December 31, 2009

The monsters that thrive on hardship haunt my dreams

As a son of a Polish soldier who had to endure more than five years in a German concentration camp, I also connect to Martin Wolf's feeling that the civilisation we pray survives for our descendants is indeed at stake ("The challenges of managing our post-crisis world", December 30).

In this respect my worst nightmare is that unmanageable Versailles-type public debts will become fertile ground for those monsters that thrive on hardships, and that is why I often wake up wishing that the US, instead of taxing and inflating itself out of an almost impossible problem, would simply do an Argentine form of restructuring such as offering 10 cents of the new dollar for each 100 cents of old dollar debt, hand out some Dollar II to its citizens and then take it from there. I believe not only that the world would still accept Dollar II as it has little other choice but also that China would then wake up and adjust . . . you see, governments can't stop dancing either while the music plays.

Once the air is cleared then we might have a better chance of tackling other challenges to civilisation like the climate change threat. As to the banking system, there is nothing that could not be solved by asking ourselves the simple question about what our banks are supposed to do for us, because, unfortunately, that is the question our current very poor set of regulators have never asked themselves.

Happy new decade!

December 29, 2009

Do not help the regulators to get off the hook.

I have always thought that bank regulations should primarily focus on stimulating the banks to take the kind of risks that are more useful to society, and so that, when something goes wrong, as it will do sooner or later, that it has all at least been worthwhile.

Instead the Basel Committee focused on trying to exorcize risk-taking from the banks so as to guarantee bank stability, something that per se does not serve society much; by allowing for some minuscule capital requirements for banks as long as they lent to or invested in operations that the credit rating agencies perceived as risk free… in other words:

Sheer lunacy! There is nothing to be obtained by giving those already blessed with being perceived as having low risks the additional advantage of generating low capital requirements for banks.

Sheer lunacy! Since capital by nature is already too coward, assigning special preferences to the “safe-havens” guaranteed these were to become overcrowded and create a new set of risks.

Sheer lunacy! Only some extremely gullible and naïve regulators would be unable to see that beside the fact that the credit rating agencies, composed by humans trying to measure hard to define risks were bound to go wrong, sooner or later, that with these regulations they were being set up for capture by many interested parties.

And this is why though I absolutely agree with much of Martin Dickson’s “The bankers who wouldn’t say sorry: a cautionary tale”, December 29, I completely disagree with it as a whole, since by pointing excessively at the bankers it might help the regulators to get off the hook.

December 28, 2009

Do we really need regulators who cannot define a purpose for their regulations?

Sir Simon Gleeson writes that the “hardest” is for the regulatory system is “deciding exactly what you are trying to achieve, “Regulatory systems do need regular pruning” December 28.

Gleeson is absolutely correct and if in need of evidence the current bank regulations produced by the Basel Committee, suffices. In these there is not one word on the purpose of the banks… because stability or better phrased the avoidance of excessive instability cannot of course per se be an objective but only a desired feature.

When having to embark on financial regulatory reform there is no better place to start than defining the purpose of the financial sector, but somehow it seems no one wants to do that… I wonder why?

December 22, 2009

Banker’s fears should pale in comparison to ours.

Sir Gillian Tett writes “when banks have made loans to western sovereign nations – or simply bought their debt, in the form of bonds – they typically do not post big reserves, since such debt is deemed ‘zero risk weighted’ in bank regulatory rules, and most western countries carried a triple A credit rating”, “Sovereign risk comes high on banker’s fears for 2010” December 22.

As I have written to FT so many times over the years now, though it has been blithely ignored, the banker’s fears should pale in comparison to ours as citizens, seeing that banks are allowed to lend to the State (which is what “sovereign nations” really means) without any capital requirements while, when lending to an ordinary citizen it must find at least 8 percent in equity.

Is not the State powerful enough without this regulatory favouring? Can’t you see it? Our banks are being nationalized through their balance sheet... or what would you call it when the bank holds many times their equity in government obligations?

I never held FT to be a procommunist paper but contemplating it’s unbelievable silence on this issue I am quite sincerely starting to have my doubts.

December 18, 2009

There should be a growth market in tea-parties.

Sir Gillian Tett is too forgiving when she describes as a “perverse situation” that “the Europeans banks are now net sellers of insurance against the chance of their own governments going into default – even though those same banks are implicitly backed by those governments”, “CDS market needs reform if more drama is to be avoided” December 18.

It is worse than so, it goes to the heart of what could be deemed to be an immense collusion of interests between big governments and big finance, which starts with the fact that banks in many countries, courtesy of the regulators, are required to hold zero percent in capital when lending to the government and therefore leveraging even more its power.

That an ordinary citizen’s borrowing gives cause for an 8 percent or more capital requirement for banks while the same lending to the governments cause a zero requirement must be a dream come true for any government. There seems to be a growth market in tea-parties all around the globe.

Sheer regulatory lunacy!

Sir Anousha Sakoui in “S&P in rating threat to covered bonds” December 16, writes that these bank issued will be rated among other based on “the likelihood of government support”. Given that governments appoint financial regulators who now use the credit risk ratings issued by the credit rating agencies to decide how much equity banks need to have, presumably so that the banks won´t fail and the governments will not have to bail them out, it is absolutely crazy that the credit rating agencies when rating the risk also measure the government´s willingness to bail out the bank. Is this dangerous and incestuous circle of opinions not sheer lunacy?

December 16, 2009

Let all citizens of all countries in on the climate change human race challenge!

Sir Jeffrey Sachs “Hold the rich nations to their world” December 16 clearly views fighting against climate change as a government issue. But, if the threat of climate change is as serious as told and which from what I at least have been able to see with my own unscientific eyes I have few reasons to doubt, then clearly the only way to have a chance to succeed in that battle is by making it a citizens issue.

In this respect when Jeffrey Sachs now rightly complains in respect to climate change that “rich-country leaders want to sneak by on minimalist commitments… not consistent with global needs or international commitments” similar to what has happened to “rich-country pledges on development aid”, he would do well reflecting on whether the citizen of rich countries were sufficiently involved when making those commitments… or does the need of participation and ownership that is so much preached on by the development community only apply to poor countries.

Also these days we heard comments from the US with respect to the difficulty of monitoring Chinese commitments on containing carbon emissions, but if in this case we can’t understand that the only real effective climate change monitoring that can be done in China or in any country is that which is performed by their own citizens, then I believe we have already lost the battle.

Let’s hurry back to the drawing board and start talking with the people of the world and not the Jeffrey Sach’s or the governments of the world… pas la même chose.

December 12, 2009

Who is guilty of having seeded expectations of climate change reparations?

Sir Christopher Caldwell is right in denouncing that “many of the developing world’s representatives have come to Copenhagen seeking reparations” Climate change, the great leveler”, December 12. What we must realize though is that these representatives did not develop these expectations on their own but that these were certainly seeded there by some reparation intermediaries or vultures. There is no doubt that we should try to eliminate poverty in the world but we must have clarity in what are the prime objectives with respect to our earth-environment.

It would be an interesting challenge for any journalist to investigate the origin of the idea to open up the flank of wealth redistribution in the environmental battle. It should be possible to do so and it would also be very valuable for all to do so, especially for those now bearing groundless expectations and who now are bound to be disappointed.

December 10, 2009

Never forget who really paid for the bonuses.

Sir, on your front page Patrick Jenkins, Brooke Masters and Francesco Guerrera reports on the “Banker’s fury at UK bonuses supertax”, December 10. Because there could be some shady collusion of interests that could want us all to ignore it, it might be convenient to remember that the real payers of those bonuses, or taxes, are the clients of the financial intermediaries. If we are going to have true fiscal transparency then perhaps the supertaxed part of the bonuses should be returned to the clients of the banks, and if so needed, taxed there.

December 08, 2009

Do the poor not have the human right to share the obligations of the human race?

Sir Jeffrey Sachs in his letter “Poor pay for the sins of the rich” December 8, writes about “Pushing the developing countries into a climate accord based on tiny sums today and vague financial promises for the future”. It makes one wonder about what is wrong with the developing countries doing what they feel they should and can do in fighting climate change without being paid anything. Do they not have the human right to help out when the human race and the world is faced with a challenge?

It is all part of the same preaching that has it that the poor should not have to pay for the water when having a water meter installed is perhaps the best chance the poor can start feeling that he is becoming a citizen.

Instead of offering the poorest of the poor in a developing country a payoff I rather see them shaming the rich and poor in developed countries into taking on their full share of responsibilities.

Also much more honest is to tell the poor in the developing countries that they are “on their own” instead of giving them some illusions about that some champions will convince the world to help them out. Or is Jeffrey Sachs willing to give the poor his word that he will be successful?

And frankly I cannot think about something less constructive to get us working together as the indigenous to the earth all we humans are, than phrasing the funding of the efforts needed to combat the climate change threat in terms of it being “a compensation for damages caused mainly by the rich world”.

Does this mean that I object to Mr Sachs motives and that I disagree with all he does? Of course not!

December 07, 2009

To solve climate change, concentrate on that and shy away from green pork and fighting injustice, those are other battles.

