August 31, 2009

The Fed should not pay negative rates but charge an access to the safe-haven fee.

Sir I am not sure Central Banks should charge interests below zero like Wolfgang Münchau writes in “Central Banks can adapt to life below zero” August 31, mainly because those negative rates should not permeate to other areas of the economy, and much less so to the public debt.

Instead, as I have proposed some time ago, the Fed should start charging an access to the safe-haven fee. The final negative return to the investor would of course be the same, but the reason why, would be more transparent, and we would save ourselves having to listen to politicians saying “they trust us so much they even lend us moneys at negative rates”. That would also improve the possibility of avoiding the risk of overcrowding the safe haven and turning it utterly unsafe.

Taxing the speed of capitals with a Tobin tax is a thousand time better than directing the capitals with capital requirements

Sir Tony Jackson in “Putting a rational spin on inefficient markets and irrational investors” August 31 writes “just because markets are inefficient, it need not mean investors are rational.” Right on. What happens if driving the car your GPS or radio, suddenly announces a roadblock ahead and recommends taking an alternative route? Rationally you do so though that could prove to be highly irrational if all others do the same at exactly the same moment.

That is why I sustain that taxing the speed of capitals with a Tobin tax is a thousand time better than directing capitals with Basel type capital requirements for banks based on credit ratings that could be wrong or that could change whether one second too early, one second too late or exactly in the right second.

Jackson refers to a paper by Paul Woolley and Professor Dimitri Vayanos titled “An Institutional Theory of Momentum and Reversal” which draws special conclusions about “assets with high idiosyncratic risk. And I wonder Sir, have you ever come around something with a higher idiosyncratic risk than an AAA-rated asset?

You have to root out the monsters in their homeland first

Sir Stefan Wagstyl should perhaps have expanded the title “Stalin still looms large over eastern Europe” with the “because he still looms large over Russia” August 31. Wagstyl rightly points us to see that the way countries victimized by foreign monsters can overcome such events starts with how the monsters´ homelands overcome being just that. Since Germany has done so much more in accepting the horrendous realities of a Hitler, than Russia those of Stalin, Germany has been more able to overcome its own demons and shames, and, consequentially the world has been much more able not to hold it against it. Besides, these monster´s, if not pulled out completely, with all their roots, can rot and infect and propagate.

August 28, 2009

Better putting some sand in the wheels than building channels that deviates the flow of capital.

Sir perhaps if there was a tax on responding an email during the first ten minutes of receiving it many unnecessary embarrassments could have been avoided. And that is primarily the role of a Tobin type like tax proposal, to slow things down, to give us a little more time, to put a lid on the trading of any small arbitrage opportunity becoming a purpose and not a tool. And, of course, in this I agree with Avinash Persaud’s “Time to put sand in the wheels of the market” August 28. Also, when you are allowed to put huge taxes on so many other goods and services, why should a minuscule tax of this nature be the source of much more dangerous inefficiencies?

But, having said that, let me point out the irony with so much being discussed about what a Tobin tax, with its little sands in the wheels of the market could do, compared to how little discussion, or none at all, there has been about the construction of the huge channel that the current capital requirements for banks made in Basel signifies, and that deviates trillions from what is perceived as risky to what is perceived as less risky. That is indeed a humongous tax, that is indeed a source of crazy structural inefficiencies, and that is what we are now paying for with the current financial crisis. Compared to that a Tobin tax is only a footnote

August 27, 2009

Do financial regulators have a legal right to discriminate?

Sir Benjamin Friedman writes that the activity of so many of our young well educated luminaries working in finance “adds no economic value” “Overmighty finance levies a tithe on growth”, August 27. My first question is how does he really know it is because they are well educated and not because they work in a quasi-monopolistic environment? My second, if so are we not to blame professors for it? And third, should the world sue Harvard and other for their teachings?

