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.