November 30, 2012

Regulators bully banks, banks bully “The Risky”, and “The Infallible”, they just have a blast.

Sir, Brooke Masters, Claire Jones and Patrick Jenkins report “Big banks’ capital needs under microscope” November 30. 

"Regulators suspect banks have understated possible losses and need a 'material' amount of extra capital"

Of course I favor more capital in the banks, at least for their exposures to ‘The Infallible”, which are seriously under-capitalized as a result of overly generous capital requirements. 

But what regulators must remember is that while different capital requirements for different assets exists, their pressures on banks to increase their capital, will be mostly felt by those who generate the largest capital requirements, namely “The Risky”, like small business and entrepreneurs. 

Regulators bully banks, banks bully “The Risky”, the small businesses and entrepreneurs, and “The Infallible”, sovereigns and triple-A ,they just have a blast getting even more bank funds at even lower interest rates.

PS. Could these type of capital adjustments not trigger the conversion into zero clause of Barclays' recent $3bn contingent capital notes deal?   

Mr. Mark Carney, what are you thinking to do about Britain, keep on making it wimpy, or making it great?

Sir, and FT’s experts and journalists, this is the letter that I would send to Mr. Carney 

Dear Mr. Carney. 

As a chairman of the Financial Stability Board, and a bank regulator, you share the responsibility for imposing on banks, capital requirement that are much lower for assets ex-ante perceived as not risky than for those perceived as risky. 

And you must of course understand this allows the banks to earn a much higher expected risk adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. 

And you must of course understand this means too much bank credit will go on too generous terms to “The Infallible”, and that “The Risky”, like all small businesses and entrepreneurs, will see their access to bank credit made much more difficult and expensive than without your intervention. 

And so, is it your intention to keep these capital requirements and have Britain little by little go wimpy, withdrawing more and more into a falsely perceived safety, like a young boy who stays in his room with his computer and never dares to walk the streets of his hometown, or are you going to put an end to this nonsense and thereby at least allow Britain the chance to remain great? 

And just in case you have not had time to think about the fundamentals lately, let me remind you of the fact that nations grow great thanks to risk-taking; and also of that all bank crisis in history have always resulted from excessive exposures to what was considered ex-ante as absolutely- not- risky, and never ever from excessive exposures to what was ex-ante seen as risky. 

By the way Mr. Carney, just out of curiosity, has a conservative government hired you to keep the capital requirements for banks when lending to the government much lower than when lending to the citizens, or, hopefully, to get rid of that odious pro-state regulation? 

Oh, and before I forget, Good Luck! 

Sincerely 

Per Kurowski 
A former Executive Director at the World Bank (2002-2004) 
Currently censored by the Financial Times

November 29, 2012

We must rid ourselves of the incredibly vicious regulatory centrifuge that will make our economies implode.

Sir, David Pilling writes about inflation being a tonic that grows the size of the nominal economy and keeps the ratio of public debt to gross domestic product more manageable, “Japan, too, needs outside thinking at its central bank”, November 29. So that's the trap! What a horror story... at least for those who have saved for their retirement investing in government debt.

First the bank regulators appointed by governments, declare that it is so much safer for banks to lend to the government than to lend to a small business and entrepreneur, and so banks need to hold 8 percent in capital when lending to “The Risky Citizen”, but can lend to “The Infallible Sovereign” holding zero or little capital (Basel II).

As a result banks will expect earning a much higher risk-adjusted return on equity when lending to “The Infallible Sovereign” than when lending to “The Risky Citizen”; while some lucky banks will also be able to grow into desirable “too-big-to-fail-banks”, by leveraging their equity more.

And as a natural consequences of this regulation “The Sovereign” gets saddled with too much debt, and since this could threaten its infallibility, they contract “outside thinking”, which suggests to them they use inflation so as to inflate themselves out of the problem.

And simultaneously, the most cooperating courtiers, the “too-big-to-fail banks”, get knighted as Systemic Important Financial Institutions, which will of course allow them to keep up the cycle of lending to the still "infallible sovereign".

What an incredible vicious regulatory centrifuge they invented. It will make our economies implode. Sincerely, I do not think they did it on purpose, because, otherwise, instead of just wanting the regulators out, I would want them shot.

November 28, 2012

As a central banker Mark Carney might be great, but, as a bank regulator, like the rest of that bunch, he stinks.

Sir, I do not opine on Mark Carney´s qualifications as a traditional central banker, these are probably fabulous, but, as a bank regulator, like Mario Draghi, Lord Turner, Michel Barnier, the Americans and the rest of the current bunch, he is not qualified.

Anyone who does not understand that lower capital requirements for banks on assets perceived as “The Infallible” than on assets perceived as “The Risky”, artificially elevates bank returns for the first and makes the other uninteresting, cannot be a good bank regulator… and this is simply so because a good bank regulator also thinks about the purpose of a bank, primarily that of allocating efficiently resources in the economy.

To me all current regulators are also non-transparent statists, since only statists could think of requiring a bank to have some capital when lending to “The Risky”, like the small businesses and entrepreneurs, while allowing the banks to get away with zero or very little capital when lending to “The Infallible”, like to “infallible” sovereigns, and to their courtiers, the triple-A rated.

Well, the result of all their badly concocted risk-adverse regulations, Basel I, II, and III, will be that we are all going to see our banks and our savings drown into oceans of absolutely worthless “absolutely safe assets”; and only then will the regulators perhaps remember that the actions of “The Risky” are in fact through history those that most have contributed to our economic well being.

That they´ve learned their lesson? Forget it! Basel III only doubles down on their mistake. Now on top of capital requirements based on perceived risk, we are also going to have liquidity requirements based on perceived risk; and the too big to fail their regulations helped to grow, have now been promoted into "Systemic Important Financial Institutions", leaving the rest of the banks in the unimportant segment.

I assure you that history will not be kind on these regulators (nor on their collaborators)

PS. This mostly references Brooke Masters´ and Claire Jones´ “Outspoken and innovative, Carney enjoyed a good crisis” November 28.

November 27, 2012

For Mark Carney to guide the economy to the "least intolerable destination”, is that not a too low expectation Mr. Wolf?

Sir, I have not seen any heartfelt intention on behalf of The Financial Stability Board, FSB, to throw out the window that paradigm of capital requirements for banks based on perceived risks, and that so distort the market and impedes the bank to fulfill efficiently their important economic resource allocation function. 

Therefore I can see no reason why congratulate Britain for having chosen Mark Carney, the current chairman of FSB to head Bank of England. Time will tell and let us pray for Britain´s sake it was a wise choice. 

Martin Wolf, in “Welcome to Britain, Mr Carney it needs you”, November 27, defines the task of the new governor of BoE as being that of “to guide the central bank and the economy towards the least intolerable destination.” 

I do agree with the importance of not creating too high expectations but those, even for someone like I who except for a deep feeling of admiration for Britain has very little to do with Britain, seems to be a bit too low. I think Britain needs and deserves more than "the least intolerable destination".

Throwing Basel II, III, out of the window, is the best way to free us from the too risky risk-adverse bank nannies.

Sir, William Rhodes makes many valuable and correct suggestions in “The time has come to end the eurozone´s ad hoc fixes” November 27. 

The most important is when he reminds us about the need to “reformulate the balance of regulation in favour of enabling the banks to lend more to small and midsized enterprises, which are the prime job creators in most economies” and suggests this can only be the result of a banking union that “can separate banks from sovereigns”. 

