Of course, as had to happen with any central planning initiative, sooner or later, the credit rating agencies put up their triple-A signs pointing into the wrong direction and led the world over the precipice of the lousily awarded mortgages to the subprime sector. The central planners are currently laughing their heart out. Boy, what a vendetta!
December 31, 2008
Of course, as had to happen with any central planning initiative, sooner or later, the credit rating agencies put up their triple-A signs pointing into the wrong direction and led the world over the precipice of the lousily awarded mortgages to the subprime sector. The central planners are currently laughing their heart out. Boy, what a vendetta!
That said many areas of finance might in fact be truly unproductive, for instance I harbour serious doubts on the validity of much of the financing of consumption; and much of the financial innovation, although perhaps valid in principle and theory, has resulted in disasters that makes it obvious that we need to reign our tendency to give any innovation the full benefit of doubt.
The Financial Times does a lot better defending the financial sector when it points to the real connections between the financial and the other sectors of the economy but, if that results in a shrinkage of the financial sector so be it, that in itself does not mean it is bad.
Finally your humble acknowledgement that “finance is riddled as it is always has been, with gamblers using other peoples money, chancers taking risks but calling it genius, and worthy people following the crowd into collective insanity” but completely leaving out the regulators who with their excessive empowerment of the credit rating agencies laid all the foundation for this crisis has nothing to do with “Without fear and without favour”. Perhaps the Financial Times needs to reflect a bit more on its own real market.
December 30, 2008
Much more important though than predicting the crisis is alerting to the existence of conditions that could create a crisis, but this is no easy task either. I had no idea from where the current crisis was going to come but I was absolutely certain a huge crisis would appear, sooner or later.
When the Basel Committee as our supra-national bank regulator decided to establish a direct linkage between the opinions of the credit rating agencies and the minimum capital requirements of the banks, they sent out a loud and clear message of “If they’re good enough for us they should be good enough for you”. This excessive empowerment of some very few agencies was doomed to create a mega crisis. The explosion, this time, came when the market was led by some shining triple-A rates over the precipice of the badly awarded mortgages to the subprime sector in the USA.
I warned about it all (even as an Executive Director at the World Bank 2002-2004) but to no avail. Either the credit rating agencies were so important that few wanted to step on their toes; or their sole existence was so comforting that no one wanted to abandon their Nirvana of having someone to believe in. And therein lies the prime difficulties of all contrarians namely that they most often are contrary to the normal human wish and need of having something to believe in.
December 27, 2008
A difficult task indeed, especially considering that it was the financial regulators who exercising some not so transparent powers over the markets, were responsible for putting dampers on plurality, with their creation of some truly mumbo-jumbo minimum capital requirements for the banks and the empowerment of the credit rating agencies.
If you want plurality in the market you need to start by stimulating plurality among regulators. Anyone wanting to defend the free markets but that does not realize how imprisoned they really are, is not an effective defender of the market.
There is a branch of liberal radicalism on the web and that in their opposition to any sort of government intervention try to place the responsibility for this crisis fully on the shoulders of Fannie Mae and alike. The real truth is though that more than loans to insolvent borrowers most of the lousily awarded mortgages to the subprime sector were part of the production of attractive alternatives to investors that capitalized on too easily obtainable triple-A ratings.
Unfortunately, as a consequence of the world not having debated the purpose of the financial system for now some decades; and the financial regulators having just concentrated on lowering the risks of individual bank failures, your prescription seems about right. To me though the role of a financial system should be to move the financial resources to the most productive areas for the society at large, and that is an entirely different proposition.
I was a smoker and it took me years to break my habit, or at least not give in to it more, but during my quitting time of about two years, and to the extent that I was unable to write any cohesive ideas on paper, I was an impaired person.
In this respect to think of the president of the most powerful country of the world, in these extremely difficult times, impairing himself just to set an example is about the worst example he could give his country.
Maybe the Supreme Court in exercising their checks and balances should order Obama to smoke a number of cigarettes a day while his presidency last. Or is this an issue for Congress?
Obama will be risking his life. In the line of duty? As a Commander in Chief? You’ve got to be joking!
December 24, 2008
On the first page of this same FT on Christmas in Iceland we read “There will be a lot of people who leave this country, just go away. Think of the future here for the children. When they are 95 they will still be paying for this“. Does Keynes have an answer on what to do about that? Probably not! The uncomfortable truth, and which is why most of us wear blinders, is that some answers are only ours to give.
PS. Since Martin Wolf wishes “to see the punishment of financial alchemist who claimed that ever more debt turns economic leas into gold” let me remind him that the prime ingredient in that alchemist formula was that the triple-A ratings were to be true, like the financial regulators believed they were… and therefore the market believed it too.
December 23, 2008
December 22, 2008
In the same vein and as a citizen of an oil country accustomed to see liquidity pouring on asphalted parking lots without producing any results I am very concerned that the Obama mega stimulus will not help much unless the ground is better prepared to absorb the humidity. No stimulus in the world will suffice if the market does not believe in a future, and any effort to convince it of the contrary by pouring liquidity on it could only hinder its future take off.
The stimulus package needs to follow a credible story line not compensate for the lack of it.
In January 2003 in a letter published by FT I wrote “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”
Well here we are years later facing an enormous financial crisis that will have tragic consequences for hundreds of million people around the world, and where the credit rating agencies triple-As can be identified as having directly provoked 50 Bernard Maddof' losses or more. We are now long overdue returning the rating agencies to where they were before the financial regulators in the Basel Committee super-empowered them.
