Bad bank regulations in the company of big egos, hidden agendas and lack of accountability have our economies stuck in the doldrums

Sir I refer to Joseph Stiglitz’ review of Martin Wolfs’ recent book “The Shifts and the Shocks” August 29.

Stiglitz writes: “The problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation between those with excess funds and those who need more money, in which scarce savings are allocated to the investments of highest social returns”

Of course that is the problem. A financial system, in which perhaps its biggest agent, the banks, are given immense incentives to lend and invest based on perceived credit risks, something which has absolutely nothing to do with social or economic returns, cannot fulfill its role of intermediation.

But, those immense faulty investments are given, not by any market, but by regulators who, for instance in Basel II, constrained a bank to leverage its equity 12.5 times to 1 when lending little to a small business or entrepreneur, while at the same time allowing banks to invest huge amounts in members of the AAAristocracy, leveraging a mindboggling 62.5 times to 1. 50 times more!

Unfortunately, in a world in which most of the big brass opinion makers carry their own agendas, and which in the case of Martin Wolf and Joseph Stiglitz neither one include the possibility of regulators regulating too much nor regulating too badly, it is difficult for this truth to surface. 

Add to that the fact that regulators themselves, quite naturally, hate their outright stupidity to be known, and stubbornly refuse to answer questions about the distortions their risk-weighted capital requirements produce in the allocation of bank credit, and you will get a better feeling for how stuck in the doldrums our economies are.

At a growth summit Matteo Renzi and Francois Hollande should just ask ECB’s Mario Draghi a simple question

Sir, I refer to Hugh Carnegy’s report “Hollande presses for growth summit” August 29, and I would strongly suggest Matteo Renzi and Francois Hollande, they ask Mario Draghi the following.

“Mr. Draghi. As you were for years the Chairman of the Financial Stability Board and therefore an expert on bank regulations we would like to ask a simple question.

Currently European banks are not lending to medium and small businesses, entrepreneurs and start-ups because that type of lending is considered to be risky by regulators, who therefore require banks to hold much more of that extremely scarce bank capital (equity) against that type of loans than against other supposedly safer loans. And that we would hold makes it impossible for our economies to grow in a sturdy way.

So can you please explain to us, in an easy way, why bank lending to medium and small businesses, entrepreneurs and start-ups is considered risky? We ask so because one could think that having banks not lending to these borrowers would be something way riskier for Europe and our economies.

Could it not in fact be so that the risk of your risk-weighted capital requirements creating distortion in the allocation of bank credit is far more dangerous than what the borrower’s credit risks represent to banks?

And while you’re at it Mario, please explain to us what is the reasoning behind the risk-weights? For instance are these to reflect the possibilities of a borrower not repaying the bank, or the possibilities of a bank going under because of a borrower does not repay? If the latter it would seem to us, humble laymen in these matters, that what is perceived to be safe and therefore is lent to much more by the banks represents more real danger… not the skimpy lending to those perceived as “risky”.

PS. FT, dare to question the sanity of current regulations.

Bank fines, if not paid with new voting shares issued, seems societal masochism

Sir, I refer to Gillian Tett’s “Regulatory revenge risks scaring investors away” August 29. In it Tett indicates the possibility that the 10 largest western banks will end up 2014 paying £200bn in bank fines. Let me translate that for you.

In terms of the Basel III US leverage ratio of 5%, that signifies £4.000bn less in lending capacity or, with the European leverage ratio of 3%, £6.666bn less in lending capacity… and that is paid by the economy as a whole… in other words it seems pure societal masochism.

And that does not even consider that if any of these banks run into problems, and is undercapitalized, then tax payers might also end up paying the fines.

That is why I have for quite some time suggested that we should think about forcing the banks to pay their fines with voting shares issued at their current market price. Government could then resell those shares in the market.

That would dilute the value of a bank's current shareholder's investment, but not reduce the assets the fined bank has to manage any unexpected events and to give credit.

Are not bank regulators there to see to our banks are strong and well capitalized? Have we heard them protest these fines?

If regulators can stop banks from paying out dividends in cash... how come they cannot ask the courts to extract shares and not cash from banks?

PS. FT, dare to question the sanity of current regulations.

Central banks’ Friedman helicopter pilots have no idea about how to spread quantitative easing and low interest rates

Sir, Ralph Atkins report that "Central bankers face ‘confidence bubble’” August 28.

With respect to central bankers as bank regulators you know very well it’s been a long time since I have had any confidence in them. They are so lost in the labyrinth of their own making.

For instance they are now also supposed to base their monetary policy on the job rate, and so they pour liquidity and low interest rates on the economy while at the same time, with their risk-weighted capital requirements, they make sure that does not go as bank credit to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups… those who could create the next generation of jobs. How crazy is not that?

Really, how smart is it of the central bankers to believe ordinary lowly bankers to be so blind and so dumb so as to require them to hold 5 times as much capital when they lend to someone they know has a BB- rating than when they lend to someone they know has an AA rating?

Or, inversely, how smart is it of central bankers to believe ordinary lowly bankers when they argue they could hold only a fifth of capital when lending to someone who has an AA rating, than what they should hold when lending to someone with a BB- rating?

I can’t help to ask myself what Friedman would have to say about the ability of the current central bank’s helicopter pilots. I am sure he would be aghast at their stupidity.

PS. FT, dare to ask!

What does stealing a show among adoring fan means? Draghi should dare to address a room full of unemployed young Europeans

Sir, Mario Draghi, as the former chairman of the Financial Stability Board, is one of the responsible for the risk-weighted capital requirements for banks, which, because regulators think that is too risky for the banks, stop banks in their tracks from lending to medium and small businesses, entrepreneurs and start-ups.

And so now, when Gavyn Davies reports that “Mario Draghi steals the show at Jackson Hole” August 27, I have to wonder how Draghi would be received by a crowd of well informed young unemployed Europeans? I really doubt he would there be able to steal a show, most likely he would have to retire running.

The inexplicable inconsistency of Martin Wolf

Sir, I refer to Martin Wolf´s “Opportunist shareholders must embrace commitment” August 27.

With respect to the corporations, those entities “largely responsible for organizing the production and distribution of goods and services across the globe”, Martin Wolf argues that “we have made a mess off them… with shareholder value maximization… which leads to misbehavior but may also militate against their true social aim, which is to generate greater prosperity”.

And though I agree with most of his concerns, I am left wondering if we would not run the risk of causing an even greater mess trying to correct it.

But, if Wolf is so concerned about how corporations allocate resources in the world, should he not be even more concerned about how bank regulators, with their risk weighted capital requirements, are providing a much worse and more concentrated distortion of something perhaps even more important like bank credit? Or is not the function of banks also to help generate greater prosperity?

