May 31, 2013

Authorities must learn to contain their desires to help and to meddle

Sir, Sir Samuel Brittan writes “How we can reconcile this general wisdom [that we do not know enough] with the desirability of giving individual officials definite objectives is an unsolved problem”, “Modern economics for the diligent seeker of truth”, May 31.

Precisely, it is an unsolvable problem, and that is why we need our authorities to contain themselves designating individual officers to do anything not really knowing what they are doing, no matter how much they all desire it.

Just look at what happened when the authorities designated the Basel Committee to eliminate bank crisis and those thereto nominated, not knowing what they were doing, set up a system of capital requirements for banks which guaranteed that next time when a bank crisis resulted, because of excessive exposures to what was perceived as “absolutely safe”, the origin of all bank crisis, we would find all the banks standing there naked or with very little capital to cover themselves up with.

May 30, 2013

Professor David Camroux, referring to a Robin Hood tax, seems to be just another applicant to the position of a Sheriff of Nottingham.

Sir, here is David Camroux, an Associate Professor of Science Po, quoting Jean Baptiste Colbert in that “the art of taxation” is taxing so that it is least noticed; writing that the FTT proposed by the European Commission could raise about €30bn to €35bn annually; and indicating it as an amount “rather small in comparison to the revenue needs of the 11 European Governments concerned”, and still he has the gall to refer to it as a Robin Hood tax, “FTT a feather in the cap for the average taxpayer”. May 30.

Sincerely as far as I am concerned Mr. Camroux is clearly only showing credentials to apply for the position of a Sheriff of Nottingham.

Perhaps one day we will find FTT as uncontroversial as VAT Camroux writes. Indeed, but was that to happen, that would just mean another regressive feather plucked from the goose average-taxpayer and put in an average European Commission bureaucrat cap.

If Professor Camroux really wants to help the average taxpayer, then what he should do is to question the revenue needs of their respective governments.

PS. There was a time that the FTT could have been a Robin Hood tax. That was when it was seen as an instrument to obtain resources from rich countries so as to help poor countries. But that was, at least, a financial crisis ago.

May 29, 2013

Regulators should not bet our banking system on the pigeons always carrying true messages.

Sir, John Kay writes about “Enduring lessons from the legend of Rothschild´s carrier pigeon” May 29. I would like to pick up on some of the lessons who some, like our bank regulators, have seemingly not learned.

Kay argues “Today, as yesterday, it is differences in perceptions that give rise to trading opportunities” and he is correct. But yet bank regulators insist in trying to reduce those differences in perceptions by forcing banks to heed more the opinions and messages brought by some officially endorsed pigeons, the credit rating agencies.

And in doing so they bet our whole banking system on that the pigeons were always to relay the truth, completely ignoring that our problems, and theirs as regulators, are almost exclusively to be derived from when the news brought by the pigeons happen to be false. Indeed “A damn rum thing, Wellington might have said.”

May 27, 2013

EU, ECB, what “Robin Hood” taxes are you talking about? Sounds like mislabeling to me

Sir, Ralph Atkins writes “ECB offers to recast‘Robin Hood’ tax amid fears over market impact” May 27, and I just have to ask “What Robin Hood tax?” as in its current form it seems just to be another tax collected by a Sheriff of Nottingham to feed the coffers of Prince John. 

The challenges of the “We have nothing to do” and of the society as a changing habitat.

Sir, you title the article on the current riots in the suburbs of Stockholm as “The challenges of the Swedish model” May 27. Although that is quite understandable perhaps a “Not even the Swedish model gets away” would have been more appropriate, since what is happening in Sweden is perhaps foremost a reflection of the growing unemployment of youth.

This is really nothing new in Sweden. In 1965 in the middle of Stockholm there were thousands of youngsters (I was not there) rioting for days and causing damages… and the basic explanation heard was that of “We have nothing to do”. 

And in this respect, given the possibilities of prolonged large unemployment, I have often argued that the well being of nations might come to depend more on the capacity of the unemployed to deal with their reality in a constructive way, that on what the employed are capable to do. 

That said there is no way to avoid the fact that whether we like it or not, current rioting in many places also closely correlate with immigration problems and the de-facto creation of immigrant ghettos which result even though no one wishes that to happen. Especially disturbing in Sweden is that during some of the car burning, some religious slogans were overheard.