Of course Friedman has a point but what really levies a financial tithe on growth are the various tolls on financial risk. Regulators for instance order banks to have more equity for clients perceived as more risky, and credit cards financiers are more than happy to have the credit rating scores create the illusion they charge the right level of interests to their customers.

Anyway I would argue that much more important than what the financial sector has earned in profits (before the losses of the crisis are netted out) is to think on what other growth opportunities could have been financed with those trillions of dollars wasted in the housing sector only because some hustlers managed to hustle up some credit ratings made overly important by the regulators.

A question to the Professor, when the regulators impose on the banks an 8 percent capital requirement when lending to unrated citizens and zero if lending to the government... are they not exceeding their mandate? Do they have a legal right to discriminate this way?

August 26, 2009

The Peter Principle needs an addendum

Sir John Kay writes “Banks brought down by a new Peter Principle” August 26, and scores good argumentative points. That said the banks and the financial sector have also been severely affected by the Peter Principle that operated in the financial regulatory world.

In this case the Peter Principle could have been activated when allowing PhDs to move from financial modelling directly into the financial application of models, without having to dirty their hands with for example some old fashioned inventory finance. But, if so, this also calls for an addendum to the Peter Principle since that would indicate that it is not only about individuals moving up until they find their level of incompetence, but also about competent individuals moving into areas where their competence is outright dangerous.

Who but a deskbound PhD could have come up with such a crazy notion that you could outsource so much regulatory powers to the credit rating agencies without these being subjected to capture… ipso facto.


A prudent regulatory reform might be to see to that the PhDs are always in minority wherever decisions affecting life on main-street are taken.

What we need are central bankers that knowing the risks and problems dare to do their best.

Sir Stephen Roach in “The case against Ben Bernanke” August 26 sums up with “The world needs central bankers who avoid problems, not those who specialize in post crisis damage control” He is absolutely right with the second part, but neither does the world need central bankers who avoid problems, it needs those that knowing the problems try do the best out of it.

We have had enough, for a very long time, with those problem and risk avoiders that got together in the Basel Committee. Look where the banks ended up egged on by their minimum capital requirements based on risk and the lousy supreme risk-sentries that they anointed.

August 24, 2009

What quality-of-spending rating do the bureaucrats merit…an AAA?

If a banker lends to someone who wants to risk his money on for example an environmentally sound project but has no credit rating, then the bank has to put up 8 percent in capital. If instead it lends that same money to the Government and it is the Congressmen who decide which are the environmentally sound projects to be financed, the bank does not have to put up any equity at all.

If the world is going to keep assigning so much importance to the credit ratings then it must complement this with some quality-of-spending ratings, since the risk for the society in any financing is not only getting its money back but, even more importantly, that it is well spent.

Nouriel Roubini in “The risk of a double-dip recession” Augusts 24 gives about ten reasons for ongoing economic problems, but he does not even mention the above ongoing regulatory mindlessness; and he also writes in relation to the “risks associated with exit strategies from the massive monetary and fiscal easing; policy makers are damned if they do and damned if they don’t”. Mr Roubini, honestly, when was the last time you saw a really damned policy maker? As I see it they are all having the time of their life!

No Mr Münchau, the world remains unstable and all the toxic fumes are ever so dangerous

Sir Wolfgang Münchau titles “How toxic finance created an unstable world” August 24 but writes that “there is no way the [financial sector] will recreate the pre-crisis levels of securitization, even if we make no changes to financial regulation”. He is wrong. That at this moment, after the monumental indigestion recently suffered the appetite is not the same, is of course right, but the truth is that the credit rating agencies are still out there waiting to be sequestered by the next generation of sub-primes (public debt?).

In fact, every day a client perceived as less risky by the credit rating agencies receives a lower funding cost through a regulatory subsidy, while a client perceived as riskier has to pay more than the market requires would otherwise require; all this courtesy of the capital requirements imposed on the banks by the Basel Committee, we live in a system rendered more unstable than needed. As if the world was not unstable enough.