Sir, you end your editorial “Copenhagen: we can´t risk failure” December 7 saying “The forces of negativity and scepticism, whether self interested or naïve, must not prevail if we are to reduce the threat to the planet´s future without sacrificing future economic growth”. Do you mean that if reducing the threat to the planet´s future implies that we have to sacrifice future economic growth that then we should bother? Can´t you see that trying to achieve multiple objectives is one of the ways of risking failure?

One of the problems of finding a solution to the threat of climate change is that like many legislative process, many are interested in adding their own (green) pork to the bill; some by creating business opportunities, others by trying to foster global justice. When will we have a climate change congress that just concentrates on what it takes to insure solely against climate change?

December 04, 2009

There is still a lot learning to do about the real meaning of “getting out of the way of markets”

Sir Martin Wolf writes “Gone, too, must be the assumption that governments should merely get out of the way of markets”, “A weakened Britain enters the post post-Thatcher era”, December 4.

Absolutely not! When we see governments ordering the banks to hold significant amounts of “high quality” government bonds and allowing them a zero percent capital requirements when lending to the government, as compared to the 8 percent required when lending to an ordinary citizen, we cannot but wish that the governments and some financial commentators someday learn “what getting out of the way of markets” really means.

And also, when Wolf suggests that we should not suppress markets but instead support them and guide them, I can´t keep but wonder on what Margaret Thatcher would have had to say about the guiding part.

December 03, 2009

Is communism being infiltrated through financial regulations?

Sir José Maria Brãndao de Brito, in “New rules on liquidity could do more harm than good”, December 3, refers to how “the Committee of European Banking Supervisors, aim to raise the quantity and quality of liquidity buffers by forcing banks to hold significant amounts of ‘high quality’ government bonds”.

If we add to that the fact that the current Basel regulations permits banks to lend to the government with a zero percent capital requirement, compared to 8 percent when lending to an ordinary citizen, there are reason to suspect that some are trying to smuggle in communism through financial regulations. Are they building a new wall? With governments and their special triple-A rated comrades on one side of it, and all the rest of us the rabble or Pöbel on the other?

December 02, 2009

In Copenhagen, let us hope they finally make up their minds, and, if it is serious, scrap the cap and trade and fully enlist the poor

Sir though I agree with much of Martin Wolf’s “Why Copenhagen must be the end of the beginning”, December 2, what I most would like to see happening there is for the world to finally make up its mind whether it is going to treat climate change as a real threat or not. A wishy-washy middle ground that creates the false impression that something is done is the worst place to be. For instance, if we decide that we are going to act as we were in any real danger, then probably the first thing to do would be to scrap the whole cap and trade divertissement, roll up our sleeves and go whole heartedly for the carbon taxes which Wolf so correctly prefers.

But, where I really disagree with Wolf is when he mentions that “the cost should fall on the wealthy. This is as much because they can afford it as because they produced the bulk of past emissions.” Of course the wealthy have larger shoulders but, if this is really serious, then every human has the duty, and the right as a human showing solidarity, to push as hard as he can, with whatever he has, without any consideration to other issues. The climate change threat shall not be taken as a threat against humanity similar to the one depicted in the movie “Independence Day” and in which an American president takes an active part saving the world… as a fighter-pilot. This is no matinee show. The poor are probably among those to be most affected by climate change and so please, whatever, do not tell them that the wealthy will take care of it, especially when you know this isn’t so.

November 30, 2009

Is Greece becoming Germany´s fart-payer?

Sir Wolfgang Münchau writes “Greece can expect no gifts from Brussels” November 30, and which makes us reflect on what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark. 

In such a case Germany would have had to be doing the Chinese styled currency weakening on its own instead of having Greece and others euro-black-sheep average the Euro down for them. And clearly Greece would be able to devalue and use that politically more friendly approach of being able to inflate yourself out of the problems, instead of having to impose Germanic discipline on their citizens. Come on, does not Greece deserve a little gift?

Rumours have it that in old Venezuela the fine ladies of society were always accompanied by a small coloured boy whom they could hit on his head whenever a lady farted. These boys were known as fart-payers (paga-peo). Could it be that Greece is becoming Germany´s fart payer?

In a world with reduced lebensraum it might be time for the Dollar II

Sir Jeffrey Gartner tells us “We must get ready for a weak-dollar world” November 30. It sounds like wishful thinking since what we need to get ready for is for a weak world, since it looks like the business model of most countries is out of synch with so many realities, among others the diminishing lebensraum that energy scarcity and environmental threats are signalling.

Also, when Gartner writes about a multi-currency framework as an alternative to the dollar, but says that”this regime will take time to devise” this is just another way of ignoring that, if we do not want to use gold, the only alternative to the dollar, for the time being, is the dollar II, to which the old baby-boomer dollars can be converted at a rate of ??? The dollar II would be a more transparent and perhaps even less socially traumatic than that of “camouflage a slow-motion default” by means of inflation.

What a world! A citizen admonishing monetary authorities “to meet secretly”, “perhaps between Christmas and New Year, to start discussions... (to avoid spooking the markets)” Has Gartner not heard about gate-crashers, twitter and facebook?

November 27, 2009

If all the bright students went to Wall Street… who became the regulators?

Sir Avinash Persaud declares “risk is a chameleon” and then describes many absolutely perfect reasons why no one should build a bank regulatory system centered around capital requirements based on perceived risks; all this reasons perfectly ignored by the regulators, “Boomtime politicians will never rein in the bankers” November 27.

Having often in serious jest forwarded the idea that perhaps bank capital requirements need to be higher for what is perceived as risky since that perception could introduce pro-cyclicality and carelessness into the system I fully agree with Persaud’s comments on risk.

Persaud also asks “why the universities and press, falling over themselves to kick bankers today, did not play a more effective counterveiling force” hindering the bankers from capturing the regulators. To phrase that question one has to assume the expert PhDs and expert reporters really knew what was going on, but seeing that so many of them are still not capable to free themselves from the paradigms they bought and wake up to the real facts, that might not really be the case; which is of course even more unfortunate for us all. They say that all the bright students went to Wall Street… if that’s true, then who stayed at the universities, who went to the press and who became the regulators?

November 20, 2009

The mother of all the systemic risks is believing that the systemic risks are under control.

Sir if systemic risk is strictly defined as the issue of institutions being too large for a financial system then I fully agree with William Donaldson’s and Arthur Levitt’s “Tackling systemic risk is no job for the status quo” November 20. But, if we by systemic risk also mean the risks that can be introduced to the system, then I would not want to see a “systemic risk oversight board” (SROB) be in charge of it, precisely because of the systemic risk that the belief that systemic risks have been controlled represents.

Have the regulators not learned their recent of what happened to them so recently when they appointed the credit rating agencies as their sentries, and then went to sleep? Don’t the regulators know that they were the ones who introduced the systemic risk of having the system believe that default risks were accurately measured?

I completely understand the proposal, but the answer is no!

Sir Martin Wolf’s wish to “Tax the windfall banking bonuses” November 20 is such an honest and truly understandable “populist” proposal that it makes us fret what lies in store for the world. In essence it signifies that governments should have the right to claw back in taxes any earnings that resulted from any government largesse. I can already hear future taxpayers lining up the arguments for not having to pay their taxes and asking instead the taxman to go after the neighbour who received an indirect untaxed interest subsidy on his mortgage. Is not this the mother of all slippery slopes?

And then also remains the issue... should a "confiscatory" tax like the one proposed be applied retroactively?

If I, on the spot, must venture an alternative proposal I would prefer decreeing that any compensation in excess of a specific amount, paid in the financial sector, or in a company that has received government support, can only be paid out with shares that are non-tradable for ten years. That I believe would better help to realign the incentives to work for all of us.

If not already here, high-octane populism is waiting for us around the corner, so whatever we can do to postpone or dilute it the better.

The taxes not yet paid might remain unpaid tomorrow

Sir Gillian Tett is absolutely correct on that the rhetoric on the taxpayer footing the bill for the banking crisis is wrong in the sense that no taxpayer has yet done so, “Can today’s philanthropy fend of future bank-bashing, November 20.

But when she in that respect suggests the bankers to prepare themselves for tomorrows bank-bashing she forgets that those who really will face the possibility of some true bashing are those trying to collect those taxes. From what little stress-testing I have been able to do of the willingness of the taxpayer to pay up for this crisis, my feeling is that those taxes are going to remain uncollected.

November 19, 2009

For jobs, the US also needs to eliminate regulatory discrimination against job creators.

Sir you write the “US needs fiscal action on jobs” November 19, but that won’t suffice. It also, urgently needs regulatory action on jobs. As is, the US is still, like other countries, through the capital requirements for banks based on perceived risk, actively discriminating against those best positioned to provide new fiscally sustainable jobs, namely the entrepreneurs and the small businesses

How many ounces of gold richer am I?

Sir when reading Gregory Meyer and Henny Sender report that “Paulson starts gold fund amid record prices” November 19, and all of the rest noises or sounds on gold, I cannot but help questioning how long it is going to take before we ask our private investment bankers inform us not only of the returns produced in dollar or euro terms, but also of the returns measured in ounces of gold.

November 18, 2009

But FT and the experts can’t stop themselves from admiring the “emperor’s clothes”.

