October 31, 2015

Nothing could have predicted the financial crisis more than economics… the question is where were the economists?

Sir, Martin Sandbu writes: “The economics profession lost a lot of lustre when its practitioners failed, with only a few exceptions, to foresee the global financial crisis of 2008… it also added to the credibility of those who have long argued that economics is a deeply flawed discipline, built on a misrepresentation of people as selfish beings and ideologically constituted to conclude in favour of free-market policies.” “New model economics”, October 31.

That must be because Mr Sandbu is unaware of what happened. Bank regulators allowed banks to leverage much too high on assets that were perceived as safe; and so banks made too high risk adjusted returns on equity holding assets perceived or decreed as safe; and that of course caused, as any economic 101 course teaches, banks to create too large and dangerous exposures to what is perceived as safe… and for the economy equally dangerous scarce exposures to what is perceived or decreed as risky.

And so the problem had nothing to do with economics, it had all to do with economist not looking at regulations…. perhaps they thought that handwork was unworthy of their fine minds.

@PerKurowski ©

If only we had truly disconnected silos the current crisis would not have happened

Sir, Gillian Tett writes: “Eight long years ago the top managers of western banks learnt the hard way just how damaging fragmentation can be; most notably, banks such as UBS suffered big losses in the financial crisis because they were divided into so many silos that it was impossible for top managers to get an overview of risks.” “Some new hires for a more connected Deutsche Bank”, October 30.

I am not specifically referring to Deutsche Bank but “No! Dear Ms. Tett No!”. The silos were not fragmented… they were very connected, by means of bank regulations, specifically by means of the portfolio invariant credit risk only based capital requirements for banks. Had the silos really been disconnected, we would not have had the systemic crisis, “eight long years ago”.

And that’s is why in 1999 I wrote in an Op-Ed “the possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

And that is why, in 2003 as an Executive Director of the World Bank, I formally stated: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.”

Sir, the problem with Gillian Tett, and many others, is that they are captured in their own non-fragmented silo… and of course, so am I too... only that my silo is a bit wider J

@PerKurowski ©

October 30, 2015

Martin Wolf. An essential component of an Edmund Burke intergenerational holy bond must be the willingness to take risks

Sir, Martin Wolf appeals to Edmund Burke when stating, “the value of tried and tested institutions ought to guide any Conservative government. The BBC is a great legacy from past generations. It must be passed on even stronger into the future.” “A public broadcaster is the property of the people not the elite” October 30.

Absolutely, BBC is to be defended and those who out in the world have heard it shine light on some very dark moments should be its staunchest defenders.

But that said, I do not think Martin Wolf has really earned the right to appeal to Edmund Burke’s assistance. Burke in his “Reflections on the French Revolution” wrote: 

“Society is indeed a contract…. It is to be looked on with other reverence; because it is not a partnership in things subservient only to the gross animal existence of a temporary and perishable nature. It is a partnership in all science; a partnership in all art; a partnership in every virtue, and in all perfection. As the ends of such a partnership cannot be obtained in many generations, it becomes a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born. Each contract of each particular state is but a clause in the great primæval contract of eternal society, linking the lower with the higher natures, connecting the visible and invisible world, according to a fixed compact sanctioned by the inviolable oath which holds all physical and all moral natures, each in their appointed place. 

This law is not subject to the will of those, who by an obligation above them, and infinitely superior, are bound to submit their will to that law. The municipal corporations of that universal kingdom are not morally at liberty at their pleasure, and on their speculations of a contingent improvement, wholly to separate and tear asunder the bands of their subordinate community, and to dissolve it into an unsocial, uncivil, unconnected chaos of elementary principles.”

And one of the main components of such an intergenerational holy bond must be, no doubt, the willingness to take risks. That willingness that an immoral Basel Committee has seen fit to restrict, by imposing their absurd credit-risk-only weighted capital requirements for banks… those on which Martin Wolf keeps mum.

@PerKurowski ©

October 28, 2015

How should the UN’s SDGs interact with the enormous demographic challenges now discussed by IMF and World Bank?

Sir, Martin Wolf writes: “a combination of new technological opportunities and new approaches to a deal opens up fresh opportunities… to curb risks of catastrophic climate change” “The upside of addressing climate change” October 28. Let us pray that is so.

But both the World Bank and the IMF, when now in October 2015, they discuss the huge demographic challenges the world face, they also report on a sort of low-tech tool that will seemingly also be helpful addressing climate change, namely lower fertility.

IMF, in its Staff Discussion Note of October 2015, “The Fiscal Consequences of Shrinking Populations” writes: “Declining fertility and increasing longevity will lead to a slower-growing, older world population... This, in turn, contributes to a more sustainable pattern of development and reduced pressures on the environment.”