But, in my opinion this is too an important and urgent goal so as to have to wait for a banking union. It could be much faster attained by simply throwing Basel II and III out of the window and getting us some new bank regulators; some who understand and give importance to the function of banks in allocating economic resources in an efficient way. 

Banks, like those William Rhodes worked in, used to give the loans or make the investments in whatever produced them the highest risk and transaction cost adjusted return on their equity. 

Unfortunately though, the current generation of bankers, start out doing the same, but they now have to adjust it for the different capital requirements based on perceived risks regulators impose. 

And that simply means that most bank credit will go to “The Infallible”, with low capital requirements, and that “The Risky”, like those small and midsized enterprises Rhodes fondly speaks of, are because of higher capital requirements, effectively locked out from access to bank credit on competitive terms.

November 26, 2012

Much more than a bank union, Europe needs completely new bank regulations

Sir, Alex Barker reports on Michel Barnier, the European commissioners current efforts to create a bank union in Europe, “Time to decide on bank union”, November 26 

If it is for banks to go on lending to “The Infallible”, private or sovereigns, and not to “The Risky” small businesses or entrepreneurs, then Europe does not need a banking union, since Europe will be stalling and falling anyhow

What Europe needs, much more than delaying Basel III, is throwing out completely those insane regulations of capital requirements, and now also of liquidity requirements, based on perceived risks. 

November 24, 2012

Discrimination against “The Risky”, in America, “the land of the brave”, is pure tragedy.

Gillian Tett quotes Peter Thiel concerns about that American innovation is slowing, sapped by the financial boom and a risk-averse culture. “There might be a great deal to gain in sharing the pain” November 24. To that Kenneth Rogoff had retorted that it was the implosion of the debt bubble – not lack of innovation that hurt American growth. 

Ms Tett finds Mr. Thiel’s comment fascinating in how it reflects America as “a country founded with an optimism that anything could be done, and had little sense of resource constraint” 

Yes, that might have been true but currently the US, like Europe, have introduced severe constraints on one of the most important elements of innovation and development, namely that of risk-taking. 

The debt bomb-that imploded has absolutely nothing to do with credits given to entrepreneurs or other risk-taking innovation ventures, but exclusively with credits given to what was officially considered to be absolutely safe. 

It was the direct result of extremely confused and risk-averse bank regulators who by allowing the banks to leverage their equity many times more for exposures considered as part of “The Infallibles” effectively locked out “The Risky” from access to bank credit, as these could not provide the banks with similar returns on equity. 

The Risky” are already sufficiently discriminated against by Mark Twain’s banker, he who lends you the umbrella when the sun is out and wants it back, fast, when it looks like it is going to rain. That the regulators has layered on additional discrimination against “The Risky” in a land that prides itself being called “the land of the brave”, is pure tragedy. 

A nation that worries more about history, what it has got, “The Infallible”, the old, than about the future, what it can get, “The Risky”, the young, is a nation that is stalling and falling.

November 23, 2012

Has someone really gone bonkers with Barclay’s contingent capital notes?

Sir, I refer to Mary Watkins’ “Barclays’ total loss bond poses test for ‘coco’ markets” November 23, as well as to Patrick Jenkins’ “Banks unnerved by BoE’s extreme focus on capital” November 20.

There is something I cannot figure out about these bonds, perhaps you can help me, or perhaps it is just one of those “blind spots” to which Gillian Tett refers to in “Investors must search for the next financial blind spot” November 23.

It states that under the terms of the deal, that the bonds will be automatically written down to zero if the bank's Common Equity Tier 1 ratio falls below 7% , and I assume that this is on a risk-weighted basis since I Barclay surely holds less than 7 percent in capital against all its assets.

If so, what happens if Barclays’ management decides, own its own, to move some assets with low risk-weights, “The Infallible”, which require holding little capital, into assets with a higher risk-weight, “The Risky”, and which therefore require holding more capital, and therefore cause the bank’s Common Equity Tier 1 ratio to fall below 7%?

Or, alternatively, what happens if the regulators decide to change the risk-weights and thereby Barclay's Common Equity Tier 1 ratio to fall below 7%? 

If it is as I do not want to believe it is then management (or regulators) can, without Barclays losing a cent on its assets, get all these bonds written off. Sounds crazy! And, if so, would management be able to collect a bonus on that very real profit?

PS. Will shareholders require management to adjust the bank portfolio in such a way that Barclay's Common Equity Tier 1 ratio falls below 7% and it does not have to repay the bondholders? 

PS. Will bondholders require management to adjust the bank portfolio in such a way that Barclay's Common Equity Tier 1 ratio stays over 7%, so that they will be repaid? 

PS. Have regulators now been de-facto impeded to change the risk-weights? 

PS. Who is going to sue who?

Sir Samuel Britain, here is what Lord Keynes would shout from his grave, if only he could.

Sir, Sir Samuel Britain writes “I have no idea what Keynes would say but I can hear him turning in his grave” “British economic policy echoes Habsburg decline”, November 23.

May I suggest the possibility that Lord Keynes would desperately shout out the following from his grave, if only he could: 

“You fools you have to make banks allocate resources to the most profitable projects which create the most growth which create the most jobs, instead of having these allocating resources to what requires them to hold the least in capital, in order to produce the highest returns on their equity.”

When a nation starts giving more importance to guarding what it has, and to assure their banks lend to “The Infallible”, than about what it can get by allowing their banks to lend to “The Risky”, like small businesses and entrepreneurs, it stalls and falls. The scarcity that currently most threaten our nations is that of pure un-distorted risk-taking.

November 22, 2012

“You have to rely on audited financials” “You have to rely on credit rating agencies”. Same old dumb story! (excuse)

Sir, Chris Nuttal and Richard Waters, with respect to Hewlett Packard’s messed up acquisition of Autonomy, quote Meg Whitman, HP’s CEO saying, “But in the end, you have to rely on audited financials and we did.”, “Blame game thrusts tech group’s due diligence under the spotlight” November 22.

How wrong! The first responsibility of anyone in Whitman’s shoes should be… "Is there anyway something like this could be worth this much and, if so, let us ascertain those conditions are valid, no matter what anyone else opines."

Hers is precisely the same defensive argument put out by bank regulators with their “in their end you have to rely on credit rating agencies”.

The truth is that if we shareholders, citizens and taxpayers don’t put an end to this stupidity and lack of accountability, it will put an end to us.

The way I look at things bank regulators like Mario Draghi and Lord Turner, are just about the same as failed CEOs like Meg Whitman.

November 21, 2012

Ultra-loose monetary policy distorts but, in that category, the title goes to capital requirements based on perceived risks

Sir, John Plender is indeed bringing up an interesting point in that ultra-loose monetary policy carries with it the possibility of maintaining, alive and sort of kicking, zombie companies that should otherwise and best disappear; and this prevents an effective resource allocation “UK economic growth hobbled by overambitious banks” November 21, and “Japan counts ‘zombie’ cost of easy money” November 6.

That said, and in the category of financial distortions, the title clearly must go to the capital requirements for banks based on perceived risk.

Just as an appetizer consider that the better information banks have, such as those Plender mentions Andy Haldane points to, “a shared utility, storing client accounts details”, the more this information will be adequately cleared for by the banks, and so the lesser the need to have that risk information also reflected in the capital requirements.

