August 31, 2016

Martin Wolf seems slightly lost in the oceans of global bank regulations

“A natural connection exists between liberal democracy.. and capitalism... They share the belief that people should make their own choices as individuals and as citizens.” “Democratic capitalism is in peril” August 31.

Absolutely! But Martin Wolf seems not to agree with the right of accessing bank credit freely, and gladly accepts regulators distort with risk weighted capital requirements for banks.

Wolf opines: “Capitalism is inegalitarian, at least in terms of outcomes”

Absolutely not! Capitalism both takes away from the lazy and by offering opportunities, gives to those with initiatives and is therefore extremely egalitarian! It is when besserwissers, like those in the Basel Committee intervene, that capitalism stands no chance to deliver opportunities for all.

Wolf writes: “Today, however, capitalism is finding it far more difficult to generate such improvements in prosperity.”

Yes, how could it not, when regulators allow banks to earn higher risk adjusted returns on equity when lending to the safe than when lending to the risky.

Wolf writes: “Controlled national capitalism would then replace global capitalism”

Frankly, has that not already happened with the risk weights of the sovereigns set at 0% and that of We the People at 100%?

Wolf writes “My view increasingly echoes that of Prof Lawrence Summers of Harvard, who has argued that “international agreements [should] be judged not by how much is harmonised or by how many barriers are torn down but whether citizens are empowered… if the legitimacy of our democratic political systems is to be maintained, economic policy must be orientated towards promoting the interests of …the citizenry”

Sir, frankly, how can citizens be empowered when bank regulators decide that the risk weight of the sovereign is 0%, that of the AAArisktocracy 20%, and that of We the People 100%?

Democratic capitalism is in peril? No it has already been defeated. To recover it let’s get rid of current bank regulators and their dumb regulations.

@PerKurowski ©

August 30, 2016

All projected interest/pension earnings, always depend on the real economy being able to deliver these down the line.

Sir, Keith Ambachtsheer writes: “If low investment returns are here to stay, those responsible for pension plans have a choice: wring their hands, or fulfill their fiduciary duty by rethinking what it means for the design of their schemes. Doing nothing is not an option.” “Long-term thinking will lead the way to improved returns” August 30.

Absolutely! But the long-term fiduciary duty should also include doing the best to reverse what has gotten us into this low interest rate and low economic growth environment.

That begins by protesting the risk weighted capital requirements, that which allow banks to leverage more, and to therefore obtain higher expected risk adjusted returns on equity, on assets ex ante perceived as safe than on assets perceived as risky.

It has distorted the allocation of credit causing the banks to populate (even dangerously overpopulate) the safe havens were traditionally widows, orphans and pension funds did their business.

Too low interest rates on public debt? How could it not be with risk weights of 100% for We the People and of 0% for the Government?

Let us also remember that if the real economy is in doldrums when the times come to cash in pension assets, whatever seems great now could be totally worthless.

Sir, if we do not rid banks from that regulatory introduced risk aversion that have stopped them from financing the future like lending to “risky” SMEs, and have them only refinance the “safer” past, then that future real economy is doomed to be in the doldrums.


August 29, 2016

More than low-growth, central bankers fear having to explain risk-weighted capital requirements for banks

Sir, Sam Fleming, reporting on the meetings at Jackson Hole writes: “Eight years after the crash, major economies including the US are stuck with sub-target inflation, ultra-low rates, and economic growth that remains pedestrian…[central banks] could be trapped in a low growth rut that leaves them hugely vulnerable when the next downturn comes.” “Central bankers fear threat of low-growth rut

And again the distortion in the allocation of bank credit to the real economy that the credit risk weighted capital requirements for banks causes, was not even discussed.

But of course, who would want to discuss the following?

Sir, you risk weigh an AAA to AA rated asset with 20% and a below BB-rated asset with 150%. Do you mean that assets that are perceived as very risky are more dangerous to the banking system than assets perceived as very safe?

Sir, explain how on earth you have gotten away with risk-weighing the Federal Government at 0% while risk weighing “We the People” at100%?

Sir, if a bank can leverage one asset more than another, would it then not expect to earn a higher risk adjusted return on equity with that asset, and would it then not invest more than normally in that asset?

@PerKurowski ©

August 28, 2016

Universities, especially tenured professors, sometimes neglect their vital social role as intellectual vigilantes.

Sir, I refer to Tim Harford's discussion of "Are universities worth it?" August 27.

I totally agree with Harford that universities generally produce a lot of local and global good vital for the welfare of society, though it behooves us never to ignore the possibility they could also generate some awful local and global bad.

But something Harford leaves out in his discussions, is that universities, most specially tenured professors, as intellectual vigilantes, have an important societal role to fulfill of alerting to stupid and dangerous ideas, like that of the credit risk weighted capital requirements for banks.

What are the causes of major bank crises?

1. Unexpected events, like major devaluations and natural disasters.
2. What was ex ante perceived as very safe turned out ex post to be very risky.
3. Shenanigans like unauthorized speculative trading or banks lending to their own directors or shareholders.

What did the regulators do?

They introduced credit-risk-weighted capital requirements: more ex ante perceived risk more capital - less risk less capital... re-clearing for basically the only risk that was already being cleared for, by means of size of exposure and interest rates.

For instance, they gave prime AAA to AA rated assets a 20% risk weight, while highly speculative almost broke below BB- rated, assets got a 150% risk weight...

As if banks would ever build up dangerous excessive exposures to what is below BB- rated.

And that has seriously distorted the allocation of bank credit to the real economy with disastrous consequences.

But have we heard sufficient finance professors protesting sufficiently against this the pillar of current bank regulations? Absolutely not! In fact their deafening silence on it, is one of the principal reasons why this issue is not even discussed.