And the World Bank, in its advance of the “Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change” mentions: “Demographic trends and related policies will have implications for the global environment and for the effectiveness of adaptation and mitigation strategies. Family planning and reproductive health policies may help mitigate the negative effects of climate change by reducing population growth, especially in pre- and early-dividend countries. Education is not only likely to lower fertility, it can also have a major impact on the effectiveness of measures aimed at tackling the negative effects of climate change…”

And the UN’s SDGs does include, as Target 3.7, to “By 2030, ensure universal access to sexual and reproductive health-care services, including for family planning, information and education, and the integration of reproductive health into national strategies and programs”

Otherwise the SDGs, except for some minor references, in target 11.2 to the need of improved public transport for older persons, and in 11.7 to providing access to green and public spaces for older persons, seems to completely ignore the demographic challenges IMF and World Bank reports on.

It will be very interesting to see how the SDGs and demography will complement each other and or compete for scarce resources.

@PerKurowski ©

October 27, 2015

Holier than thou extreme political correctness causes incorrectness, and that is only human

Sir Gideon Rachman quotes Der Spiegel with “Germany these days is a place where people feel entirely uninhibited about expressing their hatred and xenophobia.” “The end of the Merkel era is within sight” October 27.

I do no know about Germany but, when I visited Sweden earlier this year, what I felt was a lot of inhibitions to express even the slightest indication of not being fully comfortable with many foreigners in their small cities, many of them in public places begging.

Clearly not being allowed to vent normal human reactions builds up pressures that, sooner or later, will make humans explode.

@PerKurowski ©

And some say I am obsessive and monothematic about the risk-weighted capital requirements for banks. Hah!

Sir, Patrick Jenkins writes about “banks’ unhealthy obsession with ROE numbers — which can be a recipe for inefficient, potentially toxic short-termism. An obsessional focus on generating high ROE numbers in the boom times drove bank bosses to shrink equity to dangerously low levels, contributing to the severity of the financial crisis” “Regulator plays part in Credit Suisse chief ’s quiet revolution” October 27.

Why? What is unhealthy with trying to generate high ROE numbers in boom times if that is what your shareholders want? If you do not do that they will fire you or the bank will be consolidated into another bank.

And why only lay the blame on “bank bosses” shrinking “equity to dangerously low levels”, when it clearly was regulators who authorized European banks to leverages bordering on 50 to 1? That is if only banks leveraged with what was safe… with what caused the financial crisis.

And what can be more short-termism, than regulating banks without even defining their purpose, and so not caring one iota about if these allocate credit efficiently to the real economy.

And then some say I am obsessive and monothematic about the dangers of the risk-weighted capital requirements for banks. Hah! 

No wonder I have to keep hammering on against that much more generalized monothematic obsession of wanting to blame the banks for all bad that happened and happens… an obsession probably based solely on a deeply held dislike of bankers.

@PerKurowski ©

October 26, 2015

Compared to the misallocation of bank credit in Europe, Brobdingnagian inflation concerns sounds truly Lilliputian

Sir, Wolfgang Münchau writes: “Central bankers are conservative types. But they should have a rational interest in preventing a loss of their credibility.” I ask, should not Wolfgang Münchau also have a rational interest in that? “Draghi must be more unconventional to boost the euro” October 26.

This data is found on the web:
The fatality rate per 100 million vehicle miles traveled in motorcycles is 21.45
The fatality rate per 100 million vehicle miles traveled in cars is 1.14
In 2011 in the US, 4,612 persons died in motorcycle accidents
In 2011 in the US, 32,479 persons died in vehicle accidents

And so, even though travelling by motorcycle is about 20 times riskier than cars, cars cause about 7 times more deaths than motorcyclists. That is of course because the riskier something is perceived, the more care is taken to avoid the risk.

And yet Wolfgang Münchau, finds nothing wrong with bank regulators having decided on higher capital requirements for banks when lending “the risky” motorcyclist of the economy, SMEs and entrepreneurs, than when lending to “the safe” car drivers, sovereigns and corporations with high ratings… even though clearly dangerous excessive lending to the latter is much more likely to occur.

Sincerely, against the fact that Europe’s bank are not allocating credit efficiently, and this is murdering Europe’s chances for a strong economic revival; Münchau’s and Draghi’s 0.63 per cent, 0.88 percent, 0.9 per cent and 2 percent Brobdingnagian inflation worries, sounds as Lilliputian as it comes.

@PerKurowski ©

October 25, 2015

Shrink & Sage, here is the latest key I am trying to open that lock that stops Financial Times from understanding.

Sir, The Shrink &The Sage’s ask: “Must we get to the bottom of things?” October 24. Of course we must… especially when it really matters.