By the way it was interesting reading about the way by which Handelsbanken was entering Britain, since a couple of months ago I described a bank that I would be interested investing in, in the following way:

“As an investor in a bank, the first thing I want from it is to dedicate itself exclusively to lending to what is officially considered as “risky”, like small business and entrepreneurs, and for which the bank is required to have capital... meaning that I, as a shareholder, count. 

And I abhor my bank to lend to anything that is officially considered as “absolutely safe” for the following reasons:

a.- It probably means the bank will be less careful.

b.-They can do so with much less bank capital and so therefore I, as a shareholder, become less important.

c.- It is only in what is considered as absolutely not-risky that the banks can build up exposures that can lead me to lose all my investment.

d.-If I want to invest in something perceived as “absolutely not risky”, I do not need a bank for that... anyone can read a credit rating (and save himself some banker’s bonuses)

Spain, Europe, America, should not bank credit go to the most profitable projects, those that generate jobs and growth? It does not!

Sir, I read Sebastian Mallaby’s “Spain is in need of urgent repair”, November 21, and though I agree with much there said, it does not even mention the urgent need for bank credit to go to the most profitable projects, to those that generate jobs and economic growth. 

Currently and for the last decade that it does not! Overly frightened bank regulatory nannies, caring not a iota about the purpose of bank credit, decided to allow banks to hold much less capital when exposed to “The Infallible” than when to “The Risky”.  And that signifies of course that banks will be earning much higher expected risk-adjusted returns when lending to The Infallible than when lending to “The Risky”. 

As an example, if any European bank wants to lend to a small businesses or an entrepreneur it needs, according to Basel II, 8 percent in capital and can therefore leverage 12.5 to 1. But if that same European bank lent instead to a sovereign rated like Greece was recently, it could do so holding only 1.6 percent in capital, for a mind-blowing 62.5 to 1 leverage. 

If Spain, Europe, America want to have a real chance to get out of this monumental financial imbroglio they find themselves in, they need to get themselves a complete new set of bank regulators who also care about growth and jobs. 

I do not live in Europe but, if I did, I would sure be part of an Occupy the Basel Committee for Banking Supervision movement… and frankly if I lived in Spain I would be demanding some relief in the capital requirements for banks on exposures that have a special potential to create jobs for the young.

“Misunderstanding Financial Crises”... Indeed Professor Gorton

Sir, Gary Gorton a Professor of financial economics at Yale, and consultant for over ten years to AIG Financial Products writes “Banking must not be left to lurk in the shadows”, November 21, in which he concludes with “we know now… privately created bank money is subject to runs in the absence of government regulation”. 

"Absence of government regulation”, what does the Professor mean?” Does he not understand that there never ever have been such intrusive and distortive regulations as when regulators took upon themselves to play the risk managers of the world, and ordered risk-weights to be applied when calculating the effective capital banks needed to hold against individual assets? 

Does the consulting Professor not know that the sole reason for AIG getting into trouble selling an extraordinarily excessive amount of credit default swaps, was that bank regulations allowed banks who bought such product, when issued by an AAA rated entity, like AIG was, to hold that asset against only 1.6 percent of capital, a mindboggling authorized leverage of over 60 to 1? 

In his recent book, “Misunderstanding Financial Crises”, Professor Gorton briefly refers to “risk-based capital requirements” in the context of forcing “banks with low capital ratios to increase them”. He is wrong. What the risk weights mostly produced was a reduction of the capital banks had to hold. Basel II, required 8 percent in capital, but, when a risk-weight of 20 percent was present, like when lending to Greece, banks needed to hold only a meager 1.6 percent in capital. Clearly when the Professor writes “The commercial banks that failed in the recent crisis held on average more capital than Basel III required” is because he is not really ware of how the risk-weights weighted. 

But what really gets me up in arms is when a Yale Professor in finance, several years after this crisis has started, can write in a book:”There is no evidence that links capital to bank failure”. 

Professor Gorton should know that the correlation between all bank assets that ran into troubles and caused the current crisis, with the fact that banks were allowed to hold these assets against extraordinarily little capital, and therefore allowed the banks to earn extraordinarily high expected risk-adjusted returns on capital on these assets, was 1. And I guarantee the Professor there was causality involved. 

Yes Professor Gorton, I agree that regulators should have looked to the history of financial crisis. If they had done so they would have noted that these are never ever caused by excessive exposures to “The Risky” these are always the result, no exclusions, of excessive exposures to “The Infallible”.

November 20, 2012

What bankers are really scared of, are the regulators becoming less Taliban.

Sir, Patrick Jenkins writes that bankers in London talk these days about “the Taliban” referring to the Bank of England’s Financial Policy Committee, “Banks unnerved by BoE’s extreme focus on capital” November 20. 

But bank regulators do act like full-fledged Taliban. Their regulatory discrimination in favor of “The Infallible” and against “The Risky” is as odious and as without reasons than the Taliban’s discrimination against women. 

Jenkins also reports on Barclays raising a couple of billions in contingent capital bonds and which will be wiped out if the ratio of the bank’s core tier one capital to assets weighted for risk, falls below 7 percent. 

But what if regulators became less Taliban and decided that “The Infallible” “the men”, was not that infallible, and that the risk-weight for lending to them, the men, should be the same as for women? That would wipe out all bank capital, immediately. Just Think for instance of a 7 percent capital requirement on exposures to the infallible sovereign? 

And so what bankers are really praying for in London, is for the regulatory Taliban to remain true orthodox Taliban.

Caveat emptor, regulators regulating!

Sir, I refer to Shahien Nasiripour and Tom Braithwaite’s report “Credit Suisse faces NY lawsuit” November 20, in order to comment on the temptations that existed (and still exist) for someone doing wrong, when awarding and packaging mortgages to the subprime sector. 

The natural incentive: If you convinced risky Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Hans that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell the mortgage for $510.000 and pocket immediately a tidy profit of $210.000. 

The regulatory incentive: If banks invested in such AAA rated securities, or lent against it as collateral, then according to Basel II, they needed to hold only 1.6 percent of a very loosely defined capital, which amounted to allowing banks a mind-blowing 62.5 to 1 leverage of its very loosely defined capital. 

And the combination of these two incentives to create “The Infallible” proved too irresistible for many, like for Credit Suisse. Only Europe, over just a couple of years, invested over a trillion dollars in these securities. I am not clearing mortgage originators, mortgage packagers, security credit raters and investment banks of any of their responsibility, but are not those regulators who provided the irresistible temptations also at fault? 

The sad part of the story is that the possible cost of this sort of lawsuits will now have to be paid including by those who bear no blame for the disaster, like “The Risky”, like the small business and entrepreneurs, those with interest earning bank deposits, and taxpayers. 

From now on, besides notices on the door indicating a bank to be insured, we might also need to put up a sign stating “Caveat emptor, regulators regulating!”

November 19, 2012

To reform Bank of England, and other institutions, you need to hire tough professional skeptics.

Sir, DeAnne Julius in “The Bank of England must reform its sheltered hierarchy” November 19 touches on a very dicey subject, namely how institutions need to reform, in order to better prevent disasters like the current crisis from happening, if that is at all possible.

Personally having witnessed in the World Bank a small part of the proceedings when Basel II was being discussed, 2003 till June 2004, I know at least two things that must be avoided.

First, the incestuous relation between those who are regulating and those regulated, in this case between bank regulators and bankers, as it often became very hard to tell who was who.