But it is clear why Münchau remains confused. He says “Dollar-rich Chinese, Japanese and German investors invested in opaque product that they mistakenly deemed to be as safe as US government bonds”. Mistakenly? These instruments were rated AAA and this was considered by their financial regulators and their financial experts as a sign of a very transparent total lack of risk. Blaming the small guy aren’t we? Defending your buddies aren’t we?

August 21, 2009

Journalists are just as “complicitous silent”

Sir Gillian Tett in “The financial doublethink that needs to be eliminated” August 21, comes down quite hard on politicians and regulators accusing them, in terms developed by Pierre Bourdieu, of “complicitous silence” and urge them to start thinking more about power structures, vested interest – and social silence”. As a journalist Tett could use herself a little spoonful of the medicine she prescribes.

In her interesting and very readable book “Fool’s Gold”, Tett manages to be very “complicitous silent” about the financial regulations coming out of the Fed and the Basel Committee; which did so naively ignore that by assigning so much power to the credit rating agencies to decide how much equity the banks needed, the regulators set the agencies up for big time capture.

If the banks invest $1.000 billion dollars in AAA rated instruments they have only to put up $16 billion as equity… because the opinions of the credit rating agencies cover the other $984 billion even though for these opinions there are no capital requirements at all. Compared to the above, the other and indeed absurd paradox she refers to in her article could be regarded as of a secondary importance.

P.S. Gillian Tett and many other in FT know I have been writing about this serious issue, but they have preferred to be silent perhaps because of some “power structure” reason of their own, excusing themselves with the utterly stupid argument that I write too much.

August 19, 2009

Why we need to regulate the regulators sooner, not later

Sir Kenneth Rogoff belongs to those “influential” economist who had their expertise on financial matters been closer to their fame should have been able to timely warn the world about what was going on. The concerns he expressed in his “No grand plans, but the financial system needs fixing” in the Financial Times, February 2007, about “global hedge funds proliferate and increasingly influence key markets ... Capital flows are once again rushing into emerging markets” would have been almost laughable now had they not helped to divert the attention from the real regulatory failings. Like old soldiers they should perhaps fade away.

Now in “Why we need to regulate the banks sooner, not later” August 19, Rogoff mentions bank leverages of “three dozen” to one, and the dangers of it, but he does not admit the simple fact that had more known about the existence of 36:1 leverages, and higher, all kind of alarm bells would have sounded much earlier. As is, this did not happened because the financial regulators fooled the whole world, and of course first and foremost themselves, with that crazy concept of risk weighted asset and that, for instance, reduced the exposure to an AAA rated security to only 20%. In other words, a one trillion dollar exposure to AAA rated securities collateralized with subprime mortgages and only 16 billion dollars in equity, instead of a 62.5 to 1 leverage, would (and is still) reported as a 12.5 to leverage.

Any common sense dictates now that what we need to regulate the most, the sooner the better, are the regulators themselves.

If the net oil revenue that goes directly to government exceeds 5 percent of GDP, then oil is a curse

Sir Moisés Naím writes that “Oil can be a curse on poor nations” August 19 and of course he is right. That said I would hold that when net oil revenues amounting to more than 5 percent of GDP of a country goes directly to the government, making it independently wealthy, then simply put, the oil is a curse, on any nation, and any evidence to the contrary is just waiting for a disaster to happen.

You see when people hear about oil they think of richness and the citizens expect that richness to be distributed to them by the government, without really knowing how much they should get, and then all start jockeying for positions to be favoured by the mighty, and society breaks down.

I am the President of an NGO in Venezuela, Petropolitan, which starting in the last millennium has been working among other for oil revenue sharing. Notwithstanding more than 100 articles published on the subject our agenda has not move a lot forward and so lately we have been calling out for help to other countries trying to establish a global alliance of oil cursed citizens.

Do you know who represent some of our major obstacle? Strangely enough some of those well intentioned groups like Revenue Watch Institute and the Extractive Industry Transparency Initiative (EITI) and who, by somewhat naively pushing the illusions of good partial solutions, play right into the hands of our oil autocrats.

