April 30, 2016
Sir, you write: “With every month that passes, the decision of the Fed’s open market committee (FOMC) to raise interest rates in December looks more like a mistake. The US economy clearly decelerated around the turn of the year” “The curse of slow growth afflicts the US economy” April 30.
That increase you refer to is was from 0.25% to 0.5%. Frankly, no matter what it could have signaled to the markets, to believe such minimum minimorum rate increase plays any major role in the difficulties the US has reigniting its economy without huge fiscal or monetary stimulus, seems, excuse me, quite dumb to me.
Much more importance play the risk weighted capital requirements for banks, which have introduced, in the Home of the Brave, a credit risk aversion that seriously distorts the allocation of bank credit to the real economy.
If you need an aide memoire about how idiotic that regulation concocted by the Basel Committee here is one
What a government spends is a lousy proxy for what the citizens receive; it ignores redistribution costs and profits
Sir, Tim Harford writes that the idea of a universal basic income “appeals to three types of people: those who are comfortable with a dramatic increase in the size of the state, those who are willing to see needy people lose large sums relative to the status quo, and those who can’t add up.” “Could an income for all provide the ultimate safety net?’ April 30.
And while doing so he uses figures for UK’s social security spending of £217bn, and on health and education spending of £240bn.
Over the last 15 years the poor in Venezuela have most surely received less than 15 percent of what they would have received, had only the oil revenues been shared out equally among all citizens as a universal basic income. In such a case, supporting a net oil revenue funded universal basic income could be done by someone like me, someone who wants the state to become much smaller, who wants poor people to obtain more, and who can add quite well.
The basic mistake the undercover economist makes in this case, is that he equates all social support received by the needed with what is spent on them. That ignores the redistribution cost and profits. A universal basic income, that would put aside in different account much of the redistribution, would help bring more transparency to what the real cost of real government’s functions are. In these Panama Paper days, when so much concern is expressed on the issue of tax evasion and tax avoidance, there is little mentioning of the possibility that pure tax revenue waste could add up to much more.
Many wealthy non-leftists do harbor serious concerns about the growing income inequality, not only because of a sense of justice, but also because they know it could come back to haunt them. And so for them, a universal basic income distribution of a pro-equality tax, and which would not have to cost more than 2 percent in administration fees, might seem as a quite reasonable way to go.
Also many of us concerned with climate change but who also do feel quite uncomfortable with all the climate change profiteers who surround most initiatives, could find a huge gas/carbon tax paid out by means of a universal basic income scheme much better. For a starter it would beautifully align the fights against climate change and inequality.
And please, whenever I mention “redistribution profiteers’, I do not only refer to those who get cold cash and favors, but also to those so much worse, those populist and demagogues who take out their share in political power.
By the way here is a question for the Undercover Economist: Would our economies be better or worse had the QEs been redistributed in equal shares to the citizens?
PS. The problem with governments is not they are monopolies. It is they are operated and exploited by too many monopolists.
April 29, 2016
Sir, Dennis M Kelleher, President and CEO, Better Markets, Washington, DC, US writes “that sustainable market-based finance and economic growth require robust regulation that protects investors and markets while preventing catastrophic crashes like that of 2008” “False choice between growth and regulation” April 29.
Boy is he off the tracks! The pillar of banks regulations, the risk weighted capital requirements for banks, hindered robust growth by making it harder for the risky SMEs and entrepreneurs to access bank credit, and caused the crisis by pushing banks to create dangerous and excessive exposures to what was perceived, decreed or concocted as safe… like mortgages, AAA rated securities and sovereigns like Greece.
And the continued use of the credit-risk aversion imbedded in risk weighted capital requirements guarantees that the economy will stall and fall… only setting us up to the next catastrophe, when the next safe-haven becomes overpopulated.
Quite the contrary to what Mr Kelleher believes, making sure that banks and bad investment fail, as fast and expedient as possible, helps the economy to grow and at the same time prevents the build up of too much dangerous combustible material.
The regulations that can produce “non-bubble, non-financial sustainable growth in the real economy that produces employment and rising living standards” are those allowing the markets to work better, like antitrust legislation, not substituting with robust regulations the actions of the markets.
Sir, Tobias Buck quotes Marcel Jansen, a professor of economy at Madrid’s Autónoma university with “More than a quarter of unemployed workers in Spain have been out of a job for more than four years. Their chances of getting back into the labour market are very dire” “Spain’s first quarter job losses less severe than usual” April 29.
It relates directly to an Op-Ed I wrote in Venezuela (before I was censored there) titled “We need worthy and decent unemployments”. I quote the following from it:
“What politician does not speak up for the need to create decent and well paid jobs for young people? But, if that's not possible, and the economy is not able to deliver that on its own ... What on earth do we do?
Society must of course do its utmost seeking to solve the problem of youth unemployment ... including taking leisure to levels never thought of… six months vacations! But it also needs to prepare itself to handle a growing number of unemployed, not cyclical but structural, that is, those who never ever in their life will have a chance to get an economically productive job.
The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, at least in the sense of these not interrupting those working.”
And recently I have reflected on that a Universal Basic Income, as that is not-having-a-job-or-not related social contribution, could be a significant part of the efforts needed.
If regulators artificially favor the access to bank credit of “the safe” “the safe” will turn risky, more sooner than later.
Sir, Gillian Tett writes “post-crisis regulatory reforms have forced financial institutions to load up with “safe” assets, too, to be used as collateral for deals… The net result is a dire squeeze on safe assets” “What pawnbrokers can teach central banks” April 29.