Clearly Wolf should be concerned with it, but, for reasons that I do not comprehend, Wolf has never been able to understand that the risks with risk weighted capital requirements for banks are so much greater than the credit risks which are being weighted.

And Wolf ends admonishing “We should let 100 governance flowers bloom”. Yes indeed, but in these days when the reach of regulators is global and therefore more prone to causing systemic risks, should we also not look much closer into the governance of that sole regulating flower represented by the Basel Committee and the Financial Stability Board?

PS. And just in case, it is of course not my intention to single out Martin Wolf as someone who does not understand that risk-weighted capital requirements distort… he is in incredibly abundant and qualified company.

Sir, John Kay, while being entirely correct, makes you wonder where he has been the last decade

Sir, John Kay writes “Much of the complexity of modern finance is the result of regulatory arbitrage – avoiding or minimizing restrictions by engaging in transaction with more or less identical effect but more favourable regulatory treatment… Regulatory arbitrage is an inevitable outcome of the detailed prescriptive regulations of financial services” “Arbitrage wastes the talents of finance´s finest minds” August 27.

Of course, Kay is absolutely right, but it makes you wonder where he has been all these years.

Does Kay not know that Basel II, which allowed banks to leverage their equity in the range of 8 to infinite times, made regulatory arbitrage immensely more important for a bank´s return on equity, than being able to allocate credit to the real economy correctly? If, banks had to hold the same capital against all assets, say the Basel II basic 8%, then banks might still be arbitraging, for instance with insurance companies as Kay describes, but regulatory arbitrage would never ever have reached current endemic and monstrous proportions.

And Kay correctly holds that “The better response is to find simpler and more robust principles of regulations? Does he not know that Basel III goes into the opposite direction, increasing the complexity and perhaps even the number of tools in the arbitrage toolbox?

Well clearly Kay has not read the so many letters I have sent him about this issue over the last decade…I guess that happens when you do not belong to a financial columnists intimate network.

That said, I hope that Kay with this recent insight, then would dare start asking the regulators those nasty questions they need to be asked, if our economies are to stand a chance.

Clearly the chief of Wells Fargo cannot tell us the whole truth about the "bad mortgages", so the more reason for us to expect FT doing so.

Sir, Camilla Hall writes “The US is still picking over the wreckage of the financial crisis, in which some mortgage originators willfully ignored underwriting standards to sell as many loan as possible to government-backed institutions and private investors”, “Wells chief warns on mortgage lending” August 27.

What a tremendous loss of short term memory!

First all those lousily awarded mortgages were not sold directly to any government-backed institutions and private investors, but to security re-packagers who were able to confound credit rating agencies so much that they obtained an AAA rating for these.

Secondly the investors were not buying mortgages, God forbid, they were buying AAA rated securities backed with mortgages… something entirely different.

And thirdly and most important, the only reason why there was such an intense demand for these AAA rated securities so that all caution was thrown to the wind, over €1 trillion of European investments were sunk into those securities in less than 3 years, was that Basel II, approved in June 2004, had the audacity of allowing banks to own these securities, or give loans against these securities, holding only 1.6% in equity, meaning being able to leverage their equity a lunacy of 62.5 times to 1.

Fanny Mae? Fanny Mae did not originate one single of these mortgages to the subprime sector. It also mainly got to these through the purchase of the AAA rated securities, when it could not resist the temptation.

No! If history is not told correctly how can we avoid making mistakes?

How do I know what happened? First I had warned over and over again about the risks of trusting so much the credit ratings, and when the crash came… I also took the examinations to be a certified real estate and mortgage broker in the state of Maryland, with the primary purpose of finding out what really happened.

And to hear stories told by small real estate agents being pressured into signing whatever lousy mortgage… because it did not matter… because what was important was that the interest rate was as high as possible and that the terms were as long as possible, since that would maximize the profits when selling it at low AAA rates… and because they would make bundle of commissions that would make them rich… and because “stop asking questions about what you cannot understand”… was something truly saddening.

No Sir, it is obvious that the chief of Wells Fargo cannot tell us the whole truth and nothing but the truth, as that would have to include spelling out that his regulators were stupid, but, therefore, the more the reasons we have to expect FT to do so.

Let us hope the golf handicap system does not fall into the hands of something like the banks' Basel Committee.

Sir I refer to Anjum Hoda’s “The Bank of England´s fixation with price stability has cost us all” August 26.

Hoda puts squarely the blame for current problems, like weak wage growth and banking crisis, on “central bank’s decisions to price money incorrectly- a mistake that led to disjointed, mutually unsupportive outcomes in the capital and in the labour markets”.

I do not know sufficiently to hold an opinion on what role that played, but I do firmly believe that much more culpable were the risk-weighted capital requirements for banks, based on perceived risks already cleared for, which profoundly distorted the allocation of bank credit.

Since after soon a thousand letters to you trying to explain it I have not been able to do so, and though I do not know whether Anjum Hoda or you play golf, let me use its handicap system to illustrate what is going on.

The golf handicap system allows good and bad players to compete. Of course, now and again, the handicaps do not reflect the real golfing abilities of the players, just like credit ratings sometime misses the credit risk.

But what would happen if a Basel Committee for Golfing, because those with higher handicaps could be cheating themselves into some unjust winnings, decided to copycat their colleagues in the Basel Committee for Banking Supervision and instruct the following:

All those with handicap between 13 and 18 will have their handicap automatically reduced with 9 strokes, those between 7 and 12 with 6, and those between 1 and 6 with 3 strokes. 

Would that solve it? No, the unfortunate “unexpected consequence” of it would be that only scratch players were to be able to play golf competitively. Just like risky small businesses and entrepreneurs cannot currently compete in a fair way for access to bank credit, since that credit is now given primarily to the credit risk scratch players, namely the “infallible sovereigns”, the members of the AAAristocracy and house purchase financing.

PS. August 14 FT published a special report on Golf. In it Roger Blitz in “Sport stuck in a rut has to get a grip on its future” wrote “A single [governing] body would appear a logical outcome for an increasingly global game”. Let us golf lovers pray it does not fall in hands similar to the Basel Committee… since our breed would die out so much faster.

Does Martin Sandbu really not know who did the eurozone in?

Sir, in November 1998 in an Op-Ed titled “Burning the bridges in Europe” I believe I expressed as reasonable concerns as any about the Euro.

What I did not know at that time was that bank regulators would introduce a Basel II, by which banks were required to hold 8% in capital when for instance lending to SMEs but did not have to hold any capital when lending to “infallible sovereigns”. That of course dramatically reduced all possibilities the markets had of putting brakes on any macroeconomic imbalances.

And so now, when I read Martin Sandbu´s otherwise excellent “The euro is a scapegoat for the blunders of politicians”, August 25, I wonder more than ever about how come the absolute blunders of the Basel Committee are so brazenly ignored.

