March 31, 2010

A German Eurozone would suffer the reserve currency curse.

Sir Martin Wolf (who seems to be as obsessed with lacking German demand as I confess to be with the lousy Basel regulations for banks) writes “If the Eurozone itself became Germany, I cannot see how it would work”, “Why Germany cannot be a model for the eurozone” March 31.

It would work, with the Euro at 3 dollars, making it much harder to export the Eurozone would suffer like the US from the reserve currency curse... the safe-haven curse. That it would seem impossible for this to occur, on that I agree though.

P.S. I invite you to read what I wrote in Daily Journal of Caracas in1998 a couple of weeks before the adoption of the Euro… it explains what is happening now.

March 27, 2010

But Greece should insist they only speak with ECB... for now.

Sir in “Europe manages a wise compromise” March 27 when you quote Churchill in that “the eurozone makes the right decision in the end, though not before exhausting all other alternatives” someone could interpret you as naively believing that the Greece problem has been ended, and we wouldn’t want that, would we?

Since in fact Greece is living an economic impossibility and since IMF represents hair that cannot be cut, if I was Greece I would much prefer calling IMF for help after a restructuring, not before.

By the way, if you were a young Greek and Greece were set upon making good on their debt no matter what, would you stay in Athens or go to Hamburg?

March 26, 2010

What we need is to face up to the shattered myth of a rational regulator!

Sir here we stand before the ruins of a financial regulatory system that limited its purpose to avoid defaults and put too much trust in credit rating agencies allowing for minuscule capital requirements whenever AAAs were present… and mostly discuss the myth of a rational market? What about the myth of a rational regulator?

Justin Fox commences to hint at what we really need arguing in that “Cultural change is key to banking reform” March 26. I support a drive to simplify regulation and not to complicate them even further as is evidenced by the reforms currently suggested by the Basel Committee and the Financial Stability Board.

Justin Fox, though also supporting simplification, argues this might not be enough, as shown by Lehman Brothers´ faking the balance which is evidence of “ways to subvert even the clearest of the rules”. He is right but let us not forget that Lehman Brothers´ what they were up to was hiding and trying to redistribute the losses while the regulators, pushing so much toward supposedly risk-free land, were creating losses… and that is no doubt a lot worse.

There are many looking for the Holy Grail of the “vision thing”.

Sir, amen was all my initial response to Martin Wolf’s “Back to the future imperils Britain” March 26, but then, thinking about the need of the “vision thing” I remembered something I had written in my book “Voice and Noise”, in which I recounted some of my reactions while an Executive Director of the World Bank.

Strategic Plan

Suppose the country was an island and that the only boat with which you could leave it for the next thirty years was scheduled for departure today. If you were an ambitious and hopeful 15-year-old who loved his country and that has just read the country’s Strategic Development Plan, would you stay or would you take the boat?

When we read these plans, we are left with two lingering doubts:

What’s in this plan that separates this country from all the rest? As it is obvious that all developing cannot occupy exactly the same place under the sun or find jobs in agriculture, what more is there to lead us—except for an “If it’s Tuesday it’s got to be Tanzania!”

Yes! All the basic necessary tools are included in the plan: macroeconomic stability, brushing your teeth, better governance, eating your breakfast. But, where are you really heading and where is that green valley that will motivate and inspire your efforts?”

It looks like countries share much more than what is believed too many of them seem to be looking for the Holy Grail of the “vision thing”… and Tanzania is not even an island.

March 25, 2010

Greece would be nothing compared to the big AAA-bomb already dropped!

Sir, of course Goldman Sachs´ Erik Nielsen is correct saying that “ECB must re-examine its dependence on rating agencies”, March 25, since “no country would hand the controls of a nuclear device to a third party”.

But this has really very little to do with Greece as that would be just a minor tactical puff! The real big AAA-bomb already exploded in the subprime heart of the Empire, causing a couple of trillions of dollars in damages and radiating many harmful after-effects that we are just beginning to tally and comprehend.