A society is more than a piece of land, it is a delicate habitat. It thrives on the slow introduction of new species, but it can also fall apart if too many new species are introduced too fast and cannot adapt, without destroying too many of the previously existing ones.

May 25, 2013

63 year old grandfathers need to stick together, ‘cause next year… we’ll be "Sixty-Four"

Sir, to be interviewed in FT´s Life&Arts must be an honor for an author. But for 63 year old grandfather Martin Amis, to be described when opening the door to the interviewer Martin Dickson, as having skin which has advanced from “plump to papery”, clearly must spoil much of the fun.

As a 63 year old grandfather, pondering the fact that next year we’ll reach that so distant “When I’m Sixty-four”, we heard the Beatles sing just minutes ago, with our respective Vera, Chuck and Dave on our knees, I feel I should express my deepest sense of solidarity with Mr. Amis.

May 24, 2013

Is Ms. Gillian Tett now, at long last, beginning to understand what is happening?

Sir, Gillian Tett, writes about “how inefficient central banks’ pump priming has been when it comes to delivering capital to the parts of the economy which need it badly – and which are essential to long term growth”, “US venture capital falls short on love in buying frenzy” May 24. 

Since I am not a PhD, a bank-president or a famed bureaucrat, Gillian Tett might not be reading my letters, but that is precisely what I have been telling her and some of her colleagues for years, namely that capital requirements for banks based on perceived risk hinders banks to deliver credit to the parts of the economy which most needs it and which are essential to long term growth.

Perhaps this might be a reminder for her that, now and again, it is convenient for everyone, including anthropologists, to walk the streets of the real economy, and not only those of Davos and alike.

What UK (and Europe) needs, is a massive capital injection into the banking system

This is in reference to “Osborne is too complacent about Britain’s economy” Martin Wolf, May 24.

Sir, first, in the UK, if a bank would give a loan to a Solyndra, the solar power company that recently went bankrupt in the US, it would need to hold, according to Basel II, 8 percent in capital. But, if the bank instead lent that money to the UK government, and so that a UK government bureaucrat could relend it to a Solyndra then, according to Basel II, the bank needs to hold no capital at all against that. That is a huge distortion that needs to be eliminated, and to be replaced by a general capital requirements against any asset, 8 to 10 percent.

Second, because of such regulatory distortions UK banks (as all European banks) have ended up with a dramatic gross, not risk-weighted, shortfall of capital, and which now not only stops them from being able to lend but even forces them to contract. And so, when Martin Wolf writes about “the private sector has a huge structural excess of income over spending” my recommendation, instead of those huge government investment programs Wolf suggests, would be to launch a massive bank capitalization program, offering special tax incentives for all “private excesses” which are converted into bank equity.

How much capital? Whatever is needed for the banks to hold 8 to 10 percent of it, against all assets, including government debt. At that moment the general risk-profile of banks would also change dramatically. At that moment banks can start to contribute to help the real economy to grow.

Why is it that some insist that all rescue actions is to be carried out by governments? Could it be that this crisis is being exploited to advance some political agenda through the backdoor?

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him any more comments related to “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

May 23, 2013

Get over it. Set a high credible capital requirement for banks and ask for it to be met within a very short time.

Sir, you finish your “Noise and truths in the IMF’s verdict” May 23 writing: “Inadequately capitalised lenders will continue limit lending. This in turn, will hamper growth. For all the brouhaha about changing tack on fiscal policy, Britain’s priority should be to fix its banks”.

Absolutely right… and we all have known that for many years…right?

To fix the banks you need to set a high but achievable goal, let us say 8 to 10 percent of capital for all bank assets, and ask for it to be complied with in a very short time. It would also be recommendable to help out in the process of raising all that bank capital, by for instance offering some special tax incentives.

What you cannot do is to meekly be tip-toeing around the issue, because before bank investors are absolutely sure that the capital raised will be the capital needed, and that it will dramatically reduce the risk-profile of banking, they will not volunteer to try it out.

FTT is no longer a “Robin Hood tax”, now just another “King John tax”, to be collected by another Sheriff of Nottingham

Sir, Alex Barker and Philip Stafford report that “Brussels looks at incentives to ease collection of ‘Robin Hood’ levy” May 23, and I do think some clarification is in order. 

There was a time, many years ago, when some thought that the financial transaction tax was going to be used to redistribute wealth from the richest to the poorest countries. And so those days, branding FTT as a “Robin Hood” tax made some sense. Not any more, now it is a quite ordinary and traditional “King John” tax to be collected by a Sheriff of Nottingham. 