Sir Peter Dunkley refers to “published intellectual nonsenses that were later to become the bank risk capital rules” and splendidly analyzes the new industry in regulatory arbitrage that resulted from these. “Another flawed idea – but regulators might be convinced” November 18.

This, which is great writing from an economics teacher in a college in Switzerland, stands in stark contrast with the way that for all practical purposes the Financial Times and other “experts” still seems to be in awe of the “emperor’s clothes” of the Basel Committee.

November 16, 2009

Financial Times, is not the City your home team?

Sir in “Gain the advantage” November 16 though you accept that London will still be an important centre you are certainly not cheering up what I expected would be your home team. The arguments you give of stricter global regulations and the concerns of being at the mercy of fickle finance for tax revenues have little to do with the international importance of the City.

I am not a Londoner but if I was I would be cheering the city asking it to forget Basel with all its stupid anti-risk biases and ask my banker to look into themselves and bring out again all those merchant-bank instincts and traditions that made the City great to begin with.

If there was ever a moment for professional risk-taking bankers this is it!

It is a great plan but what about its implementation?

Sir in “Gain the advantage” November 16 you analyze what could take the place of finance in Britain and you suggest world-class education, avoiding punitive taxes on business and helping new businesses to flourish. What a plan! Unfortunately I guess most countries will develop a similar strategy but very few will really achieve the results that make them stand out. What would you suggest in terms of implementation? Or is this a trade secret?

November 13, 2009

Ethics is also about not preventing financial crisis at any cost

Sir Philip Booth in “Ethics alone will not prevent financial crisis” November 13 asks: “If I can make a few million from a securitization – is that creating a dodgy financial product to generate fees for the bank or does it reduce mortgage spreads for poor homeowners?” In some cases there can be no doubts.

In a business based on convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with a little help from the credit rating agencies, reselling that same mortgage in a securitized version to risk-adverse Fred in $510.000 yielding him an expected return of six percent, and pocketing as a result of it profit of $210.000, anyone should be able to understand that some sort of foul play was involved somewhere.

And in reference to the title of Booth’s article we should also never forget that preventing financial crisis from happening might be just as unethical, if with that prevention we stop society from taking the risks it needs to move forward. In this respect the current bank regulation which determine the capital requirements exclusively on the basis of perceived default risks, are, simply put, very unethical.

November 12, 2009

This is a very untimely moment to force the rebuilding of bank equity

Sir often when I mention the impact of the Basel II regulations many observe that they were not really in effect, completely ignoring that just the announcement of these regulations, and especially their approval by the G10 in June 2004 immediately led the financial sector to initiate adapting to them.

When Caitlin Long writes “Wall of US maturing debt threatens to extend the crunch” November 12, she somehow seems to ignore that much of the effects of all the speculative quality debt that is coming up for refinancing in the next years are already here, which is one of the reasons why regulators should not wait to lower the capital requirements for this type of BB+ or below rated debt.

Capital requirements should be increased in a pro cyclical way when times are good and reduced when times are bad. It does not really help to rebuild insufficient capital reserves at the wrong time… that will just make the capital reserves even more insufficient.

November 11, 2009

Solipsism is an endemic condition in oil rich Venezuela

Sir your “Bolivarian bully” November 11, is completely right in all except the subtitle where you mentions “chávez´s 100 years of solipsism” Indeed we agree in that chávez is a particularly bad case of extreme egocentrism, but the real truth is that Venezuelan solipsism is rooted in the centralization of the oil revenues and that it therefore affects all our governments whenever oil prices are high.

The centralization of oil revenues is what has made it so hard for the opposition to develop an alternative to chávez, since in a rent seeking society the important factor is not who spends the best but who seems to care the most about you, and in this chávez has been a truly formidable politician.

Venezuela´s Berlin wall will only fall the day the citizens manage the will to take away the oil checkbook from their local solipsistic tropical sheiks.

To get the real jobs you have to also be willing to take on the real risks on main-street.

Sir Jeffrey Sachs in “Obama has lost his ways on jobs” November 11, makes very clear and relevant observations, from a central-planners point of view. That said there are many other difficulties on main-street, and these should not be forgotten. Our real job creating machines, the small businesses and entrepreneurs, are being crowded out from access to bank credits, while the banks are rebuilding their capitals, and the financial regulators, even while they were so recently cheated, insist on their love affair with what they think are “low-risk clients”.

When banks lend to a triple AAA rated corporation they are required to hold 1.6 percent capital but, when they lend to a BB+ or lower rated risk or an unrated entrepreneur, the banks are required to hold 8 percent, in other words 400 percent more capital.

The difference of 6.4 percent in bank equity, if the cost of bank equity is 15 percent represents about a one percent regulatory tax on perceived risk, and which has to be added on to whatever interest rate spreads the market already charges for perceived risks. This, unlawful, discrimination against risk, is something that Jeffrey Sachs would do well to add on his list.

Please reprint this article once a month.

Sir John Kay´s “Powerful interests are trying to control the market” November 11, should be obligatory reading for voters and policymakers alike. Please consider reprinting it about once a month, as the truths therein exposed are so swiftly forgotten, not the least by people who knows and believes it all to be the truth, John Kay and me included.

Social engineering

Sir I also belong to those who like Martin Wolf have a special relation with the cold war and it might be very difficult to transmit its real meaning to those born after the fall of the Berlin wall.

With respect to Wolf’s “Victory in the cold war was a start as well as an ending”, November 11, I have two comments.

The first is that we need to pray for that the size of the recent “piecemeal social engineering” and by which the government supported the markets, was not too big a piece, so that we will not choke on it. I do feel it could have been fed to the market in more nutritive and digestible forms.

The second comment is to remind Mr. Wolf that the most recent “utopian social engineering” to hit us, was when the financial regulators thought they should and could drive risks out of the banks.

In order to keep the lights on you need to reduce capital requirements

Sir Daniel Schäfer in “Keeping the lights on” November 11, writes “Bankers say that there is a time bomb ticking that could explode next year, when banks, already under pressure to deleverage, may be tempted to cut credit commitments on the back of companies presumably dire 2009 results”.
It is precisely because of that highly countercyclical “pressure to deleverage” that I am begging for the financial regulators to urgently decrease the capital requirements for all those BB+ or lower rated, or unrated, and that having in no way been the source of this crisis are now the most castigated by the need to rebuild the equity of the banks.

November 10, 2009

I dare you to think about the horrors of a world with no bubbles.

Sir Frederic Mishkin wrote “Not all bubbles present a risk to the economy” November 11. I go one step further and hold that it is the absence of bubbles that would drive the economy into the ground, in just a few decades, and that what most drives the economy forward is precisely the probability of finding yourself a nice little bubble to float up on.

I dare you at FT to think about the horrors which a world with no bubbles would imply. Ah you want controlled bubbles? Are you going to use bubble rating agencies for that? Good luck! What I want are financial regulations that do not discriminate against risk and that are willing to risk the bubbles instead of embracing the certainty of staying on ground or even underground.

I do not want the regulators worry so much about the crisis, but instead worry about how to increase our possibilities that the bubbles takes us somewhere we want to go.

Recovery Inc.

Sir in “Dodging the graft”, November 10, you discuss the needs to strengthen the UN Convention against Corruption, because it still lacks teeth.

In Washington in September 2009 in a conference titled "Increasing Transparency in Global Finance: A Development Imperative.", organized by Task Force on Financial Integrity & Economic Development Lord Daniel Brennan QC outlined the Caux Round Table's initiative to develop a private recovery agency for registering, recovering, and restoring corrupt assets. How about that for teeth?

I immediately saw in front of me a corporation listed in the New York and London stock market called Recovery Inc and therefore published soon after an article in Venezuela suggesting to do the same on a local basis, in order to take advantage of our very favorable market conditions and ample supply of inside knowledge.

Lord Daniel Brennan´s conference:

November 07, 2009

Send Sigrid Rausing to speak to the Basel Committee

Sir your Life & Arts section carries an interview of Sigrid Rausing by Isabel Berwick, “Discreet charm of the super-rich”, November 7. In it Rausing declares “Risk avoidance is the real risk” and thereby proves herself to be a more worthy financial regulator that all those whose misguided risk avoidance pushed the financial system to search excessively for the triple-As. Look where that got us! The Basel Committee wimps, even after proven so wrong, are still incapable of understanding that their role is to develop prudent and intelligent regulations that support the risk-takers instead of building up a false sense of security that lulls and numbs investors and savers alike.

When in the interview we also read Rausing discuss how equality and human rights issues have been allowed to confuse the relations between employer and employee, clearly for the detriment of all, and then says “There’s got to be another way” she also shows an openness and willingness to changes and challenges that our current financial regulators, buried under their own paradigms, would benefit from.

Would it not be an incredible learning experience for the regulators of the Basel Committee to have to sit down, for at least an hour, and listen to the opinions of people totally unrelated to the financial sector, like Sigrid Rausing? With luck, that could help to get them out of their current incestuous thinking mode.

It suffices to read the recent report on financial regulations submitted to the G20 by the Financial Stability Board to know they do need it, urgently. The reports is all about stability and higher capital requirements, and nothing about how to finance the risk taking entrepreneurs who are the only ones really capable of giving us the real and sustainable jobs the world needs. As usual they don’t care an iota of what happens with the rest of the world as long as their banks are stable... and then they dare to talk to us about moral hazard?

