December 31, 2008

The central planners´ vendetta.

Sir Chrystia Freeland in her "Fixing the flaw", December 31 proposes as one cause of the current crisis that “perhaps the total discrediting of central planning was one reason the champions of the market developed such an infallibility of their own system”. May I suggest an alternative take, namely that the humiliated central planners decided to avenge their defeat by surreptitiously entering into the reign of the Basel Committee and fouling up capitalism by convincing the bank regulators to empower the credit rating agencies as their commissars of risks. The trick they used was to sell the idea that since the credit rating agencies were private they were true representatives of the market.

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!

And which is the ‘real’ market of the Financial Times?

Sir I am sorry to say that as an end of this particular 2008 year editorial “The return of the ‘real’ economy” December 31 is, simply put, bad. You base it on “It is mistaken in seeing finance as unproductive. . . Nor is financial innovation mistaken in principle” and frankly I do not know anyone of importance who would contradict you on this.

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

Breaking up the oligopoly on credit risk information means returning powers to the banks

Sir John Dizard in “For fast relief of the credit markets democratise them” December 30 requests that “Rating agencies and banks should not retain their oligopoly on inside information”. He is right on the rating agencies but not on the banks. To be precise, the only ones who have had an oligopoly in credit risk information are the credit rating agencies. In fact the democratisation process should start by allowing the banks to fully recover their role as credit analysts and which was so diminished when the bank regulators empowered the credit rating agencies to act as their most trustworthy outsourced risk-surveyors.

“If they’re good enough for the Basel Committee they should be good enough for you."

Sir John Kay in “Kudos for the contrarian” December 30, writes well about the difficulties of predicting a crisis but leaves out perhaps the difficulties many institutions like the IMF face when they also have to avoid the risk of turning some of their predictions into self-fulfilled prophecies.

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.

Erroneous credit ratings were the ignored Black-Swans.

Sir in your “A straitened future for troubled banks” December 30 you rightly lay forward the many of the difficulties in deleveraging. But your analysis would have been more complete if you had acknowledged the fundamental role that financial regulators played in the leveraging process. The Basel Committee set up a system based on the presumption that risks could be measured accurately, always, and allowed some very highly leveraged balance sheets when the risks, among other as measured by the credit agencies, were deemed to be low risks.

The risk that was never accounted for, in other words the real Black-Swan event, was the risk that the credit rating agencies would be mistaken, a risk the regulators should never have ignored.

December 27, 2008

Regulators crafting plurality? Not likely.

Sir in “Why free markets must be defended”, December 27, you write “What was shocking was the failure of disciplined pluralism” and that now “Financial regulators must shoulder the difficult and technical task of crafting the rules that will ensure that there is no repeat”.

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 huge difference between poor and insolvent

Sir in “The year the god of finance failed” December 27 you mention as an example of government patronage “the effort to promote home ownership among the insolvent.” That is plainly wrong. Too much importance has indeed been assigned to home-ownership, in general, like the tax deductibility of interest paid on mortgages; and much of those efforts have been destined to help the poor, but no one has on purpose given assistance to the insolvent.

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.

The financial system needs to be more than what FT currently wants it to be

Sir in “The year the god of finance failed” December 27 you write “First and most important, finance is the heart of the market economy. It pumps money from those who have it, but do not need it, to those who need it but do not have it.”

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.

The Supreme Court should order Obama to stop quitting smoking

Sir I could not agree more with the general tone of Christopher Caldwell’s “No smoke without ire” December 27.

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

Uncomfortably some answers are only ours to give.

Sir as a radical of the middle or an extremist of the centre I much agree with Martin Wolf in that “Keynes offers us the best way to think about the crisis” December 24. Having said that and not feeling I should be considered a “liquidationist” I yet believe that a tremendous amount of debris has to be cleared out from the system and that also some extensive tilting of the land is required before we expose our economies to any stimulus Tsunami. Can we bailout the past and still sow the seeds for the future is one of those hard questions that needs to be answered in that “spirit of humility and pragmatism” that Martin Wolf asks for.

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

And what about the midgets of finance?