The Shrink refers to “Steve de Shazer [recommending that instead of looking] more and more effort into finding out why the lock is as it is or why it doesn’t open… we should be looking at keys” Indeed that is what I have done in my TeaWithFT.

I have for a long time, by means of over 2.000 letters to the editor, been looking for the key with which make the Financial Times understand the true horrors of current bank regulations. Seemingly I have not found on yet, but in words of The Sage, I will keep on looking for what is under the turtle.

The latest key I have been trying out is the following:

Data found on the web:
The fatality rate per 100 million vehicle miles traveled in motorcycles is 21.45
The fatality rate per 100 million vehicle miles traveled in cars is 1.14
In 2011 in the US, 4,612 persons died in motorcycle accidents
In 2011 in the US, 32,479 persons died in vehicle accidents

And so, even though travelling by motorcycle is about 20 times riskier than cars, cars cause about 7 times more deaths than motorcyclists. That is of course because the riskier something is perceived, the more care is taken to avoid the risk.

And yet no one at The Financial Times seem to find something wrong with bank regulators having decided on higher capital requirements for banks when lending “the risky” motorcyclist of the economy, SMEs and entrepreneurs, than when lending to “the safe” car drivers, sovereigns and corporations with high ratings… even though clearly dangerous excessive lending to the latter is much more likely to occur… and even though that clearly must lead to a dangerous misallocation of bank credit to the real economy.

What are my chances this key will work? I guess slim, I guess I will just be told I am being boringly monotonous again.

@PerKurowski ©

In this cynical age why do some, like Gillian Tett, trust so much the bank regulators to know what they are doing?

This is data found on the web:
The fatality rate per 100 million vehicle miles traveled in motorcycles is 21.45
The fatality rate per 100 million vehicle miles traveled in cars is 1.14
In 2011 in the US, 4,612 persons died in motorcycle accidents
In 2011 in the US, 32,479 persons died in vehicle accidents

And so, even though travelling by motorcycle is about 20 times riskier than cars, cars cause about 7 times more deaths than motorcyclists. That is of course because the riskier something is perceived the more care is taken to avoid that risk.

Sir, Gillian Tett after informing “that some online reviews by Amazon were fake or, more accurately, that authors could pay for a positive review” ends with “What is really interesting is that faith in the cyber crowd seems so resilient to scandals… online reviews will continue exerting a spell and act as a reminder of how we blindly trust things — even in a cynical age.” “Why we trust the cybercrowd” October 25.

Bank regulators have decided on higher capital requirements for banks when lending “the risky” motorcyclist of the economy, SMEs and entrepreneurs, than when lending to “the safe” car drivers, sovereigns and corporations with high ratings… even though clearly dangerous excessive lending to the latter is much more likely to occur.

Ms. Tett: In this cynical age, and even after the financial crisis, produced exclusively by excessive lending to what was perceived as safe, how come you still put so much trust in regulators, so as to ignore all my letters explaining their horrendous mistake?

@PerKurowski ©

October 24, 2015

Migration is about freedom of movement of people. But what about freedom of movement of bank credit?

Sir I refer to Tim Harford’s “The real benefits of migration” October 24.

For me it is hard to understand how someone who takes such a positive view on migration as Harford therein expresses, at the same time is seemingly ok with regulations that interfere with the free allocation of bank credit.

Not long ago I went to visit the Statue of Liberty for the first time. While standing there I thought about what would have become of these migrants if, on top of how bankers are adverse to risk, regulators also had instructed the banks, by means of lower capital requirement incentives, to stay away from the “risky” migrants?

I ask: “In a world where we rightly abhor racial and sexual discrimination” why should we agree with regulators discriminating against the bank borrowing needs and wishes of the risky? And such discrimination occurs even when for instance in the US there exists an Equal Credit Opportunity Act.

Tim Harford argues the “supposed costs or benefits [analysis] always omit one crucial group. That group is the migrants themselves”. But, in the case of bank regulations, there is also an omitted group, namely all those SMEs and entrepreneurs who have been denied bank credit, precisely because regulators disliked “the risky”.

PS. Tim Harford refers to concerns about “brain drain”. I, having been an Executive Director of the World Bank for many nations depending on remittances by their migrants, have always been more concerned with the possibility of a “heart-drain”.

@PerKurowski ©

Amazing! Simon Kuper calls a zero risk weight of government and a 100 % for the private, a “right’s cult of free markets”

Sir, Simon Kuper writes: “the right’s cult of free markets was the last surviving big idea. Then the financial crisis of 2008 killed it off almost everywhere outside the US Republican party.” “Small ideas are better than big ones” October 24.