Note: Most recent background material
A YouTube on the taxing of risks in the Home of the Brave
An article in Martin Wolf’s Economist Forum
My “conspiracy” site

November 05, 2009

In trade and carbon, though borders do not matter, distance does

Sir Angel Gurría is right in that “Carbon has no place in global trade rules” November 5, when referring to what happens on the borders. That said carbon has a very real place in trade, when considering the distances and means by which that trade has transported. If the concerned world which will be meeting in Copenhagen does not affect trade, then it is clearly not concerned enough or simply irresponsible. In fact, a stiff carbon tax on transport, might be just what the doctor ordered to revive all those local and otherwise inefficient jobs that have been lost earning the benefits of trade.

The regulator should regulate not discriminate

Sir Dirk Bezemer in “Lending must support the real economy” November 5, points in the right direction, but yet fails in connecting all the dots. When a bank lends to the really real economies, the unrated or BB+ and below rated clients, it is required to have 8 percent equity, while, when lending to or investing in anything related to an AAA rating, then the bank gets off the hook with only 1.6 percent in capital. This signifies a de facto subsidy to those who least need the support and, in relative terms, a tax on those who most in need of support. Therein resides the fundamental equivocation of the current bank regulations designed by the Basel Committee.

While the banks are having to rebuild their capitals to make up for all those “no risk” AAA rated operations that went gone wrong the real economy, we have to see to that the really real economy is not crowded out from access to bank credits. In this respect I am doing what I can to pro-bono lobbying in favour of temporarily reducing the capital requirements for banks, when lending to unrated clients or to BB+ and below rated clients, to 4 percent; and that later, once out of the woods of this crisis, when capital requirements are further strengthened, the capital requirements are the same for all type of access. A regulator is there to regulate and not to discriminate.

November 04, 2009

It is indeed hard to find the right moment for sacrifices

Sir in “Private behaviour will shape our path to fiscal stability” November 4, Martin Wolf tells us that it “would have been a monstrous blunder” to lower the private sector surplus through an adjustment that destroyed private income, but also, that not to do so, is a case of “adjustment postponed” which leads to a surge in leverage and new bubbles. I guess it is all about balancing the need for finding the right moment to quit smoking with the fact that once in your grave there is no such need... and so the closer to the grave the higher the incentives for a postponement.
Is this not really a case of this generation of baby-boomers against next generation of baby-boomers?

November 02, 2009

You can’t explode a bubble and have it too

Sir are we in the future going to have to read Nouriel Roubini’s “The mother of all carry trades faces an inevitable bust” November 2, as another example of how we were warned about the risks? I hope not. First because it does not contain a single word about the what-to-do and also because it ignores that all traders, though aware that yesterday’s results has little to do with tomorrows, just in order to make a living, need to keep the dancing halls open and the public dancing.

In comparison, Wolfgang Münchau’s “We must not be too late with starting the Big Exit”, and which calls for starting to increase the interest rates in the US, is a more valiant effort to face the sad truth that you can’t explode a bubble and have it too.

October 28, 2009

Is there no cost in avoiding bubbles?

Sir though I agree with much of Martin Wolf’s “How mistaken ideas helped to bring the economy down” October 28, I have serious difficulties on understanding how one should be implementing the bubble-busting. Are the regulators now going to appoint bubble-measurers? Are we going to have these assets bubble-meters being showed off in Times Square?

Much the same way it sounded so utterly reasonable to have the credit rating agencies influence how much equity banks should have, and look where it led us, this reasoning assumes that a bubble is a bubble and that there are no risks derived from pre-announcing that a bubble will not happen. And what if the prime motor of development is the belief in the possibilities of the next bubble? If we eliminate ex-ante the possibility of a bubble will some then just stay in bed while other countries with no qualms about crisis go forward?

If there is something truly lacking in the current discussion on regulatory reform is the appreciation of the good things that come with risk-taking and now, the good things that come from bubbles.

Me, I would love the world to keep on taking risks- and blowing bubbles even at the cost of suffering huge setbacks as long as that takes us forward. Because of this, more than worrying about where the next precipice might be, I would try to make much more certain we are heading in the right direction. Others, on the contrary, seem to be satisfied with what they have achieved and settle for keeping it.

The regulators did indeed cause this crisis, with their faulty regulations

When in 2002 I arrived from Venezuela, where I had never been assaulted, to Washington DC, in less than 48 hours I was thrown to the floor at handgun point and robbed of my wallet. When I asked the police officer who had helped me to my feet “is this not supposed to be a safe area? he answered “yes, you are right, and that is why these bad figures need to come here to steal”.

If the police had told some neighbourhoods in London that just because they were safer they could lower the guard and leave the doors open and some disaster had ensued, it would surely have been blamed. But this is exactly what the bank regulators did when they authorized the banks to a 62.5 to 1 leverage as long as they were lending or investing in AAA safe areas.

So therefore when John Kay in “Too big to fail’ is too dumb to keep” argues that “the claim that regulators caused the crisis is a ludicrous as the crime due to the indolence of the police” he just shows he has no idea of what happened. 99 percent or more of those losses that detonated this crisis can be traced to this regulatory naïveté. Just for a starter the AAAs of AIG would not have the same value.

The problem we have is that so many are trying to use this crisis to push their particular agenda, which often requires a blatant disrespect for what really happened. Mr John Kay, a true baby-boomer, in the “Après mois le deluge” sense, wants us now to have narrow banks which refuse to underwrite risk-taking, as if society can prosper with non-risk taking banks.

And, by the way, since I am one of the very few who has spoken out loud and publicly against the “too big to fail” before the “too big” started to seem as failures, this is by no means a defence of them.

October 24, 2009

We must urgently, temporarily, lower the capital requirements for BB+ and below.

Sir John Dizard’s “The real reasons why banks are remaining reticent on lending” October 24 marks, from what I have seen and not withstanding my hundred of letters on the subject, the first time that anyone in the Financial Times gets involved with the real fundamental flaw of our current bank regulations, namely how it discriminates among different risk categories.

Welcome FT, better late than never!

Dizzard writes “The banks still want to lend but the desired business is now triple B or better [which in essence requires a capital of four percent]… Unfortunately, even using 2007 standards and data, perhaps half of their book was double B and below [which requires 8 percent in capital]”

And that is why, knowing for sure that those most able to create jobs and provide for fiscally sustainable growth are the entrepreneurs who usually live in the BB+ and below area, I have been on my knees begging for the temporarily lowering of the capital requirements on these loans to only 4 percent; while the banks are busy rebuilding their capitals in order to take care of all the perceived low-risks that turned into real high risks.

We would not want to crowd out our possibly savors in order to provide room in the lifeboat for those who got us in the mess, would we?

October 23, 2009

The FSA got to be kidding

Sir Brooke Masters reported in “UK regulator sees growth in banks capital having extra capital” October 23, reports on the recent Financial Services Authority Discussion Paper on the Turner Review Conference and I could not find where the FSA said such thing. Nonetheless it might very well be so, in the very long run, but the road there is extremely difficult, and even the FSA warns that “too rapid increases in capital requirements will harmfully constrain lending to the real economy which is likely to have negative implications for the capital position of firms”.

But what saddens me most is that the only consolation for the real economy the FSA identifies is when following the previous quote they say “Capital enhancement through restraining cash bonus payments and unnecessarily high dividends will not have this harmful effect. Capital enhancement achieved by these means will contribute to whole system stability and confidence by speeding the pace at which exceptional government and central bank support measures can be withdrawn”.

Do they really mean that the real economy is now in the hands of reduced banker bonuses and reduced bank dividends? They’ve got to be kidding.

If there is anything that the real economy really needs now is for an immediate reduction in the capital requirements for the banks when lending to BB+ or below rated clients, there where the real economy normally lives, at least while the banks are rebuilding their capitals to cover for all those AAA rated operations for which the regulators only required 1.6 percent in capital.

Come on FSA, understand it, the banks are not are not even supposed to be into AAA rated operations… that should be the exclusive territory of widows and orphans.

October 22, 2009

Temporarily, we need lower bank capital requirements for the old “high risk”

Sir in your “Testing times for bank regulators” October 22 you argue that “rather than having regulators carve up institution and police an arbitrary border between ‘safe’ and ‘unsafe’ activities, setting higher capital requirements allows the banks to find their own way through”. With that, may I say at long last, you are addressing the worst fault in the current Basel bank regulations, namely the fact that regulators have totally arbitrarily mingled with risk.

Now, on the way to higher capital requirements we must not forget that there are many borrowers that already pay the price of higher capital requirements and these, even though they might be the most important borrowers in terms of recovering from this crisis, will, as bank equity is scarce and expensive, now run a serious risk to be crowded out by all those other operations that previously enjoyed very low capital requirements.

Therefore, and even if it sounds a bit shocking, we need to temporarily lower the capital requirements for all which, perceived as riskier, already has higher capital requirements. In other words, while making adjustments for that “low risk” that turned out risky do not kill those high-risk who are not at fault and whose energy we now need more than ever.

October 21, 2009

Serious intentions or just a one night stand?