Sir you list with photos “The fallen giants of finance” December 23. But, what about all those midgets of finance in Basel, namely the financial regulators who thought they could exorcise risks from banks for ever with their utterly silly minimum capital requirements and the appointment of the credit rating agencies as risk overseers and got us into this mess? Should we not publish their names and photos too?

December 22, 2008

A lot of rain on a parking lot does little good.

Sir Wolfgang Münchau in “Following the Fed cannot save the world”, December 22, rightly presents some grave concerns with respect to “swamping the market with cash” before “restructure and shrink the financial system”.

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.

It is not a question of quality control or knowledge… it is solely about wise prudence

Sir Mr Blaise Ganguin from Standard and Poor’s Ratings Services is in his right to defend his company like he does in “Analysis of S&P’s ‘quality control’ is freely available” December 22. But, even accepting that all he writes is 100% the truth that does not diminish the fact that no matter how good the credit rating agencies are at what they do, it is still plain madness to empower so few with so much power over the market.

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

Obama could run out of time… in seconds.

Sir if Obama in the first seconds of his government is not able to tell a credible story of how the world can put a stop to the current crisis he and we could run out of the precious little time we have available to stop it from developing into something more catastrophic than a serious depression.

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.

Simply put, the nanny is not to be trusted.

There is nothing like some triple A ratings awarded to lousy securities and a Bernard Madoff experience to help a new generation of financiers to grow up and learn the hard way that their nanny is not to be trusted.

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.

And their names are?

Sir as the Financial Times has done Bernie Madoff should indeed be named and shamed. But, what about the naming and shaming of those financial regulators of the Basel Committee who caused immeasurably more damages by having concocted the idea of empowering the credit rating agencies as official guides; and which doomed the world, sooner or later, to follow some triple-A stars over a precipice.

December 20, 2008

There are indeed many financial issues that are up for long overdue reviews

Sir Christopher Caldwell in “Time for some morality trades” December 20, discusses whether the whole financial system should be up for a moral review. If so may I suggest we start by looking into the whole concept of placing borrowers in special high-interest rates corrals, with the help of tools that are not overly transparent, and then pushing the corralled into an impoverishing anticipation of consumption, all in order to make a profit from financial intermediation. From a societal point of view, without even discussing morality, driving an unnecessary wedge between people does not seem the smartest thing to do.

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

Since you are anyhow moving towards a clean slate, try a very low fixed mortgage rate.

Sir Niall Ferguson in “The age of obligation” December 19, presents clearly the dilemma between investing blood-sweat-tears and public indebtedness in trying to defend and build upon what exists or calling it quits and starting from scratch. It is a politically unsolvable dilemma and only time will tell. That said since no one is even talking about the subject of all the taxes that would be required to pay for defending what exists, at this moment I would have to bet on that we will see a clean slate sooner or later.

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

Those who felt for Madoff just trusted the green lights!

Sir John Gapper enters the world of incredulity and gullibility trying to explain the Bernie Madoff affair in “Wall Street insiders and fool’s gold” December 18.

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

Have your pick Bernanke, deflation or inflation, as long as you make it brief

Sir in “‘Helicopter Ben’ confronts the challenge of a lifetime” Martin Wolf, December 17, describes the very real dilemma of having to choose between ruthless deflation and ruthless inflation. The best thing to do in such circumstances is to stop thinking about how to get back to where we were and start thinking on where we want to be tomorrow. For instance in the case of our commercial banks it would be great if for a change we start thinking about what is their purpose; and we also need to remember that we have a climate change crisis proceeding simultaneously and where we won’t even have the choice of picking between deflation or inflation.

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

FT’s vision seems somewhat failing too

Sir in your special edition of “How gamblers broke the bank”, December 16, you make a reference to the Financial Times “groundbreaking reporting on the credit rating agencies”. For someone who has written about 200 letters to the Financial Times on the subject of the credit rating agencies and most of these complaining about how the FT was understating their responsibility and of those who empowered them a guides on risk leading us to this mother of all financial crisis, I would be interested in understanding better what “groundbreaking” signifies to you.

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.

How will the fines from Siemens be distributed?