Second, that insipid politeness that penetrates all mutual admiration networks, where no one considers it appropriate to speak out. When a stupidity is not protested loudly against in a very early stage, it reaffirms itself very fast and becomes an ingrained paradigm that no one dares to question because doing so would be accusing colleagues of being just too dumb. And that you can’t do.

And so perhaps the Bank of England, and the IMF, and the World Bank and most similar institutions could benefit from hiring some professional questioners whose explicit role is not taking anything for granted, and most specially so, that the experts really know what they are doing.

As an example try to trace how on earth a stupid idea like having the capital requirements for banks be based on perceived risks that were already cleared for in the interest rates, in the amounts exposed and in other contractual terms. That double consideration of perceived risk, doomed the banks to overexpose themselves with little capital to “The Infallible”, precisely the kind of over-exposures that can bring about a major crisis, and underexpose themselves to “The Risky”, small businesses and entrepreneurs, precisely those we most need them to expose themselves to.

Europe and America, do not discriminate against your economic growth engines, or you will stall and fall.

Sir, Wolfgang Münchau in “What not to worry about in the eurozone crisis” November 19 declares that the first of his worries “is the impact of austerity on growth”. I completely agree, but what most worries me is not any fiscal or monetary austerity to which Münchau would refer to, but to the risk-taking austerity that has been introduced into our banking system by capital requirements that are much lower on exposures to “The Infallible” than to exposures to “The Risky”. 

That regulation, especially in times of severe scarcity of bank capital, is stopping all access to bank credit for those officially perceived as risky, like small businesses and entrepreneurs; and channeling all bank funding to fewer and fewer quite unproductive safe-havens, so much so that these havens are also becoming dangerously overpopulated. 

If the eurozone, the whole Europe and America too, want to save their economies they’ve got to rid themselves of this regulatory discrimination against some of their most fundamental growth engines and understand that without considerable risk-taking, they will stall and fall.

Pray for some shadows sufficiently dark for some banks to escape the regulators... Caveat emptor, regulators regulating!

Sir when reading Brooke Masters report on “Regulators to tackle shadow banking”, November 19, and given the regulators doing that are the same old failed regulators, I can only fret for the future of whatever they identify as “shadow banking”.

If the regulators keep acting according to their so mistaken paradigm of weighting anything for perceived risks, even if those risks have already been weighted for, then they are dooming the shadow banks, like the surface banks, to create dangerously excessive exposures to what becomes officially considered as “The Infallible”… just like those exposures created in AAA rated securities back with lousily awarded mortgages to the subprime sector, loans sovereigns like Greece, or real estate financing in Spain.

And in that case, let us pray there will still be some banks hidden away in sufficiently dark shadows so that “The Risky”, like our small businesses and entrepreneurs, can at least have some access to bank credit… even if on the unnecessary expensive terms that the regulators’ dumb and useless risk-aversion has created. 

Lord Turner magnanimously admits that “Shadow banking is like cholesterol. There is good and there is bad”, but says “now we’ve got the really difficult job of getting national authorities to dive in and determine [which part of shadow banking] really worries us.” And that should worry us… because that sounds just like when the regulators discovered the too-big-to-fail banks they helped create, they just proceeded to make it worse by naming these Systemic Important Financial Institutions, SIFIs, and thereby relegating the rest into being systemic unimportant financial institutions. 

When will the regulators understand how much they distort all, when just distorting some? Why do they not just loudly proclaim that caveat emptor rules the shadows? Or perhaps we must: “Caveat emptor, regulators regulating!

November 16, 2012

Bernanke calls banks “overcautious”. He´s got to be joking, or insulting our intelligence.

Sir, Robin Harding reports “Bernanke says overcautious banks are slowing recovery”, November 16. Frankly, for someone like Bernanke, who belongs to the nanniest and sissiest bank regulatory establishment ever, this is either a bad joke or an insult to our intelligence. 

Our current bank regulators allowed banks to leverage their equity amazingly much when holding assets perceived as absolutely not risky, “The Infallible”, and therefore to shun away completely, from anything officially perceived as “The Risky”, because these could of course not provide the banks with an equal expected risk adjusted return on equity… and now Bernanke is calling the banks overcautious? Come on! 

If Bernanke want banks to return to their normal level of caution, all he has to do is to make the capital requirements for banks the same for all assets… and so clearly the ball is in the regulators hands.

I do not know if Paul Tucker is or not the right man for the Old Lady, but he sure does not seem the right man for Britain.

Sir, you hold that Paul Tucker is “The right man for the Old Lady”, November 16. And though I do not know much about the Old Lady I must disagree, because the last thing I feel that Britain needs at this moment, is someone who quite recently opined that “Stability comes before the good things in life”. 

It was stability searching nannies, with their silly and uncontrolled risk adverseness that made the banks to excessively increase their exposures to what was considered absolutely not risky, “The Infallible” and to doing so, not only causing many safe havens to become dangerously overpopulated but also stopping “The Risky”, like small businesses and entrepreneurs, from having access to bank credit on equal terms. 

You suggest that “the new governor should make room for intellectual free spirits, such as Andrew Haldane”. Though in some ways I have not felt Mr. Haldane yet to be free enough, I wonder why someone like him could not directly replace Sir Mervyn King.

In much current banking is just an intimate communistic relation between bank labor and the State

Sir, Karl Stenberg In “Karl Marx would have been proud of the City’s bankers”, November 11, writes “Banks’ most important domestic function is to channel saver’s money to business for investment”.

Precisely, and precisely that is the problem with current bank regulations. When regulators set different capital requirements based on perceived risk, more risk more capital, less risk less capital, to a very large degree they preempted with their own biases, how the banks were going to execute that resource allocation. 

Before these discriminating regulations banks channeled the funds based on how much they expected the borrowers to produce a risk-adjusted return on equity for them. Now, it is based on how they expect a particular borrower to produce a risk adjusted return on the particular equity banks need to hold when lending to him. 

And therefore, since lending to “The Infallible” allows banks to hold much less equity than lending to “The Risky”, banks naturally channel all their lending to “The Infallible” “The Party Members,leaving “The Risky”, “the plebeian”, like the small businesses and entrepreneurs, out in the cold. 

By the way, when Sternberg says “Karl Marx would have been proud”, he is much more correct than he imagines. For instance, when banks lend to the infallible sovereigns, thanks to the regulators, "the party bosses", they do not need to hold any capital at all, and so in that there is absolutely no capital or shareholders involved, it is just an intimate affair between bank labor and the State.

November 14, 2012

When the Senate banking committee of the US, "the land of the brave" has hearing on Basel rules, let’s pray “The Risky” get some voice.

Sir, Shahien Nasiripour gives a good account of how “Banks attack Fed’s plans on Basel III accord” in order to defend their interests. November 14. My, how much voice the banking community has when compared to by those most negatively affected by Basel rules, II or III. 

Basel rules determine that banks can lend to those considered not risky, “The Infallibles”, holding much less capital than when lending to those considered “The Risky”’, like unrated small businesses and entrepreneurs. 

That of course translates into to banks being able to earn a much higher expected risk-adjusted return on equity when lending to “The Infallible” than when lending to “The Risky”. And that results in an odious and dangerous regulatory discrimination against those already being naturally discriminated against by the banks, being charged higher interest and receiving smaller loans. 

Nasiripour refers to the US Senate banking committee hearings on the proposed Basel rules, and I just hope that “in the land of the braves” “The Risky” will also get some voice. But, seeing for instance how a Financial Times over many years has shown absolutely no interest in that issue, I can’t say I am harboring any major hopes.