What about the “lucky” 47.000?

Sir Joanna Chung reports that most probably UBS will hand over to the US tax authorities a list of about 5.000 tax-dodging clients of theirs, out of 52.000, “150 US clients of UBS investigated”, August 19.

My question is simple how do you pick out the 5.000? Lottery, profiling? Is there any auctioning out of the 47.000 not picked slots? If there is one who does the auctioning and to whom do the proceeds go… or are they split fifty-fifty? I mean, knowing this sort of information would be helpful in order to predict future USB profits or the path of the US fiscal deficit. Are these the innovative exit mechanism some big public spenders have been talking about lately?

No matter how guilty I might have felt were I among the 52.000, which I am not, phew, I am sure I would be extremely upset about finding myself among the 5.000 without understanding the how come.

Now for all the others out there, are these 5 out of 52 the odds they should include in their financial and tax models, or do you believe these odds will vary much depending on who are the negotiators and on whose behalf they are negotiating?

August 17, 2009

There should also be a list of countries where the tax-payers are allowed to use safe-havens.

Sir you request “Closing the havens” August 17, because citizens should pay their taxes. Quite right! But from a global perspective, the question of whether the non-paid taxes that have escaped to safe havens have been put to better use than the taxes that were paid lingers on.

In some places that is not the case, in some places, sadly, the most patriotic thing to do seems not to pay the taxes; and safeguard the resources so as they can be used in better times, with different governments, and, for those countries, the existence of tax-havens are a blessing and they should be kept open.

So perhaps countries should be indexed on a how good use the government makes of the taxes and other revenues, and any citizen from the 100 worst should have the right to access a safe haven, for at least ten years. Of course, this exclusion privilege should be renounced by anyone in public service.

There are though many criminals using the safe-haven facilities and that should be stopped and so what could be needed is for the banks requiring from the citizen that qualify for entrance to a safe-haven, to evidence that the funds indeed originate from tax evasion.

If the Financial Times wants to live up to its motto of “Without fear and without favour” then it should not forget the citizens so easily and so automatically side with the tax man… (that is, of course, unless it has some own dirty laundry to hide). If there is an argument for tax-evaders losing sleep, the same argument should be used for tax-wasters.

So, Sir, help us put a little pressure on Governments and prepare that list of countries where tax evasion should be permissible… I mean aren’t we all for better accountability? Constitutions are written to guarantee that the citizen is not abused by those in power, and given ever more intense globalization it would seem like we are in need of a global constitution, before those in power team up against us small fry.

August 14, 2009

The financial regulatory front lies concentrated in Basel and not fragmented in nations.

Gillian Tett feels that the pending war between the regulators and the “too big to fail” will keep on pending because the first are “badly hampered by being fragmented along national lines”, “Why the idea of ‘living wills’ is likely to die a quiet death” August 14.

She is wrong. The main sources of “too big to fail” growth resides squarely in the regulations coming out of Basel, and the real problem is that the regulators do not know how to handle Basle without risking amputating a part of themselves in the process, or worse, without prematurely using up their last “it was the Basel Committee’s fault” excuse card.

Oil revenue sharing stands the best chance of stopping wasteful energy use in the Gulf.

Sir Jim Krane in “America can stop the Gulf’s wasteful energy use” August 14, lambasts the United Arab Emirates “with their monster 4x4”, and wants the US, with its own so very heavy carbon foot print, to lean hard by means of nuclear energy agreement on the UAE´s ruling oil sheiks, to move it away from the fossil fuels.

One of Krane’s doubtful arguments is that although “raising energy prices would help” that is impossible because since the ruling sheiks “do not give their subjects a vote they must keep them happy in other ways”. For his information, in Venezuela, the citizens have the right to vote, but yet the price of gas-petrol, around $11 cents per gallon, is about 15 times lower than in UAE.