Sir Jonathan Wheatley and Alan Beattie in “Brazil taxes foreign portfolio flows in bid to stem exchange rate rise”, October 21, make a reference to the Chilean capital controls, and it is important to understand that these were of quite different nature than Brazil’s tax.

Chile’s capital controls, intelligently, wanted to make certain that the foreign investments flows wanting to go in into Chile, as pretenders, had serious long term intentions, and were not just looking for any one night affairs. It was therefore based primarily on freezing the use of funds for one year, so as to assure a proper courting.

Compared to that, Brazil’s 2 percent tax, just raises the price of having an affair in Brazil. And what is 2 percent in these days of hedge-funds fees if the signorina is beautiful?

Il Cuckoo Supremo

Sir Martin Wolf in “How to manage the gigantic financial cuckoo in our nest” October 21 fails to mention the cuckoo-est cuckoo in our financial nest, the financial regulators, those caretakers who came up with the idea that the best therapy for calming down the patients was to have them play safe games, assigning these lower capital requirements, which altered the normal routine of the asylum and started that crazy and finally so devastating race in search of some AAAs.

Let the financial franchise owner charge the operators a percentage of their earnings.

Sir Martin Wolf in “How to manage the gigantic financial cuckoo in our nest” October 21 mentions “a ‘windfall tax’ or special curbs on bonuses” but perhaps the starting point should be a ‘windfall tax’ on bonuses. The current real owner of the financial sector franchise, the government, should have the right to extract a windfall fee from those operating individual franchises, if that helps to improve operations and strengthen the public image of the whole franchise. That said one needs to be careful the tax does by means of netting, does not castigate those investing in the franchises, especially when you want to attract more capital to them.

October 16, 2009

Is Jacques de Larosière befuddled or just lobbying?

Sir Jacques de Larosière´s “Financial regulators must take care over capital” October 16, is either a perfect example of how trapped the regulators are in their own groupthink, or a simple lobbying effort on behalf of some European banks.

Larosière starts by rightly declaring “History shows that economic recovery essentially depends on the existence of a strong and risk-taking financial system” but then speaks out in favour of higher capital requirements for banks the higher the risks as “it is the quality of the assets of a bank that matters more than its leverage”; and writes that “imposing a non-risk based leverage ratio could entail serious negative, albeit unintended consequences.”

Well the market already charges for risk though interest spreads and so any additional risk-adjustment, for instance by means of different capital requirements, amounts to an arbitrary intervention by the regulators in favour of what they might consider low risk and quality, but which might have absolutely nothing to do with what the economy really needs.

If we want an example of how “serious negative, albeit unintended consequences” that regulatory mingling with risks could have, it suffices to look at the current crisis with its low capital requirements for the huge exposures to “non-risk” AAA rated operations. And besides, the “quality” of a financial asset is not a function of risk, but a function of its risk-reward relation.

If we are to have banks capable of taking the risks the economy needs to recover, then the first thing we need is for the regulators to stop from arbitrarily interfering with the risk allocation mechanisms of the market. If this signifies special transition problems for the European banks, as Larosière indicates it could, let us solve that by other means than defending and conserving the worst element of our current financial regulations.

October 14, 2009

We´re stuck in an unsafe to be dollar safe-haven, most probably waiting for the Dollar II.

Sir Martin Wolf writes that “The rumours of the dollar´s death are much exaggerated” October 14, but the discussions have really been about who could take over some of the dollar´s job so that it would not die of a heart attack. And the dollar´s job is not an easy one, as it has the USA suffering from the curse of exporting safe-haven permits, which creates few jobs of that sort the world likes to qualify as “real sustainable” jobs, while importing products produced by real jobs abroad.

Will the dollar suffer the agony of a slow death or fade away like a soldier? Not likely, once the rumour of the safe-haven is having become dangerously overcrowded starts, death will be swift. Strangely though, as things currently stand, the most likely heir of the dollar would be the Dollar II.

October 12, 2009

The US suffers from the safe-haven curse

Though both Roger Altman “How to avoid greenback grief”, and Wolfgang Münchau “The case for a weaker dollar” October 12, are very right in their comments they are, for the time being, sorry to say, somewhat irrelevant.

The US is currently suffering from a safe-haven curse, which has the world buying dollars not really because of monetary parameters but more as parking permits to what they perceive is one of the few safe havens to whether out the storm. All of us who come from resource cursed nations, in my case Venezuela, know how difficult it is living with a curse, not least the fact that even though we know those resources are finite, and investors will wake up one morning suddenly thinking the dollar safe-haven to be unsafely overcrowded, there is little to be done until that happens. Just like no one stopped until they had chopped down the last tree on Easter Island.

But, having said that, let us not forget that, on the positive side, once the curse is lifted, a lot of new opportunities arise and so we do not necessarily have to be so pessimistic about the future of the US.

On a separate issue I would also recommend Mr. Altman that he performs a stress test on the willingness of the US tax payer to pay for the current public debt being contracted; he might find it even weaker than the current outlook for US consumer spending.

When in doubt just announce a Nobel Peace Price Objective

Sir personally I am convinced that Obama got the Nobel Prize for Peace by default since the committee could not really find someone else. That said I would not suggest for Obama to return the prize as Clive Crook does in “It is too early to land Obama – or to be disappointed” October 12, as that would be an unnecessary slap in the face of the Norwegians who must find themselves going through much pains anyhow trying to come up with a worthy winner each year. May I suggest to them the following alternative?

Those years when they do not find thee natural candidate why do they not declare an objective and that if accomplished would automatically give right to a Nobel Peace Prize sort of placing the carrot more explicitly before any possible candidates. As is it is not really sufficiently clear whether Obama got it for past or future achievements.

We need more responsible regulators too

Sir Paul Myners writes “Regulators can limit risky activities by making them less profitable, by requiring increased capital...” “We need more responsible corporate ownership” October 12.

A better way to phrase the above in view of our recent disastrous experiences would be “Regulators should not incentivize less risky activities, making them more profitable, by requiring less capital”. And so it is clear we need more responsible regulators too, those who know that tinkering with risks is a risky affair.

October 09, 2009

Slow the dance but do not impose the tune

Sir Chrystia Freeland ends “Investors had little choice but to keep dancing” October 9 asking for “a more powerful regulator to be established with the authority and courage to slow down the music for everyone” and this absolutely correct. But in doing so we need to avoid by all means that the regulator chooses the tune to which the markets should dance.

I say so because the current crisis resulted from the Basel bank regulator wanting the market to dance slower and, using capital requirements based on risk, induced it to take up some slow low risk waltzes instead of fast polkas or emotionally laden tangos and which led the markets into the arms of the dangerous AAAs.

By the way there are still two dance halls open and that many feel should be closed but which proves something impossible to do while the music plays. One is the dollar, where investors all know that one morning they will wake up find the safe-haven unsafely overcrowded, and a murderous panic for the exit will ensue, and the other is the public debt here and there and almost everywhere. Who is making the preparations for when these other two dance halls close down?

Most will not even wake up to the ‘silo curse’

Sir when Gillian Tett writes “Waking up to the ‘silo curse’ is far from the end of the problem” October 9 she is absolutely correct since the worse “silo curse” is the one we all carry in our own minds and which keeps channelling our minds towards the answers we feel comfortable with. For most the real problem is that they will never even wake up to it. And, among them, are many regulators.

October 08, 2009

Mme Christine Lagarde, the crisis demands we think things over more carefully, from scratch!

Sir who would disagree with Mme Christine Lagarde´s call that “The crisis demands we finish what we started” October 8, that is of course as long as it does not mean finishing us off completely.

Strangely enough, when Mme Lagarde rightly focuses on the issue of cutting unemployment, the first concrete results she points out is “150 tax information exchange agreements have been signed and the number of tax havens has been drastically reduced.” There is nothing wrong with fighting tax evasion but, what it has to do with job creation beats me, unless she is referring solely to the creation of jobs for public servants. The funds hanging around the tax-havens are not sipping cocktails on the beach but creating jobs somewhere.

Also in the same vein no one would disagree with her when she writes “we need to make sure that requiring banks to hold more and better capital does not hinder their ability to lend to individual and companies” but how can she then say in a congratulatory tone that “The Basel II framework for banking capital has now been accepted by all and the heads of states have committed to applying it to the most important financial centres by 2011.”? Is she totally unaware of that the Basel II framework sabotages the risk-taking needed to create jobs? And that many of us consider the Basel II framework as the main explanation for this crisis?

No Mme Christine Lagarde, the crisis, what it really demands, is that we think things over more much more carefully, from scratch and without being stuck in the past.

Risk avoidance is an extremely risky business

Sir surprised I read Mr. Stuart M Turnbull´s and Mr. Lee M. Wakeman’s whishing that “the rating agencies published and kept current, term structures of survival probabilities [so that] investors would be able to compare directly the risk of default for various maturities across corporate and municipal bond markets”, “Investors value accuracy ahead of stability” October 8.

Since presumably the whole market, and not only these two gentlemen would have access to this information, have they not given a thought to what this would do to the risk-weighted returns they would receive? I will tell them. They would be condemned to absolute mediocre return rates, as the intermediaries will previously have sucked out any arbitrage profits there are… that is until the day the credit ratings get it wrong again, as they, being humanly fallible are doomed to, and that day they lose it all unless, they are again bailed out by their grandchildren picking up the tax tab.