Last miles and gene pools should be considered when discussing manufacturing jobs.

Sir, John Kay writes about “Our fetish for making things fails to understand ‘realwork’” November 14. Of course, services is as real as any manufacturing job, but, as an economist, I still want to see some solid real assembly line manufacturing jobs close to me, for two reasons: 

First, the just in case; I do not want the last mile for delivering me ploughs, cloth, guns and batteries, to have to go over enemy land. 

Second, manufacturing is part of the biodiversity of a strong economy, and so I would like to keep some good solid real jobs for manufacturing workers, just like you would like to keep some heavy horses, “the Suffolk, the Clydesdale and the Percheron vie”, for your nations’ diversified gene pool reserve. 

Does that make me a manufacturing fetishist? I do not think so. The fact that I can get all on the web, does not mean I can get it all when the web is out.

November 13, 2012

With Basel III bank regulators are doubling down on the same mistake as Basel II. They must be stopped!

Sir, you conclude “A Spanish tragedy”, November 13, with “Banking crises have a human cost. “The price paid by some has already been too high. Unless Madrid and the banks face up to the truth, this will only get higher”. Absolutely! 

Spain’s banks excessive financing of housing was a direct consequence of bank regulators who allowed banks to earn a much higher return on equity when doing so, because housing was one of the officially deemed “The Infallible”, and therefore benefited with causing so much lower capital requirements for banks than when lending to “The Risky”. 

And so when are you going to suggest that the Basel Committee and all your other regulatory friends also face up to the truth? Currently it would seem that they are only doubling down on their mistakes, since Basel III, besides keeping the capital requirements based on ex-ante perceived risk of Basel II, will now also include liquidity requirements based on the same silly illusions… and FT does not seem to mind.

Professor Hubbard, bad news, the waters you fondly remember, have been contaminated by bank regulators

Sir, Professor Glenn Hubbard wants the US to walk down a narrow path, carefully avoiding the fiscal cliff, so as to reach the “pleasant waters [with] less uncertainty and stronger growth, “How the US should avoid falling off the fiscal cliff”, November 13. And, in doing so, he suggests that the US avoids increasing marginal taxes, which “distort behavior and reduce activity” and go for scaling back tax deductions instead. 

I completely agree with Professor Hubbard, but I have some very bad news for him. Those waters that he so fondly remembers from his youth are not the same waters anymore, they have been contaminated. 

When bank regulators decided to allow banks to hold much less capital against exposures to “The Infallible” than against exposures to “The Risky”, and thereby allowed “The Infallible” to provide the banks with a much higher risk-adjusted rate of return on equity than what “The Risky” could do, they effectively made the banks much more risk-adverse than what they already were. 

And banks, as a consequence, abandoned taking on the traditionally manageable risks we need them to take on, like lending to small businesses and entrepreneurs, “The Risky”, and entered a suicidal path of taking unmanageable exposures to “The Infallible”, and precisely the kind of exposures that have always resulted in a lot of tears. 

And so Professor Hubbard, if you do not want to be unpleasantly surprised when reaching the waters, ask your bank regulators to immediately stop discriminating in favor of those already favored by markets and banks, and against those already discriminated against. 

It is none of a bank regulators’ business to distort the economic resource allocation function of our banks, only because full of hubris they want to fool around playing risk managers for the world. In fact, and as I have said it before, if these bank regulators had done what they did knowingly on purpose, that would represent an act of high treason against our economies, and for which they should be shot.

November 12, 2012

Europe (and America), allow your small businesses and entrepreneurs to compete with "The Infallible" for bank credit on equal terms

Sir, Wolfgang Münchau in “Competitiveness is good but it will not save the euro” July 12, basically begs Europe to set aside all mumbo jumbo on “institutional reforms and structural reforms” and first solve what is “ultimately a balance-of-payments crisis”. 

Mentioning “intellectual muddle”, and the “distraction of the nebulous concept of competitiveness”, Münchau suggests “reforms that serve a specific and well defined purpose”, and to “separate these from reforms with unproven effects” and even “from those that stem from pure rightwing ideology”. And, “With youth unemployment at 52 per cent in Spain”, and “a fragmented labour market which protects workers with a permanent labour contract but discriminates against outsiders and the young… this should be the priority for economic reform”. 

Of course, sounds reasonable, but, what has “the balance of payment crisis” to do with youth unemployment? I did not really get that. 

For me, again, the primary cause of a balance of payment crisis in Europe is bank regulations that kept banks from allocating economic resources efficiently within Europe, and instead made them allocated these mostly to “The Infallible”, based on something as nebulous as what was officially perceived as absolutely not risky. 

Before the odious discriminatory regulation of capital requirements for banks, based on ex ante perceived risk is completely eliminated, neither Europe’s balance of payment problems, nor its high youth-unemployment problem, stand a chance of being solved in any sustainable way. 

Mr. Münchau some type of competitiveness matters a lot! For instance Europe (and America) should allow their small businesses and entrepreneurs “The Risky” to be able to compete with "The Infallible" for bank credit on equal terms.

But, if you absolutely can’t stop your regulators from distorting, a genetic condition, beg them at least to set the capital requirements for the banks based of potential-for-job-creation-for-youth ratings?

Allow the citizens, not the State, to do the sowing of the natural resource revenues

Sir, Sylvia Pfeifer, tackles the issue of how “Africa’s new oil nations grapple with the ‘curse’ of wealth” November 12 and, in it, refers to South Sudan where oil represents 98 per cent of state revenues. In my country, Venezuela, because of high oil prices and a prolonged period of economic de-diversification, oil revenues currently represent over 97 percent of all exports, and these are also managed by a “small staff”, in Venezuela´s case by only one.

Having been named the first diversification manager in the Venezuela Investment Fund set up in 1974 to manage the explosion in oil revenues, and resigning from my post after less than two weeks because of political pressures to have a mega project approved, I know a bit on the subject of oil and its governance. The first think I would recommend Sylvia Pfeifer and her readers, is to sit down and reflect for a while, on what such a concentration of power would mean in their own country. Would they be able to have some type of meaningful democracy? No way José! 

Our much loved and famed Venezuelan intellectual Arturo Uslar Pietri wrote about the need for “Sowing the Oil”. Unfortunately, Pietri left out the vital issue about who was going to do the sowing. At this moment, having accumulated all type of experiences I am absolutely sure that had oil revenues been distributed directly to the citizens in Venezuela, so that they had had the chance to learn how to sow it, we would live in a much better country. As is, all our citizens´ prime concern, from cradle to grave, is to how position themselves in order to get the most of those resources, which are really theirs, back from the sort of elected Great Distributor. 

When a nation begins receiving significant natural resource revenues, there is one very important question it needs to answer, namely: What is more important, that its government learns to manage those revenues or that its citizens do? I myself have no doubt, good citizens are much more important than good governments.

http://theoilcurse.blogspot.com/


November 10, 2012

Is posh London being leased out a la Hong Kong?

I refer to your House & Home weekly supplement from which we can deduct that London holds a tremendous appeal for capital looking for posh safe havens. Could it not be described as, de facto, Britain giving up an important part of London under a sort of Hong-Kong type lease? 

For a country that has joined others in giving up on risk-taking, in order to go for what seems to be ultra-safe, triple-A rated, this does not sound like a bad business model. It poses though some interesting questions, like for what length is this lease envisioned, what other benefits than high real estate prices are obtained, and how are these benefits distributed. 