Does Martin Sandbu really not know who did the eurozone in? Or is it something else I am unaware of?

Sir FT, are you allergic to the idea that SMEs, entrepreneurs and start-ups lend our economies a helping hand?

Sir in “Central banks at the cross-roads” August 25, you describe the cross-roads in terms of whether central banks and governments are, with fiscal and monetary policies, to help or not to help. 

You do not include the crossroad that rids of the discrimination against “the risky” present in the risk-weighted capital requirements for banks. Doing so would allow banks to once again lend to medium and small businesses, entrepreneurs and start-ups. Are you allergic to the idea that they should have a chance to help out?

Bank regulators should stop profiling risk and use predictive statistics instead.

Sir, Gillian Tett brings up an extremely interesting question. What has predictive statistics on crime, which might indicate more crime possibilities in black areas, have to do with discrimination? “Mapping crime – or stirring hate” August 23. I would apply those notions to current banks regulations.

Regulators should apply risk-neutrality, meaning stop profiling bank assets using risk-weights based on perceived risk, which in essence is highly discriminatory and creates distortions in the allocation of credit; and instead use predictive statistics about when banks really get into troubles. Would they do so, they would soon discover that bank lending to “the risky” requires much less supervision than bank lending to what is perceived as safe and profitable. 

The predictive model could be based on quite simple algorithms… like what bank exposures are growing the fastest, in real time. At this time it would clearly indicate that, in Europe, regulators would have to urgently send out a squad to patrol the area of loans to infallible sovereigns.

Why is FT such an apologist of absolutely failed bank regulators?

Sir, referring to “a new post crisis world marked by tougher regulation and supervision”, you end with “If bankers are to regain public trust, they must learn the lessons of the past”. “Bankers brace for a brave new world” August 23. 

Excuse me… what lessons of the past? Those lessons regulators themselves have not understood yet and therefore, with their risk-weights, they keep on shepherding banks with little equity into corrals where the most dangerous “absolutely safe” wolfs stroll freely?

Brave world? What a laugh, with now also Basel III liquidity requirements, it sure looks just like the world with too many too frightened nannies of lately? 

PS. FT reporters... dare to ask The Question!

“More safe assets” might just quite dangerously signify too much safe assets.

Sir, I refer to Tim Harford’s “Low inflation targets becalmed our economies” August 22.

Harford writes “Low real rates suggest lots of people are trying to save, and particularly in safe assets, while few people are trying to borrow and invest” and that “regulators (understandably) insist that banks and pension funds hold more safe assets”.

Labeling it as “understandably”, Harford seems to miss the possibility that “more safe assets” could and does most likely signify too much safe assets. If our banks, those who have usually played the role of designated risk-takers, standing in for us much more risk adverse citizens, are by means of the risk-weighted capital requirements given incentives to also avoid risk, there is no way we can have anything but secular stagnation.

PS. FT reporters... dare to ask The Question!

The weaker their banks the lower the interest rates of their sovereigns; the sick result of risk-weighted capital requirements.

Sir, Claire Jones and Ralph Atkins report “EU borrowing costs hit new lows amid call for ECB intervention” August 22.

And they write for instance that “Portuguese yields fell to a near decade low – despite fears about weaknesses in its banking system”. Is it so hard to understand that precisely because of perceived weaknesses in the banking system sovereign yields must fall… because sovereign debt is precisely what weakened banks with no capital can hold without being required to have bank capital?

That is one of the very sick results of the very sick risk-weighted capital requirements for banks.

PS. FT reporters... dare to ask The Question!

What a waste of a good $17bn fine. Oh, if only it had been collected in voting shares of BofA.

Sir, Kara Scanell and Camilla Hall report that “BofA settles for record $17bn claim” August 22, and I cannot but reflect on what a waste of a good fine that is.

The fine is to be paid by BofA in cash and in consumer relief, all payments of course going against BofA’s capital account… in these days bank capital is already so scarce because bank regulators allowed it to become so scarce.

If we multiply be the 20 times leverage implied by the 5% leverage ratio US regulators have announced, those $17bn as capital could have supported $340bn in loans. Oh if only that fine had been collected in voting shares of BofA at current market valuations.

PS. FT reporters... dare to ask The Question!

Europe is about to throw away €489m to obtain fairly insignificant new information about its banks.

Sir, Claire Jones, Sam Fleming and Alice Ross report “Consultants to reap €490m from Europe’s banking audit” August 21.

First, we should not ignore that money, if bank capital, and if leveraged at the 3% leverage ratio allowed for banks in Europe, would permit bank credits to the tune of €16.3bn.

But we should also think about what that money can buy, and in that respect I believe it will buy regulators preciously little.

And I say that because we should not have to take a too close look at the balance sheets of banks to know that, because of the risk-weighted capital requirements they have:

Too little equity as a result of being allowed to have too little equity for much of those exposures that gort into real problems, like AAA-rated securities, sovereign like Greece, and real estate in general; and

Too much dangerously large exposures to what is perceived as absolutely safe, like the “infallible sovereigns, because those are the exposures that require the banks to have the least capital of that scarce capital; and

Perhaps even more dangerous because its implications too little exposures to what being perceived as risky requires banks to hold more capital, like loans to medium and small businesses, entrepreneurs and start ups.

What could the fees for that type of consultancy analysis be? Tops €1m? If so Europe will really be throwing away €489m in order to obtain information that on the margin seems to be quite insignificant.

And that does not even consider the fact that quite often, especially in the case of banks, the bliss of ignorance, is a quite valuable commodity.

Mario Draghi’s “Whatever it takes” should include Draghi going into early retirement.

The pillar of current bank regulations, those concocted in Basel II and surviving in Basel III, the risk-weighted capital requirements for banks, determine: less-risk-less-capital, more-risk-more-capital.

But what is perceived as “risky” is only risky, if it is more risky than what it is perceived to be. And what is perceived as “safe” is not safe, if it is less safe than what it is perceived to be.

And therefore the current capital requirements for banks based on perceived risk is utter nonsense since, if something like that could help our banks to be safer, it should at least be based not on the perceived credit risks, but on the risks of the perceived risks not being correctly perceived.

And, in such case, can someone really determine what is more risky than what it is perceived to be is, or what is less safe than what it is perceived to be is? I guess not.

But no! The Basel Committee regulators felt they had full authority to know best, and here we now have our banks being allowed to hold little capital against monstrously large exposures if these are only perceived as safe, like AAA rated securities, loans to infallible sovereigns like Greece, or real estate financing in Spain; while being required to hold much more capital against an immense number of small loans to SMEs, or entrepreneurs, only because these creditors, individually, are perceived as risky.

And that means that banks can leverage more their equity with “absolutely safe” assets than with “risky” assets; which results in banks being able to earn higher expected risk-adjusted returns on equity when lending to what is perceived as “absolutely safe”, than when lending to what is perceived as risky.

