And now what?

And now what?

And now what is society to tell all those who entered into private social security schemes all over the world? Sorry chaps you should not have risked it on your own!

To sell the whole concept of one generation after the other always finding initial final market conditions favourable enough so as to in guarantee them that, in the long run, their older days will be taken cared of, is almost fraudulent.

In this respect I very much share with Peter L. Bernstein that “the possibility the long run has run away is one of the few pieces of good news. “In the long run, we are searching for answers” February 26.

At last we now can go back and discuss on more objective grounds the real differences between pay as you go social security plans based on solidarity between generations and the everyone-is-on-his-own type of private insurance schemes sold lately.

But would they listen?

Martin Wolf suggests “What Obama should tell the leaders of the Group of 20”, February 25 and it all sounds so extremely intelligent and rational. Problem is though that the chances of obtaining a rational responses to rational requests are very slim in a world where there has been so little capacity to respond to any threat of something that could occur more than a week ahead, and in a world where so many promises, like that of .7% of GNP to foreign assistance are continuously and shamelessly broken by most.

In this respect if I was Obama, which I am of course not, lucky you, I would start by asking... how can we make sure that the upcoming summit will not be a waste of time since we clearly have no time to waste?

As a bare minimum, before flying over the pond, I would request the Europeans to deposit at least half of their voting rights in the International Monetary Fund, in the same escrow account where I on behalf of the US would also be depositing its own half of the voting rights, also before flying over the pond, and so as to be able to proceed down the road of international cooperation in a much more credible and expedient way. Wasting even a second of the summit on the voting right issue should just not be an option.

Also if I was Obama, and Martin Wolf, I would stop from dividing the world between surplus and deficit countries since that division helps very little when trying to foment a spirit of international cooperation when clearly all the countries are hurting.

Credit rating agencies...indispensable? Absolute nonsense!

Sir although you finally admit to the lead role the credit rating agencies played in causing this crisis you still hold that we can’t live without them and describe their services as “indispensable” “Quo vaditis, raters?” February 23. Absolute nonsense! Of course we can live without them.

There are millions of credit rating agents performing their daily function in what we all know as the market but the problem is that the importance of their diversified judgements were diminished when the regulatory authorities assigned oligopoly powers in the risk information market.

The credit rating agencies have been around for many decades but it was not until the Basel Committee sent out the message that “if they are good enough for us they should be good for you” that they were empowered to do so much damage.

Sir think of what could have happened to a financial world without officially endorsed credit rating agencies and what really happened where trillions of dollars followed their AAA’s into the subprime swamp lands. If you have any sense you must come to the conclusion that what is indispensable is to immediately strip them from their powers.

Do you sincerely believe that we can make the credit ratings to perform so good that nothing of this or even a worse crisis can’t happen. Do you not know that the biggest risks lurch in what is perceived as the safest waters?

For all your experience and reputation you seem quite unwise and perhaps even incapable of learning. Or is it that you have an undisclosed conflict of interest with the credit rating agencies?

If interest rates fell, borrowings would still jump.

Sir Martin Wolf writes “When interest rates fell in the early 80’s, borrowing jumped. The chances of igniting a surge in borrowing now are close to zero”, “Japanese lesson for a world of balance-sheet deflation” February 18.

He is wrong the world has not changed that much, if the interest rates fell borrowings would still jump. The problem Wolf has is that he is looking only at the Federal Reserve’s intervention rate which is close to zero and cannot fall much more, and not at the rates that really do matter, for example the interest rates on credit cards. The interest rate on a credit card in the US for someone like me that has a substantial credit line available and has never defaulted on any payment is currently 17%.

With a rate of 17% low inflation expectations, for now at least, and cash being king, I would have to be an absolute nut to borrow even if I most fervently wanted to help stimulate the economy.

In order to reform regulations we need first to reform the regulators.

Sir John Dizard is calling the bluff of the regulators in “The inside story of reforms is that there is no story” February 17. Well done! Now in order to have a chance to make truly worthwhile reforms there are two things that must happen.