No, the best way to stop the gas-petrol waste is to allow the citizens to participate directly in the oil revenues… so that its waste hurts the citizen´s own pockets... but that would mean putting an end to oil-autocrats in UAE and Venezuela. Yes, and so what? An extra bonus... good riddance!

Is Iceland´s debtor´s prison different from Argentina´s?

Sir Jóhanna Sigurdadóttir’s “Iceland are angry but will make sacrifices” August 14, writes about the problem of trying to make good “hundreds of thousands of UK and Dutch savers” who lost their money when attracted by high interest rates they place their money in a private bank in Iceland. I can’t help to think about the hundreds of thousands of probably much less sophisticated small Italian savers that lost their savings in Argentina… and I wonder are there some standards for responsible behaviour? There is no debtor´s prison for individuals but is there a debtor´s prison for countries even when given home for jail? Would the world be better off with some global standards that apply to all countries?

And what about all those who lost their money because they followed the advice of the credit rating agencies, those appointed as the official risk sentries by the financial regulator in Basel?

What a great diversity of worries and concerns.

Here I am concerned with issues such as climate change dangers; how society will cope when the genetic maps of citizens are found on facebook; the 100.000 Kalashnikovs spread out by Chavez in Venezuela and more of that sort while George Magnus is losing sleep thinking about how to replace the financial leverage and the increased number of women working as engines for growth, “How to release the next boom” August 14. Are we humans not a wonderfully diversified lot?

August 12, 2009

Not captured… raptured!

Sir in Mr Michael G. Mimicopoulos letter “Regulators too close to the regulated”, August 12, again we read about regulators being captured by the regulated. We sure wish that was all there is to it.

The real problem though is no that the regulators were captured but that they were raptured by the silly idea that they could control for risks with their capital requirements for banks based on a vaguely defined default risk and have the credit rating agencies do the risk-surveillance for them.

So raptured were they that even two years into the crisis they seem still as enamored with that idea as the first day it crossed their naïve and gullible minds.

Having to read, almost on a daily basis, serious frowns declaring about “risk-weighted” bank assets, as if those risk-weights were God sent and really meant something, drives me mad.

The reformers of the health sector need to go to Basel.

Sir in reference to “Debating US health reform”, August 12, I hold that instead of town hall meetings the reformers should go and visit the Basel Committee. There they could learn about empowering health rating agencies to check up on the citizens and thereafter place some special capital requirements on the insurances of the unhealthy; by which they can provide a very fiscally sustainable and Darwinian solution to the whole problem.

August 10, 2009

The signs pointing towards “risk-free” land are still there; and to some they still mean exactly the same.

Sir Tony Jackson admonishes us “Don’t believe bubbles have been scientifically abolished” August 10. Of course not! How can we be that stupid? Especially since all those risk-free AAA signs that led so many over the cliff are still there and taken to mean exactly the same as before, at least by the regulators.

But when Jackson suggests that “the aim should not be to prevent [the next crisis] but to contain its effect next time around, may I humbly add... and what about giving a little more purpose to the boom?

August 07, 2009

The originally “risky” are being diabolically squeezed

Sir Gillian Tett in “Pipes remain clogged even as liquidity is pumped in” August 7, writes that “now most banks seem unwilling to use spare liquidity to engage in activity that regulators or shareholders might deem risky”. This is not surprising, anything risky requires more regulatory capital, and the banks have more than enough with all their currently outstanding loan and investments that require more capital when they are downgraded, and so even though the banks have liquidity they cannot afford more risky business.

This is placing an excruciating squeeze on the weak and more risky clients of the banks, because even if these are performing much better than the originally “risk-free” banks might choose to liberate capital by getting rid of these exposures without booking losses so as to be able to keep on the books AAAs turned into junk and that if sold would hit the banks harder.

Also let us not forget that the capital requirement for any investment in an AAA rated public instrument is 0%. In all, with their minimum capital requirements for banks based on risk, the regulators have created a monster.

