March 29, 2016

The risk weighted capital requirements for banks, put the “Minsky moments” on steroids.

Sir, you write “A period of stability leads to rising investment, financed by borrowing, which drives up asset prices until cash flows generated by those assets can no longer support the debt taken on to buy them. Eventually there is what has been dubbed the “Minsky moment”: a dash for the exits as asset prices plunge. After the bubble bursts, the debt burden remains and can depress activity for a long time. “The challenge posed by oil’s ‘Minsky moment’” March 29.

But the regulators, with Basel II, told banks “If you think that something is safe then you can hold less capital against it”. And, in their Standardized Approach to Credit Risk, the regulators allocated the basic capital requirement of 8 percent according to the following risk weights: zero percent for loans to AAA-rated sovereigns; 20 percent on loans to the AAArisktocracy, 35 percent risk weight on the finance of residential mortgages; and 100 percent risk weight on exposures to unrated citizens.

And that translated into banks could leverage equity unlimited times when lending to AAA rated sovereigns; 62.5 times to 1 when lending to the AAArisktocracy, 35.7 times when financing residential housing 35.7, and only 12.5 times to 1 when lending to the unrated citizens.

And of course that allowed banks to earn different risk adjusted returns on equity not based on what the market offered, but much more based on what the regulators dictated.

And since “Minsky moments” never occur in areas ex ante perceived as risky but always in what is perceived as safe, that is of course equivalent to putting the “Minsky moments” on steroids.

You also end with: “As Minsky argued, booms and busts are endemic to capitalism. Sensible policy strives not to abolish the cycle but to mitigate its effects.”

But the risk weighted capital requirements signifies banks will have especially little capital precisely when the busts occur. And that has nothing to do with “mitigating” its effects, just the opposite.

Sir, I must have written to you and your colleagues well over 2.000 letters trying to explain the dangerous distortions caused by the risk-weighted capital requirements for banks, but apparently it has not yet been understood.

Sir, between us in petit committee, although I understand that it probably has to do with you wanting to sound sophisticated, I do not think you have earned the right of referring to Minsky into your editorials.

PS. This is not a critique directed solely to you Sir. For example, out there, the less many seem to understand what is really going on with our banks, the more they express concerns about “derivatives”, only because that word sounds so delightfully sophisticated.

March 27, 2016

Sir, would you trust a columnist who refuses to acknowledge what produced Europe’s financial crisis?

Wolfgang Münchau asks: “would you trust with your own security somebody who cannot even contain a medium-sized financial crisis? I personally would not, which is why my own preference is for the Schengen system of passport-free travel to be suspended indefinitely” “A history of errors behind Europe’s many crises” March 28.

Sir, here are some of the Basel II’s risk weights that determined how much of the basic bank capital requirement of 8 percent banks were required to hold against some different exposures:

Loans to sovereigns zero percent; to the AAArisktocracy 20 percent; financing residential housing 35 percent; and loans to ordinary unrated citizens 100 percent

That meant banks could leverage equity unlimited times when lending to sovereigns; 62.5 times to 1 when lending to the AAArisktocracy, 35.7 times when financing residential housing 35.7, and only 12.5 times to 1 when lending to the unrated citizens.

And that allowed banks to earn different risk adjusted returns on equity not based on what the market offered, but much more based on what the regulators dictated.

So forget the Euro, forget bank unions, that distortion of the allocation of bank credit to the real economy had to provoke, more sooner than later, financial crises that will destroy Europe.

And so I ask you Sir, would you trust a FT columnist that steadfastly refuses to acknowledge such facts to opine on anything? I would not!

@PerKurowski ©

March 24, 2016

Securitization is useful, but not when it is driven primarily by differences in capital requirements for banks

Sir, Alexander Batchvarov writes: “It is claimed that securitisation was one of the main causes of the financial crisis because it was complex, performed poorly and lacked transparency.” “It is time to ditch the ‘toxic’ tag for the sake of Europe’s economy” March 24, 2016

There are deggrees of possible toxicity that are a direct function of how much the securitization process increases the perceived safeness of what is being securitized.

And in this respect what turned out to be really toxic, was not the securitization of relative safe 30 years fixed rate mortgages to the prime sector, but of home equity loans, subprime loans, Option ARM loans, and similar risky affairs.