Sir, it would be great if the undercover economist Harford would dare to do some research on the why of that silence. He could do that in his beloved Oxford or, if he feels more comfortable doing so, in some university of some other faraway town. (Cambridge?)

PS. Here is a more detailed aide memoire on the Basel Committee for Banking Supervision’s regulatory monstrosity.

PS. There are some academics who have protested these regulations but mostly in terms of the capital requirements being too low or in terms of the distortions these might cause of the balance sheets of banks. They are correct but my point is that the distortions produced in the allocation of bank credit by using different capital requirements, is even more important than these being too high or too low.

@PerKurowski ©

August 27, 2016

If I was young and my pension fund was to invest in a bridge, I would want and need for it to lead to somewhere great!

Sir, John Authers with respect to future pensions holds that “if we have done our job properly, we should by now be scared out of our wits”, “There is still time to alter the script of the pensions crisis” August 27.

And just like in The Graduate Mr McGuire recommended Dustin Hoffman “plastics”, Authers recommends current kids “infrastructure”.

How did we get here? The answer is that regulators, with their risk weighted capital requirements, told the banks to go to where pension funds did much of their savings, basically in what was perceived as fairly safe.

Authers spends most of his article writing on how we should adapt to lower yields and longer life resulting in huge pension deficits. He argued for instance “There is no reason why young investors’ long-term savings should not go into funding infrastructure, or clean energy, or other beneficial investments for the future.”

That could be, clearly supposing the specific beneficial investments for the future, yield enough real returns for our retirement planning young investors. We have left them enough debts so as to complicate matters even more by sticking to them some bridges to nowhere!

But, before that, we must see to that our banks, again become banks making profits and returns on equity by taking risks, and not by just minimizing equity.

While concluding Authers writes: “it grows clear that the issue of pensions divides us, particularly along generational lines. Many view it in moral terms. This is all wrong. We are all in this together, whether we are generationally lucky or not.” Absolutely, for a starter, if the economy is not prosperous and employ the young, who is going to buy all the retirement investments at the price of a then decent purchasing power?

The only way to keep an economy moving forward, so that it does not stall and fall, is to ascertain that primary societal risk-takers, like banks should be, take the risks that are needed. Too much risk aversion is riskier than too much risk taking.

Of course, we all want and need for that risk-taking to be carried out with reasoned audacity. God make us daring! 

@PerKurowski ©

August 26, 2016

Regulators tell banks “Occupy what’s safe”; and so expel widows, orphans and pension funds, to handle what’s risky

Sir, Brooke Masters reports on how the Security Exchange Commission is making sure that private equity industry duly manages conflicts of interest and treats its clients fairly. “SEC enforcers must keep bearing down on private equity” August 27.

But Masters also writes: “Historically, PE clients have been highly sophisticated. So they are either well placed to decipher complex investment contracts or rich enough not to quibble about extra fees. But that is changing. Public pension funds are shifting more and more of their money into private equity as they chase higher yields. Pension fund managers are far less experienced with the sector.”

Why did this happen? When regulators, with their risk weighted capital requirements told banks they could leverage more, and therefore obtain higher risk-adjusted returns on equity with assets perceived as safe than with assets perceived as risky, they made banks occupy that area in which, without leverage, widows, orphans and pension funds used to dwell.

So see what they done. By trying to make banks safer they clearly made life for widows, orphans and pension funds much riskier. That is what happens when regulators regulate with no concern about the impact their regulations will have.

And the saddest part of it all is that it is all for nothing. Major bank crisis are never the result of excessive exposures to what is perceived as risky, but always the result of unexpected events or excessive leveraged exposures to what was ex ante perceived as safe, but that ex post turned out not to be.

PS. For the sake of our children and future pensioners, I pray we can reverse this, and that there are still some bankers out there who know how to be bankers, and not only how to be equity minimizers. 

@PerKurowski ©

While central bankers ponder moving their targets, we should ponder the need of moving them out.

Sir, I refer to your “Central bankers ponder moving the goalposts” August 26.

Stock and bond markets are important but the banks are most often the financiers of the first stages of growth. So while regulators, with their risk weighted capital requirements, insist in distorting the allocation of bank credit to the real economy; impeding sufficient flows to what has been deemed as risky, like SMEs and entrepreneurs, there is no chance in hell that QEs, negative interests or whatever else central bankers might concoct will work.

Some want to make up for the regulatory risk aversion by designing special financing facilities, for instance to SMEs. That’s would be the wrong way, that would just make everything more complicated and even less transparent.

Frankly, when I read about what options central bankers are pondering, it all sounds like a Lilliput and Blefuscus debate, 2% or 4%, break the egg on the larger or on the smaller end. Perhaps, if they cannot get their act together, and before they take us further up the huge mountain of debts they talk down as quasi-debts, we should seriously ponder the need to move them out. 

Inflation targets, nominal value of GDP and such, means little for most on Main Street. For instance, as a grandfather, I would welcome some central bankers that would target future employment rates, in decent jobs of course; and were willing to index their respective retirement plans to my grandchildren’s success, and to the value of the pension and retirement plans of those of their generation.

Sir, the independence of central bankers, cannot signify they are not to be held accountable for what they do.

@PerKurowski ©

August 25, 2016

We have jobs because banks risked their (and our parents) money on “the risky”. Let’s give our kids the same chance

Sir, Sarah O’Connor reports on a UN forecast that indicates that “Global youth unemployment has started to worsen again after three years of modest improvement” “Finding work proves harder for world’s youth” August 25.

There are two angles to this story: How to create jobs, and what to do with those who will not get jobs.