That is simply not true. If we are going to talk about the biggest current idea, and that has been applied on a global scale, I would say that is the credit-risk weighted capital requirements for banks, an idea concocted by the Basel Committee. And its origin, the Basel Accord in 1988, set the risk weights for loans to governments at zero percent while the risk weight for loans to the private sector were set at 100 percent.

That BIG IDEA, discriminating with regulations against the citizen and in favor of the state, has survived the financial crisis, and is still up and running strong in Basel III 

If anything, the Basel bank regulations should be called, the product of a “left’s cult of controlled markets”.

PS. Of course small ideas are always better than big dumb ideas. 

@PerKurowski ©

Bernanke, what bank risks? Motorcycles are riskier than cars but yet more die in cars than in motorcycle accidents.

Sir, I refer to Martin Wolf’s FT lunch with Ben Bernanke “Hostility and hyperinflation” October 24. Bernanke states that “the Federal Reserve was originally set up primarily to address financial panics, not do monetary policy”.

And so Martin Wolf asks: The late Hyman Minsky, I point out, argued that “stability destabilises”. So did the very notion of a “great moderation” cause the imprudent behaviour?

And to which Bernanke replies: “individually rational behaviour can be collectively irrational. And that’s why the regulators have to do what they can to constrain individual behaviour, so that it doesn’t lead to collectively irrational outcomes.”

At which point, had I been invited to the lunch, I would have observed and asked the following:

Banks respond to the credit risk in a risk-adverse way. More risk higher interest rates and lower exposures – lower risk lower interest rates and larger exposures.

Bank regulators also use their credit risk weighted capital requirements for banks in a risk adverse way, namely more risk more capital less risk less capital.

So Mr. Bernanke, and you too Mr. Wolf, is it not so that by reacting to credit risk in the same way banks do the regulators, instead of constraining individual behavior, potentiate individual behaviour? What they would have answered to that is anyone’s guess.

And when Bernanke states: “the amount of [bank] capital you should hold depends on the kind of assets and the kind of businesses you have. And if it’s a fixed leverage ratio, then you’re going to have every incentive to load up on risk.” I would again have impolitely interrupted to ask: Mr. to load up on what risks? Driving motorcycles is by far more risky than going by cars… but those who go by car and suffer mortal accidents still surpass by far those who die riding motorcycles.

Mr. Bernanke, if you happen to read this, may I invite you to a debate, perhaps moderated by Mr. Wolf? In that debate you would defend the current portfolio invariant only-on-expected-credit-risk weighted capital requirements for banks; and I would defend an 8 to 10 percent capital requirements against all assets, to cover for unexpected losses, solely based on the risk of regulators not knowing what they are doing.

@PerKurowski ©

October 23, 2015

Who in his right mind can believe credits rated BB- are more risky to the banking system than credits rated AAA to AA?

Sir, on October 22 Gregory Meyer and Joe Rennison reported on FT’s front page “US regulators signal first moves to rein risks of high speed trading”. Timothy Massad, chairman of the Commodity Futures Trading Commission was quoted saying “he wanted to safeguard financial markets against algorithms going haywire” That is great, but who is going to guard financial markets from regulatory algorithms going haywire?

Anyone who dares to really enter and analyze the pillar of current bank regulations, the credit risk weighted capital requirements for banks, comes out not believing what he has seen.

For instance, in Basel II, a credit to the private sector rated AAA to AA was assigned a risk weight of 20 percent while a similar credit to someone rated BB- or less was assigned a 150 percent credit risk weight... meaning a 7.5 times higher capital requirements.

And I just ask, who, in his right mind, can believe credits rated BB- are more risky to the banking system than credits rated AAA to AA? Honestly, what could attract more excessive financial exposures?

@PerKurowski ©

October 21, 2015

Is it not dumb to kill the goose that lays the golden eggs just because it laid a bad one?

Sir, John Kay asks correctly: What purpose is achieved when taxpayers, by fining state-funded hospitals, in effect fine themselves? “It is natural but wrong to blame executives” October 21.

I would go further still by asking: What is the reason to fine corporation that generate jobs in such a way that it weakens them? Instead of in cash, is it not better to have those fines paid in shares… the current shareholders may not like to get diluted, but it is always better to dilute the wealth of the owner of the goose that lays golden eggs than the goose itself.

And of course, if you need clarification, the goose here stands for banks and for Volkswagen.

@PerKurowski ©

In banking, by means of its regulations, the governments are the biggest receivers of crony capitalism gifts.

Sir, I fully agree with Martyn Roetter in that “An honest economics profession should help defend against crony capitalism, not act as an apologist by obfuscating its reality and denying its existence.” “Fighting the cronies calls for honest economists” October 21.