First we need a totally new crop of regulators, most especially in the headquarters of the Basel Committee as those currently there have dug themselves so deep in their framework they have no earthly chance of getting out of it. As an example they cannot even visualize a world without “trustworthy” credit rating agencies when we all know well that no one but God should be given so much trust.

Second there must be some type of accountability. For instance the thousands of licensed professionals involved in generating those masses of lousy mortgages to the subprime sector should, as a bare minimum, have their license revoked for five years.

Sorry, if I am a party pooper

Sir Mohamed El-Erian finds a silver lining for our current crisis in that “As the risks become clearer, a greater degree of international policy co-ordination may emerge”, “Era of policy activism opens door to global co-ordination” February 17.

I am sorry if I am something of a party pooper but may I remind him that this crisis was caused precisely by the international policy co-ordination in banking regulations that took place in Basel. Without the Basel Committee we would most certainly have had other bank crisis but none as systemic and severe as the current one.

Will the world trust the American taxpayer?

Sir Mohamed El-Erian in respect to the Federal Reserve being “prepared” to buy Treasury bonds asks “Will the world be comfortable with two US public agencies offsetting operations that ultimately must be supported by someone else?”, “Era of policy activism opens door to global co-ordination” February 17.

That is either a slightly coward or a too kind way to phrase the issue since that “someone else”, when push comes to shove, is no one else but the American taxpayer.

The US dollar instead of “In God we Trust” should state “In the American taxpayer we trust and thereafter in God’s will”. What will the markets do when they realize the real picking order?

“Tea with FT” is your External Devil’s Advocate

Sir in “Sounding off” February 13 you speak about the importance for an institution of a “Devil’s Advocate appointed to challenge and probe its assumptions and evidence”. This is exactly the role of a blog like “Tea with FT”.

In your case you have censored and tried to have the whistleblower fired by stopping from publishing his letters, suddenly, most probably because the feathers of some journalistic Prima-Donna were ruffled. The beauty in this case though is that even if the FT establishment wants the Devil’s advocate to disappear, he still hangs in there, on the web.

Does a Devil’s Advocate always have to be right? Absolutely not! That is not his role.

Can a Devil’s Advocate be advocating too often and therefore only be accepted if he limits himself to one letter a month? Of course not! That would be plain silly.

But a Devil’s Advocate can surely not appoint himself? Why not? Do you prefer the management or the Prima-Donnas appointing him?

Cheers

The debate has been sequestered by the machos and the wimps.

Sir Samuel Brittan seems to divide us economic debater between the machos, those who hold that this is no time for hesitance, better too much stimulus than to little and that we should forget about how we are going to pay for it all; and the wimps those, who urge more caution. In my case I confess that I often find myself among the latter, though mostly as a reaction to the runaway machismo of the machos. “Economic dominoes are still falling” February 13.

The truth, which as usual lies somewhere in the middle, is that we all should be very careful machos, and by which I imply we should stimulate a lot but make sure that every cent of stimulus counts.

In this respect (once again) I wish to point out that there are other issues that need to be looked at, such as the interest rates charged on credit cards.

To stimulate consumption placing compromises of a trillions of dollar on the shoulder of future generations of tax payers while at the same time allowing credit card companies to charge 17% interest rates in an economy where inflationary expectations are low, has nothing to do with machos or wimps, only with plain stupidity.

I am therefore proposing that the US government and the Congress should limit the interest rates that can be charged on credit cards to something like 5% and perhaps, for a year, as a partial compensation, pay the creditors an additional 3% on any balance financed. That stimulus cost would amount to a meager 30 billion dollars, per each trillion of credit card debt.

Doing it would put real money in the pockets of the real consumers and simultaneous work at solving the next wave of toxic assets soon to hit the markets.

Balloons explode, don’t they?

It is amazing that so soon after having witnessed what disasters comes from having empowered credit agencies to put up their AAA signs showing the roads to no risk-lands Arvind Subramanian and John Williamson dare to recommend setting up zones for asset prices. “Dear I don’t think we should buy our house here because it has a 343 bubble rating. Perhaps I should look for a job in Toledo?”, “Put the puritans in charge of the punchbowl”, February 12.