Yes, the investor values accuracy and stability, but they also value the possibility of some special returns, just for them. If these two gentlemen believe there is even a remote possibility of regulating a financial market so that it will be just and fait to everyone, when all the rest is not just and fair, then they clearly belong among all the other naïve and gullible financial regulators out there.

October 07, 2009

Bumpy roads indeed!

Sir Martin Wolf writes that “Big bumps lie ahead on the road to recovery and reform” October 7. Though I sort of agree, on most, for me the biggest real bump for recovery is that of not knowing yet what kind of growth is sustainable, given the two bottlenecks of oil and climate change. Some countries could resume growing as if these constraints do not exist, but that might very well not take us where we want to go. Yes, we want to stimulate the world, but we also want it to take off in the right direction.

Then of course we have the problem with the monetary system, most particularly for the US, the exporter of the currency the world most trusts in lieu of other alternatives, and that therefore has to live with the safe-haven curse. All of us who come from resource cursed nations know there are serious difficulties living with a curse, not the least the fact that those resources are finite, and though we know that one morning investors might wake up finding the safe-haven unsafely overcrowded, there is little to be done until that happens. Just like they could not stop until they had chopped down the last tree on Easter Island.

But where I might disagree completely with Wolf is when he quotes Andrew Smithers arguing to “force banks to raise the needed capital and if they cannot, let government provide it” if with this he implies he believes public bank capital is the same as private bank capital. What we most need in term of reforms is to eliminate any bureaucratic interference with the risk and capital-allocation mechanism of the market, like those of the minimum capital requirements for banks based on perceived risk of default. What is most needed, especially in the “comfy” countries, is for a banking sector willing to take risks on those few willing to take risks.

October 06, 2009

UK adopts a marker put down by Argentina

Last year Argentina´s Cristina Kirchner nationalized 10 private pension funds arguing it was “necessary to protect retirees in the global financial crisis” We know different, she needed the money to feed the government coffers.

And so today when Brooke Masters and Patrick Jenkins report on the UK regulator announcing rules that “could require UK banks to increase their holdings of high-quality government bonds” we cannot but reflect over how in this small world you never really know who influences who. “FSA puts down a global marker” October 6.

October 05, 2009

Timothy Geithner should start by increasing the capital requirements for banks when lending to the government.

Sir Krishna Guha in “Bankers´ pleas on rules rebuffed , October 5, reports that Timothy Geithner said of the banks “These are the institutions that told the world and told the shareholders and told their creditors and told their customers they knew how to manage risk and that they were better at this than their supervisors were ever going to be”.

Does Mr. Geithner really believe that the supervisors will ever be better at managing risks than the banks? Is he suffering from amnesia? Has he already forgotten that it was the minimal capital requirements which the regulators authorized the banks to have whenever the regulator´s own outsourced credit risk supervisors, the credit rating agencies, awarded their AAAs which detonated the crisis?

Of course regulatory overkill is a risk for a recovery which urgently needs risk-taking to awaken. Nonetheless if Mr. Geithner needs to show himself off as a real regulatory macho man why does he not increase the capital requirement for banks when lending to his own government?… it is currently zero!

Or does Mr Geithner also believe that public bureaucrats are better at taking investment decisions than their private counterparts?

AAAs proved more dangerous than “junk”

Of course real disasters are more prone to be found in sectors perceived as less risky than those thought as more risky, if only because when entering the latter we are all more careful.

Having said that though reading Michael Milken, who was known as the Junk Bond King, telling the world now that “investors will lose more money on AAA credits than on any other rating category”, is a wonderful reminder of how little we really know about risk and cosmic order, and it should hopefully help to humble some regulators.

As for me, in the title of his article “Prosperity rests on human and social capital”, October 5 I would have loved for Milken to also have included in the title “and the willingness to take risks”; so as to help make clear that we are running risks when allowing our bank regulators to impose special taxes on perceived risk.

October 02, 2009

More stars for a more stable triple A?

Sir when the president of Standard & Poor’s, Deven Sharma writes that the credit “ratings should not be used for purposes for which they were never designed”, like “hardwiring” prudential regulations around them, we can only ask… why did he wait so long to say that? Investors require consistency when it comes to credit ratings” October 2.

And when Sharma mentions the investment institutions want “credit ratings to be relatively stable” and that he intends to satisfy such demand by an “initial lower rating” of any security “more prone to a sharp downgrade in periods of economic stress”, we can only think of a chef developing some ratings a la carte, in order to earn more stars on some Michelin guide.

October 01, 2009

Should Snow White have known the apple was toxic?

Sir in “Shining a light on bank´s deep hole” October 1, you write about “bad bets on risky assets”. What risky assets do you refer to? To those AAA rated securities that carried so little risk that the regulators only required the banks to hold 1.6 percent equity against them?

When Snow White was offered the apple, was she supposed to have known Queen Regulator´s helpers, the credit rating agencies, had poisoned the apple?

Please free us from imprudent risk-aversion and give us some prudent risk-taking.

Published in FT's / Martin Wolf's Economist Forum October 1, 2009

There is not one single reason to believe the world would be a better place because our financial regulators provide additional incentives to those who, perceived as having a lower risk of default, are already favored by lower interest rates, or punish further those who, perceived as more risky, are already punished by higher interest rates. In fact the opposite is most likely truer.

According to the bank regulations of the Basel Committee, the global standards setters for much of the world, if a bank lends to an unrated corporation then it must hold 8 percent in equity but, if lending to an AAA rated client, then only 1.6 percent will suffice. The difference between 1.6 and 8 percent, 400 percent, given the high costs of bank equity, carries a substantial cost that increases the premiums on risk; something which also confuses the markets risk allocation mechanism. And, by the way, you better sit down; the capital requirement for lending to governments is quite often zero!

The debate of the current financial crisis ignores what really hit us. We still hear the most influential experts, Nobel Prize winners included, repeating over and over again the mantra of “excessive risk-taking”. How can they be so blind? This crisis did not detonate from financing “risky projects”, but from financing the safest of assets, houses and mortgages, in the supposedly safest of countries, the US, and using instruments rated AAA, which are supposed to carry no risk. 

This crisis resulted from some misguided and imprudent risk-aversion policies put in place by regulators by means of capital requirements for banks based on risk and the empowerment of the credit rating agencies, and who with their rating signs caused herds of capital to stampede over a subprime precipice. If we do not want to understand and accept this, how are we supposed to move out of this crisis and into a better future, something which, as human history has proved again and again, always requires prudent and sometimes even a dose of imprudent risk-taking?

I have been writing about this issue for a long time, to little or no avail, since the current financial regulatory system is founded upon an almost unbreakable paradigm created by regulators who are not at all interested in the big-scheme of things but who furiously concentrate on trying to live out their own small bedroom fantasies, that of a world without any bank failure... and as if a world without bank failures has to do with a better world. Actually, the more frequent bank failures are, the smaller the risk of a systemic crisis like the current. 

If you need evidence for the above, read the 347 pages of the bank regulations known as Basel II, where you will not find a single phrase that has anything to do with establishing the purpose for our banks. Regulators, when regulating, should you not start by doing just that?

In January 2003 the Financial Times published a letter were 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.” But, even though it were the mistakes of the credit rating agencies which detonated the crisis, and which were doomed to happen, the most important part to understand, and the hardest one to accept, is that the systemic errors for the world at large would occur even if the credit rating agencies had got their ratings absolutely right. 

Between 2002 and 2004, as an Executive Director at the World Bank, I did what I could to remind this development bank that risk is the oxygen of all development, but I was never really heard. The World Bank, forced to harmonize with Mr. Stability, the IMF, had been effectively silenced. Today, when there are renewed puritan screams against “risks” I hope that the World Bank finally comes to grip with its role and turns into a Champion of prudent risk-taking. The world needs it. Just as an intellectual exercise think of how much better off our children and grandchildren could be, had the trillions that were wasted on a useless housing boom in the US, been lost instead financing projects which adapt and mitigate for climate change?

As a note, in terms familiar to the development community, current financial regulations, by favouring the “lower-risk” that resides more easily in the rich and developed countries, and castigating the “higher-risk” more prone to be part of the poor and the developing world, helps to increase the inequalities and therefore the world’s Gini coefficient.

Dear baby-boomers, there is a world out there that needs a whole lot of risk-taking in order to stand a chance of a better future; a world which does not want to lay down and die in tranquility, just yet.

PS January 2016: What already exists is usually perceived as safer than what is to come; and so regulators have de facto imposed higher capital requirements for banks when financing the future than when refinancing the past.

September 30, 2009

Tame the tamers!

Sir John Plender’s “How to tame the animal spirit” September 30 leaves me utterly confused. What animal spirit does Plender refer to? That spirit which caused trillions to invest in AAA rated securities that offered a couple of basis points more or those who leveraged their investments in AAA rated securities because the regulator allowed them to do so by requiring ridicule small capital requirements on these?

As I see it those we really need to tame are the tamers, and in fact, looking at the global challenges the world needs to confront, perhaps we could benefit immensely from a little bit more of that old fashioned real animal spirit.