I do not mind the distribution from the rich to the poor… what I do mind is that in the collection and distribution process, most funds transferred end up in pockets other than those of the poor.

May 22, 2013

If climate change believers do not abandon their holier than thou attitude, climate skeptics will always win.

Martin Wolf writes about China that “Its leaders feel rightly, that there is no moral reason to accept a ceiling on the emissions allowed for each Chinese individual far lower that the level Americans insist upon for themselves”, “Climate skeptics have already won” May 22.

And of course, if the climate change challenge, instead of being placed in terms of a shared human responsibility, where even the poorest of the poor, as a human, has the right to feel the same responsibility as the rich, and this is instead phrased as an issue of quotas and fairness, which only divides, the climate skeptics will win… almost by walk-over.

Also, at least in the US, it is clear that the climate change challenge has been politically captured. It is almost as “if you are not a progressive-democrat, you have no right to be concerned with climate change” or “if you are concerned with the environment you have no right to be a conservative-republican”. Before climate change is freed from that sequestration, there is no chance of a united front, and again the climate skeptics win.

Wolf mentions eight possibilities to curb emissions and buy some time and I fully agree with all of them, most especially with the “go nuclear” one, our only bridge between now and when something better for the environment is found. That said I would like to make the following comments:

First, with respect carbon taxes it is important to be consistent and transparent. That little dirty trick used by some European countries of taxing gas-petrol to assist the environment, while at the same time giving out subsidies to coal, cannot be allowed.

Second, in finding the best way of financing for creating and saving energy I have often mentioned that if we can use credit ratings to determine the capital requirements for banks, something which for no purpose at all distorts , why do we not distort somewhat with a purpose and do the same based on sustainability ratings?

But, first and foremost, in terms of advancing on climate change issues, we really need to get rid of all those holier than thou attitudes, which instead of making us plant a tree, so often makes us feel like going out and chopping one down.

May 21, 2013

What did Mohamed El-Erian really hear? Should we buy or should we sell gold?

Sir, with interest I read Mohamed El-Erian’s “We should listen to what gold is really telling us” May 21.

Unfortunately I could not understand what Mohamed El-Erian really heard... should we buy or should we sell gold at current prices?

Has Robin Hood sold out and now been co-opted by King John as a neo-Sheriff of Nottingham?

Sir, Ralph Atkins and Alex Barker quote Simon Chouffot saying “You can draw parallels between the Sheriff of Nottingham and financial services, and Robin Hood redistributing gains back to those who needed it.”, “Robin Hood tax: A long shot”, May 21.

Sorry but I am utterly confused, I always saw the Sheriff of Nottingham as the tax collector for bad King John, and Robin Hood as providing good people a safe-haven in the Sherwood Forest.

Besides setting the target for bank capital, we need to think about how to get there.

Sir, Anat Admati and Martin Hellwig write that “capital ratios in Basel III rely on a complex, distortive and manipulable system of risk-weights”, “Banks are not a special case on debt-equity ratio” May 21.

They are absolutely correct, on all three counts, and that is applicable to Basel II too. But what I would like to mention is the curious fact that the “distortive” element, and which to me is the most serious flaw of Basel regulations, as it affects not only the banks but the whole market too, has received the least of attention.

There is no doubt that we need to go down the route of substantially increasing the capital requirements of banks, whether to the 8-12 percent level I favor, or the 25-30 percent level Admati and Hellwig favor. But, when considering the fact that bank capital is going to be extremely scarce while travelling on the route to the final bank capital that is needed, we should not forget that the distortive effects of the risk-weights will be more important than ever.

In this respect I opine that regulators, more than thinking about how to force bank capital increases, need to think in terms of how to help these increases to happen as fast and as smooth as possible. There might be many other ways, but personally I favor either large public sector capital injections in the banks accompanied by clear rules as to how current shareholders could repurchase that capital in order not to be diluted, or some strong tax incentives awarded to any bank that achieves a capital increase which in the short term meets the final long term target.

May 20, 2013

Would a private bank depositor insurer allowed the European banks to do what they did? No? So?

Sir, Wolfgang Münchau writes “It doesn’t make much sense but I am a Eurofanatic” May 20.

It makes me truly wonder why if so he does not want to put forward the fact that the current problems of Europe, and especially of the Eurozone, were not caused by Europe or the Euro, but essentially by faulty bank regulations.

