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?