And when looking for the crony relations in banking, all you need to do is to follow that which has been awarded the regulatory blessing of lesser capital requirements. Clearly, since that would be the sovereign, awarded an amazing zero percent risk weight, the governments are de facto in that sector, the biggest exponents and beneficiaries of crony capitalism.

Requiring more bank capital for some exposures than for other clearly distorts the allocation of bank credit to the real economy. And so an honest economics profession should also be denouncing that… but most economists keep mum on it… perhaps because they do not even understand it.

Financial Times, for unexplained reasons, has been extremely reluctant to report on such crony bank regulatory relations… would this be crony journalism going hand in hand with crony capitalism? 

@PerKurowski ©

If a credit from one sovereign to another were classified as a crime against humanity how would the IMF proceed?

Sir, in Venezuela going to the IMF for assistance, is such a hot potato that some might even be hauled in front of a court accused for antipatriotic behavior for even mentioning that possibility. But if at the end it has to go to the IMF, it is clear that Martin Wolf raises an extremely important issue, namely how the influence of some sovereign creditors could block constructive actions by the IMF to reach acceptable solutions. “Resist Russian blackmail over Ukraine’s debt” October 21.

And the same problem, of how to treat sovereign credits, would be present in any Sovereign Debt Restructuring Mechanism. It has no easy solution… and the perfect might well prove to be the enemy of the good.

That said, a sovereign should have the right to go in front of some international court, in order to at least have the chance of getting the debts it owes, including to other sovereigns, classified as derived from odious credit, if for instance there is sufficient proof that substantial corruption was involved when the debt was contracted… and that the creditor had or should have had sufficient knowledge about it.

In the case of the most egregious malfeasance, where it can be sufficiently evidenced that many humans are suffering as a direct consequence of a debt having been contracted, one should be able to have that debt qualified as an economic crime against humanity.

And if a debt owed by a sovereign to a sovereign were to be qualified as resulting from an economic crime against humanity, by for instance the International Criminal Court in Hague, how would then IMF proceed? I really do not know… I am just an economist.

@PerKurowski ©

October 19, 2015

John McDonnell, here is a question Professor Blanchflower should ask BoE during his review, if he dares

Sir, John McDonnell has asked Professor David Blanchflower, a former member of the MPC, to lead a review of that Bank of England’s mandate. And he has assured Prof Blanchflower that all options are on the table and nothing has been prejudged. “The mandate of the Bank of England is not set in stone” October 19.

Let me, as a long time admirer of Britain’s go-get-it-ness, suggest a question to be included in that review.

Should BoE support bank regulations which, by allowing banks to hold less capital against assets perceived as safe than against assets perceived as risky, allow banks to earn higher risk adjusted returns on equity on what is safe than what is risky? 

That silly risk aversion distorts the allocation of bank credit to the real economy; without providing any additional stability, since, if you look back, bank crises are always made of “safes” going risky, and never ever on risky being risky.

@PerKurowski ©

October 18, 2015

Do I have a question to The Shrink & The Sage!

Sir, The Shrink, Julian Baggini writes “It’s hard to give our environment the right importance. Sometimes we assign it too much weight, sometimes too little.” "How important is our environment?" October 18.

He and The Sage, Antonia Macaro, also request questions to be sent to them on their email. Boy, do I have one for them!

Bankers obviously look at the credit risks of a client, or of an investment, before deciding what risk premiums (interest rates), how much exposure they want to have t that risk and what other contractual clauses they need in order to serve their own interests as good as possible. And that makes perfectly good sense. If they did not, they should not be in banking.

But then, sort of surprisingly, bank regulators also require that the capital a bank is required to hold against different assets, are also based on the same perceived credit risks.

So here is the question: Shrink, Sage, do you think ex ante perceived credit risks are getting due importance, or are they getting too much importance? If the second, this would obviously distort the allocation of bank credit to the real economy, even if the credit risks were perfectly perceived.

And if the second, and given that The Sage writes “Just as the quality of a grape is rooted in the earth in which the vine grows, so 'the ground of our opinions' is the human environment in which we are raised”, the question is… can these regulators rectify or is rectifying way beyond their reach?

I am anxiously waiting to see their answers… if they are allowed to answer.

@PerKurowski ©

October 17, 2015

Give money to entrepreneurs in Nigeria… but be extremely careful when lending to British entrepreneurs and SMEs

Sir, Tim Harford writes about “a development program… give $50.000 to Nigerian entrepreneurs… while entrepreneurs in other countries are held back by corruption, red tape, poor roads and patchy electricity, they are also constrained by a lack of the funds needed to get their ideas off the ground.” “Development needed? Just give cash” October 17.