I would just ask Münchau the following: “Do you believe a private bank deposit insurer would have ever permitted banks to lend to Greece holding only 1.6 percent in capital, something which implies mindboggling authorized 62.5 to 1 leverage and as the Basel Committee did?” I am sure his answer would be definite "No way José!" So?

I do like Europe, I do support Europe, but what I do not like is how it is being run by what seems to be a quite lousy and conceited bureaucracy. Perhaps if that changed, Münchau could feel that being a eurofanatic made much more sense.

PS. Just as a reference I include a link to my version of “Who did the eurozone in?

May 15, 2013

Again, we would do better with capital requirements for banks based on sustainability of earth and job creation ratings

Sir, I often wonder about how strange it is that those who most present themselves as being very concerned with the health of our planet, and should therefore one would presume be the ones most concerned with making sure that scarce financial resources are used as effectively as possible to save the earth, then end up being the most willing to just throw money at the problem.

I say this because Martin Wolf in “Why the world faces climate chaos”, May 15, argues that “If we are to take a prudential view of public finances we should surely take a prudential view [on saving for humanity] the only home it is likely to have”. As I see it those two prudential views go hand in hand, as we do need a prudential view on public finances in order to assure having some resources for all the prevention, adaptation and mitigation which will be required.

Two fundamental problems the world faces everywhere now, is the deteriorating environment of the earth and the lack of jobs for our youth. And in this respect for almost a decade now I have been arguing the following:

If we have capital requirements for banks which clear for the information provided by credit ratings, even though that information has already been cleared for elsewhere, and thereby only produces dangerous distortions, why then do we not have instead capital requirements for banks that are based on sustainability of earth and job creation ratings?

The above would allow banks to play a significant role in solving both problems, without us having to leave the financing of environmental or job creation projects in the hands of government bureaucrats or short terms political interests. Unfortunately there are some who prefers the government to solve it all… seemingly that is on their agenda.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has told me not to send him anything more about these “capital requirements”… he already knows it all, at least so he thinks.

May 14, 2013

We need to see the hiding-behind-regulatory-risk-weighting index of the banks

Sir Patrick Jenkins and Daniel Schäfer at the end of their “Banks in cash calls to meet Basel III” state the caveat with respect of the numbers shown that “Regulators [will] either raise risk-weightings and/or give more emphasis to nominal balance sheets.” Indeed, but it can also be, like the current crisis has clearly evidenced, that the risk-weights could also simply turn out to be very wrong.

And that is why I consider the illustration that shows Basel III core tier one capital ratios of 12 large banks to be quite opaque. As a minimum, next to each Basel III ratio they should have given us each banks capital to nominal balance sheet ratio.

That way, by dividing the first ratio by the second (or the other way round) we can build an index which allows us to identify how each bank hides behind risk-weights, whether these are calculated by themselves or by the regulators.

May 10, 2013

Was the Basel Committee, and the Financial Stability Board, created in order to bypass democracies?

Sir, what would be the possibilities of passing a law, in any European parliament, which would dramatically increase banks expected risk-adjusted returns on equity when lending to a sovereign or triple-A rated borrowers, and thereby stop banks from lending to those perceived as more risky, like small and medium businesses and entrepreneurs, or having these pay higher interest rates to make up for a regulatory competitive disadvantage; and all justified with the argument of making banks safer? None I would say… especially if a parliamentarian reminded law makers of the fact that no bank crisis ever has resulted from excessive lending to those perceived as risky, they have all resulted from excessive lending to what was wrongly perceived as absolutely safe.

But that is exactly what the Basel Committee has achieved by imposing their capital requirements for banks based on perceived risk. And this is why I do not agree much with Philip Stephens’ “Do not blame democracy for the rise of the populists” May 10, since democracies should never have allowed their power to be diffused in such a way. Governments and democracies are now in many ways kept hostages by their own creations... and suffering their own Stockholm-syndrome 

Was the Basel Committee and the  created on purpose in order to bypass democracies? I have no answer to that question… sometimes shit just happens. But, who have benefitted from it? Not “the risky”, that’s one thing for sure.

Regulators, and FT journalists, suffer from cognitive overload and malfunctioning prefrontal cortex.

Sir, Christopher Coker’s “Technology is making humans the weakest link in warfare” May 10 is an extraordinarily enlightening article…among other for understanding why bank regulators are seemingly not able to correct what they should correct.