December 21, 2008
Now if I had Obama political capital to spend I would do so by telling the story of a green valley built with taxes on gas and plentiful resources given to the Nuclear Regulatory Commission so that they can work night and day on getting us the answers we need in order to develop what currently seems to be the toughest but perhaps the single best route towards energy and climate sustainability.
But it is also amazing to watch a society that has invested billions in paying the best tutors for their brightest to learn now being reduced to placing ads wanting a stricter fräulein… to trust.
December 20, 2008
By coincidence in the same issue Dr. Milford Bateman in “Microfinance’s ‘iron law’ – local economies reduced to poverty” suggest that those lending money for marginal and most often informal entrepreneurial activities are digging the poor deeper in the hole they’re in, since those resources could have been used to finance some much better development ladders. Indeed this possibility and that for the development community must sound as a real shocker, also qualifies the microfinance sector for an urgent moral and practical review.
December 19, 2008
To have a chance to transition to the future without incurring in new public debt that will make the future unbearable substantial real haircuts have to be made in the rest of the economy and the faster and deeper the better since that leaves more room for the ok it hurt but now at least it is over feeling that is a prerequisite for all belief in a better future.
What would I do? With respect to the mortgages I would analyze the possibility of imposing by decree a very low fix interest rate on all outstanding mortgages in the US; and this because I believe that in that unfair and unsustainable idea that you could finance anything to anyone as long as the high rates that some were willing to pay were enough to compensate the losses of those not capable of repaying, lies much of the original cause for this crisis.
The above would give millions of lousy mortgages more chance of being duly serviced and perhaps even make the market value of these mortgages higher than what their current impossible-to-pay value are. In order to compensate those younger generations that have no houses, the same kind of financial facilities should be extended to anyone buying a repossessed house, at 70% of its previous price and that makes a 15% down payment. Just? No! But there is also little justice in public debt forgiveness.
December 18, 2008
Gapper completely forgets to mention that this incident occurred in a time zone when the financial expert consensus was that risk could be diversified away into the arms of those who could handle the risks, with little or nothing said about who these blokes might be; and the financial regulators, the supreme authorities, committed the most extreme act of incredulity and gullibility of empowering the credit rating agencies… and then these officially appointed masters of the risk lured away trillions into the swampland of the badly awarded mortgages to the subprime sector.
Comparatively speaking, in these times, asking why people put their trust in Madoff is more like asking someone who has been overrun by a car why he trusted the green light.
Mr. Gapper, if “with hindsight the whole affair seems deeply implausible” start by asking yourself why you believed that the credit rating agencies could save the world from “insiders and fool’s gold” and, if you did not gullibly believe so… why did you not speak out?
December 17, 2008
Also since in reality neither deflation nor inflation are bad things per se, if they occur instantaneously and do not prolong themselves in time, we should perhaps concentrate more on finding ways to clear out all irreversible losses instead of trying to hide them. For instance in the case of the US automobile industry it must be obvious that any infusion of fresh public funds should only happen after its restructuring.
Martin Wolf suspects “the result will ultimately not be deflation but unexpectedly high inflation, though probably many years hence” and I am not so sure of his timeframe. If markets start believing that the US is going all out for inflation, a lack of confidence, propagated at modern speeds, could bring us hyper-inflation in days or hours.
The world lost confidence because never before had it been told to trust some few so much and been so let down. Let us now rebuild that trust that allows us to wake up and feel like singing “Oh it’s a wonderful morning!”
December 16, 2008
On the contrary may I ask where were FT and all the "world's most influential economists" when they were needed to alert that allowing the financial regulators to impose the credit rating agencies on the markets was pure madness since "Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds"? The last quote is from a letter published in FT on May 11, 2003 and written by someone unfortunately considered by FT not sufficiently influential, namely me.
Between January 2003 and September 2006, out of 138 letters to the editor you published 15. But then you censored me, and of the next 635 letters you published none, and the only explanation provided was that I wrote too many letters. In this respect I submit that it is not only the economic forecasters’ vision that is failing but yours as well, as a consequence of you having decided ex-ante who you want to read.
A corruption of a third kind?
In this respect I am concerned that too little consideration is given to the maturity profile of the US debt since one would preferably like to minimize the risk of all wanting to leave simultaneously. When last week I ask a prominent US lady economist about this she mentioned that for her this was not of a major problem since the US debt markets are very deep and liquid. She might be right but, unfortunately, we have lately had enough of deep and liquid markets drying up overnight.
As I see it, the US should be issuing a very sizable portion of long term debt, 30 years so as to make sure that many anchor deep inside the haven. Instead we hear about the issuance of short term treasury paper to buy up long term bonds, so as to bring down the long term rates in order to help the mortgage sector. After such a recent mishap with the teaser rates to the mortgage sector… is now the US public sector falling for these?
December 15, 2008
The question is indeed valid, but not at all redundant, since even in the most normal of normal times, one would have hoped that our bank regulators should have had to answer it, to all of us, before they regulate. They did not!
One of the worst things with the current crisis is the total absence of a “was it at least worth it?” and this is a direct consequence from not having discussed, in any way shape or form, for many decades, the exact question Tony Jackson poses, namely “What are banks for?”
When we allow regulators to regulate according to their whims we deserve what we get. In this case the regulators were allowed to play out their bedroom fantasies of a world with no bank-failures and for which they implanted a sort of ridiculous set of minimum capital requirements based on some vaguely defined risks of default, and then empowered the credit rating agencies to measure those vaguely defined risk.
For starters that for a society some default risks are worth taking while others are not, was a consideration that did not even cross the regulators minds.