With respect to job creation let me remind you, for the umpteenth time, that many of us hold jobs only because banks risked their and our parents money lending to many SMEs and entrepreneurs. And currently, because of the credit-risk-weighted capital requirements for banks, those loans are not available in significant amounts or in competitive rates. Our bank regulators should be ashamed of that as well as those who like you, keep so much silence on this.

And with respect to what to do with those without jobs, there’s no question that as a society it behooves us to at least find them some decent unemployments. For this day by day I become more convinced we need some sort of Universal Basic Income scheme that does not segregate our youth into those with jobs and those without.

@PerKurowski ©

August 24, 2016

Much of those interest margins banks now obtain financing what’s perceived safe, used to belong to pension funds.

Sir, I refer to Mary Childs and John Authers’ “Canada quietly treads radical path on pensions: Retirement funds are pushing beyond bonds and stocks in search of better returns” August 23.

Please hear me out. Before the introduction of the risk weighted capital requirements, banks spread out their credits to those who offered them the best risk-adjusted margins, while subjecting the size of the exposures to the same perceived credit risk. Taking risks, with reasoned audacity, was the business of the banks. In comparison, avoiding risks, and looking for certain minimum returns, was the business of pension funds.

But, with the risk weighted capital requirements that allow banks to leverage much more their equity with what is perceived as safe than with what is perceived as risky, banks began maximizing their returns on equity by minimizing the equity they needed to hold, something which meant going for what was perceived, decreed or concocted as safe.

As a result the bankers were able to realize their wet dreams of huge perceived risk adjusted returns on equity for playing it safe.

But that de facto meant that banks occupied the investment space pension funds use to occupy, and so now we have that pension funds have to go out there and take the risks banks used to take.

Sir, you can be damn sure that if banks needed to hold the same capital against all assets they would not be swamping the safe havens, and pension funds would not have to be “facing the challenge of [so] low returns on traditional assets”

This is all so foolish. Why can’t we allow banks to be banks and pension funds to be pension funds?

This is all so dangerous. If banks do not finance risky SMEs and entrepreneurs the real economy will stall and fall, and then even the safest will not buy retirement tranquility (or jobs for our children and grandchildren).

August 23, 2016

BoE, if you really believe jobs come first, why not capital requirements for banks based on job creation ratings?

Sir, I refer to John Authers and Robin Wigglesworth “Big Read: Pensions: Low yields, high stress” August 23.

There we read that Baroness Altmann, the former UK pensions minister, said this month “The emergency to pension schemes has been caused by Bank of England’s quantitative easing policy of buying bonds…I don’t see how it is reasonable to ask companies with pension schemes to fill a £1tn hole and put money into their businesses as well. It doesn’t add up.”

BoE officials say they recognize the problem, but Andrew Haldane, its chief economist, says the central bank’s top priority must be to stimulate the economy. “I sympathize with savers, but jobs must come first”.

I don’t think so, from what BoE and their colleagues are doing, it seems much other, like keeping the values of assets high and borrowing costs for the government low comes first.

Sir, again, for the umpteenth time, the Basel Committee, the Financial Stability Board and other frightened risk adverse bank nannies, have mandated stagnation.

When you allow banks to hold less capital when financing what’s perceived as safe than when financing the risky; banks earn higher expected risk adjusted returns on equity when financing the safe than when financing the risky; so you are de facto instructing the banks to stop financing the riskier future and keep to refinancing the safer past… something which guarantees stagnation… a failure to develop, progress or advance… something which guarantees lack of employment for the young and retirement hardships for the old.

I would prefer not to distort the allocation of bank credit but, if I had to, then I would try to ascertain that bank credit goes to where it could do the society the most good; in which case I would consider basing these on job creation ratings and environmental sustainability ratings and not on some useless credit ratings already cleared for by banks with the size of their exposures and interest rates.

PS. If you want more explanations on the statist bank regulations that are taking our Western society down here is a brief aide memoire.

PS. If you want to know whether I have any idea of what I am talking about here is a short summary of my early opinions on this since 1997.

@PerKurowski ©

August 22, 2016

Ms Merkel, Mr Renzi and Mr Hollande. Do you want to tackle growth and youth issues? Read the memo or give me a call.

Sir, Arthur Beesley, Anne-Sylvaine Chassany in Paris and Stefan Wagstyl report on that the leaders of Germany, France and Italy will attempt to forge a common plan to bolster Europe’s economy; and that Sandro Gozi, Italian secretary of state for European affairs said: “Europe needs an immediate answer on growth, youth and security issues”, “European leaders seek to bolster economy” August 22.

Part of that is because the result of that a the €315bn investment plan introduced last year by Jean-Claude Juncker, European Commission designed to tackle youth unemployment, during its first year, fell well short of expectations.

Here is what I would suggest they should do. They should ask their bank regulators whether when they regulated they gave any attention to the need that banks cooperate promoting sustainable growth and employment for the youth?

The answer they should receive, if the regulators were honest, would be: “Not one iota… all we cared about was for banks to avoid the risks we all perceive ex ante!”.

At that moment Ms Merkel Mr Renzi and Mr Hollande should begin to get an intuition that something is not smelling right.

In short, the current risk weighted capital requirements have banks avoiding the financing of the riskier future, and just keeping to the financing of the safer past, and that’s not the way for our economy to move forward, in order to not stall and fall.

Of course, if they want further explanation on how inept the current bank regulators are, they could read the following aide memoire, or they could give me a call.

@PerKurowski ©

To restore growth and wealth generation we must get rid of dumb regulatory risk aversion.