Great! Perhaps Harford would now do himself a favor by asking one of his many banker friends the following: When you give a £40.000 loan to an English entrepreneur how much capital does your regulator require you to hold against that loan, when compared to a similar loan to someone with an AAA credit rating?

Regulators, by means of their capital requirements based on the perceived credit risk, that risk banks already clear for with interest rates and amounts of exposure, have ordained that ex ante credit risk perceptions should have a 200% weight in banking. And of course that impedes “risky” SMEs and entrepreneurs to have fair access to bank credit, and so they are also constrained by a lack of the funds needed to get their ideas off the ground.

Mr. Harford you write here favorably of giving money to entrepreneurs while in your own homeland bank regulators are hindering banks from even lending to these. There is some sort of incongruity in the air…isn’t it? 

@PerKurowski ©

October 16, 2015

After banks have placed assets on their balance sheets, they are de-facto “after the curve”

Sir, Gillian Tett with respect to the difficulties posed by a possible drop in the oil price write that “now [regulators] are keen to show they have learnt the right lessons from last decade’s crisis — by getting ahead of the curve and forcing banks to be tough”, “The tangle of loose lending to tight oil” October 16.

Getting ahead of what curve? In the case of bankers after they have placed the asset on their book they are already de facto after any curve that is going to be thrown at them.

What is it with these statists? They abhor fiscal austerity and they love lots of QEs and minimal interest rates, but they do instruct banks to be austere… and regulators have many adoring fans cheering them on.

Why do regulators require banks to act be pro-cyclical and not counter-cyclical? If when oil were over $100 per barrel, banks would have stopped putting oil related loans on their balance sheets… that would have meant, quite correctly, “getting ahead of the curve”.

When will regulators learn… or it is just so that they just refuse to learn? 

PS. How long will we have to live with dumb regulators who make banks clear for ex ante perceived credit risk in their capital... when that is about the only risk banks have already cleared for, with interest rates and amounts of exposures? 

@PerKurowski ©

We need capital requirements for banks based on the risk regulators have no idea about what they do.

“Is the Bank of England right to take climate risks seriously? The answer is: absolutely… the risks do exist… It is the job of regulators to help decision makers become aware of those risks” That is what Martin Wolf argues. “Carney is right to warn insurers of the coming tempest” October 16.

Clearly Martin Wolf and Mark Carney both believe the insurers are so inept so as not have considered the possibility of impending regulations aimed to stave off climate change, and which could have serious implications, for instance for oil. But, to consider others inept, carries its risks too.

For instance, both Martin Wolf and Mark Carney consider bankers so dumb so as to not take into account ex ante perceived credit risks, and so they both agree on having to slap banks with capital requirements based on ex ante perceived risk. The result? An excessive consideration of ex ante perceived credit risks with all distortionary implications. Dangerously much credit to what is perceived as safe and equally dangerous little credit to what is perceived as risky…

Who on earth told banks they could leverage their equity (and the support they received from society) over 60 times to one when investing in AAA rated securities or lending to Greece? The market? Bank-shareholders? No! It was regulators, like Mark Carney the current chair of the Financial Stability Board. And why would they do a crazy think like that? Because they were scared silly banks would not consider credit risks, and would therefore perhaps lend too much to risky SMEs and entrepreneurs. 

Sir, sincerely, I guarantee you that if the current capital requirements for banks had been based on the risk that regulators would scheme, meddle and distort, not knowing what they were doing, and we had slapped Basel’s 8 percent capital on all assets to cover for that, instead of weighing for ex ante perceived credit risk, the world would not be facing its current difficulties.

Again, why did regulators decide to pick on the ex ante perceived credit risk, basically the only risk already cleared for?

How do we stop Bank besserwisser busybody hubristic bank regulators from interfering with the allocation of bank credit to the real economy?

@PerKurowski ©

Berlin, are there no more urgent sustainability needs to serve in Europe than having Volkswagen recall 8.5m diesel cars?

Sir, Jeevan Vasagar and Chris Bryant report “Berlin forces VW into mandatory recall of up to 8.5m diesel cars across Europe” October 16. Why on earth would Berlin do a dumb thing like that?

What will that cost? Are there no more urgent needs to serve in Europe than recalling diesel cars?

Is it because the hurt inept emissions controllers who were cheated now want revenge? A lover’s spat?

How does the world benefit from forcing VW into mandatory recall of up to 8.5m diesel cars across Europe?

What will that cost? Is Europe really so buoyant that it can pay for an 8.5m diesel cars recall across Europe?

Is recalling these cars the most effective way to cut emissions that pollute, and to help the earth’s sustainability?

How much useful research could not be funded with what is to be wasted on the recall of 8.5m diesel cars?