December 12, 2008
Sir Joseph Stiglitz comment “Chapter 11 is the right road for America’s carmakers” December 12 is correct and timely. The US has enough resources to retool and sustain its automobile industry, after a much needed restructuring, but not enough to maintain what currently exists and, if they tried to do so that could provoke a significant loss of confidence in the dollar. In this horrendous crisis the US, like all others, is better off playing on its real strengths than trying to maintain vivid the illusions of so many virtual realities.
Since Stiglitz also reminds us of the many widows and orphans that will need real and concrete assistance and not just the illusions of a trickle down on them somehow-somewhere I would similarly like to remind all pf the sobering fact that our current was not caused by speculative investments but by pure triple-A widows and orphan stuff.
Ironically the current bank regulations fabricated by the Basel Committee had the sole purpose of avoiding bank failures, and which is why the regulators imposed minimum capital requirements based on vaguely defined risks of default and empowered the credit rating agencies to measure these risks, and we see were all that nonsense got us. The worst part of this financial nightmare turned reality is that most countries have so little to show for it.
An explosion of public and consumer debt, as if we all had placed a reverse mortgage on the world, is nothing to write home about. Our worst risk now is that the regulators in Basel and many influential opinion makers with them are incapable of understanding that the purpose of our banks is really not to avoid risks but to take the right risks on behalf of society since those are the only risks taxpayers could be asked to pay for.
Any problem with the US debt will show up as inflationary expectations in the required interest rates since all it currently takes to defuse a CDS on US debt is some paper and ink, printing dollars. As I have written to you earlier, November 21, Dr. Strangelove possesses much real mass destructive power when he rides on the credit ratings, and which is why perhaps a more cautious regulator would request a security clearance for all the individual credit risk raters.
Having said that, in today’s nervous financial climate, even a toy gun could produce panic.
December 10, 2008
Having said that what I really wanted to comment on is when Wolf writes “It is possible to imagine a ´sudden stop´ on higher risk sovereigns bonds. That would force the debt to become short-term – a classic route to a crisis” and this is clearly another very real risk. In this respect, an insistence by the US Treasury to try to collect on the benefits that a drop in long term rates could have reviving the housing market, by buying back longer term bonds and as a consequence shortening the maturity profile of the US public debt, is exposing the US, and us, to some very dangerous risks.
December 09, 2008
Yes surely we need more global rule of law but while legislating for the globe let us be very clear on the differences between law and interference. The current financial crisis was caused primarily by the financial regulators in Basel interfering with the markets by giving unlimited siren powers to the credit rating agencies without tying us all up to the mast or plugging our ears with beeswax, regulators included.
December 08, 2008
Let the American motorist pays 50 cents per gallon of gas for new equity in their automobile industry
The truth is the sooner the market gets a feel for the full circle, “this is what we spend and this is how we pay for it”, in ways that make sense, the faster it will regain the confidence it needs.
For instance I am proposing that the American motorists subscribe and pay for fresh equity in their automotive industry with 50 cents per gallon of gas, as a tax. That should help to raise more than 70 billion dollars a year to take care of the current problems of their industry and finance the green retooling they must embark on. If at the end of the exercise the equity is not worth what the motorists paid, it is still only right that those who drive should primarily carry the burden of rescuing the automobile sector.
Also, let us not look at this financial crisis as created only by financial scientists gone mad. The financial regulators are also to blame. Not only did they introduce minimum capital requirements for banks based on their own subjective interpretation of what risk means and without giving much thought on how that would affect the whole system but they also empowered some few credit rating agencies to be the official guides on risks which, as we have seen, was a magnificent act of pure madness.
Let me here ask the question that perhaps best helps to place the whole issue of the credit rating agencies in its real perspective. Since these agencies have been given so immense powers that if misused could turn them into dangerous weapons of mass destruction capable of inflicting big sufferings on humanity… should then the individual credit raters have to undergo a security clearance? Of course I do not imply any planned wrong doings, that I swear, but I guess you have to agree with me that this is at least great stuff for nail-biting movies.
December 06, 2008
Instead of having a Congress requests such ridiculous things like the senior management of the automotive industry driving to Washington in order to access new credit, the Congress should be asking the banks about what they would need to start putting that kind of automotive risk on their books again.
Finally, when Thal Larsen quotes Robert Self of Credit Suisse saying that the appetite for yields drove a lot of demand for mortgage backed securities, this is just not so. The yields themselves were nothing to write home about and the risk-reward ratio was deemed to be attractive only because these securities had triple-A ratings. Without these ratings no one, and I mean no one, would have purchased these securities. Moreover without those triple-A ratings we would not even be in this crisis.
Death penalty for corruption!
December 05, 2008
Having said that, Sir Brittan needs not to be overly concerned with any excessive prudence. In the US, all similar discussions on how to pay for it, and the screaming about the implications for the taxpayers, anyhow all end up with new tax-rebates being given.
Finally on Brittan’s quoting Friedman’s recipes for fiscal stability, how strange he did not comment on the absence in them of the regressive VAT.
December 03, 2008
Unfortunately the fact that it all sounds so reasonable, does not make it one iota more possible to achieve, especially considering that in order for the rebalancing act to produce the desirable effects, the new savers would have to save in an already harsher environment and the new spenders would have to take on new-debt instead of consuming their old savings that have already been invested in somebody else’s past spending.
And so the real question is whether we believe there is sufficient willingness to work down the global imbalances and therefore insist on playing a game that might already be irreversible over, and which to the suffering that must ensue will only add the fastidiousness of a useless prolongation; or we call it quits, honour the winner, ceremoniously, with a trophy, and begin a fresh new game.
