But I’d better whistle in the dark or sing too!

Sir there we are, sky-walking on a slack-wire over a high ravine in windy weather with no safety net under us, and Martin Wolf comes along with his timely advice telling us we could hurt ourselves by falling on either side, “How unruly economist can agree” February 26. Thanks! Now, how are we to remain calm?

Wolf recommends a very active use of a balancing pole which on one side (hand) has the closing of “structural current deficit relatively rapid”, to keep our faith in the sustainability of the public debt, and on the other, “credible temporary offsets, particularly via spending on investment and tax holidays”, as a stimulus for the economy.

Sounds swell but, since I am absolutely not as daring as a Maria Spelterine, I’d better also start doing some whistling in the dark or singing to stop me shaking like a leaf. “I’m singing in the rain.... what a glorious feeling...”

Bank regulators need a better understanding of risk

Sir Martin Wolf holds that “The world economy has no easy way out of the mire” February 24. Who could argue with that... except perhaps in terms of it being an understatement.

Wolf holds that, ceteris paribus, we will not get out of the crisis unharmed and that either through a bigger financial crisis in the future or the “the fiscal rope” running out we will ultimately have a “sovereign debt crisis”. No doubt he is right. And as the only possibility for avoiding collapse he argues, quite correct again, having the world to grow out of its debt overhang.

But what I have not been able to convince Martin Wolf about, no matter hundreds of letters is that to grow out of the debt overhang we need a completely different paradigm with respect of how we regulate our banks. The current one, based exclusively on risk-avoidance, will not take us anywhere and on the contrary will just help to reinforce the dangerous fairytales that there are enough safe-havens and AAAs to go around for all, and that it is in safe havens you can generate real growth.

Martin Wolf quotes William White former chief economist of the Bank of International Settlements referencing “the explosion of the balance sheet of the financial sector and increase in its exposure to risk” as one of the imbalances that led to this crisis.

If our bank regulators were more capable of performing what Arthur Koestler labelled as bisociation they would have long ago discovered the irony in that the explosion of the balance sheet and the exposure to risk that occurred and failed was almost all in supposedly risk-free AAA rated operations.

Smoking more so as to be able to quit smoking more sounds like the wrong way to go.

Sir Wolfgang Münchau makes reference to a paper co-authored by the chief Economist of the IMF that proposes increasing the inflation target from 2 to 4 percent and is correct when titling the article “Inflation must not become a moving target” February 22.

To talk about higher inflation target so as to have more room to manoeuvre is like increasing the cigarettes smoked just to make it easier to cut the number of cigarettes smoked.

We could perhaps understand if what could be labelled as a “pro-growth” proposal had come from a development institution like the World Bank, but to hear it come from the IMF just evidences the utmost confusion this financial crisis has caused.

Also defaults, restructurings and high inflation are, though nasty and unwelcomed, quite effective tools when taking care of debt overhangs but, that said, what you least do is to preannounce them since that allows for the build-up of defensive positions that will only make the final battle so much bloodier.

Obama heads in the absolute wrong direction!

Sir Tom Braithwaite reports “Obama to renew call for stricter capital levels” February 19. This is just what the US, and the world, least need now.

Allowing the private banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats do the lending or decide on fiscal spending.

A dollar spent by a bureaucrat is a tax dollar spent but a dollar lent by a banker does not necessarily mean a future tax dollar spent and this is what anyone concerned with a fiscal deficit should know by now.

The flaws of the euro were part of the plan for a Europe

Sir in November 1998 I expressed clearly my surprise on Europe entering a monetary union before being a political union and especially about there not being a single word on how to proceed if any country wanted to retire from the Euro. But even though the article described exactly the difficulties that are now being confronted I titled it “Burning the bridges in Europe” because I felt it was an effort to bluff history and generate the conditions that would make a political union unavoidable.