Sir Daniel Schäfer reports on December 16 that Siemens has to pay $1.4bn in fines to US and German authorities in order to settle bribery inquiries in the United States and Germany related to Venezuela, Argentina, Iraq, Israel, Russia and Bangladesh. How much of these fines will the real victims, the citizens of those countries that were the object of the bribery receive and how will these be distributed?

A corruption of a third kind?

Is now the US public sector falling for teaser rates?

Sir Ricardo Hausmann writes that “The crisis gives America new financial power” December 16, and though there is no doubt that is true, for the time being, we must also be clear that these powers derive mostly from the fact that the world is desperately seeking for a safe haven in this financial turmoil. To this effect the US faces now the extremely difficult balancing act of trying to remain a safe haven while allowing access to all. Let us not forget that the safest of havens can turn into a death-trap if overcrowded.

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

Knowing the purpose of our banks is never redundant.

Sir Tony Jackson begins his “Banks’ crisis of identity leaves depositor in trauma”, December 15, asking “What are banks for?” and adding the comment “In normal times the question would seem redundant”.

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

Support the real world and not to the virtual world.

Not long ago web-navigators were buying real estate in virtual cities. Great fun, but of course no one would dare to plea for a bail-out in order to cover for any losses sustained there. But, down here, on the earth, there are currently many investors in securities with very similar virtual characteristics that shamelessly ask for help. We must learn to ignore their pleas not because we do not want to help them but because we cannot afford to help them.

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.

But what are Britain’s banks to do for Britain

Sir Martin Wolf “What to do with Britain’s banks”, December 12, is evidence that the most immediate task at hands for the regulators who “represent the interest of these risk-bearers of last resort” should be to start giving thoughts on what Britain’s banks should do for Britain.

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.

CDS on US public debt is more of a toy gun.

Sir Eric De Keuleneer worries that a Dr. Strangelove could set out to destroy our world with credit default swaps (CDS) on US debt “Tomorrow could bring a new threat” December 12. This is not so these CDS are just toy guns.

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

A debt’s maturity profile might be much more important than its amount.

Sir I do know how to interpret a Britney Spear “oops” but I hope it does not carry the same meaning for Martin Wolf “The eurozone depends on a strong American recovery” December 10. If indeed Wolf is now surprised by the existence of European sovereign credit risks then he has clearly been writing much too close to the trees and needs urgently to step back so as to get a better look at the forests.

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

Law, yes, interference, no

Sir Gideon Rachman quotes Jacques Attali, an advisor to President Sarkozy of France saying “the core of the financial markets is that we have global markets and no global rule of law”, “And now for a world government” December 9.

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

Sir is Clive Crook panicking? It is hard to draw a different conclusion from his “A question of first things first” December 8. Of course we need some fiscal stimulus and of course we should not procrastinate getting it out on the street… but what is wrong about thinking on the future in terms of what the stimulus should stimulate and what not, and about how to pay for it all?.

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.

Should the credit raters undergo a security clearance?

Sir Nassim Nicholas Taleb and Pablo Triana, “Bystanders to this financial crisis were many” December 8, are right in that we need to extract more accountability from the experts and from those that showed themselves incapable of questioning the experts. And, now and again, a please-return-your-Nobel-Prize back does not have to be so bad for the Nobel Prize either. That said I do not share in the extremisms like that of retiring “Value-at-Risk” books from the shelves” especially because those are exactly the books that now need to be reread so that we can learn from a better understanding of What-Was-Really-at-Risk.

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.

Purposeless human sacrifices.

Sir you are absolutely right saying that “Zimbabwe needs a political solution” December 8 and which should be nothing short of Mugabe’s resignation. The current sufferings in Zimbabwe, which have nothing to do with religious or cultural traditions but just with the mad ineptitude of an autocrat that wants to hang on to power no matter what, are not the kind of offerings that could be justified on the sovereignty altar of any country. And most of the African leaders know it, which makes the inaction of so many of them even worse.

