraw-Hill, also owns Standard & Poors?
Most probably not but given the real power that has been given to the credit rating agencies that should not even have to be a question we consumers would have to ask ourselves since the regulators should know that it is in their best interest to keep incest as far away as it can?
Is there anything else with sufficient power to stand up to the credit rating agencies going crazy than a free media with the voice to criticize it? Will the criticism be the same if they have the same father? I do not think so and so I would gladly suggest that McGraw-Hill makes up its mind about which part of the business it wants to keep.
September 13, 2007
If we discuss “ambivalence” then perhaps we should also discuss what the report does not touch upon and which frankly I consider being the single most outstandingly ugly blemish on the World Bank’s reputation. Sir, please search out INT on the external website of the World Bank and click on the list of Debarred Firms and Individuals. There you will find, duly named and shamed, a list of names of individuals that one way or another after a due process have been considered to be involved in corruption, but that list does not include the name of one single of those officers of the World Bank that presumably must also have been involved in corruption one way or another. Susanne Folsom the Director of INT, on a Q&A session on that same site mentions, “We’re often asked why we don’t publicly name Bank staff who are terminated for fraud and corruption as well. The Bank’s rules don’t allow such disclosures….” What credibility can you get naming others while not being willing to name your own?
Sir, it might very well be that the “ambivalence” on anti-corruption in the World Bank is insurmountable but if so perhaps what we need is to have two world banks since the world definitely needs one that comes out completely and unabridged against corruption. And mind you I am far from being a zealot on this issue, since life has taught me well that zealousness frequently carries within its own even more dangerous breed of corruption.
I recently told a prominent-save-the-Amazon person that they should, at 7 am each and every morning, put a matchstick to one hectare of pristine Amazon jungle and transmit this on the web and then perhaps the world could easier understand that it needs urgently to create some huge world forest reserves. These reserves could be managed and cared for by hundreds of thousand forest-guard families and who could all be helped to partially improve their lives receiving a small monthly salary from the whole world, financed perhaps through the levy of a special forestry tax of one cent per litre of petrol.
In 2004 while an Executive Director at the World Bank we were asked at the Board to approve a loan to Brazil for “Environmental Sustainability” and I told my colleagues that what we really should be approving was how much each one of all the world countries would have to chip in to help repay that loan, since obviously keeping our most important lung clean could not only be Brazil’s responsibility.
Does burning 365 hectares per year sound awful? Well the same report indicates that only in Indonesia 1.87m of hectares have been lost every year since 2000. Now having said that… please be careful with the matches though.