Sir, Michael Heise writes: “Greater innovation and higher productivity remain the safest routes to restored growth and wealth generation. And this needs open markets, tax incentives for investment and a well-qualified workforce — not ever more fiscal spending and central bank cash injections.” "Monetary policy lacks the muscle to boost growth" August 22.

Absolutely, but a prerequisite for that to be achieved is getting rid of that toxic risk aversion present in the risk weighted capital requirements for banks and that are distorting the allocation of credit to the real economy.

@PerKurowski ©

High interests do not solve any retirement problems, if there is no real economic growth to pay for these

Sir, Jonathan Ford writes of how “The Bank of England’s decision to cut interest rates and resume quantitative easing” is creating all sort of expected deficits in retirement plans, and specifically to “UK’s 6,000 still existing defined benefits schemes” “Real change in attitude is needed to solve the issue of fund deficits” August 22.

Ford also mentions the responsibility of the “existing generation…to strive to provide for the obligations to workers they have inherited”. That is very correct, but the possibilities of it will also very much depend on the health of the real economy.

If there were no low or even negatives interest rates, but only high positive interest rates, in order for these to translate into real positive rates, the interests would, in the medium and long term anyhow, have to be paid by real economic gains.

And that is why, once again, I insist that the most egregious thing that is happening to that future economy on which we all will depend, is the risk aversion that has been introduced into the allocation of bank credit by means of the risk weighted capital requirements for banks.

It is just amazing this is not even being discussed.

@PerKurowski ©

August 19, 2016

Even sophisticated up-in-the-fronters can fall victims to populists, like those dressed up as bank regulators.

Sir, John Lloyd correctly writes that “rising inequality, wage stagnation and workplace insecurity merge with concern about fragmenting communities, exacerbated by fear of unregulated immigration and terrorism…produces a popular energy” that can be captured by populists. “For left-behinders, populists paint a picture of a better future” August 17.

But not only left-behinders can be victims of cheap populism, those up-in-the-front too, and populism can come in all shapes of form, including camouflaged as bank regulations.

Like that populism imbedded in: “If banks avoid risks, this will keep them from failing, and we will all prosper. So more risk more capital - less risk less capital”

And what is amazing is to see the how many famed journalists, Nobel Prize winners, academicians and politicians, fell for it, ignoring that what is risky is already made safer by being perceived as risky, but made even riskier if perceived as safe.

And what is even more amazing is how, even after a crisis brought on by excessive bank exposures against too little capital to what was perceived as safe; and an economy that is stagnating and not showing increased productivity, they still can’t open their eyes to the distortions in the allocation of bank credit to the real economy caused by that grievous piece of bank regulation.

Or is it like John Kenneth Galbraith said: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.” “Money: Whence it came where it went” 1975.

@PerKurowski ©

In Venezuela there’s much human suffering because of lack of food and medicines; but petrol is 1 US$ CENT PER LITER!

Sir, I refer to your editorial "Venezuela’s problems can no longer be ignored" August 19.

Of course as a Venezuelan I pray for my country to get out of that tragic black hole into which crooks or naïve fools has submerged it controlling 97% of its export revenues. 

When we get out of it, which we will, we must see to never to fall into it again. And what we must do for that is to share out all oil revenues directly among the citizens, so to have our governments operate solely with the tax revenues provided by We the People.

But for the rest of the world, there also are important lessons to be learned. One is that stupid and irresponsible economic policies can cause just as much violation to human rights than any of those other sources usually identified. And when those economic crimes are especially grievous, those responsible for them should be prosecuted in international courts.

For instance, right now when there is huge human suffering in Venezuela, because of the lack of food and medicines; petrol (gas), even after it was raised a mindboggling 6.000 percent in February this year, is still being sold at less than ONE US$ CENT PER LITER - FOUR US$ CENTS PER GALLON.

That petrol should be sold, as a minimum, at its world price as a commodity. And the resulting revenues shared out equally to all, so that its citizens could be better positioned to deal with the de-facto state of emergency that exists; and petrol consumption would go down, and more petrol could be exported, and more food and medicines imported.

@PerKurowski ©

August 18, 2016

Regulators divided private sector in two, Safe and Risky. And guess who is losing out more than usual? All of us!

Sir, Bill Gross asks: “Why would the private sector… not borrow at practically no cost to invest in a centuries’ old capitalistic model proven to reward risk-taking in the real economy?”, “Central bankers are threatening the engine of the economy”, August 18.
In his comments Gross forgets there are now two private sectors. One, perceived, decreed or concocted as “safe”, AAArisktocracy and residential housing, and to whom banks can lend against very little capital; and the one which includes those perceived as risky, SMEs and entrepreneurs, those that regulators require the banks to hold much more capital when lending to.

And so “The Safe”, by allowing banks to leverage more their equity, provides the banks with higher expected risk adjusted return than what “The Risky” can do,

And so regulators decreed that money paid in net risk adjusted margins by “The Safe”, is worth more to banks than that same money when paid by “The Risky.

And so The Risky have been left out in the cold, that is unless they accept to compensate banks for this regulatory discrimination; by paying rates over what their ordinary risk adjustments would justify.

QEs and other fiscal stimuli, or negative interests, finds it hard to overcome this hurdle and reach with bank credit the vital SMEs and entrepreneurs, who might want to borrow, and so most of it gets wasted.

And besides The Risky, we all lose out! It refuses the risk-taking tomorrow’s economy requires be taken by todays’; and all for nothing, because The Risky never cause that type of excessive bank exposures that can cause a major crisis; that dishonor belongs entirely to “The Safe”. 

@PerKurowski ©

August 17, 2016

Are you shocked seeing the Financial Times report on banks not doing anything but storing cash, and want to help?