While an Executive Director at the World Bank 2002-2004 I gave my unlimited and heartfelt support to the African countries in the issue of more voice to them and more freedom to apply their own criteria and country systems. Today I pray all Africa makes it very clear that a Mugabe represent neither an African voice nor an African country system

December 06, 2008

More toughness is needed in Basel in order to get bankers moving instead of the Congress.

Sir I much appreciated Peter Thal Larsen’s “Withdrawal unavailable” December 6. At long last someone has given enough importance to how minimum capital requirements imposed by the Basel Committee is a constrain on new banking business, among other because they force the banks first to dry up any already spilled milk. Official efforts to get the bank credit moving should of course start with introducing modifications of those capital requirements, unfortunately our so risk adverse regulator wimps do not even dare to enter that terrain. When the going gets tough we need to call in the tough!

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!

Sir with respect to "Japan halts aid for Vietnam after bribe case" by Tim Johnston and Mure Dickie December 6, are you aware that there is death-penalty in Vietnam for corruption? Below what I wrote when visiting Vietnam as an Executive Director of the World Bank in 2003 (Voice and Noise, 2006)


Death penalty for corruption!

What does it really mean to have a death penalty for corruption—and still they tell you that corruption is rampant everywhere? In effectiveness, how does it compare to OECD's recent huge step forward of not allowing tax deductibility of corruption payments any longer? Are there any anticorruption patches to be found that might make it easier to break the bribery habit? Or do you have to go cold turkey?

December 05, 2008

Do not worry it looks like they are just staging it! Help!

Sir Sir Samuel Brittan clearly rapped all of us who dare to ask “how we are going to pay for it?” over our knuckles, “A framework for economic stability” December 5. We do not deserve it. In a world where the British Pound should have imprinted “In the British Taxpayer We Trust”, since that is all it has backing it, not asking the question could frighten away all economic stability. The quoted Harold Macmillan “Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost” might have benefited from having much less darkness around him than what exists now.

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

If the game is over, aren’t we being better off starting anew?

Sir Martin Wolf in “Global imbalances threaten the survival of liberal trade”, December 3, tells us that savers must turn into spenders and spenders into savers, in order for all to balance out and allow us to keep on playing the same game, or we “must prepare for dire results.”

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

Those cows trusted us!

Sir Peter Schwartz in “Right question that has several possible answers” December 2, rephrases the Queen’s question of “Why did nobody see this coming?” into a “What would it take to make decision-makers both believe and act?”

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!

Et tu Britain?

Sir for someone who has had to live with my state of Venezuela completely out of control and who has often mentioned that if I had to reincarnate elsewhere I hope it would be in Britain, Philip Stephens “British police, and the state are out of control” December 2, is a hard blow. Is there nowhere where the governments are for the people and not for the governments?

We now have to think harder about what we can afford?

Sir Jeremy Rifkin writes that the “Sunset carmakers should look to a new dawn”, December 2 and clearly, if they don’t, they are crazy, especially since different to others trapped in a sunset industry the carmakers do not seem to have a good cash-flow to milk; in fact their current cash flow, they tell us, is the taxpayer.

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

Europe has the sovereign right to guard its interests even when doing it stupidly.

Sir Paul J. Davies and Nikki Tait report “Concern over Brussels rating agencies plan”, December 1. What can one say? If a Hugo Chávez feels he needs a Banco del Sur to make a difference in this world why should not Europe want to have their Credit Rating Agency de Europa? And, with respect to that ´This introduces an extra-territorial approach and will be seen as protectionism” why should Europe also not have the right to try their best to see that the next subprime swampland where the credit rating agencies will surely take us again, sooner or later, lies not in California but in old Europe?

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

Dear World, you’ve got to be kidding!

Sir I refer to Philip Stephens “Broken banks put the state back in the driving seat” November 28 and which as a basic premise must have it that our governments were not in the driving seat. Wrong!

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!

Neutralize the regulatory credit destruction

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?

More than bank lending it is the willingness to take risks that must be restored.

Sir holy Moses, Martin Wolf in “How Britain flirts with disaster” November 28 tells us that the global freeze that hit Iceland is on its way to Britain as the economy will shrink, the public debt increase and the ratio of it all snowball into pure unsustainability. I am no Britain expert but it would seem that Wolf has trusted the triple-As contained in previous pre-Budget reports too much. Now he might know how it feels for a banker that deposited too much trust in the credit rating agencies.