The resource cursed citizens merit more sympathy and respect

Sir, you have published some quite thoughtful articles on the resource curse lately but, though I tried hard, I could not find one single valid argument why the “Resource wealth need no longer be a curse” in the article by Mats Berdal and Nader Mousavizadeh published on March 25.

The resource curse have millions of people suffering horrors so it is somewhat upsetting to see it being taken as lightly as some acne that could disappear if only instead on private investors it is governments like China or other similar hopefully western states” are to invest in natural resources with long-term commitments dubbed “macro-finance”... resource curse exploiters are just what they usually end up being.

The resource curse is a cancer, for so many... and you just do not go around speaking lightly and self-servingly about easy cures to cancer. Please the resourced cursed citizens merit more sympathy and respect.

But it is also high time to stop rewarding perceived prudence.

Sir John Plender is very right in that “It is time to stop punishing prudence” by treating equity more fair when comparing to how debt is rewarded by the tax deductibility of interests, March 25.

But equally we also need refrain from rewarding perceived prudence, which happens when bank regulators, on top of all those benefits that already accrues to what is perceived as having lower risk, generously (and stupidly) layer on some minuscule capital requirements for banks any time they are involved with anything that can display a good credit rating.

As we have seen, and should have known, that undermines stability even more.

March 24, 2010

But some excessive virtues might not be a too bad vice for the world economy.

Sir yes, yes and yes I would absolutely agree with Martin Wolf that Germany must increase its demand, if only he could be able to hint at exactly what the Germans could be demanding more of in order to achieve a sustainable growth, “Excessive virtue can be a vice for the world economy”.

Perhaps, taking advantage of their currently quite green mindset, we could convince them to make a helicopter drop of resources on some green projects… that virtue, even though sounding a bit excessive, would perhaps not be a vice for the world economy.

March 23, 2010

But might the US have become sicker now?

Sir the more divided a nation is, the sicker. I as a Venezuelan should know. That is why I cannot join you in such unchecked felicitation for the US having passed their health bill, “Obama secures his place in history” March 23.

Since the only thing that a nation can truly unite around is something which can easily be understood, a more than 900 pages long bill unfortunately evidences that those involved did not care sufficiently about the health of the nation. That, for us foreigners who are convinced that so much of our descendants’ wellbeing is much dependent on the health of the US, does not make this truly a day to celebrate… and this even if we agree with the reform.

But there are some glimmers for hope though. Having lived in the US for more than seven years now, the only aspect related to health sector reform on which I felt there was almost total consensus about was tort-reform. That according to the bill is now to be studied by individual states, receiving quite modest grants of up to $500.000, with the idea of providing Congress a report on the issue in December 2016 and so, hopefully, then some source of unity could be provided for, but, why the wait?

Yes we need regulatory dynamism... in the right direction of course

Sir I much appreciate Tony Jackson’s call “Let’s get some dynamism into dynamic provisioning” March 22. He is absolutely right, as I have been arguing for more than two years, now is the time to lower the capital requirements for banks, at least for those small businesses and entrepreneurs and though they caused the largest regulatory capital needs had nothing to do with causing this crisis.

What two years? I have been on this much longer

March 18, 2010

Regulators, please do no harm, you’ve done enough!

Sir Viral Acharya in “Why bankers must bear the risk of ‘too safe to fail´ assets” March 18, points out that “though AAA –rated tranches and repo financing are relatively safe, their entire risk is systemic in nature” and therefore [bank] regulations “should be more concerned about seemingly fail-safe assets… rather than worrying much about riskier assets”.

As you must have been able to gather from my many (unpublished) letters making the same argument I believe he is absolutely correct. My deepest concern though is how we all landed in the hands of bank regulators so naive as to believe that in a world of intrinsically coward capitals disaster looms where risk is perceived as high and not where the risks are perceived as low and therefore create conditions for stampedes towards safety and that could dangerously overcrowd even the ex-ante safest haven.