But even these “risky” underlying loans would not have morphed into truly toxic securities, had it not been for the regulatory benefits awarded to them by means of risk weighted capital requirements for banks.

For instance Basel II assigned a risk weight of only 20 percent for securities rated AAA to AA- , which with a basic capital requirement of 8 percent, meant banks could leverage their equity with these securities a mindblowing 62.5 times to 1 (100/1.6). Those incentives distorted the whole process.

The moment when a securitization, for instance of SME loans, generates a lower capital requirement than non-securitized bank loans to SMEs, that introduces a distortion in the allocation of bank credit that can be very profitable for the banks, but generates little value for the SMEs.

And so if Batchvarov, head of international structured finance at BofA Merrill Lynch Global Research, wants to emphasise proper use of the securitisation technology for the benefit of the broader European economy, he should begin by favoring the elimination of the risk weights differences which cause bank capital requirement differences between what is ex ante perceived as safe and what’s perceived as risky.

And, by the way, that would not increase European financial instability, since there never ever are excessive dangerous bank exposures to something ex ante perceived as risky… that dishonor belongs entirely to what is perceived as safe.
@PerKurowski ©

March 22, 2016

There is risky bank lending and then there is "risky" bank lending

Martin Arnold and Laura Noonan quote Gonzalo Gortázar, chief executive at Spain’s Caixabank with “In a world of low or negative interest rates, that is a possible consequence. You could see banks taking more risk” “Europe bank chiefs fear risky lending from ultra-loose policy” March 22

Of course I cannot be absolutely sure but, when “banks taking more risk” is said, it most probably refers to larger exposures to something that because it is perceived, deemed or sold as safe, carries lower capital requirements.

What is perceived by regulators as risky, like loans to unrated corporations, SMEs or entrepreneurs, and which is risk weighted 100 percent or more, and so require banks to hold more capital, well that’s not the risks banks are taking, unfortunately for the economy.

It would be nice to see reporters digging up a little bit more about what risks is being referred to. In fact, I start any risk assessment by identifying what risk one cannot afford not to take... because that would be too risky.

PS. Another interesting detail is whether it is the ex-ante perceived risk or ex-post resulting risk that is being considered.

@PerKurowski ©

March 21, 2016

Does anyone see the grey showing on the roots of Lucy Kellaway’s hair or the smear of icing sugar on her leg? Not me!

Sir, you know I am usually a great admirer of Lucy Kellaway’s writings, but, this time, I think she’s got it wrong. “High heels and boxing gloves: a portrait of women at work” March 21

Kellaway writes: “If a company wants to show that it really values women and wants to prioritise action in the gender equality landscape, it will show pictures of them in which they don’t always look cool or gorgeous. They just look like professional women at work.”

Hold it there, my wife is a great lawyer, and she has never ever expressed to me any concerns about any type of discrimination based on gender; if anything she has lately felt, ever so slightly, more burdened by age. But, no matter how she looked at work (always gorgeous of course), she would always, no exceptions, prefer to be depicted as if not at work.

And we men are instinctive survivors. We know perfectly well we should never ever take photos of any woman, including Lucy Kellaway, with “grey showing on the roots of hair and a smear of icing sugar on leg”.

PS. The following is absolutely no opinion, especially not mine; its just a question:

Is there anything as deflationary as women willing to work for less? If women did not work, and stayed home to binge on over 100 episodes shows, then unemployment rate would be lower, salaries higher, and so central banks would get the higher inflation they desire and so allow us higher interest rates, and so we could all have a chance to earn a bit on our savings to cover for our retirements. Matching life styles with the economies is always challenging… so they say.

@PerKurowski ©

Holy moly, some will be paying MIT $75.000 for learning techniques on how to hunt us down.

Sir, Adam Jones writes that some “will pay $75,000 in tuition fees for their Master of Business Analytics degree, with “Applied Probability”, “MIT’s $75,000 finishing school for Big Data” March 21.

And Jake Cohen, senior associate dean for MIT Sloan undergraduate and masters programs says: “The return on investment we expect to be very high [for those who take the course]”

That is more than clear evidence that we, the hunted, the main suppliers of “Big Data”, need to urgently defend ourselves.

Before these hunting licenses are awarded, we should get a copyright over our own personal preferences and lives, so to at least have something to negotiate with.