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

Mr. Sachs let us though avoid stabilizing underdevelopment.

Sir The introduction by the Basel Committee of the minimum capital requirements for banks and which is based on some vaguely defined risk of default only reflects, at its best, the perspectives of a developed country that has a natural desire to keep all that it has gained under the belt; and has nothing to do with the risk-taking a developing country needs in order to place at least something under its belt.

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.

Sir John Kay hold that “A passive approach to bank stakes is inadequate” November 26. I agree but before we have our governments start using their bail-out investment’s to start bossing the banks around we should request the governments to first remove the disincentives the government has created to keep the banks from doing what they should do namely taking on productive risks.

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

Do the bells toll and if so for whom?

Sir Martin Wolf titles “Why fairly valued stock markets are an opportunity”, November 26, and who would argue with that? It gets much thorny though when figuring out what “fairly priced” really means and for whom the opportunities exists.

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

We need to diversify our portfolio of regulators.

Sir Walter Maatli and Ngaire Wood in “Who watches the watchdog?” November 24, and in reference to our current financial regulators say that “The Basel Committee is dominated by central banks. They do not represent the broad range of interests likely to be affected by bank failure. They are not politically accountable… many have a culture of discretion and secrecy, rather than of transparency and openness to public scrutiny.” This is indeed a source of problems. We cannot afford to have the regulations of our financial systems correlated exclusively to the risk-adverse brainwaves of one special brand of regulators.

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.

This is no classic crisis

Sir I could not agree more with Mr William Jacobson that we need to concentrate more on the real economy as opposed to the financial economy, since the first has much better possibilities of delivering fundamental positive economic change, “Restore balance to financial and real economies.” November 24. This of course does not imply that Wall Street is irrelevant to Main Street.

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

Don’t count on the Dr Strangeloves in Basel.

Sir Peter Montagno in “Danger of pressing nuclear button on a rating agency” November 21, holds that “a bloodbath in the markets” could happen “if and when the authorities decide to withdraw an agency’s registration”. What on earth does Mr Montagno call what is currently happening in the markets?

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.

And what about some more flexible Basel limits?

Sir Peter Thai Larsen reports that “Basel outlines stricter limits”, November 21, but that one official said “We’re not going to jack up all the minimum capital requirements in the middle of a crisis”. Phew... what a relief? Even though just talking about it cannot make the urgent task of raising new equity for the banks any easier.

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

Indeed we must not try to avert crises; we must make them more manageable

Sir Benn Steil in “We need a safe-fail approach to avert new crises”, November 20, argues for “interventions that recognize that institutional failure will continue to occur and that focus on limiting the systemic damage after they do”. He is absolutely correct and in this respect I have argued for a progressive tax on our financial institutions based on the bigger you are the bigger it will hurt us when you fall concept, which could help us to contain the size of the damages.

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.

Get the banks going instead of having them crying over spilled milk.

Sir Glenn Hubbard in “Ways for Obama to energise the economy”, November 20, when mentioning the need to recapitalize our banks so that normal lending returns, leaves out one of the most important adjustments the bank regulators could do.

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

We might need an international regulator, but we humans do not have the people for that.

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

Please, do not dig us deeper into the sophistications of risk management!

Sir Michel Schrage in “How to sharpen banks´ corporate governance” November 18, tells us “that the most important governance reform in financial services would make risk management the explicit duty of the board.” “insisting that directors be more conversant in and accountable for risk.”

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.

If it is not a job for the market it is still less a job for the government!

Michael Skapinker in “Every fool knows it is a job for the government” November 18 seems quite willing to let the pendulum on financial regulations to go back completely based on a “Fool me once, shame on you; fool me twice, shame on me”.

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!

Are we to see us all as public servants!

Sir having protested for years the artificial risk-adverseness that the Basel regulations introduce in our financial sector by means of the minimum capital requirements for banks, I cannot but agree fully with Mr Andrew Hope in that “Basel II has become an obstacle to trade flows” November 18.