If I were young, healthy and reasonably capable there is no question that I would choose to start afresh and have the crisis behind me, especially if for the next round we could agree upon some changes in the rules; like the imposition of immense carbon taxes that would help us all to avoid environmental disasters. For all of the rest the dwindling hopes of a le déluge, après mois, seem more valid.
Could the world hope to be able to reach a peaceful start-afresh? Well that is the real challenge for a truly new and much improved Bretton Woods.
Sir this reasoning also agrees with your “Not a time for hoarding bullets” December 3. If we are going to be buried under a déluge we might as well have a full go at it since if even if we fail this could perhaps help to get it over faster, while enjoying some half-decent music.
December 02, 2008
Absolutely the most valuable lesson we could take out of the current mess is to get a better understanding of why people can turn blind and deaf when they are warned on impending disasters.
In this particular case I would like to go back even a decade or so to ask the regulators of how come they in Basel could come up with such a crazy idea of sending out in the financial markets their City Slickers (1991), the credit rating agencies, knowing well these would, sooner or later, cause a stampede; and how come they still believe they could keep on using them without an even worse stampede ensuing in the future?
I can still hear one of the slickers saying “Those cows trusted us!
That said and even though the world cannot because of concerns with energy security and the environment afford to play with the combustion engine along traditional ways, neither can it afford to do so in any new green way that comes along, most specially after being hit so hard by the current financial crisis.
In this respect to read about our homes converted into “positive power plants” and us as “participants in the energy market” in a “new era of ‘distributed capitalism’” in pure Jetsons’ style makes one shiver. It is good to be a visionary but it is also good to walk before running. For instance… can we afford to remain so choosy that we do not even mention the nuclear energy?
December 01, 2008
If Europe accepts the possibility that the credit rating agencies do introduce a bias is that in itself not a prime reason for asking the Basel Committee to eliminate completely the role of the credit rating agencies in setting the minimum capital requirements for the banks?
November 28, 2008
Our financial regulators thought themselves capable of living out their bedroom fantasies of a world with no bank crisis and thereto in Basel imposed some minimum capital requirements on the banks based on the regulator’s particular monsters, defaults, and officially empowered the credit rating agencies as the risk watchers for the world.
As a direct result we now find ourselves in the midst of a financial meltdown product of having been pointed towards the supposedly risk free swamplands where the lousily awarded mortgages to the subprime sector made their living.
And now we want to dig us further in the hole giving some government bureaucrats even more room to exercise their fantasies… Dear World, you’ve got to be kidding!
Sir in your “Credit creationism” November 28 you say “It is not clear how banks will be coerced into lending” Why do you not try by neutralizing the minimum capital requirements for the banks imposed by Basel and which mostly coerces the banks away from their normal risky bank lending into the havens that the officially appointed risk surveyors, the credit rating agencies, consider as safe?
Wolf ends his article saying “Letting bank lending stay frozen is not an option. The government surely knows that. Do the bankers?” meaning by that we better start rowing all or will sink like a stone. Wolf is only partially right.
It is not so much the bank-lending per se that has to be restored, what is much more needed is the willingness of the market to take risks. In this respect, and for the umpteenth time, I submit that it is much wiser asking the governments to eliminate the risk-adverseness they introduced in the market, foremost with the minimum capital requirements for the banks designed by the Basel Committee, than to have some bureaucrats becoming the risk-takers playing with the future tax-payer’s money.
November 27, 2008
Add to the previous the empowerment of the credit rating agencies as the official guides in the world of risks, and which directed trillions of dollars in capital to the supposedly risk free land of subprime financing instead to some perhaps less risky opportunities in developing countries and we can only conclude that the title of Jeffrey D Sachs’ article, November 27, should have been “The financing of the aid to the developing countries”.
“A new system of development finance” needs to start instead with analyzing issues such as the role of risk taking in development, since risk is indeed the oxygen of development. In this respect we feel tempted to remind Mr Sachs and other that when helping, they please try to avoid stabilizing our underdevelopment and that they instead help to get rid of those Basel regulatory elements that make the living in high-risk-country even harder than it already is.
November 26, 2008
Governments would do better stopping the regulators from bullying the bankers than joining the party.
I just wish that all of the columnists of the Financial Times took some time off to read what the minimum capital requirements created by the Basel Committee are all about. They are in fact the most important regulatory aspect that concerns our banks. You can find them in: http://www.bis.org/publ/bcbs128b.pdf
Wolf has a go at answering whether the bells really do toll by using a fundamental variable like the market value to the net assets value at replacement cost, though analyzing it mostly as a chartist looking for important inflection points. Anyone who believes or wants to believe that the market is now fairly valued will indeed find some comfort.
Now for whom does the bell toll? The young? Should they buy the shares from the baby-boomers at this level in order to build their own nest for the future or should they better wait? Not a clear call but it sure looks like it will be a horrible battle between the generations.
Should the government, given its deep pocket and the time horizon that is needed buy shares? I think better not. A government, especially when its finances are tight and it will anyhow have to bail-out many baby-boomers in the real world, should concentrate on assisting the birth of the new rather than saving the value of the old, and this even when some advisers guarantee it there are great profits to be made… when buying shares from them.
November 24, 2008
But, when they suggest the use of the Financial Stability Forum (FSF) as the check-and-balance for the regulators I must alert that just widening its country representation could perhaps not suffice, since the sole fact that new members could come from different geographical areas does not guarantee any less correlation. Often the new are completely correlated with the old by means of having gone to exactly the same courses with exactly the same professors using exactly the same financial models and that rely on exactly the same financial data.