@PerKurowski ©

March 19, 2016

With respect to inequality it behooves us all to stop demagogues from opening appetites that cannot be satisfied

Sir, Tim Harford adds valuable elements to Piketty’s r>g inequality discussions, those that have so many redistribution profiteers drooling in anticipation. “Capital ideas in a time of inequality” March 19.

To Harford’s initial discussions on rates of returns we must keep in mind that the ownership of the capital measured, might be constantly changing. And it is very hard to statistically reflect the continuity value after discontinuities like wars, and other potential wipeouts and resets. And the effect of the survivorships bias on returns, though very hard to measure, might be huge over time.

When it comes to this issue of growing inequality, which is serious indeed, I have always been more for analyzing what could be distorting the allocation of wealth, and in how we can open up opportunities for all to participate in its creation.

And since from the evidence it seems we do need a pro-equality tax on wealth, it is also important to make certain that the redistribution is done in a cost effective way. In my country, Venezuela, I always propose that our net oil revenue should be shared out to all citizens, instead of being concentrated in some political besserwissers’ hands. In this respect it is with a lot of enthusiasm I now follow the idea of universal basic income being studied in Finland and lately in Canada.

But, in all this debate, instead of referring to measured balance sheet wealth, should we not better always think in terms of realizable and transferable wealth? For instance, what about all that wealth stored in art hanging on private, or stored away in the cellars of public museums? If we want to transfer part of that value to the poorer in any significant way, how do we proceed? I mean this is very important, because to open up appetites, ignoring these cannot be satisfied, is precisely what dangerous demagogues do.

Friends, if we had managed to keep the profiteers out of the redistribution, would not the current inequalities be lower? Should not redistributing income and wealth max cost 2 percent?

@PerKurowski ©

March 18, 2016

Martin Wolf, the uncertainty of whether those who govern us really know what they’re doing is always upon us.

Sir, Martin Wolf writes: “Productivity is not everything, but in the long run it is almost everything… But the prospects for productivity are…the most important uncertainty affecting the economic prospects of the British people. Is it reasonable to expect a return to buoyant pre-crisis productivity growth? Will productivity continue to stagnate? Or will it end up somewhere in between?” “The age of uncertainty is upon us” March 18.

Mr. Wolf, for the umpteenth time, obsessively, I do not understand how you and so many other can so obsessively ignore that if you tell banks they can leverage their equity more with what is safe than with what is risky; so that they can earn higher expected risk adjusted returns on equity with what is perceived or deemed to be safe, than with what is risky; that then banks will foremost be refinancing the safer past while ignoring too much the credit needs of the always riskier future. And since then productivity is not been given the chances it deserves, the prospects for its improvement must be really lousy.

“The age of uncertainty is upon us”? Please when did we have an age of certainty?

Current regulators regulate banks without having defined their purpose, and base those capital requirements for banks that should cover for the unexpected, on the expected credit risk. Those facts evidence the major uncertainty we always face, namely whether those who govern us have the faintest idea of what they’re doing.

@PerKurowski ©

FT you’re now inconsistent! You’ve consistently ignored the nannying of banks by the nannies of the Basel Committee

Sir, you hold: “There is a case to intervene when people act in a way that harms those around them, or when it is a case of safeguarding children who cannot take an informed decision and may face bigger risks. If adults take risks with their own health, they should be made aware of the dangers and perhaps nudged into sense, but there is no case for coercion.” “The relentless march of the nanny state” March 18.

Indeed but why then do you keep mum when adult bankers, aware of the ex ante perceived credit risks, are coerced by regulators into considering those risks for a second time, by means of the risk weighted capital requirements for banks?

Can’t you understand that any risk, even if perfectly perceived, leads to the wrong actions, if excessively considered?

If you had two very concerned nannies watching over your children, you might accept them applying the average of their concerns, but never ever the sum of their concerns. Because you know that if they did that, your kids, embracing safety excessively, would grow up seriously disturbed. 

Equally, when now regulators’ risk aversion is added to bankers’ risk aversion, the result is a much disturbed banking system, that embraces excessively what is perceived or has been decreed as safe. Do you get it?

@PerKurowski ©

March 17, 2016

Should not those who live under the thumb of blatant redistribution profiteers have safe access to safe tax havens?

Sir, David Pilling raises a question that needs to be asked more often, especially when inequality is debated “Why would people pay tax if much of the money is simply stolen or distributed to others, and provision of public goods is so inadequate?” “Where states remain at the mercy of their elites”. March 17.