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

On Companies International, November 17

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?

Why the British may be more careful falling in love with the euro.

Sir Wolfgang Münchau in “Why the British may decide to love the euro” November 17, makes some curious assumptions, first and foremost placing an equal sign between the dollar and the euro. The dollar is the currency of an already established country, with already established rules in how to handle the printing machines when in a crisis while Europe, whether we like it or not, is still a work in progress with little design on how to go about and print out Euros in order to fund European bail-outs.

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.

And good luck to them!

Sir Ms Gail Easterbrook in his letter “Act locally to embed the right attitude to risk” November 17 when referring to giving new regulatory powers to IMF to provide “early warning” of risk to the global economy summarizes it adequately with an “And good luck to them.”

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.

On carbon, please disclose something useful.

James Murdoch asks that “Carbon disclosure should be mandatory by 2010”, November 17. He is right though we must avoid becoming a now-we-disclosed-it-and-that’s-all-folks society… like in a now-we-provided a credit-rating-and-that’s-it-in-financial-regulations. The most singe important aspect with the disclosure of any information is that it is understandable, for any non-expert, and we also do not need more of the type of information that reveals for instance that, supposedly, hopefully, a quart of bottled water contains 0 calories.

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

Tear down the walls of that club of mutual admiration... even if it takes a civil war!

Sir Alan Beattie in “Good question, Ma’am. But some people did see it coming” November 15, does not explain why those people were not listened to. The truth of it all was that the whole issue of bank regulations, the numero uno of financial regulations, was captured by a club of likewise thinkers coming from likewise life experiences with likewise PhDs from likewise universities and that all teamed up in a cosy small club of mutual admiration where no questions were asked out of politeness or just because they were none.

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

Some questions to the Masters of the Risks

Sir to anyone like Mario Draghi who in “A vision of a more resilient global economy”, November 14, seems to believe that making the credit rating agencies better at what they do would take care of their part of the problem, I would ask the following questions.

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?

Remember the bottom billion will also afford less a Zimbabwe

Sir Bob Geldof, in all honesty believes that the current crisis is the result of a runaway laisser faire fundamentalism and he is wrong. There is no laisser faire in having some bank regulators decide on their own upon some minimal capital requirements for banks based on a vague concept of risk and which places a regulatory de-facto tax on risk taking. Neither is there any laisser faire in the empowerment of some few credit rating agencies to act like the world guides on matters of risks, and which has made of them the largest propagators of the subprime virus. This though does not take away one iota from the correctness of many of Geldof’s proposals in “Remember the bottom in our brave new world” November 14, especially since most of what he argues was just as valid before this crisis.

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

Whatever, don’t forget the tax bill will be in the mail, quite soon.

A thirty year mortgage of 300.000 dollars at 11 percent rate to the subprime sector will, if made part of a security that because it has a prime rating is discounted at 6 percent, be worth 510.000 dollars. The difference of 210.000 dollars in financial air, pocketed as profit by an intermediary, will most probably be lost completely, no matter what happens to the housing sector. And so, if by any chance these are the kind of loses the governments are helping out with, they will not recover a single cent from it, and the taxpayer will have to make up for it, or it all breaks down in more inflation or in, gulp! … sovereign defaults.

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!

Do you allow Mr. Trichet to get away with it?

Sir if a president of the European Central Bank can now get away with blaming the investors for the crisis as “they put full faith in the ability of rating agencies to draw up risk assessments” like Jean-Claude Trichet does in “Macroeconomic policy is essential to stability” November 13, then Europe has a bigger problem than what I thought possible.

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

At least listen to the Joker before giving more powers to the schemers

Sir, Richard Thaler and Cass Sunstein in “Human frailty caused this crisis”, November 12, hold that “regulators need to help people manage complexity and temptations” but ignore the frailty of the regulators and the dangers of all their regulatory temptations.

I can hear now the free market answering a confounded citizen by describing the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008. “You know, they're schemers. Schemers trying to control their worlds. I'm not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … was nothing personal, you know that I'm telling the truth. It's the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…” collateralized debt obligations.