And that has of course completely distorted the allocation of bank credit to the economy… and therefore utterly diluting the significance for the economy of QEs, fiscal deficits, low interests, or any other similar stimulus.

And one of those most responsible for causing these distortions which are murdering any hopes of a sturdy economic growth in Europe, and the creation of jobs for our young, is of course the former chairman of the Financial Stability Board, Mr. Mario Draghi.

And therefore Sir, when Richard Portes now suggests that “Draghi has to do, as well as say, whatever it takes” August 21, I feel that “whatever it takes” should include Mario Draghi going into early retirement… and of course taking some other of his failed bank regulating colleagues with him.

And, if you consider that to be inappropriately harsh, then would you at least require him to publicly confront and answer this criticism of the risk-weighted capital requirements.

PS. It is a real tragedy hearing so many opining on current bank regulations, and being convinced we are now much better off with Basel III, without them having read, much less understood, what is said in that monument to mumbo jumbo document that is “The Basel Committee on Banking Supervision´s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005”. I am sure Draghi did not understand it… or at least I hope he did not… as otherwise that would be so much worse.

http://www.bis.org/bcbs/irbriskweight.pdf

PS. If we do not at least learn to hold especially accountable those whose regulations have a global reach, then we are really setting us up for total disaster.

Most of the concern with derivatives derives only from the fact that “derivatives” sounds so deliciously sophisticated.

Sir, Tracy Alloway and Michael Mackenzie when reporting on the “Dangers to system from derivatives´ new boom", August 20, might not understand the most important differences between underlying markets and the derivatives traded based on these.

In a derivative, there is a buyer and a seller, and so whatever happens someone wins and someone loses and in essence it’s a wash out… of course as long as all can live up to their commitments.

But, in a real market loss, like that of a lower value of a stock, a lower value of a painting, or a lower value of a real estate, there is at that time only a loser… and no winner… that is unless you count he who might have way back earlier sold the stock.

And in this respect the trading in derivatives will depress much less the market than a depression of the values of the underlying vanilla assets.

The big fuss that is raised around the issue of trading of derivatives, again, besides the possibility of one side of the trade not living up to his commitments, has much more to do with the fact that “derivatives” sounds so deliciously sophisticated.

It is bank regulators who cuddle up to politicians and governments.

Sir, John Plender begins his “Eurozone debt problems in need of a fresh start” of August 20 with “Rarely can bond markets have taken politicians so comprehensively off the hook.”

What? Please? If there is anyone taken politicians so comprehensively off the hook – and delivering “the decline in government bond yields” which has “reduced the cost of servicing excessive public sector debt”, that is the bank regulators who decided banks had to hold much less capital (equity) when lending to governments than when lending to the “oh so risky” citizens.

And quite recently one of you in FT argued in an email to me, that it should be so since “the risk in lending to a government able to print its own money (like the UK) IS CLOSE TO ZERO” meaning with that we should trust the infallible politicians because the controlled the printing machine. Well no way Jose!

The squeeze between the leverage ratio, and the risk-weighted capital requirements for banks, intensifies the regulatory distortions.

Sir, Adam Posen opines that the Fed should “Keep rates low until the hidden jobless return to work” August 20.

I have not any strong opinions on where rates should be but, when Posen writes “After the global financial crisis, no one can dispute that central banks have to take financial stability into account when making policy”, then I must speak out again.

As I see it, it was precisely when trying to consider financial stability, and to that effect coming up with the risk-weighted capital requirements for banks, that regulators distorted the credit allocation of banks. And that made banks invest too much in safe assets, like for instance AAA rated securities, sovereigns like Greece, and real estate in Spain, causing a crisis; and way too little in lending to medium and small businesses, entrepreneurs and start-ups, causing joblessness.

And so for me more important than anything on the interest rate front, is eliminating the distortions that are impeding job creators to have fair access to bank credit.

And the saddest part of it all is that none of the regulators, in US and in Europe, seem to understand that while they are prudently imposing a minimum floor of capital by means of a leverage ratio, the constraints imposed by the risk-weighted minimal capital roof, become more severe and the distortions intensify… something which really kills the creation of jobs.

Do not reduce what is an economic crime against humanity to merely being a “petrol subsidy”

Sir, Daniel Lansberg Rodriguez, I presume my former colleague as columnist in El Universal, as I assume he has been censored too, writes about “slashing petrol subsidies” in Venezuela, “Latin America swaps its populists for apparatchiks” August 20.

Hold it there, “petrol subsidies” is not the correct way to describe selling gas at less than 1 US$ cent per gallon, at less than 1 € cent per 5 liters, less than 1 £ penny per 6 liters of petrol or gas.

To put it in its real current perspective it means that, more than US$ 2.500 are handed over to each one of the more than 5 million cars on the roads of Venezuela, representing a value that by far exceeds what the government pays out in all other social programs put together… if we now can count the gas/petrol give away as a social program.

The International Court of Justice should be able to also handle these economic crimes against humanity.

How long are individual countries to accept that risk-weighting capital requirements bullshit from the Basel Committee?

Sir, John Plender writes that “In the eurozone the banking system has become increasingly fragmented… [and that] The new parochialism is reflected in the way European governments have been encouraging banks to shrink their balance sheets while simultaneously demanding that they lend mote to domestic small business” “A threat to prosperity if the world cuts the ties that binds” August 19.

Not sure Plender has got the title right… because the global bank regulation, the “ties that bind”, that are coming out of the Basel Committee imply that the local banks are better off lending to any far away infallible sovereign, or any far away member of the AAA-ristocracy, than lending to their local medium and small businesses, entrepreneurs and start-ups… and, sincerely, that does not sound right... for prosperity!

Philipp Hildebrand, unfortunately ECB’s Mario Draghi is too busy covering up for his own mistakes to have time for Europe.

Sir, Philipp Hildebrand writes “QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out”, “The Fed´s regimen will not remedy Europe´s ill” August 19.

And you know that is completely in line with what I have been writing you letters about for about a decade now. And I say this because in my letter of November 18, 2004, one which you did publish, thanks for that, I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world…How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?

Hildebrand also writes “There will be no robust European growth without properly capitalized European banks…Swift action is essential to rectify any capital shortfalls that are discovered [after] comprehensive assessment of eurozone banks”. And he also mentions the “distortions will ultimately lead capital to flow into mispriced financial assets, instead of financing investment in new productive capacity.”

Hildebrand is right but, unfortunately, he ignores or forgets, first, that those comprehensive assessment do not include analyzing what should have been on eurozone balance sheets, like loans to SMEs, and second, that when he writes “Mario Draghi is right to prioritize fixing the banks”, the sad truth is that Draghi, as a former chairman of the Financial Stability Board, is too busy covering up his responsibilities in creating the current mess to have time for Europe.