It would also be interesting to hear if someone is setting aside something of the lease revenues so as to pay off Britain’s not so small public debt. 

Also in a world where we can suspect the competition among posh-safe havens for clients to increase, how is London doing relative to its competitors? That of course is only if the thought of London having some competitors is deemed acceptable to you.

November 09, 2012

Greece cannot be rebuilt without the assistance of “The Risky” Greeks.

Sir you write “Only the Greeks can rebuild Greece”, November 9. I absolutely agree with that, as well with your conclusion that their politicians need “to sell to the Greek people the idea of a future lived within their means, and stop pretending to defend them against heartless foreigners.

But, if only Greeks can rebuild Greece that must also include to put a halt on those nonsensical banks regulations which through the risk-weighted capital requirements, discriminate so much the access to bank credit in favor of “The Infallible” of today, if there is such a thing, and thereby discriminates against “The Risky”, small businesses and entrepreneurs, those that represent so many of the possible infallible of tomorrow.

You seem to think that a recapitalization of Greek banks in terms of a Basel III would suffice to reignite the Greek economy. Forget it! For that to happen, as a minimum, the distortions produced by those regulations which impede the banks from performing with any sort of efficiency their role in allocating economic resources, need to be eliminated.

In other words “The Risky” Greek must be allowed to help rebuilding Greece. And by the way, if you do not want to become just like Greece, that goes for your homeland too.

November 08, 2012

No “fiscal cliff” of the current size can be jumped over without a lot of private risk-taking.

Banks currently need to hold much more capital when lending to “The Risky”, like small businesses and entrepreneurs, than when lending to “The Infallible”, like the government or anything with a good credit rating.

So here the question: How much more does “The Risky” have to pay the banks, on top of their normal risk premiums, in order to be competitive when accessing bank credit? 

That question reveals the profound distortions produced by bank regulations which impede banks to perform with any sort of efficiency their absolute vital role of economic resource allocation. 

Unfortunately, that distortion is a topic not yet discussed by the private sector as can be seen in Ed Crooks’ report “Business calls for accord to boost growth” November 8. And, as for the bank regulators, they won’t even acknowledge questions on it. 

One of the problems is that “The Infallible”, and many banks too, are very much benefitted by such distortions, and so, until “The Risky” lift their own voice in protest, very little will be happening on this front. 

To me it is amazing that in the “land of the brave” the private business sector can sit down to discuss the future without discussing what an excessive regulatory risk-aversion must mean for that future. There is no “fiscal cliff” on earth that can be jumped over without abundant, and hopefully smart, private risk-taking.

November 07, 2012

Are Basel bank regulators sadists?

Sir, Michael Stothard reports that “Corporate bonds get ready for Basel boost” November 7, as banking regulators are now thinking of also allowing single-A rated bonds to be held for banks in compliance of the new liquidity rules. And this though, “The corporate bond market hardly needed another lift. Central bank bond buying has already stoked strong demand for global credits, allowing companies to borrow at all-time low rates”.

What is wrong with the bank regulators? I can’t believe they can be so dumb. Are they sadist? Do they not understand that for every little new preference they dole out to some bank investment in what they perceive as not risky, or less risky, “The Infallible”, they are making it so much harder for those officially perceived as "risky" to access bank credit.

“The Risky” includes of course all those unrated small businesses and entrepreneurs out there, and which bank credit needs we are very much interested the banks serve well, as these borrowers could be those best suited to help us to find the new generation of jobs for our young.

And besides, all regulators achieve with their discrimination, is to artificially decrease the return for other than bank investors when investing in reasonable safe securities. What do the regulators want? That widows and orphans perform the economic resource allocation function of banks?

And, FT, how long are you going to remain in conspiratorial silence about this regulatory lunacy?

For now I will not buy Sebastian Mallaby’s risk averting potion, it might even enhance the risks.

Sir, I refer to Sebastian Mallaby’s “Economics must heed political risk” November 7. There he mentions the idea that “The familiar statistics on gross domestic product [could be] coupled with an index of financial risk-taking, so that the usual focus on growth would be tempered by a measure of the danger that growth might suddenly implode” and creating “a forecast of output divided by a measure of the risks to the forecasts; [something akin to] a Sharpe ratio for economic growth. 

Questions: Would that increase or decrease the risks? How would that help? Could that not also result into some risks becoming exaggeratedly considered? 

Quite recently, too radical academic finance regulators, believed they could control risks in banking, by setting up capital requirements based on ex-ante perceived risk of bank assets. And, what happened? Absolute disaster! 

Not only did they ignore that a bank has other purposes than just avoiding risks, but also, worse, the risk of default became excessively considered. It was taken into account when banks set their interest rates, amounts of exposure and other terms, and so to use precisely the same ex-risks to also set the capital requirements was sheer lunacy… though the responsible geniuses, seem not to have realized it yet. 

And how on earth does Mallaby suggest the IMF gives outlook projections that are not based on some simple assumptions, but based on a more diffuse concept of political risk? Would that be more accurate, or more believable? I doubt it. It is hard enough for the IMF as is. 

The US GAO Report in 2003, subtitled “Challenges Remain in IMF’s Ability to Anticipate, Prevent, and Resolve Financial Crises” stated: “Internal assessment of the Fund’s EWS (Early Warning System) models shows that they are weak predictors of actual crisis. The models’ most significant limitation is that they have high false-alarm rates. In about 80 percent of the cases where a crisis was predicted over the next 24 months, no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.” From reading the report it is easy to understand that one of IMF’s problems is that what it opines, becomes a political and an economic risk too. 

Finally Mallaby seems to completely ignore the issue of retro alimentation of risk perceptions. When writing that if “eurozone authorities fail to contain sovereign and banking risk… Capital will flee from Europe’s periphery to the centre and from risky corporates to the remaining comparatively safe sovereigns”, he forgets that being the receptor of all that “”hot capital” flight, also carries enormous risks. 

Anyone should be free to manage risks the way he likes, and if someone wants to buy from an economic growth political risk ratio from Mallaby, he should feel absolutely free to do so. But, to sell us the institutionalization of a risk-neutralizing product, right now when our economies have been so neutralized by one of these, sounds to me too much like selling us magical potions on a country fair. So, no thanks!

A “can-do spirit” is not based on dumb risk-avoidance but on a smart, even audacious, embracement of risk

Sir, Lionel Barber, from Washington writes “Wanted: a president to put can-do spirit back in the US” November 7. Absolutely, and that I believe is something the whole Europe also needs. 

Again, for the umpteenth time, few things can be so anathema to a “can-do spirit” than bank regulations which discriminates in favor of what the nation has got, the past, “The Infallible”, and against what the nation can get, the future, “The Risky” 

Currently banks are allowed to obtain much higher risk adjusted returns on equity when engaging with was is officially perceived as “not risky”, because that requires from them to hold much less capital than when lending to what is officially ex ante perceived as risky. That, basically instructs the banks, to stay away from what is risky, no matter what the risky, like small businesses and entrepreneurs can do. And if that is a spirit it can only be the “let’s enjoy what we did” 

America, Europe, a “can-do spirit” is not based on dumb risk-avoidance, but on a smart, even audacious, embracement of risk.

First step… Get rid of Fraulein Basel!