In my country Venezuela, the really poor have not received more than a maximum of 15% of what would have been their per capita share of the nations net oil revenues. The rest if not just wasted, has gone to redistribution profiteers and associates.

And Pilling quotes Senator Alphonso Gaye from Liberia saying: “You need some cash. Your respect in this country depends on your capacity to respond to people’s demands.” Of his salary… how much do you think goes into his responses? 10 percent?

This is why I am hopeful the universal basic income that currently is being studied, for instance in Finland and Canada, could become a reality.

That would help us to get rid of all those odious redistribution profiteers. And with such a redistribution mechanism many would look much more favorably on a pro-equality tax on wealth.

Question: Where would inequality be today if all social redistributive spending had been done by means of a cost effective Universal Basic Income?


@PerKurowski ©

March 16, 2016

Mario Draghi, a risk adverse regulator, now wants banks to increase lending to the risky real economy. Inconsistent!

Sir, I refer to your “Monetary policy is not enough to beat deflation” March 15.

You write that Mario Draghi holds “there is still plenty of scope for central banks to innovate by extending their asset-purchase programs to riskier assets and finding ways to support banks that increase lending to the real economy”.

Mario Draghi is a former chair of the Financial Stability Board and the current chair of the Group of Governors and Heads of Supervision that govern the Basel Committee.

He has therefore fully supported the risk weighted capital requirements for banks.

Those give banks much incentive to stay away from what is perceived as risky and to embrace what is perceived as safe.

Sir, so don’t you think that Draghi now pushing banks to venture more into the realms of risks is being extremely inconsistent? Why not just abandon the bank regulatory distortion of the credit allocation to the real economy?

@PerKurowski ©

Sir, here’s what I would have told young Martin Wolf 40 years ago at the World Bank on India, had I been his boss

Sir, Martin Wolf covers a lot of terrain in his: “India’s growth is a light in a gloomy world” March 16.

He must surely have more knowledge about India than I so I have nothing to argue against his opinions.

BUT! At one point he writes “Markets for land, labour and capital are all highly distorted” and he also informs us “Forty years ago I worked on the Indian economy for the World Bank.”

Which brings me back to my obsession against the distortions in the allocation of credit produced by the risk-weighted capital requirements for banks, which Wolf so firmly has decided to ignore.

Let me be clear, if I had been Wolf’s boss 40 years ago, and if the banks of the world had then also been suffering the Basel Committee’s risk adverseness, I would have sat him down and firmly told him the following.

Listen young man. We represent the world’s premier development bank and so we know that true risk-taking is the oxygen of any development.

Wolf might have asked “True-risk-taking Sir?”

Yes. I do not refer to those risks that derive from building up excessive and dangerous exposures to what is “safe”… which is what the very low risk weights and resulting lower capital requirements for banks for what is perceived as safe currently does.

I refer to taking much, albeit low exposure risks on the risky, like lending to SMEs and entrepreneurs, something that is currently hindered by the higher risk weights and resulting higher capital requirements for banks for what is perceived as “risky”.

So young Martin, if you really want to help India, tell them to ignore the silly aversion against risk imposed by some developed countries’ bank regulators, who on their own decided they should not dare to climb more. Remind those in India that they cannot afford such nonsense. They owe their people the chance of much risky climbing.

And Sir, don’t ask me what steps I would have taken if young Martin had then ignored me J

PS. Here is the document I presented at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, and titled “Are the bank regulations coming from Basle good for development?” It was also reproduced in The Icfai University Journal of Banking Law Vol. VI No.4, India, October 2008

@PerKurowski ©

March 15, 2016

Has the SEC really shown such merits that Patrick Jenkins has to stand up in their defense against bullies?

Sir, Patrick Jenkins, in “SEC should stand up to asset management bullies on liquidity risk” of March 15, writes that some “even accuse the SEC of attacking the very essence of American free markets”

Those “bullies” are right! Risk weighted capital requirements is something totally incompatible with free markets, whether in America, Europe or anywhere else.

And let us not forget that the main reason the investment banks supervised by the SEC suffered more than the commercial banks supervised by the Fed and FDIC, was that in April 2004, the SEC gave in to the Basel Committees' capital requirements.

That some “blame the SEC’s poor regulation…for the risk that exists in the system”, is not something outlandish.