Frankly if you want to punish Volkswagen without punishing other don’t recall cars give the diesel car owners, or other, some Volkswagen shares instead.

Sir, as a reminder, here is a previous letter on that.

@PerKurowski ©

October 15, 2015

What if your company was so honest you could lose your job or you had to accept a lousy salary?

Sir, Michael Skapinker writes about someone who bought a company, discovered it was engaging in corrupt practices, disclosed it to the government, was told to correct it, and the company lost one half of its business. “What to do if you discover your company is corrupt” October 15.

What would you do if you discover your company, is so scrupulously correct with absolutely everything, even with the silliest regulations, that it begins to lose business and could disappear

Unfortunately, we do not live in a perfect world, in which all are scrupulously correct.

And sometimes I have even got the feeling that the corruption fighters themselves, are engaged in some very devious kind of corruption.

Am I not against corruption? Of course I am! But I am also absolutely sure that the best way of fighting corruption is to reduce the temptations. In other words not to require weak humans to be able to resist too big temptations.

I come from Venezuela. There the government receives 97 percent of all export earnings… and these, oil revenues, do not even come as a result of a productive effort of its citizens… it was given to us by God.

To impede corruption in Venezuela, the minimum minimorum needed, would be to share out all net oil revenues to all citizens. But that is not happening, because there is always someone in waiting for the opportunity to manage and exercise the power provided by those oil revenues... and there is always somebody there, like EITI, telling you that if only they supervise and the governments adhere to their principals, everything is going to be fine and dandy.

Let us not ignore that so many speaking out against corruption, do so out of a position of security, one that quite often was assured them and their countries by not so utterly clean means. So less preaching, and more practical action.

@PerKurowski ©

The Basel Committee’s dangerous, risk adverse and failed bank regulations illuminates brightly a World Bank's mission.

Sir, Alan Beattie writes” The World Bank’s policy experience makes it a natural source of ideas for growth and development, but its expertise is being underused… Ramping up one more source of infrastructure finance for emerging markets is a lesser priority than solving the developing world’s longer-term problems. The bank needs more money less than it needs a new mission.” That is correct ,but then Beattie titles it:  “The World Bank lacks the tools to enrich humanity” October 15.

No! The World Bank, as the world’s premier development bank, has the tools to enrich humanity, but it must be willing to use these… and not be silenced by being required to harmonize with other institutions, like the IMF, and that have completely different missions. The Basel Committee’s dangerous, risk adverse and failed bank regulations illuminates brightly a World Bank mission. 

Allow me to shamelessly quote myself. The following is part of what, as an Executive Director of the World Bank, in 2003, I formally stated with respect to Basel II, those bank regulations which would later be approved in June 2004. 


“The whole regulatory framework coming out of the Basel Committee for Banking Supervision, might possibly put a lid on development finance, as a result of being more biased in favor of safety of deposits as compared to the need for growth.

The financial sector’s role, the reason why it is granted a license to operate, is to assist society in promoting economic growth by stimulating savings, efficiently allocating financial resources satisfying credit needs and creating opportunities for wealth distribution. Similarly, the role of the assessor –in this case, the Bank– is to fight poverty, and development is a task where risks need to be taken.

From this perspective we have the impression that the Financial Assessment Program Report might revolve too much around issues such as risk avoidance, vulnerabilities, stress tests and compliance with international regulations, without referring sufficiently to how the sector is performing its social commitments…. In this respect let us not forget that the other side of the Basel coin might be many, many developing opportunities in credit foregone.

We all know that risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones… There is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. The World Bank seems to be the only suitable existing organization to assume such a role.

Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg. Perhaps only the World Bank has the sufficient world standing to act in this issue

Basel is getting to be a big rulebook”—this said by the World Bank. And, to tell you the truth, the sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies, introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them—instead of rather fatalistically accepting their dictates and duly harmonizing with the International Monetary Fund.

Basel is getting to be a big rulebook—this said by the World Bank…. As the financial sector grows ever more sophisticated, making it less and less transparent and more difficult to understand for ordinary human beings, like us EDs, it is of extreme importance that the World Bank remains prudently skeptical and vigilant, and not be carried away by the glamour of sophistication. In this particular sense, we truly believe that the World Bank has a role to play that is much more important than providing knowledge per-se and that is the role of looking on how to supply the wisdom-of-last-resort.

A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind. Who could really defend the value of diversity, if not The World Bank?"



Sir, in light of the financial crisis that has now hit the developed world I ask, does not what I wrote in 2003 contain much of what, besides its ordinary lending business, should be the World Bank’s mission… and not only for the developing countries

Sir, development is a continuous process, if we stop we stall and fall. God make us daring!