Coker writes “The digital world we have created may be outpacing our neurons’ processing capabilities [cognitive overload], forcing us to log off emotionally. The neurons associated with empathy, compassion and emotional stability are sited primarily in areas of the prefrontal cortex. In evolutionary terms, this is a recently developed part of the brain that is bypassed when we are stressed or overanxious. Emotions such as empathy and compassion emerge from neural processes that are inherently slow. It takes time to understand the moral dimension of a situation.”

Bank regulators, with the introduction of risk-weighted capital requirements for banks, which much favors access to bank credit for “The Infallible” caused, as collateral damage, that the access to bank credit for “The Risky”, like small and medium businesses and entrepreneurs became, in relative terms, much more expensive and harder to access. In other words the gap when accessing bank credit, between “The Infallible” and “The Risky”, increased dramatically.

And, since “The Risky” includes many or perhaps most of those potentially able to create the next generation of jobs, our young ones are paying dearly the consequences of such odious regulatory discrimination.

Having for years been protesting these regulations, I could never understand why bank regulators (or FT journalists for that matter) did not care one iota about something which in my mind could even be labeled as a crime against humanity. Now, thanks to Coker I have at least a clue; they are suffering a cognitive overload, which is causing their prefrontal cortex to stop functioning.

I sure pray they recover soon… or we will have to wait for those regulatory drone-robots which in terms of Coker could at least console us with “reducing the inhumanity so as to balance the loss of humanity”.

May 09, 2013

Since when can a mistake in a paper be used as evidence of an opposite conclusion?

Sir, Robin Harding reports “Reinhart and Rogoff publish errata to paper on public debt and growth”. May 9. In it Harding writes that the 2010 paper on public debt and growth, by pointing out a significant effect on growth when public debt reached 90 percent of GDP, was widely cited as an argument for fiscal austerity. Since the paper was thought to be correct, I guess that was a quite reasonable thing to do.

What I cannot lay my hands around though is how the existence of a mistake in the paper can suddenly be turned into evidence which supports the opposite conclusion. I say this because I have lately read more opinions advancing that the 90 percent is no limit, than what I ever read about the original paper stating it was.

That said, since all this type of debt-sustainability discussions often sound to me like a torturer debating how much torture his victim can take before fainting… I will, without any religious fervor invested in it, keep on opining that public debt at 90 percent of GDP is high… although that will of course also have to do with who are the holders of that debt, nationals or foreigners, friends or foes.

And also, if the 90 percent to GDP has been reached by incurring in distortions, like requiring banks to have more capital when lending to the citizens than when lending to the government, then my previous “high” becomes a “VERY HIGH”

May 08, 2013

Higher bank capital ratios without eliminating distortions based on perceived risks, would make banks riskier

Sir, John Plender refers both to the draft legislation advanced by US senators David Vitter and Sherrod Brown, and to Anad Admati’s and Martin Hellwig’s “The bankers’ New Clothes”, in order to point out that “Support is growing for higher bank capital ratios”, May 8.

Plender unfortunately entirely misses what is most important. Many have asked for higher capital requirements but, what sets those he references apart from many others is that they also want to do away with the pillar, and the pride and joy of Basel regulations, namely that the capital requirements are to be based on perceived risk.

Let me ask Plender. Today, according to Basel II, a bank can hold some zero risk weighted sovereign assets against zero capital, while giving a loan to a business requires it to hold 8 percent of it in capital. If tomorrow the risk-weights for some sovereign would remain zero, but banks were instead required to hold 30 percent against a loan to a business, would the distortions be smaller or larger?

Without eliminating regulatory distortions, neither austerity nor profligacy can help Europe

Sir, Martin Wolf writes: “the hope that [the European countries in crisis] will grow their way out of their difficulties, via eurozone demand and internal balancing, is a fantasy, in the current macroeconomic context”, “The German model is not for export” May 8. 

Wolf’s line of argument, again, points to the “austerians”, as he likes to call them, being wrong. I agree with this. But that does not mean that their opposites, let’s call them the “profligates”, would be right either.

Europe, to stand a chance, and the European youth to find the next generation of jobs, needs to get rid of those distortions which direct bank credit, not based on its productivity, but based on perceived risk-avoidance. And before that is done, I would have to be an “austerian”… since wasting away scarce profligacy space on nothing is just plain stupid.

In fact those regulations are more than stupid they might in fact even signify a crime against humanity.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has asked me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all… at least so he thinks.