When I think of a small group of bureaucratic finance nerds in Basel thinking themselves capable of exorcizing risks out of banking, for ever, by cooking up a formula of minimum capital requirements for banks based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly by empowering the credit rating agencies and which was all doomed, sooner or later, to guide the world over a precipice of systemic risks; like what happened with the lousily awarded mortgages to the subprime sector, I cannot but feel deep concern when I hear about giving even more advanced powers to the schemers.

The US tax system needs better working progressivism.

Sir I could not agree more with Martin Wolf when in “How Obama should face his vast economic challenges” November 12, he mentions “taxation of energy”. That should be as they say in the US a “slam dunk” though let us remember that even an Al Gore, a Nobel Prize winner because of is environmental friendliness, does not dare to mention such tax in the land of the cars.

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

Let us also think about the world we want to emerge from this crisis.

Sir your “Spending wisely to escape recession” November 7 though quite correct on its own merits unfortunately ignores that our real challenge is not just to recover from the current crisis but to make certain that the world that emerges from it is sustainable, something its previous route was not.

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

How to start putting the socks back on the market

Sir, the current crisis did not arise because the market took speculative positions in Argentinean railroad bonds, it resulted from having followed whom it had been informed by their regulatory agencies were the utmost experts on risk, the credit rating agencies, into one of the least risky countries, the United States, and into a very well known market, housing finance. No wonder the crisis has scared the socks off of the market. There is nothing so scary like not understanding what has happened, and though it is nice to see so much being done to help out, it is equally scary not seeing any real efforts to avoid repeating the mistakes.

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

Is this crisis the beginning of a clash between generations?

Just this morning walking around the park on the farm where my mother lives in Sweden I stood on top of a cliff that is rumoured to be an “ättestupa”, one of those places where Swedes of ages ago were rumoured to have thrown themselves out when they felt they had become a burden for their children. I have always doubted this particular cliff as its relative low height has seemed more inclined to cause a broken foot, only aggravating the burden.

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

If it isn’t totally broke, don’t tinker with it too much.

Sir Martin Wolf argues many reasons for “Why agreeing a new Bretton Woods is vital” November 4, but, given that one of the fundamental pillars of our whole financial system, namely the market’s confidence in the dollar, is in fairly good shape, if only perhaps because of lack of confidence in anything else, we should at least be very careful not to tinker too much with something that might not be that broken.

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

Governments, whatever, do no more harm... you’ve done quite enough as is!

Sir in “Finding a way out of the global crisis”, November 2, you hold that “With goodwill and imagination, the G20 leaders can commit themselves to a co-ordinated, co-operative solution to the financial crisis” when they now meet in Washington on November 15.

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

Inside or outside the Euro-fence

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

The regulators took us back to the dark ages!

Sir though I agree with most of John Kay’s “Could Napoleon have coped in a credit crunch?” October 29, I protest vehemently when he says that “The financial innovation that was once the means of spreading risks is now an unmanageable source of instability.” The source of instability was not the financial innovations per se; the prime source of instability was that those financial innovations were rated triple-A and that we so much believed in the ratings.

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.

Après us le déluge?

Preventing a global slump is indeed a priority as Martin Wolf says October 29, but relying solely on government to do so could mean breaking the back of their finances, further inflaming “xenophobia, nationalism and revolution.”

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.

A case for massive immigration?

Sir in “Learning to live with excess debt” you hold that though “deleveraging is needed but authorities are right to slow it” and you also warn against “overstretching” solvent states as “currency meltdowns could follow” and you therefore conclude that “the only viable alternative is to accept current debt levels and try to grow the economy to match them” October 29.

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?

But first make real sure reserves are worth something, when needed.

Sir George Soros, October 29, writes that “America must lead a rescue of emerging economies” and of course he is right. Who else could? Who else would?

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

When in a panic, think, for a millisecond at least!