There is nothing wrong for a central banker to keep an eye on assets prices such as houses to decide on monetary policies but if he wants to make any official use of it he should first make sure he does not own a house so as to be free of any conflict of interest but, more importantly, he needs to remember that bubbles, even though they might hurt when they explode, have a role to play in taking human and economic development forward.

A world without bubbles gets to be closer to a world without illusions.

Limit and subsidize credit card rates

I heard Geithner in the Congress and I read Martin Wolf’s “Why Obama’s new Tarp will fail to rescue the banks” February 11 and it is clear that they and most of us have entered into a quite unproductive phase of the debate, where we are all threading muddy waters not getting anywhere.

We should all take a break, from discussing solely about banks, and discuss those other participants of the economy we know as the consumers.

The US consumers face incredibly and unexplainably high rates on their credit cards, like 17% if in current status and 26% if in default.

Why does not the US government not limit those rates to 4 and 6% respectively and as an incentive offer to pay the creditor a 3% compensation on any balance financed over the next year? That would only cost a meagre 30 billion dollars per trillion of credit card debt.

Doing that would put real money in the pockets of the real consumers and simultaneous work at solving the next wave of toxic assets soon to hit the markets.

After such fresh air we might take up our current discussion with new energies.

The scary cognitive dissonance of the Basel Committee

Sir Whitney Tilson in “Lessons to be learnt from losses” February 10 writes about some harmless “cognitive dissonance” in a group “who believed the earth was going to be destroyed by a flood on December 21, 1954” and then extrapolates from that in order to explain some recent investment behaviour.

But there is also quite dangerous “cognitive dissonance”. For instance the way in which the Basel Committee is now responding to its absolute failure in trying to avoid a crisis by creating disincentives for bank to assume credit risks as measured by others, is now slowly evolving into the belief that they could and should measure and fight systemic risk. That is indeed a really scary “cognitive dissonance”.

A KeynesKeynesKeynes economic plan?

Sir Benn Steil is both correct and timely with his “Keynes and the triumph of hope over economics” February 6. But, just as well, he could have titled it “Keynes and the triumph of the shortcut over the real way”.

When we ser how many use Keynes to back up any call for stimulus, no matter how big, without even looking at what is going on at street level, like the enormous interest rates currently charge by the credit card companies to finance and refinance, it only reminds us how the credit ratings got their AAA ratings so wrong.

Do not dangerously overcrowd the safe-havens.

Sir Willem Buiter in “The ‘submerging market’ crisis”, February 6, proposes that the US and UK Treasuries should cover the Fed and the Bank of England for the credit risks they take on when they purchase private securities. This is one good way of looking at it.

I would prefer the Fed and the Bank of England charging their respective Treasuries with a commission on all public debt issued. This way the Treasuries would know better that the benefits derived from safe-havens considerations is really not for them to keep; and also that it costs a bundle to keep ever more crowded safe-harbors safe.

That the markets trust Treasuries has more to do with the lack of alternative ports during a very difficult storm than with any intrinsic trust in the harbor chiefs. The governments need to humbly accept that before they and we are left with nothing.

The world needs a Davos meeting without financiers

I just received a letter from one of those big banks that has recently received billions of dollars in official assistance. It informs me that if I finance my purchases with my credit card, where I have ample credit available since I repay all my consumptions monthly, my interest rate will be 17% and, if I enter into any default, 26%. This all in a country where there are no inflation expectations; the government is paying zero rate on its short term borrowings and contemplates a close to a trillion dollar stimulus package; and everyone wants the consumers to spend more to get the economy from falling. For a consumer to finance the anticipation of any purchases with these interest rates would be an act of extreme irresponsibility.

And then I read Martin Wolf’s “Why Davos man is waiting for Obama to save him” February 4, and though it seems such an utterly sensible article that recommends “focus all attention on reversing the collapse on demand now... employ overwhelming force. The time for ‘shock and awe’ in economic policymaking is now”; it only makes me reflect on how much we need a Davos type meeting where the financial sector is not invited and where one could freely dare to ask questions such as... why should we stimulate the economy before making sure that all the new green sprouts are not going to be devoured by some of the players in the financial sector?... and how could we get a finance sector that serves our needs too?