November 04, 2015

Something dysfunctional is hindering FT from living up to its motto of “Without fear and without favour”

Sir, Martin Wolf holds that “The relentless decline in the proportion of prime-aged US adults in the labour market indicates a significant dysfunction. It deserves attention and analysis. But it also merits action.” “America’s labour market is not working” November 4.

There is a whole lot of things that do not work as we want them to work, and there are certainly many major dysfunctions causing that, and clearly not only in America.

For instance one truly major dysfunction is that our banks, those who should allocate credit as efficiently as possible to the real economy, have been awarded huge incentives, not to manage perceived credit risks, but to avoid credit risks.

That is so because even though banks consider credit risk when deciding on the size of exposures and interest rates, the regulators decided those same perceived credit risks should also determine the capital banks needed to hold. The end result of that regulatory nonsense is of course too much bank credit to what is perceived as safe, and too little to what is perceived as risky… and, among the risky, we find the SMEs and entrepreneurs, precisely those who have the best chances of delivering new jobs.

That dysfunction which started in 1988 with a major destructive tsunami known as the Basel Accord, in which the regulators amazingly set the risk weights of sovereigns to zero percent, and that of the private sector at 100 percent, has been in crescendo ever since.

The regulators have just not been able to understand that even a perfectly perceived credit risk, leads to imperfect results, if excessively considered.

But that dysfunction might be topped by an even worse dysfunction, namely that of the academia and other influential actors, like journalists, simply not daring to accept the possibility that regulators could have made such a fatal blunder, and therefore keeping silent about it.

Sir, since during the last decade I have written Martin Wolf over 250 letters about that problem, which I accept is slightly dysfunctional in its own way. But, the only time Wolf publicly acknowledged these was when in 2012 he wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk. For this reason, unweighted leverage matters.”

And yet, even describing the argument that showed that the regulators, with their more risk more capital – less risk less capital, could be 180 degrees off mark, he left it at that.

Sir, I am sorry to say but there seems to be something very dysfunctional at FT that hinders it from living up to its motto of “Without fear and without favour”

@PerKurowski ©