November 30, 2007

When will a foreign judge be retained in Heathrow?

Sir Martin Wolf questions the current extradition agreements between the UK and the US based on the extremely harsh sentences in terms of time and inhuman conditions that could be imposed on British citizens and for that he paints a horror picture about the US prisons, “Judicial torture and the NatWest 3”, November 30.
I do not know about the prison conditions in the US, thank you Lord, but in too many countries around the world when judges sentence people to prisons, they are in fact sentencing them to another Auschwitz in terms of the absolute disrespect those places show for the most basic human rights, and worse the judges cannot even start to claim they didn’t know. When will the International Criminal Court in The Hague start to investigate these crimes against humanity?
If we cannot correct the correctional institutions around the world the quality of all our future is much in doubt.

Relying on financial pre-screeners could be dangerous to your financial health

Sir Ira Sohn suggests that we should “Insist on pre-approval for novel bank processes” November 30, so as to stop bad financiers from exploiting opportunities in regulatory arbitrage. I wish it was that easy. The fact is that most of our current financial turmoil arose from the use of old time tested instruments called mortgages but that were turned into something very explosive and dangerous when they were bundled up and sent away to the financial markets carrying the approval stamp from the credit rating agencies and who found no reason to look closer at the individual quality of the mortgages. There is no pre-screening in the world that would save us, on the contrary, what we have to do is to reduce the power that our current screeners, the credit rating agencies, which only lends itself to lull the world into a false sense of safety.

Snooties abound

Sir FT’s front page November 30 voices Peer Steinbrück’s, Germany’s finance minister, accusation that bankers are “snooty”. Of course he must be right, almost by definition but, before he throws the first stone, he does well looking closer at those nearer to him. If “snootiness”, a word that I never heard before but immediately felt intimate with, has to apply to anyone I would have to say it is to all the bank regulators who in self congratulatory ways thought they hade tamed the risk in banking for ever with all their Basel inventions.

November 28, 2007

We need to rewrite bank regulation from scratch before accidents are unmanageable

Sir Martin Wolf asks “how do banks get away with holding so little capital that they make the most debt-laden of private equity deals in other industries look well capitalized?”, “Why banking remains an accident waiting to happen”, November 28. Mr Wolf could do well reading carefully the minimum bank capital requirements that have been imposed on the banks by their regulators. There he would see that if the banks lend to the public sector, or to creditors qualified as utterly safe by the credit rating agencies, such as securities backed by subprime mortgages, they need very little capital. If, on the contrary the would want to give credit to an unknown and not to well capital endowed entrepreneur, who might help to create those decent jobs the society needs, then the bank has to put up a lot of capital. With this incentive structure guess which route the banks are taking?

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

We are in need of swift and far-reaching actions

Sir Lawrence Summers in "Wake up to the dangers of a deepening crisis" November 25 mentions that there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible…[and] to assure that there is a continuing flow of reasonably priced loans to credit worthy home purchasers." This sounds right though let us hope that with it he does not refer to a need for maintaining the prices of the houses. The more intense the market is allowed to work the shorter the adjustment period and that should really be the primary goal. This subprime bad tooth needs to be pulled out very fast if we are to avoid much worse complications.

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

Let us also look at the quality of growth

Sir Martin Wolf in “Who will pick up the thread after the great unwinding” November 21, answers himself that question with a “the rest of the world” and we, praying, join the chorus.

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

We the rest also want Galileo

Sir we, the rest of the world, fully agree with Pierre Bartholomé and Kevin Madders´ “Why the Galileo project must go ahead” November 19, for reasons of our own. Just to be on the safe side we prefer two navigational systems so that we can either average out their results or concern ourselves with any differences. Can you imagine having to rely on just one source to tell you where you find yourself? What horrific systemic errors could ensue. In fact why should we not have at least three systems to tell us where to go, especially when seeing how the financial sector, even with their three credit rating agencies sextant, so utterly lost itself?