Again, for the umpteenth time, we need for our regulators to be fully aware that their regulations could be the source of the worst kind of systemic risk and, if they’re not, then we are much better off without any sort of regulation.

When selecting the regulators we must reduce the risk of a systemic fault or similarity in their thinking process. Now we have only single-minded gnome clones.

Those who cannot handle a test failing never test

Sir Tim Harford correctly proposes that “Political ideas need proper testing” March 18. What he fails to understand though is that the main reason for the politicians not wanting to perform tests on their proposals is that if they fail they would not know what else to propose and that is as we know a nightmare for these professional besserwissers.

Take as an example financial regulations. The regulators came up with what they thought was the splendid idea of rewarding banks with lower capital requirements if they kept themselves doing more operations deemed as having lesser risk by some external and supposedly independent credit rating agencies. Because it naturally led to the dangerous overcrowding of traditional safe-havens, like mortgages, the results were absolutely disastrous. But the same faulty regulatory paradigm is still applied, only because the expert regulators kept in their places have no clue about what else to do, and that they cannot allow us to see.

March 17, 2010

But Germany could always make an offer no one could refuse!

Sir Martin Wolf in “China and Germany unite to weaken the world economy” March 17, writes that “Since… Germany… has no chance of expelling any member it disapproves of from the eurozone it would have to leave itself”.

I am not at all sure about that. Germany could always make an offer to Greece and to Greece´s creditors that no one could refuse, especially if things go from bad to worse.

Germany could for instance guarantee 20 percent of Greece current debt in Euros if creditors are willing to convert the remaining 80 percent into New Drachmas at reasonable rates and with reasonable maturities. This would allow Greece to devalue and perhaps even keep the option of returning to the euro-fold at a more propitious moment.

It’s good but please do not call it a financial regulatory reform!

Sir you are correct in what you hold in “Reform is in sight” March 17, namely that “When money is loose and prudential rules are lax, banks will find dubious assets to stuff leveraged-financed balance sheets”. The current crisis is a result of the regulators authorizing banks to leverage up to 62.5 to1, if their appointed risk surveyors, the credit rating agencies, deemed these assets all but dubious.

But precisely because of that you should perhaps better refrain from referring to proposals such a Senator Chris Dodd´s bill as a reform, since it contains nothing that truly addresses the above. To do so might cause the impression that the work has been completed when in fact it has almost not started.

Play it maestros!

Sir I do agree with all of Martin Wolf´s good and absolutely cut clear “Chermany calling”, March 17, except for his last phrase “Forget all the self-righteous moralizing. Try some plain common sense instead.” That call unfortunately carries also a ring of self-righteous moralizing, since what common sense really tells us is that what is on the line is not the avoidance of some truly harsh adjustments, but more the timing of those. Are they to occur during our baby-boomers' time or after we have retired from the scene?

The world has two alternatives, one is to grow itself out of the crisis in the hope that it will find a sustainable economic down the road, the other is to readjust in the hope it can find a political sustainable and decent way to do that. Which way you prefer depends much on your starting point. Deficit countries are naturally more inclined to go for growth, surplus countries less so, if only because they have not the same keen urgency. Again, as usual, little will be done… until, as they say, the shit hits the fan, or the music stops.

Meanwhile I would be glad, and honored, to sit in a chair on deck, next to Martin Wolf, listening to some hopefully not too bad music we can both whistle to.

March 16, 2010

Why do you have to sound so envious of Germany?

Sir you might be absolutely right but with yours “Europe will not save its way to growth” March 16, you come out, for the umpteenth time in some few weeks sounding just envious of Germany. Though Germany might indeed have benefited more than its fair share from the conditions previous to this crisis there is no way you could blame German frugality for causing it.

If instead you spent some time trying to point out a seemingly viable way to sustainable economic recovery I am most certain that most Germans, or all of those non Germans that lay their hands on Germany’s savings, will gladly help out to take us there. But, just in case let me remind you that sustainable recovery does not seem to have a great chance in a world where China buys even more cars than the US.