November 06, 2012

Let the credit rating agencies rate, and us learn, again, just to take the credit ratings for what they are.

Sir with respect to your “Holding the rating agencies to account” November 6, there are only two alternatives: 

One is the caveat emptor route of taking the credit ratings for what they are, always subject to the possibility of human fallibility, of one or any sort, and always subject to some uncertainness which is very hard or even impossible to measure, and all for which the ratings should be handled with care. In this case, the best regulators can do, is to append a label stating: “Warning: excessive reliance on credit ratings can be extremely dangerous to the health of your portfolio.” And, the worst thing what regulators can do, is precisely to give the ratings the credibility and importance these were given in Basel II. 

The other route is that of “we must make them work” no matter what. Yes, if a credit rater had just gone out of his office for one single day to see how the mortgages that formed part of the securities he was rating, these would not have been AAA rated, and that I swear. But, since the rater preferred the comfort of his office to the subprime suburbs¸ just as you and I do, he did not go there. And so should he now be sued? Perhaps, but if you hope to get something remotely substantial out of him, you must hope he is able o enlist the support of Bernanke and Draghi. 

And here is the “sophisticated” Financial Times going for the second option and writing “Things will only change once ratings are regulated more rigorously and paid for by investors rather than issuers”. I am amazed that FT has descended into such primitive naiveté… just for starter what would a credit rating cost if the raters needed to insure themselves against any sort of malpractice. 

Really, if anyone should be held accountable in this case that should be the bank regulators, they must have known the risks. In a letter that you yourself published in FT in January 2003 I told them that “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds” 

No! Let the credit rating agencies rate, and us learn, again, just to take the credit ratings for what they are.

PS. The current S&P and Kroll duet “Anything you can rate, I can rate better I can rate anything better than you No, you can’t Yes, I can” 

November 05, 2012

The regulatory lockout of small businesses and entrepreneurs from bank credit can only guarantee Europe´s and America´s insolvency.

Sir, Wolfgang Münchau writes “Why I remain a pessimists on Europe´ solvency” November 5, and though he speaks about the need for “growth” he fails to mention the current most important sine qua non barrier that must be removed for such growth to occur in a sustainable not stimulus fueled way. And I refer of course to the capital requirements for banks which discriminate in favor of “The Infallible” and against “The Risky”. 

I hold, and I believe few would disagree, that small businesses and entrepreneurs need to have access in competitive terms to bank credit. But currently, because there is such a huge scarcity of bank capital, and lending to these borrowers carries the burden of requiring the most of bank capital, these vital economic agents are for all practical purposes suffering a regulatory ordered lock-out. 

Gentlemen, there is no way for Europe or America to grow themselves out of their current predicament if keeping the risk-adverse regulations that so distort the efficient economic allocation of resources produced by the banks. On the contrary, keeping these can only guarantee Europe´s and America´s insolvency.

Let us think about the need for a new generation of bank regulators, and financial journalists too.

Sir in “Restoring trust in the banking sector”, November 5, you argue that if current bankers cannot reform “a new generation will have to be sent for”. That sounds reasonable, but why do you not apply the same principle to bank regulators? 

The regulators still insist in Basel III on capital requirements based on perceived risk, thereby allotting regulatory subsidies to “The Infallible”, and imposing regulatory taxes on “The Risky”; and that can of course only guarantee that banks will keep on following a model that brings “precious few social benefits”

And by the way, besides thinking about a new generation bankers and regulators, we should perhaps also think about the need for a new generation of financial journalists. I mean they, you, have refused to understand or to report on the shameful and outrageous manipulation of interest rates in favor of “The Infallible” and against “The Risky” that the current regulators produce.

More than simple rules we need rules that do not distort.

Sir, in your weekly review of the fund management industry, FTfm, Jonathan Davis writes that “There is an inevitable irony in the fact that the two main epicenters of the debt crisis, subprime mortgage lending and more recently sovereign debt, were both assigned minimal capital at risk ratings under the Basel II regime”, “Simple rules should trump regulatory overkill” November 5. 

“Irony”? No way José! The Basel II capital requirements for securities rated AAA, like those backed with mortgages to the subprime sector, and to sovereigns rated like Greece was for some years, were only a meager 1.6 percent of some very generously defined capital. If you allow banks to leverage the risk-adjusted return when lending to “The Infallibles” 62.5 times to 1, but only 12.5 times to 1 when lending to “The Risky”, that is simply dooming the banking system to a disaster. 

Of course, for all those reasons recently exposed by Andrew Haldane, we need simpler rules, but, what we most need is for the bank regulators to stop acting as if they were the master risk-managers of the world, and distorting the financial markets and impeding the banks from performing efficiently their vital function of allocating economic resources.

November 03, 2012

How can I help free FT from its current severe bout of Stockholm syndrome?

Sir, in your “The self-defeating Greek rescue policy”, November 3 you write again about the need to have “banks recapitalized” But again, for the umpteenth time, over soon a decade now, you refuse to approach the question of “Capitalized in order to do what?”. 

The fact is that capitalizing the banks, for these to keep on doing what they did, namely lending or investing excessively in “The Infallible”, because there was where regulators allowed them to earn the highest ex ante risk adjusted returns, and to avoid excessively lending to “The Risky”, like to small businesses and entrepreneurs, because there the overly sissy nanny regulators did not want them to go, no recapitalization of banks can lead to any sustainable good result, and these will all be just other examples of kicking the can down the road.

It is clear that FT has been hijacked by bank regulators, like Mario Draghi, and is suffering from a severe bout of the Stockholm syndrome that impedes it to criticize what needs to be criticized in harsh terms. How can I help you to free yourself from it?

I sure have tried a lot!

Please, if we are to stand a chance, we must not allow the fight for less environmental damages to be politicized

Sir, with respect of the threat of climate change, or, ‘the just plain huge environmental damages of which we do not know what consequences these will have though we might presume these will not be overly positive’, I do not agree with Clive Cookson’s conclusion that “a second Obama administration seems certain to do more [reducing carbon dioxide emissions] than a President Mitt Romney”… that is unless he considers taking a baby aspirin is a solid way to fight a tumor, “It shouldn’t have taken Sandy for US to debate science”, November 3. 

In fact given that the environmental challenge needs the cooperation of everyone if we are going to stand a chance, including by the way that of the poorest of the poor, the worst thing we can do is to politicize it, or allow the solutions to become the exclusive domain of some self defined especially conscientious high income earning groups. 

That we need accurate forecasts no one doubts; that governments are the best fitted to provide these services is probably true, but, as citizens it behooves us to always and continuously explore alternatives, like what if all money publicly spent was used for premiums to the 100 most accurate and important weather prognosis provided to the public each year… with a charge to all service providers for the 1o most important weather prognosis mistakes. 

When Cookson writes that “Mismanagement and under-investment threaten the US weather satellite programme”, I am quite sure that neither he nor I, have the faintest idea of how much of the threat corresponds to each of the two factors he lists. 

On a more personal note, for many years now, I have expressed surprise over the fact that those who seem most concerned about the environment, and thereby as I see it should be the most concerned with how scarce resources are used to meet the challenge, seem the most willing to throw resources at it with no contemplation at all given to how do that more efficiently.

November 02, 2012

I will be tweeting Fabien Cohen and Les Pigeons.