But when Mr Jacobson says “that the current credit crunch is the aftermath of a classic leverage-fuelled financial boom” I must disagree. There I nothing classic in a crisis caused by investors having followed officially empowered risk surveyors, the credit rating agencies, to such a swampland as the one represented by the extremely bad awarded mortgages to the subprime sector in the US. That is by all means a first, and let us pray it also becomes a last.
November 21, 2008
Instead of pinning our hope on some Dr Strangeloves in Basel figuring out how to better control the credit rating agencies we should just proceed and disarm their nuclear heads, taking away the powers of influencing so much the markets that have been vested into them by the same scientists in financial regulations.
But what about lowering some of the minimum capital requirements in the middle of a crisis? Especially considering that these capital requirements did not turn out too low for the risks they were supposed to cover, but ended up way too low only because the risks were lousily measured by the risk surveyors appointed by the Basel Committee.
November 20, 2008
We need to be very aware that this crisis is turning out to be one of the worst ever just because our regulators in their sincere but silly efforts to avert a crisis, introduced some minimum capital requirements for banks based on what they wished to understand as risks and empowered the credit rating agencies as their global risk surveyors. These man-made artificialities created and leveraged some awful systemic risks.
Of course, like Benn Steil mentions, we also need some basic operative “fail-save” solutions, like adequate clearing houses that can safely assure us that our expected small net exposures are not turned into irreconcilable monsters.
Why does a bank that raised equity according to the minimum capital requirements now have to use extremely scarce new equity to replenish its equity to compensate for the discoveries and down-ratings? This is like crying over spilled milk, when we would all be better off if they used all fresh equity to sustain new business, which is the only business capable of lifting us out from the hole we’re in?
For any fresh capital injections, from governments or other sources, the banks should be allowed, if they so wished, to adopt a uniform equity requirement, for instance 6% across the board, lower than the standard 8% target set by Basel, at least for the time being. It is indeed important to stretch out a hand to help those down but it is much more important to provide the support to those going up.
And with respect of that helping hand, let us be absolutely clear that the best way of solving the mess with all the lousy outstanding mortgages, for all the parties, is to make sure these mortgages become worthy of the prime ratings they were initially wrongly awarded. If they keep on being subprime they will be so much more expensive for everyone to carry.
November 19, 2008
Sir Carmen Reinhart and Kenneth Rogoff declare that “We need an international regulator”, November 19. Their fundamental reason for it is that “finding ways to insulate financial regulators from political meddling is critical to creating a more robust global financial system in the future.” I vehemently disagree.
The current crisis is a direct result of the financial regulators having insulating themselves in the Basel Committee, the Financial Stability Forum and the Central Banker’s club house, the International Monetary Fund, where they in splendid isolation among friends concocted ideas like the minimum capital requirements for banks based on vaguely defined risks, and empowered the credit rating agencies to serve as the guiding stars for the capitals of the world. What more political independency could they have wished for? When were the financial regulators stopped by the politicians from stopping this crisis?
Someone recently reminded me that F.A. Hayek wrote that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design", and which tells us that even if we could have much need for an international regulator, we humans simply do not possess the people capable of being international regulators; and ignoring this would only set us up to much worse systemic risks.
Contrary to what Carmen Reinhart and Kenneth Rogoff say I would welcome some more political meddling in our current bank regulations so as to ascertain that our financial system, or at least our commercial banks, have a worthier purpose than not falling into default, which is the only thing that our regulators worry about. What about banks risking it more to provide us with decent jobs… instead of playing it safe using the AAA ratings the regulators instructed them to use?
November 18, 2008
As someone who knows quite a bit about risk management and that also, while an Executive Director served on the audit committee of the World Bank, drowning in Sarbanes Oxley procedures, I feel this is a very dangerous approach that could lead to an over-specialization of the boards which would, sooner or later, end up with some extremely sophisticated blinds leading some quite expert blinds.
No, what we need is a much diversified board of directors, where before any approval all directors have to certify, in writing, that they fully understand what they approve. What cannot fully be understood, by reasonably intelligent Directors, without a PhD in financial risk management, has absolutely no place in any financial institution that has the benefit of a public lender of last resort.
This is especially so because financial studies of financial risk management does not guarantee knowing about all the risks of life in general, such as the possibility of credit rating agencies suddenly not knowing what they are up to and sending us, the herd, away into crazy directions.
And with respect to the “too big to fail” the solution is simple. A tax on size, because the bigger they are the more it will hurt when they fall on us, as they will, sooner or later.
Skapinker would do well remembering that no matter how much talk of de-regulation there is we got here primarily because the financial regulators in Basel concocted what the thought was a magical potion capable to eliminate the risks in banking for ever, the minimum capital requirements for banks based on vaguely defined risks of default, and then empowered the credit agencies to serve as the Masters of the Risk in the world. Without that, we would be where we are.
And please, do not argue that the same thing happened with the dotcom bust. There investors were pursuing profits in an always risky stock market while this crisis happened because investors followed what was supposed to be AAA least risky securities, and which by the way pokes fun at the whole concept of allocating risks with those better able to manage it.
And so, before we start swinging, let us make sure where the pendulum really is. Perhaps it is because I have never minded government regulations, when clearly needed, that I find it much easier not sending the government where it is not needed. Long live the radical middle!