March 10, 2010

Is a bailout the right pillar for a political union?

Sir Martin Wolf is quite clear on that much of Germany´s strength is based on other´s weaknesses and so he reaches the conclusion that in order to be able to manage difficulties such as the one Greece is having within the EU, “Germany must become less German”, “The eurozone crisis is now a nightmare for Germany”, March 10.

This is the classic dilemma, shall we put those students who study hard in the same group as those who do not in the hope that the average becomes better... or might we risk spoiling all by doing just that?

In normal circumstances I would probably agree with Wolf but given there are new recently discovered limits to sustainable growth, like climate change and lack of oil, I am not sure having Germans consume like American points in the right direction.

And then there is also the fact that the Germans do what they do because they´re Germans while the Chinese do what they do because their governments orders what they are to do, and so before China gives in I truly dislike asking the German to do so.

Is a bailout a good pillar for a political union? If the answer is no then perhaps we need to analyze more in detail the real implications of a eurozone breakdown before making our minds up. Whatever, at the end of the day, I would still prefer a German eurozone crisis´ nightmare than the Greek or Spanish version of it.

March 09, 2010

FT seems to be seriously obfuscated by some European issues.

Sir in a world where there seems to be no sustainable way of taking average world per person consumption to even a frugal German level, I must say that I find your editorial of March 7, “The burden of German thrift” and in which you actually demean those not consuming as much as they could be consuming, to be outright irresponsible.

Yes, the economic variables need and will sooner or later be realigned so as to take care of the current disequilibria that are more the result of Greece having abused the strength of the Euro than of Germany abusing the weaknesses of the Euro. To be so obfuscated so as to prefer the Greek economic model to the German one points to some very serious underlying European issues in FT, and that I sincerely hope they can sort out for the good of all.

March 04, 2010

Naïve regulators went to sleep like babies.

Sir in “Do not rush to switch off the life support” March 4Robert Skidelsky and Marcus Miller refer to “flaws in regulatory philosophy that stemmed from the belief that the banks could safely be left to regulate their own risks”. That is simply not true!

The fundamental flaw was that regulators replaced the hard-work that financial supervision ensues with a naïve belief in some capital requirements based on risk they concocted and in the capability of some credit rating agencies to adequately measure risks… and then went to sleep like babies.

Had they left the banks to their own design and not influenced them with absurd low capital requirement for what was perceived as having low risks of default... something else might have happened, but not this crisis.

What we need more than anything is to get rid of the current bunch of regulators who have entrenched themselves in the almighty and to no-one responsible Basel Committee and which’s has in the Financial Stability Board its first line of defence.

March 01, 2010

If you can pay out on a credit default swap you are not naked.

Sir Wolfgang Münchau opines that it is “Time to outlaw naked credit default swaps” arguing that “the case for banning them is as strong as that for banning bank robberies”, March1. I must say that the simile provided is quite unfortunate not only because it is not more bank-robbery than the robbery that can be carried out by the bankers inside a bank but also because though bank robberies have always been banned that has not prevented them from happening.

The real risk with naked credit default swaps is that it permits someone to collect upfront the insurance premiums without necessarily having to capacity to pay up when the incident occurs, in other words the counter-party risk. If all those who are now selling a five years CDS contract covering Greek Bonds for €394.000 per year could immediately pay out the €10m they had obliged themselves to do then nothing would have happened except for a redistribution of moneys… and of course there would be no robbery involved.

In this respect we should not outlaw the CDS but instead assure these CDS are traded through clearing houses that apply rules which really guarantee the payouts, and make sure that our banks are required to have so large capital requirements against their CDS positions so as to remain banks instead of becoming bookies. AIG went wrong not because of its bets but because of the unlimited credit that because of the AAA-ratings it received as a bookie.

Sincerely, what could be more naked that the fact that our banks can hold zero capital when lending to sovereigns rated AAA to AA-? That has helped to cause the huge public debt overhangs much more than any consequential CDS trading has done and so, if something real is to be done about it, let us go for the jugular.