Sir, I refer to your front-page “Big bills: Plans to hoard banknotes pose tricky problem over storage”; and Claire Jones’ and James Shotter’s “Note of caution as Europe’s banks seek to stockpile cash” August 17.

It is shocking; we all know that is not how it should be. That is money not earning what it needs to accumulate in order to pay pensions for the older of tomorrow. That is money not invested in creating the jobs of tomorrow for the young.

Just like John A Shedd said: “A ship in harbor is safe, but that is not what ships are for.”, “Money held by banks in their safes is safe (sort of) but that is not what banks are for”

Do you want to help change that? Then please support the discussion of the following:

Until banks have 8 percent in capital against absolutely all assets, including cash and including loans to infallible sovereigns, the banks should not be allowed to repurchase their own shares, or to pay out more than 20% of their net after tax profits in dividends.

With that I guarantee you some real action in banks lending to the real economy; and that could lead to real economic recovery, real possibilities to build up pension funds, and real jobs for our children and grandchildren.

Forget about QEs, fiscal stimulus and negative interest rates; and let “risky” SMEs and entrepreneurs get the credits to have a go at it.

@PerKurowski ©

August 16, 2016

Little is as imprudent as the risk-adverse risk weighted capital requirements for banks.

Sir, Amar Bhidé writes: “Sweden’s Handelsbanken is an exemplar of prudence… The target loan loss ratio is zero; low loan losses, in turn, allow the bank to offer competitively priced loans and personalised service to creditworthy customers.” “Easy money is a dangerous cure for a debt hangover” August 17.

That is NOT exemplary prudence. “A target loan loss ratio of zero”… might allow “to offer competitively priced to creditworthy customers” but it will clearly not offer sufficient opportunities of credit to the not so creditworthy, which includes too many risky SMEs and entrepreneurs, those that could help provide the proteins the economy needs to move forward, in order not to stall and fall.

The truth is that in the medium and the long term, the creditworthy are more benefited by the banks taking more risks on the not creditworthy, than by just getting low priced loans.

However Bhidé also qualified it with: “prudent case-by-case lending also undermines the stimulative effect of the loose money unleashed by central bankers [because] Experienced financiers will not lend more to less worthy borrowers simply because of low or negative interest rate policies.”

Yes, indeed, but much more undermining of the stimulative effect of loose money is caused by the risk weighted capital requirements for banks… those which require Handelsbanken to hold more equity when lending to someone perceived risky, than when lending to someone perceived safe. Those that result in Handelsbanken earning higher expected risk adjusted returns on equity when lending to someone perceived, decreed or concocted as safe, than when lending to someone perceived as risky. Those that cause “small and medium-sized businesses have been left behind”.

Bhidé opines: “What the Fed and other central bankers can — and should — be held responsible for is prudent lending by banks”

Absolutely, I totally agree! But “prudent lending” means guaranteeing the economy sufficient risk taking by the banks; and knowing that, contrary to what current regulators believe, major bank crises are never caused by excessive exposures to something perceived risky, these are always caused by excessive exposures to something perceived as safe when placed on their balance sheets.

Sir, Handelsbanken is a Swedish bank, somehow it seems to have completely forgotten that in Swedish churches we all sang “God make us daring!

PS. Bhidé writes that central bankers “base their assessment of risks, and of what would have happened without their intervention, on models whose mathematical sophistication hides a primitive representation of finance and the economy.” 

That is correct. In October 2004, as an Executive Director of the World Bank, I formally warned: “We 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.” Sir, how many spoke out that clear at that time?

@PerKurowski ©

There’s a distortion of the allocation of bank credit to the economy that does not want to be named, but must be named.

Sir, Mohamed El-Erian writes: “BoE had already gone beyond consensus expectations… by skillfully combining four elements — an interest-rate cut, a reinvigorated and broadened asset purchase program (QE), a special funding scheme for banks, and effective communication” ,“Bank of England bond-buying needs a fiscal helping hand” August 16.

How sad BoE is not skillful enough to understand that a regulatory distortion of the allocation of bank credit to the real economy is blocking the chances to achieve stronger and more sustainable economic growth.

What distortion do I refer to? The risk weighted capital requirements for banks of course. That which allows banks to leverage equity more with assets perceived as safe than with assets perceived as risky; and thereby that which results in banks earning higher expected risk-adjusted returns on equity on assets perceived as safe, than on assets perceived as risky.

As a result too much of BoE’s, and other central banks, and fiscal stimulus, gets to be wasted; by mostly flowing to increase the value of existing assets (stagflation profiteering) and by that way hindering the opportunities of “risky” SMEs and entrepreneurs to gain access to bank credit.

What would happen to UK government borrowings if the sovereign UK, now assigned a zero percent risk weight, had to carry the same risk weight as We the People, 100 percent? To top it up there are many other statist pro-government funding subsidies.

Sir, we have to find a smart way to urgently work our banks out of these regulations, something made difficult by the fact our current bank regulators simply do not know what they are doing. Ask them and you’ll see.

Finally, for someone from a country suffering murdering inflation, Venezuela, it is a real shocker having to read highlighted in FT: “Owning a printing press, the BoE faces no funding constraint”

@PerKurowski ©

August 15, 2016

To generate societal and economic resilience, risks need to be intelligently faced and not just brutishly avoided.

Daniela Schwarzer opines: “Democratic leaders have to join the battle of ideas and be audible in defending their ideals. They need to fight nondemocratic, antiliberal and extremist propaganda proactively and show vision and the capacity to recast in adverse circumstances”, “Resilience is important for societies as well as individuals” August 15.

But real leaders are also open to that dangers can come in all shape and forms, and among the most dangerous, is any kind of populist groupthink generated within mutual admiration clubs, like that of the Basel Committee for Banking Supervision and associated regulators.