In November 1999 a began an Op-Ed titled “About the SEC, the human factor, and laughing” with: “A couple of days ago, SEC reported that their pension fund had also been the victim of a fraudulent stock-managing firm, and that they had lost a lot of money”. And I ended it with: “the possible Big Bang that scares me the most is the one that could happen the day…regulators… playing Gods, manage to introduce a systemic error in the financial system, and which will cause its collapse.

I have no idea why Patrick Jenkins goes out defending the SEC with his “415 pages of often technocratic proposals, the regulator suggest some sensible mechanisms to mitigate the fast-growing risks in the fast-growing asset management industry.”

Any regulators who have to write 415 pages to propose some partial solution, is only working for himself and for friendly regulation consultants. I am sure those 415 pages, which I have not read, contain all type of dangerous distortion and gaming possibilities.

@PerKurowski ©

The strongest opposition to a universal basic income (UBI) would come from the redistribution profiteers to be substituted

Sir, John Thornhill discusses an upcoming book of Andy Stern titled “Raising The Floor”. In it the author “argues powerfully for the US government to provide a universal basic income (UBI) of $1,000 a month to every citizen” “A basic income — welfare for the digital age” March 15.

Having seen a real fortune in oil income being wasted and stolen away in my homeland Venezuela, I have for soon two decades been proposing something similar… although clearly there we would be talking about much less money per citizen.

In Venezuela, during the years of XXI Century Socialism I seriously doubt its poor got more than 10% of what would have been their per capita share of the country’s net oil revenues.

And lately I have also proposed a Pro-Equality tax on the wealth of all paid out in equal shares to all.

But, when it comes to opposition to the idea, that will surely come the strongest from the redistribution profiteers… those who have a vested interest in doing the redistribution.

@PerKurowski ©

March 14, 2016

Why do regulators insist in realizing bankers and insurers wet dreams? It costs the real economy too much!

Solvency II does to the insurance industry what Basel regulations did to banks. It introduces what is known as the “risk-based approach” to capital and regulation.

In essence it means more ex ante perceived risk more capital, less ex ante perceived risk less capital.

That translate into the lesser the ex ante risk is perceived, the more you will be able to leverage your capital.

And the more you are allowed to leverage capital, the higher are the expected risk adjusted returns on equity.

And so, just like it realized the banker's wet dreams (more elegant "nocturnal emissions") Solvency II should now realize those of the insurers… namely that of being allowed to earn the highest risk adjusted returns on equity on what is perceived as the safest.

Evidence of the existing enthusiasm we find when Oliver Ralph quotes Omar Ripon, partner at accountants Moore Stephens with “Risk-based capital is a great thing. The best firms are looking at using it to improve their returns. If you only look at it from the compliance angle, you won’t get the benefits.” “Insurance divides over shared rules” March 14.

Unfortunately allowing bankers and insurers to realize their wet dreams has a very high cost for all the rest of us.

First it obviously distort a lot in the financial markets in terms of how credit, investments and capital is allocated.

When the European Commission explains why Solvency II is needed they hold that Solvency I “does not entail an optimal allocation of capital, i.e. an allocation which is efficient in terms of risk and return for shareholders”

But that is certainly what the risk based capital approach cannot do.

That is because all risks that are considered by the capital requirements are risks that have already been perceived and cleared for in other ways, by means of risk premiums, amounts of exposure and other.

And any risk, even if perfectly perceived, if it is excessively considered, causes the wrong action.

And then of course “hiding risks” or production of Potemkin ratings, which allows for higher leverages, becomes a competitive tool.

“Any risk you hide I can hide better, I can hide better the risks than you can… No, you can't - Yes, I can - No, you can't Yes, I can! Yes, I can!”

And if the distortions in capital allocation to banks and insurance are bad, the distortion it produces among those who access bank credit or insurance investment funds from the insurance companies is much worse. It will mean the “safe” will get too much, much more than what they already get (making them risky) and that the “risky” will get too little, much less than what they already get… and as a consequence our real economy will suffer a lot.

I know too little of the insura © nce industry to estimate their capital requirements but, in the case of banks, these should be required to hold 10 percent in capital against all assets to cover for the unexpected, which, even though it can be expected, includes such events as regulators having no idea of what they are doing.