That is why I do not agree with Samuel Brittan when he argues “Greek spotlight on a flawed project” February 19. All possible risks with the euro must have been known by its promoters, when even I knew them, and so this euro project was launched with the clear purpose of creating a political union... and, whether it fails or not, is yet to be seen.

Do I hope the burning of the bridges produces the expected results? Of course I do? Do I believe they will? I am not sure... but it is sure giving Europe a good run for its money.

Reflect on the dangers that the very real possibility of a bad global coordination could signify.

Capital is intrinsically coward and loves anything triple-A rated. Therefore, when on top of this natural love, the regulators awarded the triple-A rated additional benefits in terms of these generating much smaller capital requirements for banks... the demand for triple-A rated instruments soared. As should have been expected the supply mechanism of the market started to fabricate triple-A rated instruments in enormous volumes... something that should be by definition anathema to a low risk.

There were of course many other economic imbalances that aggravated the final result but this, the excessive belief in that risk should and could be avoided, is why the current financial crisis came to happen.

In February 2000 in an article titled “Kafka and global banking” published in the Daily Journal of Caracas I wrote: “The risk of regulation: In the past there were many countries and many forms of regulation. Today, 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.”

But 10 years later when the above has unfortunately been proved to be too true, Dominique Strauss-Kahn of the IMF, in “Nations must think globally on finance reform” February 18, keeps on going as if nothing has happened writing that “the work of [the Basel Committee and the Financial Stability Board] must be accelerated to harmonise rules that limit excessive risk taking”.

IMF, please, before going forward, reflect more on the dangers that the very real possibility of a bad global coordination could signify to the world.

Are there not any other routes and, if not, when do we get to the point of no return?

A dollar spent by a bureaucrat is a dollar spent but a dollar lent by a banker does not necessarily mean a dollar spent.

I believe that allowing the banks to help out the economy by lowering their capital requirements now, even at the risk of more bailouts tomorrow, is much better than having government bureaucrats trying to do it directly.

And it is because calling for the first available tool, fiscal stimulus, might make it more difficult to identify alternative options that I mostly differ with Martin Wolf when he states his case for the immediate short term need of fiscal looseness, “How to walk the fiscal tightrope that lies before us”, February 17.

And then of course is the fact that no matter how sure you are of the direction of where you are heading, sooner or later, one reaches the point of no return... and that must make a difference. Where is that point in this fiscal walk?

The small businesses are unfairly discriminated against by the regulators

Sir, Richard Milne in “The cogs are clogged” February 16 writes about the difficulties of the smaller enterprises to secure the funding they need but fails to even mention the regulatory discrimination they are exposed to.

One of the banks’ historical responsibilities has been to nurture the small businesses until they’re big enough to enter the capital markets, but that ended when the regulators, acting entirely on their own, decided that the most important role for the banks was to avoid taking risks and to that effect set up a system of capital requirements dependent the risk of defaults as perceived by the credit rating agencies.

In effect a bank when doing business with one of those entities that because of an AAA rating should not even need the assistance of the banks must put up only 1.6 percent in equity while, when doing precisely what it is supposed to do, helping the small businesses, it is required to have 8 percent in equity.

At this moment, when all the faulty AAA ratings ate up all the capital of the banks, those small businesses are discriminated more than ever, by this regulatory double whammy of not only having to pay for the additional risk premium the market ordinarily charges, but also having to pay the costs of the higher bank equity requirements.

That this issue of unjustifiable risk-discrimination is not among the first things currently discussed when considering financial regulatory reform is truly mindboggling to me.

We need more solidarity among the free.

Sir Gideon Rachman rightly calls China´s manufacturing sector a headache to Mexico naming it as one of the reasons “Why Mexico is the missing Bric”, February 16. But to then jump to the conclusion of Mexico´s “economic underperformance” hides the fact that China´s competitiveness is not exclusively based on economic performance but on foreign exchange manipulations. For a still so much communistic country like China it is much easier to keep their currency artificially low than for a country like Mexico that, no matter their Carlos Slim, is an immensely freer country.

