Too many monkeys with razorblades!

Sir Stephen D. Young states quite strongly that “Professionals recognise that blindly following any model is foolish” and he is absolutely right but which leaves us with the problem of what to do when so many that are identified as professionals do. I have no problem with finance using sophisticated mathematical models, that’s what these tools are there for, but sometimes I get the impression that our professionals are sent too early to the frontiers without enough basic Boot Camp training. What are you to do if in the trenches your laptop suddenly stops functioning?

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?

Sir, I am sorry but you’ve got a lousy short term memory

Sir you say it is “Time to avoid a subprime future” October 29, and then discuss the efforts that have to be made to avoid individual fraudulent behaviour of borrowers and lenders since “human nature and markets being what they are” history will repeat itself. Surprisingly though you leave out the fact that all the individual frauds would have gone nowhere, had it not been for the blessing they received by the credit ratings agencies. In another editorial the same day “Memory’s ghost” you rightly speak about the great importance for countries to keep hold of their bad events in its past so as to not resurrect them. Therefore, in the case of the subprime affair I can only conclude you suffer of a truly lousy short-term memory. I am so sorry.

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.

You can’t sleep on the mattress and put it to work too!

Sir Sir Samuel Brittan in “How to put money in the bank” discusses the very important aspect of banks being able to pay back the deposits when so asked. But a bank is not awarded its franchise only to serve as a mattress but also because it is supposed to help generate job creating growth and distribute the opportunities to those capable of doing the most with the funds deposited.

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.

Supernanny as a super decent jobs generator

Sir it is fascinating how different you read things depending on what you are looking for. Being convinced that the capability of generating decent jobs is the glue that holds society together and that the harshest scarcity the world now confronts is the lack of decent jobs, what most attracted my attention in Tim Hartford’s “Supernanny insists that you have the right to opt out” October 26, had nothing to do with libertarian philosophical issues but more with the pragmatic job opportunities that a really proactive Supernanny could help to create.

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.

The regulators caused this financial Katrina

Sir, Gillian Tett in “Questions hard to answer” October 17, “A key reason why banks have sliced and diced in recent years is that these rules allow them to hold less capital against loans.” The “allow them” part does not really cut it and the phrase would be more accurate had it said “The bank regulators created regulation that provided the incentives for the banks to slice and dice.” Bank regulators made the rules and the banks acted in accordance, as they should. Can you imagine it any other way? If we are going to get out of this financial Katrina without setting us up to even worse storms we better be very clear about what caused what.

Let us first get rid of the financial commissars

Sir Chris Giles in “Credit squeeze leaves a long shadow” October 17, says that “credit rating are in the spotlight for providing the same rating to complex structured products and simple corporation debt with very different structures assumptions and liquidity”. If this is what we believe the problem to be, just an error in calculations and that new and better technique could take care of, then we have not learned anything and we will just set ourselves up for even a worse financial Katrina than the current. The real fundamental problem starts with the appointment of the credit rating agencies as the financial commissars that the market must heed. We all know that just cannot end well.

The environment needs a freed Gore

Sir in “Drafting Gore” October 15, you are absolutely right about that politics still pull a lot of weight for the Gore camp probably especially so for his closest aids. Many of us cannot wait for Al Gore to make clean break with the politics that tie his hands and so that he will at least be able to utter the word petrol-tax. It is a bit strange to say the least to see a country like Norway, and that even though an oil country applies immense taxes on the domestic consumption of petrol, because of his efforts for a better environment, awards the Nobel prize to a man that does not even mumble about the need of taxing more the consumption of petrol in the USA.

One thing is the appetite and the other what you eat

Sir of course Wolfgang Münchau is right with his “Boring central bankers got us into this mess” October 15 in the sense that they provided those negative real interest rates that fed the appetite for a credit boom and an asset purchasing boom. Having said that he should not be too cavalier about the role of the credit rating agencies who having been so much empowered by the bank regulators, made things so much worse by suggesting to the gourmands some really bad courses, like the so sub-primly awarded mortgages to the subprime creditors.