It was bank regulators who suffered the mother of all intellectual failures

Sir, John Kay writes that the left, were so horrified that a collapse of capitalism from its own global contradictions, might occur under their watch, that their only thought was to avert it by shoveling public money at the capitalists, “Sinister or silly, protest politicians are united in grievance” May 8. And Kay refers to that as an “intellectual failure”.

That is indeed true, but, as intellectual failures come, much worse was the one which preceded it, namely the regulatory theory that banks would be better off diverting their credits from what though perhaps productive was perceived as risky, and concentrate on earning high returns on their equity by giving credit to what was perceived as “absolutely safe”.

Capitalism might have contradictions but, allowing banks to leverage their equity 62.5 to 1 when lending for instance to Greece, but only 12.5 to 1 when lending for instance to a German medium sized business, has of course nothing to do with that.

In fact those regulations are more than stupid, they might in fact even signify a crime against humanity.

May 04, 2013

I did not take Simon Kuper for a baby-boomer.

Sir, I have admired many of Simon Kuper articles, and there is no doubt he is a rising star that could help to rejuvenate your paper. That said his “Smile if you live in Europe” May 4, left me a bit surprised, as I did not take him for a baby-boomer content with being able to obtain a certainly splendid caffé macchiato at a very good price.

I say that because when you are young, more than where you find yourself, is where you are heading that matters… and Europe, for the time being at least, is heading down, down, down.

And as I have explained to you Sir some couple of hundred times, that is much a result of silly bank regulations which allow banks to obtain a much larger expected returns on their equity when lending to The Infallible than when lending to The Risky.

And as you must certainly be aware of, the value of any portfolio which does not include a hefty dose of risk-taking, is destined to wither away, and therefore, although quite appropriate for oldies with few years left of living according to actuarial tables, is something highly inappropriate for the young. 

In fact had a certified financial advisor proposed a portfolio to a young person with the ingredients regulators establish for their banks, he would have his certification immediately removed. So no, if in Europe, and if young, don´t smile but kick out the current batch of bank regulators… as fast as you can.

The best way to compete with tax havens and fiscal paradises abroad is to create tax heavens and paradises at home.

Sir, Vanessa Houlder writes that with respect to tax avoidance “Governments are complicit in the problems they are condemning. It is their tax systems that has created incentives for businesses to behave that way”, “Talk is cheap in the clampdown on tax avoidance” May 4. And she is more correct than what she probably knows. I have always held that the best way to compete with tax havens and fiscal paradises abroad is to create tax heavens and paradises at home.

Also considering the enormous growth in fiscal income and the relative poor delivery of services, like the costs of any government financed infrastructure going to the roof, we might be reaching the point in which governments become too-big-to-govern, and in which case some escape valves could prove to be blessings in disguise. For instance, once the air cleans in Greece, private Greek capital safeguarded abroad might prove indispensable for the survival of Greece.

FT, how can you learn if you do not want to listen?

Sir, in your editorial “US spring fails to spread to Europe” May 4, if it could really be called a “spring”, you write “fixing the banks to help the recovery is the lesson Britain and the eurozone must learn from the US.”

The real difference between the US banks and your banks is that the former never fully implemented Basel II and are therefore much less exposed to the distortions the capital requirements for banks based on perceived risks already cleared for elsewhere cause.

But since that is precisely what I have written you more than a thousand lettersabout, but that you have preferred to ignore, I must then ask… how are you suppose to learn if you are not even willing to listen?

Frankly... who has such silencing powers in the Financial Times?

Bank regulators make the prospects of the living-hand-to-mouth especially bleak

Sir, Gillian Tett’s “The cost of living hand-to-mouth” May 5, is splendidly scary, especially when contrasted with all the how the US is doing great hoopla on FT's first page… especially since there is nothing in the “for our business it has become critical to understand the cycle – when pay [and benefit] cheques are arriving” that will increase the relative number of citizens who can afford a planning scenario that goes further than next pay cheque.

Of course, as Ms Tett has preferred to ignore it, even if she writes for the Financial Times, I must remind her again of the fact that if any of these “living hand to mouth” were to have access to bank credit, then the dollars, or pounds, or euros they would pay in interests, would be worth much less to a banker than those dollars, or pounds or euros paid by anyone dressed up as safe. And that is simply so because the regulators allow the banks to leverage much more a “safe” dollar, pound or euro, than a “risky” one.