@PerKurowski ©

October 14, 2015

There are many reasons we the aging should pray for the young allowing us to fade away with grace

Sir, Manoj Pradhan explores the question: “What will the future hold for the world’s ageing populations” and titles his article “Ageing economies will grow old with grace” October 14. That is indeed a sunny view; let’s pray for it.

When Pradham writes: “The elderly will resist moving out of their homes; a huge wave of construction will be needed to house the young and the millennials” some difficult questions linger: Are the young and the millennials willing to cast themselves as the downstairs and allow the upstairs elderly to stay in their homes? Will the savings and pension plans of the elderly be sufficient for them to stay in their homes? With retirement comes the wish to hold savings more liquid and so who is going to finance that huge wave of construction?

As I have argued for years, bank regulators, with their capital requirements based on perceived credit risk, which has given perceived credit risk too much weight, has caused a stagnant world… and to keep social structures amiable to all in a stagnant world is not an easy task. 

In March 2007 Peter Peterson, in FT, concluded his “Sacrifice can solve the entitlement crisis”, by citing the German theologian Dietrich on the ultimate test in moral society being the world it leaves for the children, and saying that “It is time for us to become worthy and moral ancestors.”

And in August 2006, I had finished an article I sent to FT, but that was not published with the following:

“It is said that in Scandinavia, a long time ago, when the older people felt that they stood in the way of the young, they threw themselves off steep cliffs known as an ättestupa. These days it could seem like quite the opposite, if we consider how our democracies might have been captured by us baby boomers. We need to revise urgently how our society deals with the next generations, before they throw us down an ättestupa—for damned good reasons!”

Sir, there are many reasons we the aging should pray for the young allowing us to fade away with grace.

@PerKurowski ©

John Kay: A progressive business tax in UK, based on £ rent per square foot of space?

Sir, I read with much interest John Kay’s “A nation of shopkeepers in need of new ideas on tax” October 14.

Might he have a progressive business tax, based on £ rent per square foot of space, in mind?

In a way that would help to correct for inequalities derived from unequal growth rates around the country.

In a way that would help to correct for instances the inequalities derived from QEs and similar liquidity injections that tend to benefit more some assets than other.

When I studied to obtain a real estate sales and mortgage advisor license in Maryland US, primarily interested into getting to know more about how the subprime disaster had happened, I was surprised to see that the Federal Housing Administration, FHA, would guarantee a one family mortgage in Montgomery County, Maryland for $625,500, while for instance only US$ 271.000 if that home was in Hattiesburg, Mississippi.

Can you imagine if a Eurozone FHA did the same in the case of Berlin and Athens?

That is another example of how authorities, instead of remaining neutral, reinforce market perceptions and valuations.

@PerKurowski ©  J

When regulators double up on the bankers’ aversion to credit risk, solid sustainable economic growth is not possible.

The world placed its banks in the hands of technocrats who have probably never ever walked on the mains streets of the economy and who therefore concocted about the most dangerous regulation ever, the credit risk weighted capital requirements for banks.

Sir, when to the bankers’ aversion to perceived credit risk, you add the regulators aversion to exactly that same perceived credit risk; you get an overreaction to perceived credit risk. That means banks will dangerously finance much too much what is perceived or decreed as safe, like AAA rated securities and Greece, and way too little, or even nothing, those which are perceived as risky, like SMEs and entrepreneurs… the seeds and seedlings of the economy who need a lot of nurturing. (Oops, here I am sounding a bit like Jerzi Kosinski’s Chauncey Gardiner J )

Under such circumstances, there is no way you can achieve solid growth and, because of that, the world has also wasted away much of its resilience capacity, that composed of government’s borrowing space to sustain fiscal deficits, QEs and low interest rates.

How long will it take for the world to wake up? It is hard to say. Over the last decade I have written way over 200 letters to Martin Wolf on the uselessness and dangers of excessive regulatory aversion to credit risk. From what I read in his “Solid growth is harder than blowing bubbles” October 14, it would seem like he still does not get it.

@PerKurowski ©  J

October 13, 2015

To avoid collateral damages, the fines of those who create and finance jobs should be paid in new shares and not in cash.


Sir, I refer to Henry Foy’s and James Politi’s “Volkswagen scandal fuels fears for jobs across Europe” October 13.

Again it points to reasons why the world should not impose fines payable in cash on those who misbehave and deserve punishment, but who generate jobs, or credit. That would only weaken them and thereby cause many casualties among the civilians who are not responsible.

Have them instead to pay all fines by issuing new shares to be delivered to whomever a judge feels should get these.

The dilution of existent shareholders is more than enough punishment to guarantee that management will be more careful.

And this is especially valid when regulators, by their incompetence or any other reasons, have helped to induce the misbehavior. 



@PerKurowski © J