If Gore is really right then Lomberg is really right

Sir Clive Crook when reviewing Bjorn Lomberg’s recent book “Cool It”, “An inconvenient Danish pasting” October 15, underlines the differences between the Gore camp and the much smaller group of Lomberg followers. This is somewhat unfortunate because the more the truth in Al Gore sermons the more the need for a truly sceptical attitude that considers carefully every opportunity costs, not only to help us to attack the problem wisely but more importantly to keep at distance all those peddlers of green magic potions that could sure tempt us into monumental waste. If on the other hand Gore is not right and climate change induced calamities are not waiting for us around the corner well then a little waste does not matter that much since it would just constitute another drop in that brimming bucket of wasteful spending and throwaway investing

Development rating agencies?

Sir Saskia Scholtes and Chrystia Freeland report that “Moody’s to revise ratings by end of year” and that it is now contemplating something to be marketed as “fundamental value”. Now, if that rating is only to be based on risk considerations then it does not really seem to be of such fundamental value to me. 

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.

PD. Are the Basel Committees’ bank regulations good for development?

The one and only focus of Basel is risk-adverseness

Sir John Plender in “Let’s not forget to mention liquidity risk at the Basel round” October 10, though having good intentions gets it wrong, when he says that “the focus of banking supervision has become biased towards capital at the expense of liquidity” as he confuses goals with instruments. The one and only focus of the Basel banking regulations has been to drive out the risks from the banks and for which purpose they decided to use the minimum capital requirements instead of what Plender now seems to suggest some Basel ordered minimum liquidity requirements. The sooner we accept the truth that what Basel has managed to do is to have the risks hide out in the undergrounds, such as Special Purpose Vehicles, or in other dimensions, such as sophisticated instruments impossible to value, the better chance we have of coming to grips with reality. We need also to remember that any nation that decides making risk-adverseness the primary goal of their banking system will place itself voluntarily on the way down. The saddest part is that even developing countries fell in the trap of calling it quits.

Are the bank regulations from the Basel Committee an unqualified success?

Sir Christine Lagarde, France’s minister of economy, finance and employment in her “Securitisation must lose the excesses of youth” October 9 says that “In Europe, regulations initiated by the Basel Committee have served us well” and the question that begs the answer is “who are us?

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.

If you need a hole, dig it now!

Sir James Altucher in his high spirited writing about someone else’s “The end of life – but not as we know it”, October 9, in reference to the future of the baby-boomers mentions “the golden years where they begin to cash in the chips they’ve accumulated and figure out how to enjoy the rest of their lives” it seems that is his gently skipping over the question of whether they will in fact be able to cash in the chips. Will there be a market for their big mansions far away from the nearest city or health facility and who will buy their immensely valuable complete collection of the Beatles vinyl records? Will Altucher be a buyer at decent prices?

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.

It really is about subprime subprime

Sir in order to better understand the current “subprime mortgages” difficulties it is important to remember that there is something such as a very prime mortgage that can be awarded to subprime creditors and that in fact the problem is that the mortgages to the subprime creditors were in fact very subprimely awarded; and many even fraudulent. And this is what the credit ratings agencies should have been able to catch; independently of the statistics of the subprime creditors; independently from the strength or weakness of the housing sector.

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.

Let us beware of upgrading the storm to a hurricane

Sir Gillian Tett reflects well our uncertainties when asking “Is the storm over?” October 4. Now, even if its over, in order to take stock of the damages we will have to wait for quite some time since the costs of any financial crisis are: the actual direct losses existing at the outbreak of the crisis; the losses and costs derived from mismanaging the crisis, for instance injecting too much liquidity and running up inflation; and 3 the long-term losses to the economy resulting from the financial regulatory puritanism that tends to follow in the wake of a crisis and that stops thousands of growth opportunities from being financed. I have hypothesized that each of these individual costs represents approximately a third of the total cost but actually, having experienced a bank crisis at very close range, I am convinced that the first of the three above costs is the smallest.

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.