PS. I challenge you to read the European Commission’s explanations of Solvency II and count the self confessed distortions it will produce.

@PerKurowski

March 13, 2016

Lucy Kellaway is my large glass of wine that keeps me suscribing to FT and writing letters to its (quite dumb) editor

Though that would clearly be highly unethical journalistic behavior, it is clear that someone somehow must have issued a strong, very strong, recommendation to ignore my letters to the Financial Times.

And obviously that should have me raving mad and cancelling my suscription to FT.

But it is when I read something so great like Lucy Kellaway’s

“The reply consisted of one word: Noted. This was the perfect passive aggressive response. It was just about polite enough for me to have no legitimate grounds for complaint. It shut down the discussion, and left me with only one sensible course of action — to pour myself a large glass of wine and see”

... that all is forgotten. That it is just the kind of my large glass of wine that keeps me suscribing to FT... and keeps me writing letters to You Dear Editor.

With my very best regards

Per Kurowski

PS. I sure hope and pray this will not create any trouble for Lucy Kellaway. Sir, I swear she’s innocent!

@PerKurowski ©

Wolfgang Münchau, what has risk weighted capital requirements have to do with the primary functions of banks?

Sir, Wolfgang Münchau writes: “Monetary policies, like the ECB’s quantitative easing program, filter into the real economy through various channels.” “The European Central Bank has lost the plot on inflation” March 14.

That is correct but again, so stubbornly, Münchau refuses to mention the not so unimportant fact that credit risk weighted capital requirements for banks, especially when regulatory compliant bank capital is scarce, seriously distorts the allocation of bank credit to the real economy.

Münchau also refers to ECB’s “targeted longer-term refinancing operations” in somewhat skeptical terms, arguing that there is no evidence of ample demand for loans. But there again I would ask if the lack of demand for bank loans is not a reflection of SMEs and entreprenuers having seen their loan applications so much rejected? And again those rejections are much the result of that kind of “risky” lending generating the highest capital requirements for banks.

Helicopter droppings? Yes but why not eliminate the regulatory distortions that serve no purpose first?

I was recently made aware of a paper written by Hyman P Minsky in October 1994, titled “Financial Instability and the Decline (?) of Banking: Public policy considerations

In it Minsky describes the two primary functions of banking as supplying the means of payments; and channeling resources into the capital development of the economy.

And so Münchau, unless you disagree with Minsky, let me ask, for the umpteenth time, what has the pillar of current bank regulations, the risk weighted capital requirements, to do with banks fulfilling efficiently those two primary functions?

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

@PerKurowski ©

March 12, 2016

Tim Harford, what about taxing the sin of excessive risk aversion instead of subsidizing it?

Sir, I refer to Tim Harford’s “These are the sins we should be taxing” March 12.

Mark Twain supposedly said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” And we used to mock or even abhor the risk aversion there implicit.

But then came regulators and with their risk weighted capital requirements; which allowed banks to leverage more the equity with the safe than with the risky; which allowed banks to earn higher expected risk adjusted returns on equity with the safe than with the risky; which was a de facto tax on risk taking and a de facto subsidy of risk aversion; they made it absolutely certain that Mark Twain was more correct than ever.

And that is indeed socially harmful. Not only does it block the access of “the risky” to bank credit, the SMEs and entrepreneurs, something that causes both more inequality and lesser economic sturdy growth.

But in order for this truth to sink in, so as to do something about it, we need that persons like the Undercover Economist understand the difference between the possible short-term costs of risk taking, and the truly high and certain long-term costs of risk aversion.

Just because something is perceived risky does not mean it is risky, sometimes it means, ex post, that it is quite safe. Make sure you really know what is what in risk and sins, before you tax it. ​Know your base rate J

@PerKurowski ©

Artificial intelligence has a clear advantage over humans’; a smaller ego standing in the way of admitting mistakes.

Sir, Murad Ahmed, writing about Demis Hassibis states: “At DeepMind, engineers have created programs based on neural networks, modeled on the human brain. These systems make mistakes, but learn and improve over time” “Master of the new machine age” March 12.

Ooops! I hope they do not use as models the brains of current bank regulators.

In 2007-08 we had a big crisis because AAA rated securities and sovereigns like Greece, perceived and deemed as safe, turned out to be very risky.

And what connected all that failure, was the fact that banks were allowed to hold very little, I mean very little, we are talking about 1.6 percent or less in capital, against those assets, only because these were ex ante perceived or deemed to be very safe.