Of course, as Ms Tett has preferred to ignore it, even if she is an anthropologist, I must remind her that one big reason many have possibilities of planning for a longer horizon, is that so many before them took many risks, assisted by the banks. And therefore, as a result of banks daring taking risks having been ordered out of fashion by too concerned and too dumb regulators, the future of the current living-hand-to-mouth looks especially bleak.

No nation and no economy has become great by playing it safe!!! God make us daring!!!

May 02, 2013

Distortion is not free, current low public interest rates are an illusion and could be the highest real rates ever

Sir, during the two years I had the fortune to have a voice as an Executive Director at the World Bank, 2002-2004, there were a lot of discussions on the issue of debt sustainability for poor developing countries. I hated those. They always sounded like a torturer calculating how much he could go on before his victim fainted. No doubt much of the ongoing, and I would have to say much less civilized debate between the austerians and the profligarians, reminds me of that.

And I also remember when some years ago some environmental austerians fouled up some research, which was immediately interpreted as a great go ahead by the environmental profligarians.

I do pity Kenneth Rogoff and Carmen Reinhart, for probably having been too interpreted by vested interests, hand having to end up in the eye of the current storm on debt. They do a good job of fixing their positions in “Austerity is not the only answer to a debt problem” May 2. Of course it is not a question of either or… and it is not even necessary for them to call on Keynes to testify in their defense.

That said, what they entirely miss, probably because it has never been an area of research or concern to them, is how current bank regulations, which so immensely favor sovereign borrowings, leads to the illusion of low rates.

Just one example: Banks in Europe lending to Germany do not need to hold any capital, something which implies an authorized infinite leverage of their equity. But, if they lend to a German small or medium business or entrepreneur, then they need to hold 8 percent in capital and can only leverage the risk-adjusted returns of that loan on their equity 12.5 times to 1. 

Anyone who does not understand that translates into a direct subsidy of Germany´s borrowing rate, paid by taxing the more “risky” and the real economy losing out of opportunities, has little idea about how banking and capitalism work. 

If some real game changing opportunities are thereby lost by Germany, it could in fact currently, and quiet unwittingly, be paying they highest interest rates ever on their public borrowings.

May 01, 2013

On the Battle between “Austerians” and “Profligarians”

Sir, Martin Wolf refers sort of contemptuously to “austerians”, to whom he holds “a financial crisis is a mark of moral turpitude, to be redeemed only by suffering. “Why the Baltic states are no model” May 1.

But Wolf himself could also with moral turpitude equally be accused of being a “profligarian” in holding that a financial crisis should only be redeemed by just letting the party go on… in the best style of an Après moi, le déluge baby-boomer’s perspective.

Before the worst type of austerity is eliminated, namely that which hinders banks to take the real risks the real economy demands, I find myself definitely to be an “austerian”, because otherwise fiscal and monetary profligacy would just be a waste of fiscal and monetary space.

Now, once the regulatory establishment has come to its senses, God willing, and eliminated the current capital requirements for banks based on risk-weighting for perceived risks which have already been weighted, by means interest rates, amounts of exposure and other terms, then I will gladly think of joining the camp of the profligarians. I said “think” because I would need to be sure regulators really understood how dumb they had been, so as to never again repeat similar nonsense.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, since he has told me not to send him anything more about the implications of these “capital requirements for banks based on perceived risk”… he already knows it all... at least so he thinks.

Risk-weighting for risks already weighted for, well that is regulatory zealotry you can write home about

Sir, you write that “the Fed’s monetary policy [is] much more efficient than in those economies where the transmission of central bank money-printing to real economy remains broken” “If the Fed ain’t broke, don’t fix it” May 1.

Indeed but the reason of that is that the US never adopted as fully as Europe did those Basel dictated capital requirements based on perceived risk, that so completely have clogged up the channels whereby bank lending can flow to the real economy.

And when you refer to that US Senators Sherrod Brown and David Vitter want banks to hold more capital you are ignoring that their bill contains the much more important provision of limiting [and hopefully making away altogether] with the obnoxiously dumb risk-weighting, something that is not explicitly mentioned in the Dodd-Frank law.

Sir, you mention the dangers of “zealotry”. Let me inform you that the worst example of regulatory zealotry is precisely the setting of capital requirements based on perceived risks that have already been cleared for.

Sir, as I wrote in a letter published today by the Washington Post, “Europe would also do better with a Brown-Vitter proposal”