PS. The day I write the book on how my arguments about how faulty and dangerous risk-weighted capital requirements for banks are were ignored by FT, and by many of its columnists and reporters, your prime line of defense will be exactly the same as the Basel Committee´s, namely people finding it hard to believe some “experts” can be as dumb as that. Am I impolite? Come on, I was extremely polite, outright nice, for years.

Do FT reporters really understand that capital, as in capital requirements for banks, refers not to general funds but to equity?

Sir, Christopher Thompson reports “Europe´s banks set for €250bn injection” August 18.

And that money, which according to Mario Draghi could eventually increase to €850bn, is to counter the fact that “Overall eurozone banks have decreased lending to the region´s businesses by €561bn since 2009 according to research by RBS, as they seek to raise capital and cut bloated balance sheets”

And I wonder if it is really understood that what the European banks need for renewing lending, to for instance SMEs, much more than that kind of cheap ECB funding, is the bank equity that regulators require them to hold especially much of when lending to those deemed “risky”, as compared to the equity banks need to hold when lending to those deemed “absolutely safe”.

Could the confusion result from that, for instance FT reporters, think of “capital” more in terms of general funds and not in terms of equity?

Could as it would seem Mario Draghi be equally confused about it, even though he was the chairman of the Financial Stability Board? Holy moly!

Europe, if you want to avoid death by attrition, you need to trust your bankers more than your bank regulators.

Of course it is tragic when banks collapse because of too much risk taking, usually on something they perceive as absolutely safe. Then, there is a big setback and lot of tears. But, in the long run, because your banks have also taken some constructive risks on those perceived as risky, like medium and small businesses, entrepreneurs and start-ups, net of this setback, you have at least moved forward.

But, when your current bank regulators concocted their capital requirements based on perceived credit risk, not only did they assure that banks will take even larger risky exposures on what was perceived as absolutely safe, but also that your banks would not be taking the sufficient constructive risks on the risky, something which therefore sets your economies on the road of attrition. And, so when the inevitable collapse occurs, when once again something perceived ex ante as absolutely safe turns out ex post to be very risky, not only will the pain be larger, but the setback will also be a net setback.

And Sir, set in this perspective, all usual discussions about what the ECB should or should not do which do not include getting rid of the current bank regulations, like that of for instance Wolfgang Münchau’s “Draghi is running out of legal ways to fix the euro” of August 18, are, forgive the expression, like pissing somewhat outside the pot… excuse me I mean outside the chamber pot.

I cry for you Europeans, if you can’t see where the Basel Committee’s and the Financial Stability Board’s obsessive risk aversion substituting for reasoned audacity is taking you.

Let me be absolutely clear, something else bad might have happened to your banks but absolutely not what happened to them, had there been no risk-weighted capital requirements which allowed banks to earn much higher risk-adjusted returns on their equity on assets like AAA rated securities, infallible sovereigns like Greece or real estate like in Spain.

Let me be absolutely clear, had there been no bank regulations the banks would never, at least knowingly, been allowed by the markets to leverage remotely as much as they were allowed to do by the regulators.

Friend-of-the-bank’s-owner ratings would be more useful than credit ratings when setting capital requirements for some banks.

Sir I refer to James Crabtree´s lunch with Raghuram Rajan, “Everyone expects you to be a prophet” August 16.

In his famous speech at Jackson Hole 2005 Raghuram Rajan said: “Something as intimate as credit risk is now being traded with strangers. In fact the same way as parent are asked ‘Do you know where your children are?’, bankers nowadays are asked ‘Do you know where your risks are held’”?

That was a somewhat incomplete observation because just as many parents would have answered “with their nannies”, bankers would then need to answer “in the hands of very few human fallible credit rating agencies”, because that was what Basel II approved in June 2004, instructed banks to do.

And of course, as was doomed to happen (see my letter in FT January 2003), soon thereafter some AAA ratings awarded to some securities guaranteed with mortgages to the subprime sector, became the nail in the coffer of those financial markets which even Rajan at that time called to be “in extremely healthy shape”.

And Rajan also concluded his speech admonishing regulators to allow “markets to signal the winners and losers” without reflecting that when it comes to the allocation of bank credit the risk-weighted capital requirements for banks are precisely distorting those market signals.

And I say all this because when now Rajan is quoted saying “Central bankers have had enormous responsibilities thrust on them to compensate, essentially for the failings of the political system”, he and we should not forget that central bankers, in their close nexus to bank regulations, also hold enormous responsibilities for the current failings of the banking system.

But I also say this because when I read Rajan complaining about “Many businesses groups treat public sector banks as their equity kitty”, and which of course is the same as the problem of private owners of banks also treating these as their equity kitty, it occurred to me that friends-of-the-bank’s-owner ratings could prove to be more useful than credit ratings when setting the banks´ capital requirements.

PS. Afterthought. Should not owner-controlled-banks and management-controlled-banks merit different regulations?

How do we not forget or ignore the creative sparks of the past?

Sir, Gillian Tett asks “So what inspires the ‘aha’ moment? And can anybody set out to replicate moments like this in other areas?”, “How to ignite creative spark” August 16.

I would say that even as that is an important question, even more important is the one of “How do we not forget or ignore the creative sparks of the past?” 

Frank H. Knight, in 1921, in “Risk, uncertainty and profit” reminded us of that Hans Karl Emil von Mangoldt, in 1855, gave the example of how “the bursting of bottles does not introduce an uncertainty or hazard into the business of producing champagne; since in the operations of any producer a practically constant and known proportion of the bottles burst, it does not especially matter even whether the proportion is large and small. The loss becomes a fixed cost in the industry and is passed on to the consumer, like the outlays for labor or material or any other.”

And yet, around 150 years later, our too creative bank regulators decided something akin to that if a bank was going to produce champagne using “risky” champagne bottles, it needed to hold much more capital (equity) than if it was going to produce milk using safer milk bottles… and all as if the banks did not already internalize in their interest rates, the size of exposures and other terms, the ex ante perceived credit risks of their borrowers.

And so, ignoring von Mangoldt’s spark, meant that regulators forced the banks into a double consideration of perceived credit risks, something which of course distorted all common sense out of the allocation of bank credit in the real economy.

Why does FT insist on wasting scarce quantitative easing, before removing the roadblocks in Europe?

Sir, again, sort of for the umpteenth time, you insist in that “Europe now needs full-blown QE” August 15.

Although you do not want to confess it, perhaps because for some really petty reasons, I know you are perfectly aware that the risk-weighted capital requirements for banks, acts like a roadblock that would stop any liquidity provided by quantitative easing, to reach by means of bank credit, those Europe most need to reach, namely medium and small businesses, entrepreneurs and star-ups.