Sir, in Hugh Carnegy in his report on France and François Hollande “Reluctant to reform”, November 2, mentions Fabian Cohen a young entrepreneur, a member of Les Pigeons. Mr Cohen apparently quite successfully initiated a protest against a capital gain tax increase in France, based on “You can’t tax someone who doesn’t take a risk at the same level. It is unfair and it is confiscatory for entrepreneurs and their associates”.

As you can understand I will immediately ask (tweet) Mr. Cohen and Les Pigeons the following: Do you feel it is fair and rational to have the access to bank credit of small businesses and entrepreneurs made even more difficult and expensive than what it normally is? Something which is of course the the natural consequence of capital requirements for banks, imposed by overly concerned regulators, who wish the banks to only lend to “The Infallible” and avoid like pest “The Risky”. 

Perhaps Mr. Cohen and Les Pigeons will help me ask the regulators the question that FT has not wanted to help me to ask them, namely… If banks are allowed immense equity returns when financing “The Infallible”, all in order to avoid risk, who is then supposed to finance “The Risky”, like Les Pigeons? The widows and the orphans?

Should I have been more careful my comments were more palatable to FT’s senior egos?

Sir, in “BoE’s self-criticism” November 11, you quote Bill Winters “gently” saying “[while junior staff] are often willing to challenge their superiors… there appears to be some tendency for them to filter recommendations in such a way as to maximize the likelihood that senior staff will find the recommendation palatable”. 

What is your own take on that? I myself have sent many recommendations and comments to you over the years and though I believe many of these were important different and should not have been ignored, but they were. Did I give too much credence to your motto “Without fear and without favour”? Should I have been more careful my letters and comments were more palatable to your senior egos and their friends? Do the egos have the right of blackballing? 

I mean should not FT’s commitment to truth be the same as the Bank of England’s? I mean, as a specialized media with a lot of readers, is not FT’s voice on critical issues as important or even more than BoE’s?

The Martin Wolf Inconsistency

Sir, Martin Wolf ask for “Radical policies for rebalancing Britain’s economy” November 2. In it he again favors the government to be less austere, “the case for a reconsideration of fiscal policy remains strong” and the banking sector, even though loans have contracted immensely, to be more restricted, “the case for much lower leverage is far stronger than in normal times”. Why the inconsistency? The only explanation possible is that Wolf is a firm believer that government spending allocates the resources with more economic efficiency than what banks with their credits can do. 

And yes, in many ways Wolf is correct, because regulators, by means of their capital requirements for banks based on ex ante perceived risk, exerted so much influence favoring “The Infallible” and thereby discriminating against “The Risky”, that the banks have indeed not allocated their credits in an economic efficient way. But, the solution for that should be less government intervention, not more! 

“Rebalancing?” Yes! But, Sir Mervyn King, how about rebalancing first between “The Infallible” and “The Risky”?

In this respect, for the umpteenth time, Wolf would say “monotonously”, I hold that one of the most important challenges for the UK, Europe and America, is to work themselves out of that silly bank regulatory risk-aversion, which caused and causes the banks to dangerously overpopulate safe-havens and, equally dangerous, at least for the society and the economy, to under exploit the more risky but more productive bays, like small businesses and entrepreneurs. 

Martin Wolf, when he writes “Equity targets [for banks] should be set in pounds”, and although he probably loathes admitting it, shows that he finally begins to understand how the capital requirements for banks perceived on risk distorted the economy,. 

Unfortunately, to get rid of those distortions is not as easy as Wolf would like it to be, in order for that issue to go away fast. You simply cannot attract the so much needed new bank equity, by introducing prohibitions to pay dividends subjectively set by regulators. You need to design a credible transition plan so that any new bank investor knows what he can expect tomorrow. And, to do that, you need to put at work fresh regulatory minds not encumbered by past mistakes. 

And so, before messing with tools like depreciating a currency (buying foreign low-risk assets?), in a world were so many currencies wish for depreciation, I suggest that UK, America and Europe draw up a careful plan, acceptable to future bank investors, for how to allow the banks again to take a chance on “The Risky”, those that in truth made the UK, Europe and America what they are. 

To me that plan should pursue making banking more of a safer and lower rate of returns utility, and so able to attract more widows and orphans like funds. For the rest of the economy to prosper, we must make banks be a lower returns affair.

November 01, 2012

Draghi is just desperately kicking the can down the road

Sir, Michael Steen ends his report “Draghi expands role in fight to save euro” November 1, quoting Jörg Krämer, Commerzbank’s chief economist saying “If there is a breakthrough, the history books will write about Draghi as the hero who gave the reforms time to work”. I truly cannot understand what fundamental reforms he refers to. 

What caused this crisis was that banks, by means of very low capital requirements, were given too large incentives to acquire huge exposures to “The Infallible”, like to Greece, triple-A rated and real estate, and therefore too large disincentives to lend to “The Risky”, like the small businesses and entrepreneurs. And¸ given that bank capital is becoming scarcer day by day, the distortions those capital requirements produce are only increasing. 

To save the euro, Europe and America alike, it is not enough to save the banks you must save the economy, and that is not done by discriminating against "The Risky". This Mr. Draghi seems not to have understood at all and so to me he is not saving anything, he is just desperately kicking the can down the road.

To break Italy’s, Europe’s and America’s vicious circle, their current central bankers and regulators should resign.

Sir, Giulia Segreti and Guy Dinmore report that “Italy’s central bankers fears ‘vicious circle’” November 1. That is Italy’s Europe’s and America’s problem, that their central bankers are not even aware that they already find themselves in the most vicious financial circle ever, only because of their own bank regulatory doings. That vicious circle goes like this: 

It starts with regulators foolishly trying to avoid bank failures by allowing banks to hold less capital when lending to those perceived as less risky “The Infallible” than when lending to those perceived as “The Risky”. 

That signifies that “The Infallible” will have access to bank credit more generously, cheaper and in easier terms than what would otherwise have been the case. While likewise “The Risky” will have less access to bank credit, will have to pay higher interest and need to accept harsher terms. 

And that signifies that “The Infallible”, like the AAA rated, real estate sector and sovereigns (like Greece) little by little will over-borrow and turn into huge unmanageable risky assets, while “The Risky” like small businesses and entrepreneurs will not be financed, and so there will be little of the new sturdy economic growth, and jobs, they can help to provide. 

And when it explodes there will be less and less safe havens were banks, because of the lack of equity, need to take refuge… and we all know what happens to a safe haven when it gets to be overpopulated. 

So if central banker fears a vicious circle, perhaps the best they can do to break it, is to resign and let a new generation of regulators take over. 

And if little me was one of those regulators, the first thing I would for the time being suggest doing, is to cut in half, at least, the capital requirements for banks when lending to small businesses and entrepreneurs. And that I would do in the perfect knowledge that I need their help to rescue the economy and create jobs, and that “The Risky” have never ever caused a major bank crisis, only “The Infallible” do that when they… sooner or later, always fail.

If that’s what the best and brightest can come up with, we’re toast!

Sir, Gillian Tett, in “Banking may lose its allure for the best and brightest” November 1, mentions “government does not control finance as tightly as it did in the 1930s”. But, let me assure her that back in those days, no government would ever dream of assuming the role of risk-manager for the world and dole out risk-weights which determine different capital requirements for bank assets based on perceived risks. 

Ms Tett also writes of “a possible silver lining for policy makers” namely that the best and brightest after the failure of the financial sector can now flock into other fields such as manufacturing or medicine. But in this respect should we not begin by understanding better why the best and brightest failed so miserably... before giving them new assignments?