September 28, 2009

The wrong lessons learned.

Sir Martin Wolf ends his review of Carmen Reinhart’s and Kenneth Rogoff’s book “This time is different” with “Crisis will always be with us. But maybe this realization will reduce their frequency”, September 28.

Why is that Mr. Wolf? That seems to be the wrong lessons learned. I would hope this realization would lead us in a complete different direction of where the Basel Committee is taking us, and instead make us increase their frequency so as to try to reduce their magnitude.

On our own

Sir flooding can occur because excessive waters overflows the levee, which is what Wolfgang Münchau is most concerned about; or because the levee breaks down in a point and channels too much water to one single place, as occurred when the AAA ratings opened a whole and the subprime mortgages sector was drowned, and which is what I have been more concerned about.

Today Münchau, in “At last, recognition of the deep roots of the crisis”, September 28, sounds like an ignored child who finds great consolation in that his mother has at least noticed him. As one of the subjects of Münchau’s jealousy, one who received too much attention as the “world’s most powerful leaders [were] obsessed with the minutiae of banking regulations, let me inform him that the sad truth is that mother’s attention wavers from one to another of her sons, not because of love for both but because she has not the faintest idea of what to do, and prefers thinking of the crisis like a measles that will just go away on its own.

Meanwhile, Brother Wolfgang, the levee is still exposed to disasters, of both kinds, and we are still on our own.

September 26, 2009

There is a not so secret “low-risk” leverage-enrichment facility in Basel.

Sir excuse me if I insist on it but after some hundreds of letters to you, I am still looking for the words that could help FT understand what was really the origin of the current financial crisis and why we will not be able to get out of it without getting rid of a paradigm that has chained our financial regulators, that of having the capital requirements of our banks depend on risk-weights.

Henny Sender in “Washington is the cheerleader but sentiment remains fragile” September 26, quotes a private equity executive saying “CDO´s destroyed prudent lending in America. It was like a nuclear bomb to good lenders”. What does prudent lending mean? Shying away from risks? No! Prudent lending means investing according to your risk tolerance and getting the right reward for it. In this respect prudent lending should have its own financial returns and not returns derived from arbitrarily set lower capital requirements.

What is the worth of one dollar invested in an operation perceived as having a higher risk? One dollar! What is the worth of one dollar invested in an operation perceived as having a lower risk? Also one dollar! Then how on earth can anyone sustain that a dollar lent to a BBB+ to BB- rated corporation is worth one dollar, while a dollar lent to an AAA to AA- rated one only represent 20 cents? Well this is exactly what the regulators did with their capital requirements for banks based on default risks and as assessed by human fallible credit rating agencies.

When a bank invests $1.000bn dollars in anything related to an AAA then that is subject to an arbitrary risk-weight of 20% and so the “risk-weighted assets” are reported as only $200bn, leading to low reported bank leverages, and which after a short while fooled even the designers.

And this is what has been produced in the not so secret “low-risk” leverage-enrichment facility in Basel and that has been proven to be so explosive and that I have been describing in

Sir it is so unimaginably risky to fool around with risk. Please consider that even if all the credit ratings had been absolutely precise, the world could still go so very wrong, as nobody in his sane mind will hold that the world’s future lies so much in areas perceived as having low financial default risks, that the investment in these areas have to be given especial incentives.

Friends, we need to urgently rid ourselves of regulators that can only dream about a world without bank defaults and put in their place regulators that dream of a better world, and who know that in order to reach such a world you have to learn to embrace risk… in a prudent way.

The world has had more than enough with this imprudent prudence!



September 25, 2009

Why don´t Europeans agree first...they seem worlds apart!

Sir Peer SteinBrück, the German finance minister, in “A tax on trading to share the costs of the crisis”, September 25, proposes a tax on financial transactions of 0.05 percent that could “yield up to $690bn a year.

But, Bernard Kouchner, the French minister of foreign affairs in “A tax on finance to help the world´s poor” September 17, he spoke about a tax of 0.005 percent that would “raise €30bn”.

Why don’t the Europeans agree first among them what they want to propose to the world? Now, they seem worlds apart.

That said before any tax of this sort, the world´s poor, and most of the rest of the world, would benefit more from taking away that financial tax that the current capital regulations for banks represent in that, above of what the market already charges for risk differentials, it creates arbitrary costs, far from minuscule, that directly taxes those more prone to be considered as more risky, like the poor and the development countries.

September 24, 2009

Mr Zoellick, as the president of the World Bank, has an even more important issue to bring up in Pittsburgh.

Sir Robert Zoellick, the president of the World Bank, makes an inspired call for that “Pittsburgh should be a turning point for the poor” September 24, 2009.

Sadly, and though it should be the prime responsibility of a development bank to draw the attention to the issue, he completely ignores to mention that current bank regulations introduce an arbitrary regulatory bias in favor of the rich and the developed, and against the poor and the developing. This is so because the capital requirements are based on perceived risk of defaults as measured by credit rating agencies, and we all know where these perceived risks tend to live.

For example if a bank lends to an AAA rated sovereign it is currently required to hold zero percent in capital and if lends to an AAA rated private corporation only 1.6 percent, but when lending to a BB+ to B- rated sovereign or any unrated corporation it is required to hold 8 percent in equity. The significant different costs derived from these regulations, are to be added or deducted from what the markets would normally charge for financing different risk levels, and as a result these arbitrary regulatory interferences only makes the differences wider.

The World Bank should be the first one interested in putting on the agenda the fact that the world could have been better place had not some bank capital requirements empowered the credit rating agencies so much so that with their AAA could, over just a couple of years, mislead trillions of dollars over a precipice of financing a basically useless house price boom in the US.

The World Bank should also be the first one to remind the world of the fact that risk-taking is indeed the oxygen of any development and that therefore taxing it can prove truly disastrous for the world.

The regulators, thinking themselves Gods, misinform the markets and the experts

Sir, when is FT going to do an “Analysis” on what the risk-weights signify for the reported bank-leverages. The sooner the better, since that could save many experts (including some of your own) from making fools out of themselves.

Andrew Kuritzkes and Hal Scott in “Markets are the best judge of bank capital” September 24 quite correctly state that “We need to complement regulation with more effective market discipline. This requires better information”.

But, in their discussion of bank leverage and even though they mention the possibility that “capital requirements are imperfectly linked to bank-risk taking” they seem unable to realize that the reason the capital requirements relative to risk-weighted assets turned out to be so faulty, had nothing to do with the basic 8 percent level established, and all to do with the risk-weights used.

The use of arbitrarily set regulatory risk weights, like those which give only a 20% weight to an AAA asset misinformed the market and experts like Kuritzkes and Scott, making them all unable to understand what was going. The sooner we free ourselves from regulators playing Gods calibrating risks, as if they possess the whole truth on risk, the better.

Is it not more important to make sure we would want to send our banks flowers?

John Gapper in “Where there’s a will there’s a way” September 24 discusses the issue of having banks draw up their testaments, a will, so as to make their possible disappearance a more orderly affair.

Of course all that sounds so very neat and tidy and reasonable but frankly, before discussing their funeral arrangements should we not give a little bit more thought on how the banks are supposed to live their lives? I mention this since in all the 347 pages of the bank regulations known as Basel II there is not one single phrase, much less a paragraph that has anything to do with establishing a purpose for our banks.

September 21, 2009

Mr Caruana and his fellow regulators deserve months of humbling community service and being banned for life from any regulatory activity.

Sir when a previous member of the Basel Committee like Mr. Jaime Caruana says “Basel II is evolving” and was not a contributory factor to the crisis, and that “You don’t see a correlation with the adoption of Basel II and the difficulties” as is reported by Patrick Jenkins in FT on September 21, this is indeed an insult to our intelligence and to humanity.

Mr. Caruana is well aware that when the Basel Committee demanded from the banks a capital requirement of only 1.6 percent, which is equivalent to authorizing a leverage of 62.5 to 1, when the banks were involved with a client or a security rated AAA by the credit rating agencies, they set off a world-wide race in search of the AAAs; and which, over just a couple of years, led trillions of dollars over the precipice of the subprime mortgages in the US, and created misery for hundreds of millions of people all over the world.

The least Mr Caruana and his fellow regulators deserve, is six months of a very humbling community service and, of course, being banned for life from any regulatory activity.

September 17, 2009

Is regulation really rocket science?

Sir as is published in my “Voice and Noise” 2006, on May 2, 2003 at a Risk Management Workshop for Regulators at the World Bank, I said the following:

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And so when I now read William White´s “Some fires are best left to burn out”, September 17 I can´t but agree and since I see that he is a former economic adviser at the Bank for International Settlements, the home of the Base Committee, I would ask him whether he does not believe the regulators should not have been aware of all this, in a timely fashion… is regulation really such a rocket science?

Mr Bernard Kouchner, you better beguine by taking away the tax on the world’s poor.

Sir I do not believe that the markets´ capability to arbitrage away disequilibrium would be seriously compromised by a minuscule tax on financial transactions and so I do not oppose it, in fact I support it as “a time for a second thought tax” helpful for everyone. And of course I do not reject the idea of “A tax on finance to help the world´s poor” as argued by Bernard Kouchner, September 17.