Why would you want to waste what must be some quite scarce European quantitative easing before removing that boulder?

The investors had priced market risks of CoCos, not the risks of bankers´ or regulators´ whims.

Sir, I refer to Christopher Thompson´s “CoCo sell-off uncovers high yield bargains” August 15, and which title surprises a bit as I did not know FT provided specific investment recommendations.

But that said, whenever we read about “underlining investor willingness to shoulder more risk in their hunt for higher-yielding bank assets” you can be absolutely sure that all risks have not been disclosed by the seller of that asset… so what the investor is really willing to shoulder is a little bit more of uncertainty or looked at it from the other angle, or just willing to trust his advisor a little bit more.

What has happened to CoCos is clear. Investors had priced in the risk that deteriorating market conditions could force the conversion of CoCos into bank capital… what they had not priced was the fact that conversions could happen as a result of bankers´ and regulators´ whim playing around with the current capital requirements for banks. In fact, regulators had not thought of this, and also just recently woke up to that fact.

PS. In case you do not remember I hereby send you the link to what George Banks had to say about CoCos.

http://subprimeregulations.blogspot.com/2014/07/mr-george-banks-asked-about-cocos.html

Corporations are not part of the community... and should not be allowed to dilute citizens´ tax representation

Sir, Michael Skapinker holds that “Business has lost its place in the community” August 14, and frankly I wonder if business ever had a place in the community. I mean, when a corporation does good things for the community, that is not really out of a sense for the community but because it is building up its image… a sort of clever advertising expense.

No, communities should be about people, and in this respect the tax on corporations should be 0%, because corporations should never have the possibility to dilute the tax representation of the citizens. In other words it is for the owners of the corporations to have a sense of community.

And with respect to Skapinker´s comments on bankers and their manipulations I agree…slap them hard on their fingers. But, Skapinker should not ignore that the manipulation of how bank credit is allocated in the real economy, performed by regulators with their risk-weighted capital requirements for banks, has been and is much more harmful for the society than any of the other bank manipulations currently spoken of… and in this respect Mark Carney´s behavior, as the current chairman of the Financial Stability Board, is “highly reprehensible” too.

http://perkurowski.blogspot.com/2012/03/my-tax-paradise.html

We must stop building that mountain of dangerous elusive safety that is sure to crumble and fall on us.

Sir, I refer to Tracy Alloway’s and Michael MacKenzie´s “Finance: The FICC and the dead” August 12.

In October 2004, in a formal written statement delivered at the World Bank as an Executive Director, I warned

“I believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

I have of course been much ignored ever since, as it is not considered comme il faut to be too right especially in the company of credited experts.

But Sir, now we are back to that period, and again… and it is not that the waves have disappeared… it is that the wave is building up… Just you wait ´enry ´igggins, just you wait, until it breaks.

When bank regulators with their risk-weighted capital requirements of Basel II basically ordered banks to stay away from what is "risky"… and now make those orders even more imperative with the liquidity requirements in Basel III, and when we now read about asset managers “steering clear of certain bonds, such as asset-backed instruments whose so-called secondary markets are not deep” one thing is clear… and that is… the world is trying to build a more and more, a higher and higher, mountain of safe assets.

Perhaps something on its very top and its very center might survive, but the rest is going to come crumbling down… sooner or later, there is just not enough safety material to go around for that kind of mountain.

They seek it here. They seek it there. Those Basel bank regulators seek it everywhere. Is it in heaven? Is it in hell? That damned elusive bank stability… (which does not even have the decency to rhyme!)

SEC, FDIC Worry less about bank´s living wills and more about how banks live!

Sir, Lex reports on the Fed and FDIC wanting “Bank’s living wills”, August 9.

Not only do I find bank living wills somewhat preposterous, as it would be up to the inheritors to decide what to do, not to those administrators of a bank that when a collapse might occur might have de facto been proven very bad.

And, what if the SEC and FDIC do not like the wills… will they pressure the banks so much that they might collapse because of that?

No, much more important than what happens to banks when they are gone is what they do when they are alive and kicking… and now, thanks in much to the distortions created by the regulators with their risk-based capital requirements, the banks are not allocating credit efficiently. And… excuse me, that´s a far more serious problem.

Our teenagers’ vampires might end up sucking our baby-boomer blood

Sir, Ms Gillian Tett commenting on the books current young read, like those with vampires, writes: “teenagers now face a world where boundaries are blurred… lines between childhood and adulthood, good and evil, friend and for, male or female are no longer clear cut”, “Teenage books with added bite” August 10.

That it is indeed scary stuff. Not so much because of boundaries being blurred, but for the fact that since humans cannot travel through life without some kind of boundaries, we are not really clear about what the new boundaries might look like… perhaps books on vampires going after baby-boomers’ blood will hit the charts soon?

But when we on the opposite side of the paper also find Christopher Caldwell having us pray not to fall in hands of a justice which allows “guilty rich people buying their way out of convictions and innocent rich people being shaken down by zealous prosecutors”, something for which we clearly must share somehow some blame for… we also know that such sucking our baby-boomer blood would not be totally undeserved, “Ecclestone’s cash tarnishes the court that sets him free”.

Prudence is ok. But prudence on top of prudence is very dangerous too!

Sir, William Rhodes holds that “Without prudence as a value we are all at risk” August 8. Absolutely, that is only as long as we are prudent when being prudent. Let me give you the mother of examples about what I mean.

Bankers already looked at credit risks when deciding interest rates, amounts of exposure and other terms of their financial assets. And they did so in a quite risk adverse way; if we remember Mark Twain’s saying “A banker lends you the umbrella when the sun shines and wants it back when it looks like it is going to rain”.

But then came the regulators and, in the name of their prudence, set also the capital requirements for banks based on the same perceived credit risks… something which suddenly allowed banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible” than when lending to “The Risky”… and which of course resulted in distorting the allocation of bank credit in the real economy.

And so if we begin loading prudence on top of prudence, especially on top of the same prudence, that is when we enter into that Roosevelt territory of having nothing to fear as much as fear itself.

These nanny regulators from Basel, who basically force bankers to eat broccoli when they eat spinach and reward them with ice cream when eating chocolate cake, have now turned our economies into obese monsters, with none of the muscles provided by credits to the risky medium and small businesses entrepreneurs and start ups.

Mario Draghi, Europe’s recovery might be rolling on somewhat… but it’s definitely not on track

Sir, Claire Jones reports “Draghi insists recovery on track”, August 8.

Draghi has clearly no idea of what he is talking about. The European economy might be moving on by some remaining inertia, but it is most definitely not on track… as it has been forced off the tracks by dumb bank regulators with their risk-weighted-capital requirements based on perceived credit risks.