The regulators, too fearful of banks failing, imposed risk weighted capital requirements. These resulted in that banks earn higher expected risk-adjusted returns on equity when investing in something perceived ex ante as safe than when investing in something “risky”, like loans to SMEs and entrepreneurs. And that distortion of the allocation of bank credit to the real economy did not only cause the 2007-08 bank crisis, but has also decreased the resilience of the economy…“the capacity to recover quickly from disaster.”

And so “democratic leaders”, and the elite in general, must also fight bank regulations that deny the economy what it most needs to stay vibrant, namely lots and lots of prudent risk-taking, prudent meaning risk in not too big doses.

And in doing so they would hopefully also fight against that statism that has been smuggled in through regulations by non-elected technocrats, that which is represented by a 0% risk-weight for the Sovereign and one of 100% for We the People. 

@PerKurowski ©

August 13, 2016

If one incorrectly accuses bank regulators of being totally inept, in public, one would think they would answer

Sir, Eric Lonergan writes: “Mark Carney is right: the traditional use of interest rates has run its course. For central banks to continue playing a role in preventing recession and raising growth, they will need to rethink the entire premise of monetary policy and aim their firepower directly at consumer spending and corporate investment”, “Interest rates are a spent economic force” August 13.

What central banks, and regulators, must really rethink is the whole bank regulatory framework’s pillar; the risk weighted capital requirements for banks. The problem is they are doing their utmost to avoid that Pandora box to be opened, because they know that would disclose their incredible technocratic-besserwisser disabilities.

Sir, you know what I think of these regulations, and you might think I am obsessed with the issue, which I am… but have you never asked yourself why my arguments are not even discussed? I have publicly accused Mark Carney, Mario Draghi, Stefan Ingves and many other of being absolutely inept bank regulators… and, if I was wrong, one could reasonably assume they would love to strongly correct me… in public.

PS. Sir, as you might be fed up receiving my many letters, you could also ask the regulators to answer my questions, and then you might get rid of me for good. Do you dare!

@PerKurowski ©

The regulators distrust of bankers is condemning our economies to stagnation

Sir, Tim Harford writes: Steve Knack, an economist at the World Bank with a long-standing interest in trust, once told me that if one takes a broad enough view of trust, “it would explain basically all the difference between the per capita income of the United States and Somalia”. In other words, without trust – and its vital complement, trustworthiness – there is no prospect of economic development.”, “The meaning of trust in the age of Airbnb” August 13.

And that would also mean that distrust must equally be dangerous for the development; like when regulators distrusted bankers to adjust for the risks they perceived by means of the size of exposure and interest rates, and told them to also adjust, for that same perceived risk, in the capital account.

And because any risk, even if perfectly perceived, causes the wrong action if excessively considered, our economies are suffering from an inefficient allocation of bank credit. Much too much credit for the safe havens that risk becoming dangerously overpopulated, and much too little for the exploration of the riskier bays populated by SMEs and entrepreneurs. This mother of distrusts, is a real tragedy!

@PerKurowski ©

Do you think Trump wants to lose big? To risk hearing “You’re fired!”? What if he first negotiates with GOP and then quits?

Sir, I refer to Philip Delves Broughton’s article on the candidature of Donald Trump, “The nominee whose tactics make history irrelevant” August 13.

It is incomplete because, there more than 80 days until November 8, a very long time in these times when things can turn around in seconds, and it does presuppose that Trump would be willing to accept a very significant loss, having to hear “You’re fired!”, without considering the possibility he negotiates with the GOP, and quits, and thereby quite possibly allow an alternative republican candidate to win the elections. He is a businessman after all... or not?

And what of the Democrat party if Clinton loses? Would not Obama for instance then hold on to much more influence in it? Will Michelle run someday? Sir, you see there are plenty of questions in the air. 

@PerKurowski ©

August 12, 2016

Only by getting rid of all regulatory subsidies to negative rate yielding debt, would we have free-market real rates

Sir, I refer to Gillian Tett’s discussion of “The bizarre world of negative rates”, August 12. As Ms. Tett does not refer to the obvious distortions in the allocation of credit to the real economy risk weighted capital requirements for banks and other regulations cause, I can only assume she is following some standing instruction of not to do so.

Because she must know that, if a bank wanted to “move funds from low-yielding assets, such as [sovereign or highly rated private] bonds or cash, into more productive investments that could produce better returns and growth”, then it is required to hold more of that equity that expects high returns, or then it can pay out less dividends... or bonuses.

And it will get even worse, since statism imposed via regulations is rampant. Only yesterday Robin Wigglesworth in Short View wrote: “New rules slapped on the US money market fund industry… are set to come fully into effect in October. The changes have spurred a gradual investor exodus from the funds, and the conversion of ‘prime’ MMFs which invest into corporate debt into ones that invest only in Treasuries (which are less affected by the new regulations).”

@PerKurowski ©

Statism, by way of bank regulations, marches on! Thou shall not hold anything but the Infallible Sovereign’s debt

Sir, Robin Wigglesworth in Short View August 11 writes: “New rules slapped on the US money market fund industry… are set to come fully into effect in October. The changes have spurred a gradual investor exodus from the funds, and the conversion of ‘prime’ MMFs which invest into corporate debt into ones that invest only in Treasuries (which are less affected by the new regulations).”

So clearly those statists that furthered their agenda by way of bank regulations, like in 1988 when the Basel Accord decreed a risk weight of zero percent for the government and 100% for We the People, keep marching on unabated.

And since Wigglesworth also refers to the Libor “Lie-bor” rate manipulation, let me also remind you that no private sector manipulation ever, has produced even a fraction of the costs for the society at large, as has the Basel Committee's outrageous manipulation of the allocation of bank credit to the real economy.