Authorities are currently trying to stimulate the banks to give credits to Main Street, the small businesses but, in times of severe shortages of bank capital, they insist on keeping in force requirements that instruct a bank that wishes to give a loan to a corporation that is rated from AAA to AA- to set aside 1.6 units of capital for each 100 invested; but for an A+ to A- rated they need 4 units; if BBB+ to BB-, 8 units; and below BB-, 12 units of capital.
Imagine being a BB- corporation talking to a bank that needs to set aside 12 units of capital in order to lend you 100. When compared to an AAA corporation, can you imagine how much more you have to pay in interests only to make up for the costs derived from regulations? And then the bank also needs to charge you their real net risk premium.
We need our regulators to urgently understand that risk is the oxygen for any development, and for any recovery, in the same way they need to understand that just saving jobs won’t get us anywhere, when what we really need is to create millions of decent new jobs.
Do regulators really think there is a future for all of us as government employees? Is it therefore that from a bank investing in any sovereign claim with a rating of AAA to AA- they only require… zero capital?
November 17, 2008
Whistling in the dark forest?
Sir Robert Anderson and Christopher Mason in reporting that “Newspapers face fresh pricing pressures” they quote a spokesman for Norske Skog (Norway’s forest), the worlds second largest newsprint producer saying “We see a momentum now for increased prices”. Surprising. Is that how one whistles in a dark forest?
82 percent of pirates?
Sir Kathrin Hille and Mure Dickie reporting on how “Chinese consumers flex their muscles in Microsoft piracy flight” they mention that according to Business Software Alliance China’s piracy rates are 82 per cent, and not the world’s worst. Can we really talk of piracy when 82 per cent of a country does it? Neverland? What do we call the other 18 per cent, law abiding Chinese? When might it be better for Microsoft to go underground and start to cater to the pirates? Has Microsoft analyzed what would happen to their worldwide income if they priced their Microsoft Office at $ 9.99 per year?
Whistling in the dark desert?
Sir Simeon Kerr and Robin Wigglesworth report on “UBS fund in $500 Mideast joint foray” November 17. Steve Jacobs of UBS tell them “clients had already expressed an interest in the Middle East, which is expected to outperform most other regions as the global slowdown deepens”. Surprising. Is that how one whistles in a dark desert?
Who gets the money?
Sir Jonathan Soble, (in Tokyo?) reports on an “astronomical fine” of $1.75bn levied on some glassmakers, because they “conspired to fix prices of windscreens and other automotive glass between 1998 and 2003.” Who gets the money?
Of course, a more accepted and wider used currency should in normal circumstances “offer more protection from speculative attack” than “a free floating offshore currency unit” (what a belittling way of referring to the historic pound sterling) but the fact is that current circumstances have very little to do with speculation and much to do with harsh realities.
Since Münchau in this context also brings up Iceland perhaps he could explain to us how much better off Iceland would have been had they used Euros instead of their Krona. As I see it Iceland would just have been able to run up quite a bit more leveraged debt, before all hell broke lose. Is that good?
At this junction one Pound Sterling gives a claim on a weakened but defined England while one Euro places a not completely defined claim on a not completely political Germany-and-Italy averaged Europe; and which of them might look stronger to the markets down the line, is yet to be seen.
The case for more humility and lower expectations with respect “early warnings” is laid out with crude clarity by the United States General Accounting Office (GAO) in its study of the IMF’s capacity to predict crisis, published in June 2003 (SecM2003-0306). In it, GAO states, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them, and that it was similarly bad in forecasting current accounts results. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.
Ms Gail Eastebrook also receives my warmest nod of approval when reminding us that we need to embrace risks and that “without risks there are no rewards”. This is something our financial regulators should have thought upon before they so arrogantly decided to drive risks out of banking, with their minimum capital requirements for banks based on a vague concept of risks of defaults, and that, because it also led the regulators to empower the credit rating agencies, created the current crisis when these lousy pipers led us into the swampland of badly awarded mortgages to the subprime sector.
In this respect instead of telling us how many units of carbon something generates it would be better to indicate what % of average daily emission of carbon is produced by a particular product or activity so as to allow us, in our daily life, to get a feel for whether we are making things better or worse. How many miles of average car driving does eating a standard Filet Mignon represent?
Another information that could come in handy, and which by the way does not require anything more than the gentle nod of an editor, is to publish, monthly, the list of the most and least per capita carbon emitters in the world, and on how they are evolving.
November 15, 2008
When Beattie now asks us “Let’s just try and get through this one without a civil war, shall we?” I totally disagree. It behoves us all to break down the walls of that club and let other mind-frames into the world of financial regulations, even if it takes a civil war. And with this I mean real other minds and not some same other-minds just because they come from different geographical areas.
Ma’am. Please be careful with Alan Beattie says. He might be one of the silencers. Who knows? They are all around us!
November 14, 2008
What could be riskier, a credit about which an “expert” holds to be low-risk, which could lead banks to lower their guard, or a credit that because it has been perceived as being high-risk will probably be more carefully analyzed?
Could that not point to higher capital requirements for low risk credits and lower capital for higher risk, just the opposite of what the minimum capital requirements for banks now order?
Is there not a big risk that the market instead of measuring the risks directly begins to measure the risks of a change of opinion of the risk setters? Do we then need agents to rate the credit rating agencies? And so on?
Why do you think that solely by measuring the risk of default, without taking into account anything with respect to what could be the purpose of the credit, that this would put the world on a better track?
Instead of having few credit rating agencies doing the job for the banks is it not better to give many banks full responsibility over their decisions?
Who ever told you that you had it in yourselves to be the Masters of the Risks? Who elected you?