That Europe accepts to have someone so completely unaware of the difficulties these capital requirements cause for medium and small businesses, entrepreneurs and start-ups, to access bank credit in fair terms as president of the European Central Bank, is mind-blowing.

Of course, if Draghi does understand the distortions in credit allocation that are produced, but still think that the economy can be on track… then that would be even more mind-blowing.

By George I think FT’s got it: “A ship in harbor is safe, but that is not what ships are for” John A Shedd, 1850-1926.

Sir you write: “politicians… need banks to lend money and support economic growth (rather than inventing esoteric products to boost their bonuses). A bank that never takes any chances is not doing its job”, “Complicated banks face complex rules” August 8.

And so, are you finally waking up to the fact that banks have other purposes than not just going belly up and costing taxpayers some money? About time, why did it take you so long?

The regulators though still seem to be sleeping on it, as they insist with their risk-weighted capital requirements for banks… which are based exclusively on credit risks already cleared for by other means, and not having one iota to do with any lending money or economic growth purpose... much the contrary as these requirements profoundly distorts the allocation of bank credit.

Where would our economies be without chancers, hustlers and other wheeler dealers?

Sir, John Gapper rightly nudges the question of where our economies would be without chancers, hustlers and other wheeler dealers, “Ecclestone is a chancer who has earned a final chance” August 7.

And though we would surely not like to see one of our daughters marrying one of these we regard as social misfits, there is no doubt that without them our economies would go stale.

Think of it. How much capital is currently not in action, giving jobs to many, only because someone convinced its owners of being able to make huge returns with no risks? Are we instead to have all our savings only safely increasing the value of the Picasso’s hanging on our walls? 

But, even so, I abhor the risk-weighted capital requirements for banks based on perceived credit risks. 

With these we are giving special access to bank credit to those who specialize in dressing up as “absolutely safe”… like the infallible sovereign entrepreneurs. 

But why would we want to withhold fair access to bank credit for the “risky” medium and small businesses, entrepreneurs and start-ups, with other type of knowledge and drive? That sounds like an unnecessary limitation which can’t really be good for anyone… in the long run.

There are two entirely different kinds of risks. Investing in “risky”, and excessive investment in “safe”

Sir, Tracy Alloway reports that, as a result of “low volatility” which sets off ‘feedback loop”, “Banks warn of ‘excessive’ risk taking” August 7.

Excessive risk taking comes in two forms. Investing in something ex ante perceived as risky, and the most dangerous one, investing excessively in something, ex ante, perceived as “absolutely safe”.

It is important to make that distinction because while other investors might be running more of the first kind of risk, banks, especially because of risk-weighted capital requirements, are much more exposed to the second kind of risk.

For the society the second kind of risk is of course much more dangerous, since excessive investments in what is perceived as “absolutely safe” will take us nowhere.

Two questions Mr. Kay, on “strict liability” and bank regulators.

Sir, John Kay makes a convincing case for applying “strict liability” to bankers, especially when ending with that clarifying principle “if you take the bonus, you take the rap”, “If you do not want to do the time, prevent the crime” August 6.

That said I have two questions to Kay with respect to “strict liability” and their applicability to bank regulators.

First, suppose a regulator knows very well that allowing for lower capital requirements for banks on assets perceived as absolutely safe than on assets perceived as risky could, in the long run, risk the buildup of dangerously large exposures to what is now perceived as safe, but he allows it anyhow because he does not want to be held responsible for any bank failure under his watch…. are we talking about something for which “strict liability” could be relevant?

Second, if you as a bank regulator are explained something, like that which is contained in the Basel Committee on Banking Supervision’s Explanatory Note on the Basel II IRB Risk Weight Functions of July 2005, and you do not understand it, but yet, without asking for clarification, because you do not want to see as if you do not understand, you approve of any regulations based on that information, and disaster ensues… are we talking about something for which “strict liability” could be relevant?

In the case of bank regulators, should not something like “if you take the promotion, you take the rap” also apply?

Are not living wills for banks’ just a nonsensical show to show off that something is being done?

Sir, Gina Chon and Tom Braithwaite report that Fed and FDIC demand better unwinding plans and are split over possible penalties “US rejects bank’s living wills” August 6.

And FT defines on its site those living wills as “Detailed plans that would enable banks to stipulate in advance how they would raise funds in a crisis and how their operations could be dismantled after a collapse”.

Frankly is not the whole concept of living wills for banks’ designed by the bankers themselves after a collapse just a show to show that the regulators are doing something?

I mean if I was a regulator, and wanted to go down that route, I would at least have a third party to look into what could be done in the case a bank passed away, and now and again confront the managers of the bank with those plans, in order to hear their opinions.

For instance there is a world of difference between a living will where the dead are going to be the own executors of the will, and one in which the dead will be dead and others will take care of the embalming.

And talking about that is it not the Fed or the FDIC that should state what contingent plan they really want… one where the bank is placed on artificial survival mode, and for how long, or one where it is sold in one piece, by pieces or even cremated?

To me it would seem that the Fed and FDIC need to give much clearer instructions about what they want those bankers currently working under the premise the bank will live on forever to do… as I can very much understand them being utterly confused.

How long have our economies got left with our banks having been injected with the venom of cowardice?

Sir, Martin Arnold and Tom Braithwaite report “HSBC’s warns of risk-aversion” August 5.

Of course you know very well that I hold that excessive risk aversion is what most threatens our economies but, to read of banker like HSBC’s Douglas Flint expressing concerns about “a growing danger of disproportionate risk aversion creeping into decision making of our business”, without mentioning the largest source of risk aversion for banks, the risk weighted capital requirements for banks, is maddening.

The disproportionate risk aversion of bank regulators, have banks now earning much higher expected risk adjusted returns on their equity on assets perceived as safe, which they can leverage much more, than on assets perceived as risky. And that has injected into our banks the venom of cowardice…

How long our economies can be sustained without medium and small businesses, entrepreneurs or start-ups having fair access to bank credit is hard to say, but one thing is really sure, if that risk aversion persists, our economies will go down down down.

Douglas Flint, as a banker might very well be doing his fair share of dressing up what is risky as more safe but, as a citizen, as a father, possibly even as a grandfather, and as someone who should understand the meaning of risk taking, he should be ashamed of himself. What is in it for our descendants if our generation refuses to take its proportionate and necessary share of risks required for moving the world forward?

And that, of course, goes also for many of you in FT too.

The awful truth is that risk weighted capital requirements for banks, are robbing our young of their horizons.

Joseph Stiglitz, like many other professors, has no idea about life on main-street.

Sir, Joseph Stiglitz writes that in Africa “even countries that have introduced reforms and achieved high growth have not generated enough formal sector employment to absorb the growing labour force” and suggests that “the US should encourage foreign direct investments into labour intensive light manufacturing and agro-processing industries” “A new American strategy for business in Africa”, August 4.