Jeffrey Sachs tells us: 1.- Extend swap lines to all main emerging markets. 2.- Have IMF extend low-conditionality loans to all countries that request it. 3.- Discourage big banks from withdrawing credit lines from overseas operations. 4.- China, Japan, and North Korea should undertake a coordinated macroeconomic expansion. 5.- Middle East needs to recycle all their cash. 6.- US and Europe should expand exports credits for low and middle income countries. 7.- US and Europe should follow an expansionary fiscal policy. According to Sachs "At the least it would put a floor on the global contraction that is rapidly gaining strenght. "The best recipe for avoiding a global recession", October 28.

Even if we would accept Sachs very optimistic view on the fiscal outlook as true, we should ask whether this is wasting aspirins or throwing real medicine at the problems? Compare Mr Sachs´ advice with what Michael Skapinker, on the same page tells us that Wal-Mart is doing to enforce ´sustainability, demanding "rigorous environmental and social standards", "An ethics lesson from an unlikely quarter".

The big question becomes then, should we now pull out all the stops in order to regain equilibrium on what might be a path to unsustainability or should we use this crucially decisive moment to provide the incentives to explore other perhaps more sustainable routes? In the panic it is still wise to take a brief time-out and think about what door to use. In fact our world at large is not only looking for an escape door for a financial crisis, it is looking for a door that can lead it to a better place. But, of course, neither do we have all the time to make up our mind… it is burning out there.

Do we dare to answer?

Sir Thrainn Eggertsson in his “Long-term consequences may be ruinous for Iceland” October 28, is really asking us… “Is Iceland not better off following the Argentina route? If our sons and daughters were from Iceland, do we dare to answer that question?

October 27, 2008

Instead of avoiding risks we must embrace the right risks

Sir, Lawrence Summers writes "The pendulum swings towards regulation" October 27. He is right but, when reminding us of the "need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact", he should be aware that this also requires the pendulum to swing away from the regulations. Currently the single objective pursued by the regulators, with their strict minimum capital requirements for the banks based on default risks and the empowerment the credit rating agencies as the supreme risk overseers has nothing to do with transformational impact but, ironically, only with avoiding a financial crisis.

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.

The right intention but for the wrong intervention

Sir Johnny Munkhammar and Dick Kling tell us the “World needs less government intervention” October 27 and, in general, I agree. That said when they say that “The US, government, on a massive scale subsidized home loans to people who could not afford it” they are dead wrong, and they should be able to see that those incurred losses doing so were mostly private investors, who are now paying the costs and perhaps receiving themselves, as investors, a massive subsidy from the government.

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

Did Congress never ask Greenspan about his opinion?

Sir with reference to your editorial “Saying sorry” October 25, if anyone had answered “I presume that the self-interest of organizations, specifically banks and others, is such that they are capable of protecting their own shareholders” we would never ever dream of appointing said person to anything that has to do with banking regulations. Since this is what Alan Greenspan now tells us he always believed does that imply that, in their confirmation hearings, the US Congress never asked him about his views? Can Bernanke be hurriedly recalled to Congress for a brief follow-up question?

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

Global confusionism!

Sir Philip Stephens in “Globalisation and new nationalism collide” October 24, tells us that the summit of world leaders announced by Bush in order to “advance common understanding of the crisis” would be a success “if the leaders did no more than reach the beginning of understanding”, which presumably means admitting, like Greenspan, that they never understood much of the boom either.

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.

Are you also to tango away your public-debt?

Sir of course we understand that you do not ask how much it costs when you send out a fire truck to answer an urgent alarm, but from there to imply that it will not costs us any money, as Sir Samuel Brittan, seemingly a Laffer curve believer extraordinaire, like us to think, is a bit too stiff upper lip or too blasé for my taste. “The big myth of taxpayer cost” October 24.

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

What bond of trust is he talking about?

Sir Alan Beatty titles his report on Congress hearings about the credit agency’s role in this current crisis quoting Henry Waxman the chairman of the of the US House of Representatives oversight committee saying that the rating bodies “broke bond of trust” October 23.

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

Let us now pray this was the last waking up from a wish-dream for a while

Sir Martin Wolf rightly calls out the fact that “The world wakes from the wish-dream of decoupling” October 22, although, sincerely, I have yet to meet anyone that was not long in emerging markets that really believed in that.

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.