Now unfortunately the reality of the crisis is such that even if the needs for help will increase the availability of resources and the willingness to help will decrease and that, whether you like it or not, will also require diminishing the laisser faire attitude implied in “allowing governments to determine their own agenda”. I have always fought for the right of countries to have their own unencumbered voice but the underlying assumption is of course that the quid pro quo is a more responsible behaviour. In this respect, a continent, like for instance Africa, needs now to be much more forceful in handling their Zimbabwe, if it wants to maintain its credibility.
November 13, 2008
This is why I agree and commend FT on starting to beat the drums on “Austerity must follow a stimulus”. November 13. Let us hope now that the G20 meetings do not take the form of an electoral campaign where only fiscal stimulus and tax rebates are offered and no one even speaks about the tax bill that must follow.
If it would not be for its very tragic implication it would be outright comic to see so many neo-Reaganites preaching the benediction of the Laffer curve, promising less taxes and more fiscal income… and even bail-out profits. What an amazing irresponsibility!
Either Mr. Trichet is shamelessly ignoring the role of the central bankers and the bank regulators, thru the Basel Committee, played in empowering the credit rating agencies; by naming these to have their ratings decide how much capital the banks should have, or, if he does not know that, so much the worse. At least Greenspan admitted some responsibility.
Central Bankers and regulators themselves trusted the credit rating agencies too much as their sentries for the risk-watch, while they went to sleep. To have one of the recently awakened sleeping beauties advice us on what has to be corrected, seems a bit dangerous, to say the least.
November 12, 2008
What I do not agree with though is when Wolf recommends a regressive “national value added tax rather than to rely so heavily on the income tax” as I believe that the US has to create some better working progressivism in their tax system since the very hard times fiscal ahead requires massive doses of legitimacy. Do not forget that the US dollars should actually say “In God… and in the American taxpayer we trust”
November 08, 2008
For instance, in any emerging world we all know there would be little room for energy consuming climate changing vehicles and so what are we going to do about that? Therefore, should we help car producers to keep up their current production, or should we invest the money more wisely in getting them to do some serious environmental and energy friendly retooling?
Reviving the economy just to see oil go over 200 dollars per barrel does really not seem the smartest thing to do, for anyone, including the oil extractors.
November 07, 2008
Therefore “politics and policies” and “a decline in commodity prices” could indeed be helpful to “prevent a downturn becoming a depression” as Chris Giles, Krishna Guha and Ralph Atkins discuss in “Can we go up again? The world economy”, November 6, but if full confidence is not re-established, fast, it will most probably not suffice.
How can we put the sock back on the market then? First and foremost by having the regulators guarantee they will do their utmost that never again so many will follow so much the opinions of so few. In this respect, the bank regulators, after a proper mea culpa, should announce their intention to swiftly move from a system of minimum capital requirements based on vaguely defined risks and that has induced some dangerous regulatory arbitrage, and to immediately stop imposing the opinions of the credit rating agencies on the banks and, as a result, on the markets.
November 06, 2008
George Magnus writes the “Recession will compound looming issue of rapid ageing” November 6, and though he does have many valid points these are all from the perspective of those on the way out. In this respect we also must acknowledge the needs of those on the way in. This crisis might in fact just be the beginning of a clash between generations.
If you are a prosperous baby-boomer with plenty of assets, then you are indeed interested in keeping the prices of shares and housing growing, and, if just a baby-boomer, to keep your job. On the other hand if you are a young with nothing but future ahead of you, you would not mind seeing the lower prices that could allow you to acquire shares or your house at a reasonable price, or to have the elderly move over so as to get a decent job. I mean, who would like to start building a nest egg for the future with the Dow Jones over 14.000?
November 04, 2008
Of course there are some precautionary or corrective measures. Among these and in reference to when Wolf says “Keynes would be horrified that the world has let the genie of free capital flows out of the bottle” I have always considered that slowing down somewhat the capital movements around the world, with some type of there’s-no-need- to-so-much-rush-tax, would help us to avoid some of the stampedes and therefore benefit us all, in a systemic way.
We also should not forget that besides the financial system there are some other very serious unresolved issues that limit our current growth possibilities, like the environment and energy. Had for instance some emerging countries not accumulated reserves, and invested them in US public debt, and pushed instead their on the margin much more energy intensive domestic growth, we would perhaps have seen oil well over 200 dollar per barrel. In this respect, more than a new Bretton Wood, we need to decrease the consumption of oil in the developed countries, so as to open up the growth possibilities for the developing world that do not destabilize the whole world.
As to the huge foreign currency reserves of emerging countries let us not forget that the real danger with them is not so much their size but that they are controlled by so few government officials. Had these reserves belonged to many millions of citizens instead, it would then have been called capital flights, and they would have been pursued without clemency.
And then of course one of the most vital what to do’s, is to get to the bottom to why the world was not able to react when it knew or should easily have known, that things were heading in the wrong directions. In other words… where were Martin Wolf’s many influential economists when they were sorely needed?
November 03, 2008
As someone convinced that the seed of our current systemic financial crisis lies in the bank regulations that emanated from the risk-adverseness extremists sitting in The Basel Committee, I cannot but feel apprehension when thinking about the possibility of governments, once again, unleashing their good-willed imagination on the market.
October 31, 2008
Sir I refer to your “Ring-fencing the vulnerable in a crisis” October 31. I had always held that the biggest problem with walls, borders or ring-fences is that, except perhaps for the very short term, you can never really be sure you have ended up on the right side.
A country finding itself inside the Euro-fence receives indeed some protection, at least temporary, but it also means that its responsibilities to fight it out are the greater… and it can still run out of freshwater.