@PerKurowski ©

Italy has no chance of solving its bank and economy problems, if it does not understand the regulatory distortions

Sir, Sarah Gordon writes: “Thousands of small and medium-sized companies have gone under, taking with them the bank loans on which they depended, as well as demand for lending”, “The spreading pain of Italy’s bank saga”, August 11.

First let us make on thing very clear, those thousand and SMEs that have gone under more than they were expected to go under, did so as a result of the 2007-08 crisis. They had not one iota to do with causing the crisis.

And so let me explain it again, for the umpteenth time: Before current bank regulations, pre 1988, pre Basel Committee, no one made a distinction between a Lira or an Euro in capital invested in something perceived as safe, or in something perceived as risky.

But then the Basel Committee came along and decided that, if banks invested in something perceived, decreed or concocted as safe, then a unit of their capital (equity) could be leveraged more than 60 to 1, while, if invested in for instance some loans to SMEs and entrepreneurs, that same unit could only be leveraged 12.5 to 1.

And so of course that introduced a very serious distortion of the allocation of bank credit to the real economy, which persists until today, all because our besserwisser bank regulators, insist on that they are besserwissers.

If Italy does not allow its SMEs or entrepreneurs to have fair access to bank credit then it is doomed to stagnation… that is unless La Banca Sommersa comes to its rescue.

@PerKurowski ©

August 10, 2016

Should we not also be concerned with the behaviourism of the Financial Times? I mean FT having such a delicate ego?

Before we need to concern ourselves with the behaviourism and the market, which is quite some nonsense, unless we want to ordain the markets to behave in some special way, we should concerns ourselves with those whose behaviourism could most distort the markets… like the bank regulators.

So, what behaviourism could cause them to regulate banks without defining the purpose of the banks, more than that of being safe mattresses to stash away the cash?

So, what behaviorism could cause them to believe that what bankers perceived as risky was more dangerous than what bankers perceived as safe?

So, what behaviourism could cause them to believe they needed to tilt so much in favor of the public sector so as to assign the sovereign a risk weight of zero percent and to us, We the People, one of 100%?

So, what behaviourism could cause them to believe the world becoming a better place with the banks avoiding taking the risks of lending, like for instance to SMEs and entrepreneurs?

Why do I ask? Because I have sent FT thousands of letters on this issue, and which they have 99.9% ignored, because, though they might say otherwise, they are not without fear nor without favour.

August 08, 2016

If anyone in FT is living up to FT’s motto of “Without fear and without favour” that’s Lucy Kellaway

Sir, again, Lucy Kellaway is bravely shouldering her responsibility to socially sanction nonsense. That kind of sanction is extremely important, effective and much needed. Way to scarce nowadays. “Millennials ought to ignore career advice from BCG boss”, August 8.

How I wish she would help me out to socially sanction the bank regulators who came up with the loony concept of risk-weighing the capital requirements for banks, and, in order to keep the bank system safe, to assign a risk weight of 20% to what is AAA to AA rated and of 150%, 7.5 times larger,  to what is rated below BB-.

All as if the world of the ex ante perceived as highly speculative risky below BB-’s, pose greater dangers for our banks than what is ex ante perceived as prime and absolutely safe.

@PerKurowski ©

“Progressives” can promote fairness and growth by stopping bank regulator’s despicable discrimination against “risky”

Sir, Lawrence Summers writes: “Often in economics there are trade-offs. But not always. We can and must promote both fairness and growth. “The progressive case for championing pro-growth policies” August 8.

And for that he recommends: “more demand for the product of business. This is the core of the case for policy approaches to raising public investment, increasing workers’ purchasing power and promoting competitiveness”

Again Summers seems to ignore completely what one could believe would be a great cause for “progressives”, namely to combat how the last decades those who are perceived as risky, when compared to those perceived as “safe”, have had their access to credit made much more difficult by the risk weighted capital requirements for banks

Who are “the risky”? In terms of growth, the all important SMEs and entrepreneurs, those risk weighted 100% (and more).

Who are “the risky”? In terms of fairness, the weaker, the poorer, the not yet up there, the ones praying for fair opportunities.

So how can we explain that progressives do not give much attention to these regulations that so odiously discriminate in favor of the AAArisktocracy and against "the risky"? Perhaps because these also include the risk-weight of 0% for the government, and most progressives are foremost statist.

Perhaps because it is not in the nature of progressives to understand, and much less admit, that regulators can get it so wrong.

@PerKurowski ©

August 07, 2016

If only regulators had had one of those “what-to-do” algorithms Tim Harford mentions before regulating banks.

Sir, Tim Harford refers to Brian Christian’s and Tom Griffiths’ “Algorithms to Live By” in order to ask: “Can computer scientists –– help us to solve human problems such as having too many things to do, and not enough time in which to do them? He concludes “It’s an appealing idea to any economist”, among others because “Computers practise ‘interrupt coalescing’, or lumping little tasks together. A shopping list helps to prevent unnecessary return trips to the shop.” “An algorithm for getting through your to-do list” August 6.

How I wish the bank regulators had had access to such algorithms and to the lumping together of all their, not that small, but huge necessary tasks.

If so, they would have been remembered to define the purpose of the banks, among which is the need to allocate credit efficiently to the real economy stands out, and so they would have stayed away from their distortive risk weighted capital requirements.

If so, they would have remembered to read some books on past crises, or looked into some empirical data, and thereby have understood that bank crises are never ever caused by excessive exposures to something perceived as risky, but always from excessive exposures to something perceived as very safe when put on the balance sheet, and so they would have know their risk-weighted capital requirements were 180 degrees off target.