That said let me be absolutely clear that the world´s poor, and most of the rest of the world, would benefit much more from taking away that financial tax that the current capital regulations for banks represent in that, above from what the market already charges for risk differentials, it creates arbitrary costs, far from minuscule, that directly taxes those more prone to be considered as more risky, like the poor and the development countries.

And so, Mr Bernard Kouchner, I would much prefer you forget your well-intentioned tax and instead eliminate your non-intentional tax.

September 16, 2009

John Kay is utterly lost!

Sir over the years I have often commented on John Kay’s articles, sometimes I have agreed, sometimes I have disagreed. But now I have been utterly disappointed discovering that Mr. Kay does not really know what he is talking about. In “Narrow banking can help protect the taxpayer” September 16 he writes “An 8 per cent capital cushion is inadequate as the amounts for winding up these banks will show”. Absolutely wrong! For those credits not perceived as risk-free and for which the banks took their ordinary precautions the 8 per cent equity requirement was most probably quite sufficient. What was highly insufficient was the only 1.6 percent capital requirement allowed by the regulatros for any operation involving an AAA rated security or client.

It was not the risky which provided the explosive material for this crisis but the not-risky, something that Mr Kay proposes we pursue even more, burrowing ourselves into narrow banks, so that once again we can feel the bliss of believing we are safe… so that once again we place ourselves further away from the risks we need to take in order to move forward.

No, Mr. Baby-boomer Kay, move over and let the future take over, even if it entails risks.

Madame Guillotine could be better than assisted euthanasia

Sir Martin Wolf is absolutely right when in “Do not learn the wrong lessons from Lehman’s fall” September 16 he writes that “No normal profit-seeking business can operate without a credible threat of bankruptcy”. But then he goes into some mumbling about living-wills and assisted euthanasia and though it sounds kind and gentle both these alternatives start when it might already be too late, and so we should not forget that what we could really require is for Madame Guillotine to enter swifter into action.

September 14, 2009

Even governments represent counter-party risks

Sir in “The legacy of Lehman Brothers” you write “Policymakers must own up to the fact that there are some institutions they can never credibly claim they will let fail. They must identify who they are implicitly backstopping so that they can charge a fee for that insurance” September 14.

This is indeed truly dangerous talk when what we need is for our regulators to be much more trigger happy, allowing bad institutions to fail; and when we know that the fees for such eternal life insurance would never be set objectively nor would it be set apart in a reserve, and so that, sooner or later, the final failure of any of these supreme institution, could bring the State down with it.

The economy does not need more government insurances than the ones currently awarded to individual depositors up to limited amounts, and to give more is counterproductive to the well-being of all of us, since an insurance is only worth as much as the insurance company is worth; and we do face a counter-party risk even when dealing with governments.

Not safer, better!

Sir once again in “The legacy of Lehman Brothers” you talk about the need of “a strategy for making finance safer” September 14 and you are wrong. What we need is a strategy for making finance serve our needs better. An absolutely failsafe bank can be an absolutely useless bank.

FT don’t be such a wimp. How can we get better regulations of the financial sector without, like the whole Basel regulations, speaking a word about the mission of the banks?

But be careful of not adding to the confusion

Sir it sounds so utmost reasonable what Joseph Stiglitz mentions in “Towards a better measure of well-being” September 14 that I guess no one would, in principle, argue anything different. That said, there is clearly room for a warning, especially with the recent evidence provided by the crisis, on what can happen when someone arbitrarily plays around with the numbers.

The regulators fed up with adding AAapples with Bbbananas as fruits decided to give the first a risk-weight of 20 percent and the latter one of 100 percent when calculating the capital requirements of the banks and we ended up with such a confused world that most experts, FT, included had no idea of what bank leverages they were talking about, in fact most still don’t know.

And so whatever we do to measure what we want better, and a lot of improvements are indeed needed in this area, let us see that we just do not add to that confusion the politicians love to hide behind.

September 11, 2009

Markets price risk solely in interest spreads which is why the regulators’ “risk weights” only brings confusion.

Sir with respect to Martin Wolf’s “Turner is asking the right questions” September 11, and who I see is now much closer to accept that this crisis was caused more by bad finances than by the abundant economic disequilibrium that existed and still exist, my very fundamental difference in opinion is the following.

Because the market prices risk solely through interest rates spreads, the interference of the regulators pricing it by means of “risk weights”, which lead to different capital requirements, creates much confusion in the risk allocation mechanisms; and we therefore need to eliminate all regulatory risk-discrimination. In other words, between a Tobin tax that can function as a speed bump and provide some “due diligence”, and capital requirements that “forcefully” channel funds into different risk territories I am all for the first and all against the latter.

As a consequence the credit rating agencies should revert to their traditional role as risk informers instead of being the risk decision makers the regulators turned them into.

Since Basel has become too one minded to regulate we must break up the regulator too

Sir not only do I agree with Philip Augar and John McFall in that “To fix the system we must break up the banks” September 11, but perhaps we need to break up the regulators too…because Basel has become too one minded to regulate. (It is probably not comme il faut to quote from another newspaper, but it is such a small paper so here I go.)

In February 2000 in the Daily Journal of Caracas, Venezuela, in an article titled “Kafka and global banking” I wrote:

A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.

The risk of regulation. In the past there were many countries and many forms of regulation. Today, in Basel, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.

Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basel, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs.

Sir and I hold that I am still right.

Greed comes in many shapes and forms

Sir in “more comment online”, “Roubini cameo” we read about a documentary Oliver Stone is preparing on bankers and greed. September 11. Well greed comes in many shapes and forms, not just pecuniary but also ideological. Oliver Stone has for instance recently shown much ideological greed (who knows, perhaps pecuniary greed too) filming a documentary on Hugo Chavez, “South of the Border” where he does not even mention such facts that Chavez cheats the poor of Venezuela, to the tune of about 10% of GDP, by selling petrol at about two US dollar cents per litre (gas at 10 cents per gallon)

September 08, 2009

And my warnings were silenced by the FT establishment

Sir Dirk Bezemer, in “Why some economist could see it coming”, September 8, argues correctly that many did indeed see it coming but that “they were ignored by an establishment”. FT should know about that.

In February 2000 in the Daily Journal of Caracas, Venezuela, in an article titled “Kafka and global banking” I had written:

A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.

The risk of regulation. In the past there were many countries and many forms of regulation. Today, in Basel, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.

Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basel, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs.

And, in January 2003, the Financial Times published a letter I wrote and which ended with “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.”

But then, I was shut up by the Financial Times establishment, who had perhaps decided there were only some macro economic problems and not any problems resulting from bad financial regulations, and wanted to hear no monothematic contradictions on that.

Basel regulations increase the world’s Gini coefficient

Sir from reading your “Capital ideas for financial reform” September 8 I get the feeling that you have not understood the real problem, as you are not at all clear about the how the equity of banks has to be increased.

It is not a question of just increasing capital requirements, across the board, but of increasing them only for those operations that were benefited with extraordinary low capital requirements.

Currently a normal loan to an unrated client requires the bank to hold eight percent in equity, which is not a low capital requirements at all, and which I bet you has proven to be more than sufficient to cover for any losses sustained in operations with non-rated clients, but, for a loan to an AAA rated client, the banks is only required to hold 1.6 percent in equity. As a result the clients perceived by credit ratings as having a higher credit risk are currently effectively shouldering the responsibility for the banks having capital, and thereby subsidizing those who are perceived as having a lower default risk… as if default risks is all what finance is about.

Let me explain it some harsher development terms. The current minimum capital requirements for banks based on risk assessments increase the world’s Gini coefficient and are only compatible with a world full of risk-adverse baby boomers who want to lie down and die.

September 04, 2009

Mr Geithner, and the rest of you regulators… you are so wrong.

Sir Timothy Geithner writes that “Stability depends on more capital” September 4, and he is so wrong. Stability depends almost exclusively on getting the right sustainable growth since with the wrong kind of growth you would need 100 per cent of capital and even then you probably only your real stability until you find yourself ten feet under the ground.

The hard truth Geithner needs to understand, and come to terms with, is that even if the credit rating agencies had been absolutely right in their ratings, the end results for the economy would be wrong; because subsidizing risk adverseness and taxing risk-taking, that is something that only a society that has had enough and wants to lie down and die does... and we can’t expect the whole world to be baby-boomers... can we?

Of course the regulators need to increase the current capital requirements for banks, but only for those operations where they decreased them so dramatically, like for instance allowing a 62.5 to 1 leverage when lending to anyone able enough to hustle up an AAA.

Mr Geithner please give us one single reason for why the regulators should specially favour banks lending to clients rated AAA. To me that is a pure senseless discrimination that will not lead us anywhere except over the next subprime cliff.

Jean-Claude Trichet sooths his own nerves.

Sir I feel a bit bad about Jean-Claude Trichet, the president of the European Central Bank, having to go out and affirm that he is a good and responsible parent, “Europe has mapped its monetary exit” September 4. Somehow one gets a feeling he is whistling in the dark so as to sooth his own nerves. Of course he should have an exit strategy for the current financial measures that looks to deliver price stability, and of course he should be willing to apply it, at least a priori, but both we and he know that this is just the beginning, since in any disciplinary approach a lot will depend on the children’s response.