Of course, anyone who knew anything about the history of financial crises would have alerted the regulators that to allow banks to have less capital against what is perceived as safe than against what is perceived as risky, was very dumb. That since major crises only result from excessive exposures to something ex ante perceived as risky but that ex post turns out to be very risky. And one of the main reasons for that is precisely that too many go looking for “safety”.

But now we are in 2016, and the issue of the distortion those capital requirements produce in the allocation of bank credit to the real economy is not yet even discussed. 

So before these human brain systems learn and improve over time from mistakes, they have to be able to understand these and, more importantly, to humbly accept these.

Frankly, artificial intelligence seems it could have an advantage over humans’, namely none of that human ego that so much stands in the way of admitting mistakes.

But also beware, were robots free of that weakening ego, they could conquer us!

@PerKurowski ©

What with Growth and Inequality, if regulators had imposed risk weighted bank capital requirements 150 years earlier?

Sir, you hold that “The IMF and the Peterson economists” who in the latter case is none other than Olivier Blanchard, the IMF’s former chief economist, “should not succumb to defeatism, nor to complaints in the financial markets that loose policy is creating distortions or doing more harm than good” “Concern, not panic, over the global economy” March 12.

But you have succumbed to silence what most creates harmful distortions in the allocation of bank credit to the real economy.

This September 2016, there will be 30 years since frightened regulators concocted the credit risk weighted capital requirements for banks.

By allowing banks to leverage more equity with the safe than with the risky, banks earn higher risk adjusted returns on equity with what is perceived or decreed as safe, than on what is perceive as risky, like for instance SMEs and entrepreneurs.

So let me just ask you again to test if your motto “Without fear and without favor” is for real, or just a marketing ploy.

What do you think would have happened if regulators had imposed such credit risk weighting 150 years earlier?

As I see it there would have been much less of that risk-taking our economies need to grow and move forward in order to not stall and fall.

And as I see it, by denying much more ”the risky” the opportunities of accessing bank credit, inequality would be much larger.

So Sir, I simply cannot understand how you can keep mum on such dangerous regulatory distortion.

Who gave unelected bank regulators the right to call it quits for our Western Civilization? Is that not a reason to panic?

@PerKurowski ©

March 11, 2016

Three questions that could help determine whether ECB’s Mario Draghi is for real, or just another Chauncey Gardiner.

Sir, Katie Martin, in Short View March 11 writes: Mario Draghi says that he still has ammunition left in his battle against deflation. But the question is whether he’s using it to shoot himself in the foot”.

Perhaps we should clarify that it is not really his ammo, and that the foot Draghi shoots, is our real economy.

And so now Draghi wants to “dose of cheap-as-chips cash for banks to lend to the real economy… “and even rewards banks for lending to the real world”

Why are the banks not doing that already? The simple answer is because of the restrictions that, in a severely bank capital constrained world, regulators, like Mario Draghi, have imposed with the risk weighted capital requirements for banks.

And so now Draghi wants to counter-distort one of his own distortions?

No, if Mario Draghi was working for me, he would be long gone, because he I believe he is inept and he has clearly failed.

John Kenneth Galbraith in “Money: Whence it came, where it went” wrote: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”. Well I am not pretending any knowledge, and I have sure asked for many explanations.

Again, why do we not ask Mario Draghi some easy questions? If he cannot give us answers we understand, then I hold he is, in the best of cases, just another misplaced figure like Chauncey Gardiner in Jerzy Kosinski’s “Being there”.

And that would make of most of you out there, sad characters that herald Draghi as visionary and quote him, without the faintest idea about what he's really saying.

Question 1. Mr. Draghi why do you believe the capital banks should be required to hold, against unexpected losses, should be based on the perceptions of expected credit losses that banks already clear for with the interest rates (risk-premiums) and the size of the exposure?

Question 2. Why do you think that allowing banks to leverage differently different assets, which clearly affects the risk-adjusted returns on equity each asset group provides, does not distort the allocation of bank credit to the real economy?

Question 3. What is the purpose of banks? I mean when stress-testing banks, why are you only interested in what’s on their balance sheets, and not in what might be lacking, like loans to “risky” SMEs and entreprenuers?

Mr Draghi, we are all ears!

@PerKurowski ©