Who do they think they are?

Having much argued for that the bank regulators should give the banks more time to adapt their capital requirements when there is a systemic downgrading going on of course I would agree with that the monoline insurers should be given some time to improve their capital position so as to avoid a downgrading, as stated in Gillian Tett´s and Saskia Scholtes´ “Bond insurers act to keep their rating” November 19. My question though is about who on earth gave the credit rating agencies these type of power to stay the execution of a downgrading and who is responsible for what happens during the stay? It would really seem that the credit rating agencies are moving up from being mere opinion makers to policy makers.

November 16, 2007

And what about the composers?

Sir, John Gapper in “A bruising game of musical chairs”, November 15, beats up on some financial sector dancers like Citibank’s Chuck Prince but keeps totally mum about those composers in Basel who wrote the score of the “minimum capital requirements”, picked the conductors and the musicians, the credit rating agencies, who were to perform the music to which the bankers were ordered to dance. As much as I could object the generous severance checks to the dancers much more do I object that our bank regulators are not held accountable and are now almost expected to dig deeper in the hole we find ourselves and which can only lead to even wilder dancing.

We need to look further than the usual suspects

Sir, I absolutely agree with Martin Wolf when in "Big lessons from Northern Rock" November 16, he answers with an unqualified yes the question "Would it no be better to let mismanaged institutions go under, while protecting small depositors effectively? Nevertheless, that forces us to define mismanagement and though I agree that management should be the first usual suspects we round up, in this case I would loath to let go, without further investigation, all those bank regulators who by inventing the current structure of the minimum capital requirements for the banks, and appointing the credit rating agencies as their commissars, could ultimately prove to be the real intellectual perpetuators of this mess.

November 15, 2007

And what about the composers?

Sir, John Gapper in “A bruising game of musical chairs”, November 15, beats up on some financial sector dancers like Citibank’s Chuck Prince but keeps totally mum about those composers in Basel who wrote the score of the “minimum capital requirements”, picked the conductors and the musicians, the credit rating agencies, who were to perform the music to which the bankers were ordered to dance. As much as I could object the generous severance checks to the dancers much more do I object that our bank regulators are not held accountable and are now almost expected to dig deeper in the hole we find ourselves and which can only lead to even wilder dancing.

November 12, 2007

Give the banks some time to adjust

Sir currently when financial assets like the bonds collateralized with subprime mortgages suffer a downgrading by the credit rating agencies, a bank, according to the minimum capital requirements, has to come up with new capital in the case he did not have more capital than needed. When downgradings become epidemic, as currently is the case, this might force such a scramble for bank capital that it could make matters worse.
Again, many downgradings are really not about the assets turning sour but more about discovering that they always were and so really the capital should have been there from the very start, and if so why the rush to now fix it all immediately if the rushing might turn into panic?
In this respect I would suggest that our bank regulators start thinking about giving the banks some time to adjust their capital base, for instance by giving them at least one year to come up with more capital for any asset that is suffering epidemic downgradings.
Why should bank regulators be so lenient? Well for a starter they were the ones who got us into this mess with their minimum capital requirements adjusted to risk invention and with their appointment of the credit rating agencies as their financial commissars.

Please give us a New Oil Deal!

Sir less than ten years ago the price of oil was less than ten dollars per barrel, the Economist wrote in "The next shock?" March 1999, that "in today's condition the price would head down towards $5" and Sheikh Yamani was the toast of the town with his cute ''The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.'' Of course all that set us up for low investments in oil exploration and as a consequence the current high prices of oil.
It should therefore be quite clear that when now "Opec seeks assurances on oil demand from consumer nations", FT front page November 12, so that they can invest, it behoves the consumers all over the world to come up with some constructive proposals. The world needs urgently a New Oil Deal and the only ones standing in between consumers and producers to reach it are those who just want that deal for themselves.