It was more comfy to ignore the warnings

Sir Samuel Brittan in Economists shuffle the deckchairs August 7, quotes a letter to Her Majesty written by Professors Tim Besley and Peter Hennessy stating “many people did foresee the crisis” but clarifying that “no one foresaw the form it would take and its timing, onset and ferocity”. This sure sounds to me as a lame excuse for inaction, like a mother having been warned of the dangers of leaving her child alone at the side of the road complaining that no one told her exactly when and where and by whom her child would be overrun.

Indeed plenty of persons warned about the dangers in quite clear term and I myself wrote in a letter published by FT in January 2003 saying that “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.”

If there is an explanation for why the warning were unheeded it is because of too much utterly misplaced solidarity among peers and the fact that we allowed our financial regulations to be captured by a small group of fanatics in Basel.

The speed of a deflation does matter

Sir again you hold that deflation is dangerous, August 7, and that doing too little is a greater danger than doing too much. From the perspective of a baby-boomer that certainly seems to be correct... “Après nous le deluge”, but let me also remind you that although a slow deflation is surely hell a fast one might be bliss, since when touching bottom there is only one way to go.

Don´t point fingers at the economists

Sir I refer to Robert Skidelky´s “How to rebuild a shamed subject” August 6. There should not be any finger pointing of the economists specifically. Many are to blame, including the financial press.

This crisis has nothing to do with economics and all with the lack of ordinary good common sense. Given the strong incentives of the minimum capital requirements for banks concocted by the Basel Committee for to follow the opinions of some few credit rating agencies, everyone should have known that, sooner or later, something was doomed to go wrong.

I as an Executive Director at the World Bank (2002-2004) said so over and over again; and FT even published a letter where I, in January 2003 said that “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.”

Now why could we not react and stop what was being done? Because the whole regulatory debate was captured by some regulatory gnomes in Basel, who let no outsider question anything in their cozy little mutual admiration club.

By the way, in the context of this crisis, please stop talking about a black swan or, at least, as a bare minimum, clarify that it was a black swan fabricated by the regulators.

August 04, 2009

What we need is to pay bonuses for the right kind of risk taking!

Sir the world is definitely confused. Lucian Bebchuk writes “Regulate financial pay to reduce risk-taking” August 4 even though as a Harvard professor he should now that we as a society need risk-taking if we are going to move forward, and so the issue should obviously be more that of regulating financial pay so as to promote the right kind of risk taking.

Also let us stop from hiding the truth. Had the regulators not created the risk arbitrage opportunities derived from the minimum capital requirements and their excessive trust in the credit rating agencies billions of temporary artificial profits would not have been generated and with that there would have been so much money to pay the bonuses to begin with.

August 03, 2009

The Central Banks’ independency has to be balanced with more criticism.

Sir in your sermon “The value of bank independence” August 3, you mention that “the era of economic theocracy, in which unelected experts ran the global economy is over”. Over? Where, how and when? The fact the central banks have taken a less prominent role while the fiscal spenders are doing their juggling act do not make them less independent. In fact, if anyone at this moment would have to take a bet on the central banks losing their independence or continuing to be the mutual admiration club their independence have turned them into I would advice to bet on the latter.

Also though you quite correctly opine that “risks are greater when a regulator plays God, deciding which banks should live in a crisis” why did you never say a word when the regulators also played God and with their minimum capital requirements for the banks arbitrarily decided to sort of call it quits by subsidizing risk adverseness and taxing risk-taking?

Finally you keep being stubborn and wrong insisting on the role of “too low interests” in the credit bubble. Have you any idea at what rates these subprime mortgages that defaulted were contracted at? Is it so hard to see that the problem was how these lousily awarded mortgages morphed into no-risk AAA instrument to be discounted at so much lower interest rates?

Of course the world needs independent central bankers but more than that it needs independent minds and, of course, a more critical financial press much less prone to suck up to the independent authorities.