What would have happened with Iceland had they been living inside the Euro-fence? What would be the price extracted from Iceland to allow it now some Euro protection? Would the younger generations of Iceland accept paying that price because of their parents’ follies? Should the parents of Iceland ask their kids to sign up as guarantors and help to repay for their parents’ follies? Might some Euro countries actually be envious of the non-Euro Europeans who though perhaps suffering more might also get over it faster?
Out there, in the real world, nothing is perfectly clear.
October 29, 2008
In Against the Gods Peter L. Bernstein (John Wiley & Sons, 1996) wrote that the boundary between the modern times and the past is the mastery of risk, since for those who believe that everything was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Now and as far as I am concerned, when the bank regulators put so much faith into the credit rating agencies, they inadvertently took us back to the past.
We need to help governments to be able to help in ways that keep their credibility and therefore, instead of talking about tax cuts, knowing that so many new and urgent real life spending needs will knock on their doors soon, more than recommend tax cuts, as if those had no costs or as in let-our-grandchildren pay, we need to start thinking about new taxes that could be perceived as legitimate and interfering little with the economy.
I am floating around two new tax proposals. A special tax on all profits derived from intellectual property rights that will help to pay for the costs of enforcing those rights and a progressive corporate tax based on market share and that, among other, could help to keep in check the too big to fail risks.
Another possibility is that governments use very long term zero-coupon bonds when providing assistance buying up portfolios or mortgages, remember the Brady bonds?, since that could at least buy them the time needed for economies to reflate back to where this new public debts can be duly serviced. Yes, “deflation is lethal for indebted economies” but so is public debt when it surpasses the level of what is perceived as manageable.
In practical terms what does it mean? That the US should accept the help of many million more immigrants, preferably legal, so that they can help to grow the economy and pay its fiscal costs?
Having said though when Soros then writes about the possible assistance the IMF might give a country like Brazil in terms of “$15bn, a pittance when compared with Brazil’s own foreign currency reserves of more that $200bn” he reminds us that the rescue efforts also includes making sure those $200bn are to be worth the same $200bn when Brazil might need to use them, and that by itself will require immense efforts, primarily, by the American taxpayer.
In God… and in the American taxpayer we trust!
October 28, 2008
October 27, 2008
Lawrence Summers also holds that "we need to reform tax incentives that encourage risk taking, regulate leverage and prevent government policies and prevent government policies that give rise to a toxic combination of privatised gains and socialized losses." He sounds so right, but he is so wrong. The privatization of gains and socialisation of the losses has nothing to do with the regulations per se but with the lack of the know-how and the political will of how to react when the regulations fail. And, specifically on risk, what we most need is to encourage the right risk taking as it is the oxygen of human and economic development, while avoiding creating disastrous risks in areas like housing and that, almost by definition, should be among the least riskiest parts of our economy.
And so if we are going to do well with less government intervention, let us get rid of the worst, namely the minimum capital requirements for banks based on vaguely defined risks and the risk information oligopoly awarded to the credit rating agencies.
October 25, 2008
The saddest part of the story though is that had only Alan Greenspan regulated according to his beliefs, he would never ever have imposed upon the banks the opinions of some few credit rating agencies, and these agencies would therefore never ever have been officially empowered as the supreme risk guides, and therefore they would never ever have been so much enabled to have so much of the market follow them over the subprime precipice.
October 24, 2008
But the summit could also be helped by each party bringing forward mutually helpful proposals. For instance China had a business model based on lending the US money so that it could buy from them which thereby creates jobs the Chinese. And, as so many business models do, it did fine until, in this case until the US could not afford to take on much more debt. What now? If they do not lend the US more money, Chinese could lose their jobs and China could lose a lot on their actual dollar loans to the US.
It might therefore be time for a US public-debt to Chinese jobs conversion plan. In it millions of Chinese workers would pay 10% of their gross Chinese salaries to the US in order to retain an access to the US markets. At a Chinese salary of 500 dollar per month, to repay this way the current 1 trillion dollars of outstanding US debts to China (no interests), that should take only about 10 year, for only about 167 millions of Chinese.
If it was that easy why do we not all have ourselves a couple of fiscal stimulus packages a day? It is just like listening in to the many statements about the US bail-out plan becoming profitable. If so, why does the US Treasury not take over all investment banking activities and save us all from having to pay any taxes?
Incredible amounts of virtual monopoly-money-wealth will burn up in the current crisis but the public debt will remain real; and could become too large to handle and perhaps force you down the Argentinean route, in order to tango it away.
October 23, 2008
Hold it there… what bond of trust is he talking about? Most market participants were never aware of the existence of any bond of trust, except perhaps of one with their regulators. Most market participants simply thought that the credit rating agencies knew what they were doing. And why should they not think so when even the financial regulators thought so?
October 22, 2008
But when Martin Wolf, sounding a bit like a financial policy macho-man, says “this requires Keynesian remedies. Budget deficits will end up at levels previously considered unimaginable. So be it.” we must now pray for not having to wake up from another wish-dream where budget deficits were decoupled from the lack of confidence in currencies and the consequential inflation.
I would be much more comfortable recognizing that there are some real limits to budget deficits and thereby force the need to assign priorities intelligently to what can be done.
In doing so, I would absolutely agree with Martin Wolf that one of the first things to be done has to be “enhanced procedures for restructuring debts of bankrupt households” since the only way we could be sure of that what in that area is being done is sufficient, is that whatever remains in the mortgages duly merit the triple-A rates previously wrongfully awarded.