November 10, 2007

We are all in this together

Sir Krishna Guha, in "The world's currency could become America's problem" November 10, describes several scenarios for the decline of the dollar but steers clear from the big question of whether the markets will keep their confidence in our current monetary and financial system if the dollar goes haywire.

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.
And so what do we do now with this piece of knowledge? Unfortunately very little, since while the markets keep having trust in the system there is no major benefit being short of faith. Whether we know it or not we are in fact all in this together.

November 09, 2007

We might be better off ignoring the credit rating agencies

Sir Gillian Tett in “It’s no wonder agencies are so jumpy over monoline saga” November 9, mentions that Fitch has sort of graciously conceded the “monolines a period of time in which they can raise fresh capital to avoid downgrades”. What financial Frankenstein’s monsters have our regulators created?

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

Sergeants and generals

Sir when reading Simon Ward’s “How the Bank of England broke its own rules" November 7, I suddenly had a vision of the sergeants drawing up battle plans at headquarters and the generals kept busy running the trenches.

Absolutely, the Basel Accord is the root of our current financial turmoil

Sir I must voice a Hurrah John Plender! for his article titled “The Basel Accord sits at the root of the ongoing crisis” November 7. If we are ever going to have a fighting chance of getting out reasonably well from our current financial turmoil we have to make our regulators more accountable for their mistakes.

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.

What we need is not to cap the oil prices but to give them a decent floor

Sir the real oil crisis occurred in 1998 when the price of barrel fell under $10 per barrel and the Economist wrote in "The next shock?" March 1999, that "in today's condition the price would head down towards $5", and this is what primarily explains the current high prices of oil. Had the consumer countries acknowledged the growth in demand that for instance China would bring to the market (IEA did not say a word about it for years) and expressed their willingness to enter into those reasonable long term contracts that would have allowed producing countries to make the massive investments needed we would most probably have faced a completely different energy outlook.

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

What are the costs of not allowing immigration?

Sir you are absolutely correct when in your editorial “Migration debate” November 5 you call out for more “fact-based analysis, not rumour-based angst”. You also say that “Any debate about immigration must begin with asserting the truth that immigration makes most existing residents better off” and though I gladly sign up on that principle, I must remind you that the most missing piece of evidence in the whole debate, is the analysis of the costs of not allowing immigration.

November 02, 2007

It’s not just abiut the targets but also about how you throw the darts

Sir, Paul de Grauwe opines that “Central banks should prick asset bubbles”, November 2, and though that might be right in terms of monetary policies, whether the central banks throw their darts at inflation targets or assets bubbles, does not excuse them from acting with wisdom when regulating the banks.

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.

Maids for your professionals or professionals for your maids?

Sir Martin Wolf is absolutely right when in “Why immigration is hard to tackle”, November 2, when he says that “this is no area for stealth” and requests more transparency. For instance he makes a good point when mentioning that the “impact on the gross domestic product of migration should be measured after subtracting the incomes earned by the migrants” although perhaps there is also a need to differentiate between temporary and final migrants. Where I am not really sure is when he mentions market-compatible systems like auctions of work permits to be better than arbitrated point systems since neither one of them seems to be covering the problem that could be caused by in relative terms favouring the highest added value workers and therefore implicitly perhaps relegating your own to the lower earning sectors. Do you want to allow a foreigner to work as a maid so as to give your own professionals a better chance or do you want to give the foreign professionals a better chance and have your own work as maids? Not an easy proposition to handle.

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

What do we really want from our banks?

Sir over the last two decades we have seen hundreds if not thousands of research papers, seminars, workshops conferences analyzing how to exorcize the risks out of banking; and if in that sense the bank regulation coming out from Basel was doing its job; and centred around words like soundness, stability, solvency, safeness and other synonyms. Not one of them discussed how the commercial banks were performing their other two traditional functions, namely to help to generate that economic growth that leads to the creation of decent jobs and the distribution of the financial resources into the hands of those capable of doing the most with it.

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.