The free countries need to show more solidarity among them in order to defend themselves from the not so free.

But a piñata is made to be broken!

Sir James Rickards’ “How markets attacked the Greek piñata” February, 12 represents a truly provocative piece of advice… until we run into the difficulties of defining what risks should be allowed as insurable… you see, a piñata is made in order to be broken… and so perhaps we need to prohibit anyone not having a direct interest in Greece to lend Greece the funds that loads their piñata... is that it? Also, if the Greek piñata breaks, who is to tell us with absolute certainty that it is not Greece that would most benefit from it?

Yet, again, it is indeed provocative to somehow go down this route of allowable speculations, and at least prohibit the profiting from others misery, like having an interest in people defaulting on their mortgages... though I much prefer the Danish principle of awarding mortgages with such a care that no one really dares to bet against them.

What is ‘socially desirable’ to regulators can be very ‘socially undesirable’ to us

Sir, Sir Martin Jacomb holds that “views on what activities are ‘socially desirable’ should play no part in the regulatory structure” but fails to see that this is exactly what happens when regulators discriminate bank capital requirements based on what is socially desirable to them as regulators, namely that of reducing the risk of bank default, “Hurried reforms will not get banks lending” February 11.

I ask again, for the umpteenth time, what is socially desirable about banks not defaulting if banks do not perform as society should have reasons to expect? Personally I have always argued that the lack of bank failures points to a lack of needed risk-taking, and to anyone who counters with pointing at the many bank defaults in this crisis I tell them these were not the result of bank failures but of regulatory failures.

If bank regulators had not favoured with some truly minuscule capital requirements those operations that they found ‘socially desirable’ having triple-A ratings; or empowered the credit rating agencies way too much, this very ‘socially undesirable’ crisis would not have happened.

But of course, with Sir Martin Jacomb’s general point on the importance of getting the banks to lend, I totally agree. To me it is truly surrealistic to observe how much leeway we are willing to give government bureaucrats to spend our children’s future taxes, when compared to how much we demand the regulators to rein in the banks.

Mexico should be up in arms against China and its weak renminbi.

Sir Arvind Subramanian, based on Dani Rodrik’s estimates, makes a solid case for how “It is the poor [emerging countries] who pay for the weak renminbi” February 4. The argument gets to be even clearer if using specific examples.

Mexico, should be USA’s China, had it not been for the fact that China’s political system makes it so much easier to manage a weak renminbi than Mexico’s a weak Mexican peso.

Please tax me too with this too big to fail tax!

Sir as an Executive Director of the World Bank during a risk management conference in 2003 I told the regulators “Knowing that the larger the banks are the harder they fall on us if I were a regulator, I would be thinking about a progressive tax on size”.

What I now see reported by Patrick Jenkins and Brooke Masters in “US impetus drives Bank regulators” as a tax of 15 basis points on assets more than $50bn, is not what I had in mind. 15bp for what seems to be the right of officially being termed too big to fail, clearly earning a triple-A rating is ludicrous, most small businesses or entrepreneurs, would gladly pay much more if given the chance.

To understand the magnitude of the tax we might use how the bank regulator seems to value the difference between an ordinary fallible business and a triple-A rated entity. When lending to the first, a bank is required to have 8 percent in equity while when investing or lending to anything related to a triple-A rating it is only required to have 1.6 percent. Supposing the cost of bank equity is 5 percent more than the cost of deposits, then the previous difference of 6.4 percent in equity amounts to a cost difference of 32 basis points; and which strangely enough the regulator feel should benefit those already benefitted by being perceived as having low risks and affect those already affected by being perceived as more risky.

How much less would a bank deemed as too big to fail be required to pay for its funds when compared to the rest of the humanly fallible banks? If we are to tax the too big to fail banks is it not supposed to hurt them instead of benefiting them?