@PerKurowski ©

August 06, 2016

Monetary and fiscal policies, even though they live at different addresses, are very much married

Sir, you write “there are a few welcome signs that fiscal rather than monetary policy may finally be taking some of the strain of stimulating a sluggish global economy” and, again, that “With bond yields apparently grinding ever lower in advanced economies, the cost of a debt-financed expansion continues to fall.” "A quiet shift in focus for economic policymakers", August 6.

And one gets the impression you believe monetary and fiscal policies are independent, and live separates lives. That’s really not so, they are much married even if they don’t live at the same address.

They were very much married back in 1988 when regulators (central banks) with Basel I assigned the sovereign a risk weight of 0% while giving us We-The-People one of 100%.

In November 2004, in a letter published by the FT I wrote: “Our bank supervisors in Basel [central banks] are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector [sovereigns]?”

And here follows a brief storyline I recently gave you in another of the letters you feel to have the right to ignore, only because they verse repeatedly on the same theme.

Government issues bonds, the public buys these, and central banks, wanting the economy to grow, then buy these from the public by means of QEs

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then you and many others recommend to take advantage of these low borrowing rates, in order for governments to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then (cheered on by FT) launch new rounds of QEs, and buy more government bonds from the public… and on and on it goes… until!

Sir, at what point do negative rates become absolutely incompatible with a 0% risk weight of sovereign debt? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, if these want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge them much higher interest rates, making thereby the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©

We need banks that profit by taking reasoned risks; and that have capital to cover for a good chunk of the unexpected.

Sir, I refer to Dan McCrum’s and Thomas Hale’s “Stagnation saps enthusiasm for Europe’s banks” August 6.

It includes contradictory statements like “the financial architecture appears solid” and “most people accept there is enough capital in the system now. Not just investors, but regulators as well” with that of “a rounding error of just 1 per cent on European asset values would wipe out More than a third of European bank equity, the all-important number determining ability to absorb losses.”

The ex ante perceived risk-weighted capital requirements for banks has introduced total confusion into banking. Not only with respect of these having reasonable equity, but also with respect to their business. Over the last decades, banks have looked to maximize their returns on equity much more by reducing the capital required, than by analyzing gross risk/reward ratios as such. And that must come to an end.

First EBA’s recent stress tested European banks indicated that they were leveraged almost 24 to 1, and that makes them clearly undercapitalized, not so much in terms of the expected, but in terms of the unexpected, which is what bank equity should be there for.

And secondly, we urgently need banks to assume their more traditional role of earning their profits by taking reasoned risks in the real economy… that economy in which a unit of capital is a unit of capital, independently of it being invested in something safe or something risky.

To avoid risks, especially when currency does not carry negative interest rates, a mattress seems to suffice. And for the society (taxpayers) to support banks that make their profits by avoiding taking risks, and not by helping it to build future, is stupid.

Some tweet sized conclusions:

The last decades banks have earned huge returns on equity mostly by minimizing equity, that has to stop.

European banks are severely undercapitalized, not that much in terms of the expected, but in terms of the unexpected.

Banking should be about helping society to take risks, not avoiding these. For that mattresses suffice.

Bankers capable of reasoned audacity are magnificent. Equity reducing bankers, are, at best, absolutely tedious.

Just looking at their dumb risk-weighted capital requirements, bank regulators should be disgraced by society.

@PerKurowski ©

August 05, 2016

Money from heaven can be real or fake and it can be dropped by trusted helicopter pilots or as Universal Basic Income

Sir, Robert Skidelsky writes: Because “there is no assurance that a lot of such helicopter money would not be hoarded…contemporary advocates of helicopter money like Willem Buiter and Adair Turner see it mainly in terms of monetary financing of additional government spending. The government should pay for, say, an investment programme not by issuing debt to the public but by borrowing from the central bank. This will increase the government’s deficit, but not the national debt, since a loan by the central bank to the government is not intended to be repaid. Thus the government acquires an asset but no corresponding liability.” “A tweak to helicopter money will help the economy take off” August 5.

Have these statists gone raving mad? “The government acquires an asset but no corresponding liability?” Is this a Ponzi fiscal revenue scheme?

Have these statists gone raving mad? In this world of cash-strapped citizens would they not know better what to do with their helicopter money than some bureaucrats with other people’s helicopter money?

And besides, helicopter money could be real money and it could be fake money… and only fiscal revenues Ponzi schemers would be thinking of dropping what’s fake.

And besides, helicopter pilots could be trusted, or only doing the drops on their favorite neighborhoods.

So, if you introduce a Pro-Equality tax, and drop all those revenues by means of a Universal Basic Income scheme equally to everyone, both the hoarding and the redistribution profiteering will be small.

Sir, if we are not expecting to profit on the redistribution, is that not what we, poor and rich, all want and need? 

@PerKurowski ©

At what point do negative rates on government debt become absolutely incompatible with its zero % risk weight?

Sir, in reference to Dan McCrum’s “Fire up the printing presses for a useful jolt to the economy” August 5, this is what I have to say.

Government issues bonds, the public buy these, and central banks, wanting the economy to grow, then buy these from the public.

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then Martin Wolf and other recommend the government to take advantage of these low rates, in order to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then buy more government bonds from the public… and on and on it goes.

And, to top it up, banks and insurance companies are told by their regulators: “If you do not buy 0% risk-weighted government bonds, then you have to cough up with more equity”. And so banks (and insurance companies and alike) buy more government bonds, and the rates on these keep falling and falling… where does it end?

At what point do negative rates become absolutely incompatible with a 0% risk weight? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, if SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge higher interest rates, making the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©