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.