Sadly professors, like Stiglitz, often lack one vital qualification when it comes to giving this type of advice… namely any personal real life experience of what it takes to get a business going.

For instance, Stiglitz has probably never accompanied a small entrepreneur to a bank to apply for a loan, and seen how hard that is, and seen how the applicant is often forced to distort facts to even have a chance to get that loan he believes might change his future. And Stiglitz has most certainly no idea of how those travails have been made even harder by the introduction of the risk-weighted bank capital regulations.

And I hold that as a fact because the Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, and of which Stiglitz was its chairman states “Variable risk weights used to ascertain appropriate capital adequacy standards can have strong incentive effects. Regulators need to be aware of distortions in capital allocation when provisioning and capital adequacy requirements do not accord well with actuarial risks”.

And that indicates they have no understanding that these capital requirements distort even though actuarial risks have been perfectly indentified, for the simple reason that these actuarial risks are already being cleared for by interest rates, size of exposure and other terms… and which translates directly into an added regulatory odious discrimination against the fair access to bank credit of those perceived as risky.

If Stiglitz understood how risk-taking is the oxygen of development, and knew how many African countries have or are in the process of implementing a developing strategy that is based on making banks more risk-adverse than they already are, he might cry… but as I said, for that, you must get out and do some walking on main street first.

PS. By the way, as rough as things are on many main-streets right now, I would not be that fuzzy about jobs having to be formal… even informal jobs will do for the time being... who knows, even informal jobs can carry the seed of a formal job.

Does not the price increases suffered by the Gatsby count as inflation too?

Sir, Wolfgang Münchau refers, as so often is done these days, to the problem of low inflation, and which has even caused “Germany´s conservative central bank to call for wages to rise faster than in the past”, “A desperate Bundesbank has abandoned principle” August 4.

But the fact that there is no inflation recorded could also be a result of how we measure it. For instance, if our inflation basket included assets Plutocrats buy, like stocks, prime property, paintings, collectibles and other fancy stuff, we would certainly observe a quite high inflation… something that by the way should be expected considering how money, assisted by quantitative easing and fiscal deficits, has primarily flooded their pockets.

And really, talking about money which has lost purchasing power… what about all those savings that now buy so much less because of the low interest rates?

And so of course there is inflation… but perhaps not where some would like it to be… though I must confess that, inflation for the plutocrats and no inflation for the poorer, does indeed sound like a Piketty designed plan to combat inequality… could it be a targeted financial repression?

No!, as I have mentioned so many times before, much more important is it for Münchau, and for the Bundesbank, to take some time out to reflect on how the European economies are becoming weaker and weaker, as a result of the risk taking austerity imposed by the Basel Committee´s risk-weighted capital requirements for banks.

And stopping “crime”, if the area has not been correctly identified, stops paying too

Sir, Tim Harford writing about crimes and incentives after the London riots mentions how “a mugger or a burglar in an area… entirely unaffected by the riots might still feel conscious that the mood of the judiciary had changed”, “When crime stops paying” August 2.

In 2002, just 48 hours after arriving to Washington, I was robbed at knife point, about four blocks away from the Whitehouse. I asked the policeman who helped me out whether it was not safe there, and he replied that since visitors don´t go so often to where these muggers reside, they have to come to where the market is. And as an economist I understood it… but it also comes to show that in terms of law enforcement it is not that easy to pinpoint down which are the really relevant areas.

For instance bank regulators have clearly difficulties with that. As they become obsessed with banks lending too much to where it was risky, they told the bankers that, if they insisted in doing so, they would have to put up a lot more capital, which meant less return on their equity and, consequentially, of course, smaller bonuses.

But unfortunately, when doing so, regulators confused the ex ante and the ex post risks areas, and so this only exasperated what bankers have always done which gets them into trouble… namely to lend too much to something perceived as absolutely safe.

And so regulators, in retrospect, only aggravated the crisis by having the banks being caught by bad news in the ex post area with their pants really down… I mean with especially little capital. And besides, since banks stopped visiting the areas considered ex ante as “risky”, the whole economic region started to suffer and crumble.

PS. I explained to the kind policeman who even instructed a close by liquor-store to “give him something strong”, that unfortunately I was not used to this type of events, since I came from Caracas Venezuela. I immediately felt better… and not just because of the “something strong”.

Currently both bankers and regulators are driving the bank cars simultaneously, using the same instruments and data.

Sir Tim Harford discusses the future of driverless cars in “Pity the robot drivers snarled in a human moral maze” August 2. And he left out some angles that I would have liked him to have explored.

For instance, when he talks of hiccups, human guided cars or computer guided cars accidents would we be talking about the same type of accidents… could not it be foreseeable that a computer glitch resulting accident could cause horrors way beyond what the worst pile up crashes often produced by bad weather conditions do? I mean something like the pile up bank assets crashes caused by having banks following the opinions of only a few credit rating agencies… in this case of agencies that on top of it all are humanly fallible?

And how does Harford´s reference to a person “being so arrogant as to think he could drive without an autopilot”, stand up against the constant badmouthing of bankers who did little but to trust their autopilot installed by their regulators?

But Harford is indeed right on the spot when he ends by mentioning “the question of what we fear and why we fear it remains profoundly, quirkily human” Is not a great example of that the fact that bank regulators who should in all logic fear the most what bankers do not fear, decided to base their fears on exactly the same ex ante perceptions of risks… and concocted their risk-weighted capital requirements?

In fact taking the analogy of driving a car to banking, what we now have is perhaps the worst of all worlds, namely bankers and regulators driving simultaneously using the same instruments and the same data... Can at least somebody please make up his mind about who is in charge, so that it is clear who or what we should blame in case of an accident?

As oaths come, a bank regulators´ is much more important than a bankers´.

Sir, Gary Silverman refers to the possibility of bankers, as masters of the universe, having to take an oath of office, “A cynic´s case for the bankers´ oath” August 1.

It could not hurt but, long before that it is more important that bank regulators take one… they are after all public servants… at least in concept.

What could be included in that oath? Perhaps the following could at least be a good start.

“I swear that regulating I will never forget banks have a purpose that goes way beyond guaranteeing their existence. In this respect I accept that helping banks to fail expeditiously, before they grow too large, is part of my responsibilities. I also swear that I will not believe myself to be a master of the universe, and for instance distort the allocation of bank credit through the use of credit risk weights that only very partially reflect the purpose of banks.

I also swear I will remember that all major bank crises have always resulted from excessive exposures to what was erroneously perceived as absolutely safe, so as to never confuse my own ex ante monsters with real ex post dangers”

121 words… too much? Then perhaps at this time, with lack of jobs menacing our children perhaps just having them quote John Augustus Shedd, 1850-1926, would do. “A ship in harbor is safe, but that is not what ships are for”