That is correct but, what about pre-crisis regulations? These allowed banks to leverage much more their equity with “safe” assets; and thereby earn much higher expected risk adjusted returns on equity with “safe” assets than with “risky” assets; and which therefore caused banks to lend too load up on “safe” assets, something that can be very risky.
So if you do not allow markets to allocate credit unencumbered by regulations, but favor the banks to lend to the safe, “the safe” havens are doomed to turned into dangerously overpopulated havens, sooner or later. And from what Ms Tett writes it seems that the “sooner” applies.
April 27, 2016
I always read with much interest articles that discuss the employment of the young, such as Sarah O’Connor’s “Stepping inside the workplace simulator at a London school” April 27. And I do so because of two reasons:
The first is because I am convinced of that, by means of the risk weighted capital requirements for banks, concocted by the Basel Committee, we are making it very difficult for banks to finance what in the long run creates new jobs, because that takes a lot of risk-taking.
And second, because I am equally convinced of that no matter what we do, we will end up with many persons who will never ever have had a job, and it is a true and vital societal challenge to think about what to do with them.
PS. And of course, the question in the title of this letter, is just a bit too valid for my taste.
Martin Wolf, the 11th reason against Brexit, is Britain should not want be blamed for causing EU's final divorce
Sir, Martin Wolf gives very convincing arguments against a Brexit, as they say he almost had me at hello! “Myths and fantasies in the case for Brexit” April 27.
The question then is, why does Brexit pose such an attraction to so many… and is there any chance that attraction will diminish over time?
And I guess the best answer to that is a question: Martin Wolf would you like to call Europe home?
If Wolf's answer is no, then even he must admits there is a fundamental failing with EU that will most likely, thanks to successful populists and demagogues, become worse and worse with time.
But then again, if so, that would signify the 11th and perhaps most important reason for why to vote against Brexit now, namely that Britain could become blamed for the final divorce of EU.
Let other countries play that treacherous role… I think there will be, or already exist, many candidates for an exit… like a Grexit perhaps?
And, of course, always remember to thank your lucky star you did not get involved with the Euro.
PS. That does not signify, of course, that I do not think it appropriate for the UK to withdraw, immediately, from some quasi European concoctions, such as crazy bank regulations coming out of the Basel Committee.
PS. I just read Tony Barber's "A turn in the political tide buoys Austria’s far right" So hold your horses on Brexit, and then you could blame the Austrians J
The Basel risk-weight for grand government projects is 0%; for an SME’s incremental development 100%
Sir, John Kay writes “A high proportion of the mooted benefits of grand projects could be obtained by incremental development at a fraction of the estimated cost of the world-beating schemes” “Grand projects are worthless if they do not work” April 27.
Yes but the Basel Committee, in order to make banks safer, decided to use risk weighted capita requirements. And when determining these they set the risk weight for “grand projects” carried out by government to zero percent, while that of any “incremental development” carried out by an SME was set to be 100 percent. So guess who has easier access to bank credit?
Considering FT’s total silence on this subject most, or perhaps all in FT, seem to think this is a smart way of making banks safer. I don’t. Since it impedes the best allocation of bank credit to the real economy, I think it is utterly stupid and unsafe, even for the banks.
April 26, 2016
Why should profits made with IPR protection, patents, be taxed the same as profits made in the nude?
Sir, I refer to Andrew Ward’s “FT’s Big Read on Drug Prices: Tweaking the formula” April 26.
First of all I did not know of Nice and I must admit I am impressed that some formal rulings exist on whether to fund the use or not of some medicines. That certainly must help to put a lid on some bureaucrats’ “flexibility”.
That said, the article reminds me of a question I have posed many times before, including in Op-Eds in my country Venezuela, and in letters to you.
Why on earth should profits derived from operations under the protection of an Intellectual Property Right (IPR), patents, be taxed at the same rate than profits obtained fighting it out in the markets, naked, with no protection at all?
Surely the revenues of a special IPR/Patent profit tax could be ploughed back into some type of insurance scheme that could help cover some medicine costs the society can in general not afford to cover.
Sir, Gideon Rachman writes: “any Brits who feel nostalgic for the Anglosphere, and a little resentful about Mr Obama’s ‘back of the queue’ comments, might reflect how much they still benefit from the cultural power of the US. The traditional Anglo-sphere may be in disrepair. But a different sort of Anglosphere has emerged in Brussels, with English now the common language of the EU institutions”, “Obama and the end of the Anglosphere” April 26. Here some varied comments.
It is surprising to hear an Englishman hold that the importance of English is a result of “the cultural power of the US”. Will Rachman get clobbered or is this a generally held view?
With respect to English let me ask, when does a language become so important that it does not belong to anyone more? Scary eh?
So, if Brexit happens, should EU have the right to keep English? And if the answer to that is no, or EU having been rejected does not want it, what language would win? A German-French War? Could EU survive that?
And in regard to Obama’s “back of the queue’, and though I am not a Brit, I was surprised no one asked him: “Are you telling us it is easier for the US to negotiate with Germans and French than with Englishmen?”
Finally Sir, let me repeat two related questions that I made in a recent letter
America is home for Americans. Is not Brexit just a symptom of Europe not aspiring to be home of Europeans?
How many at FT wish one day for Englishmen to call Europe home, as Americans call America home?
PS. Or could one of you even be dreaming of calling Asia home? L
April 25, 2016
Lucy Kellaway is sure lucky a Basel Committee for Transport Supervision does not regulate her cycling.
Note: I just added a PS that might explain the letter better.
Sir, I refer to Lucy Kellaway’s “I want to get back on my bike in spite of the dangers” April 25.
Sir, I refer to Lucy Kellaway’s “I want to get back on my bike in spite of the dangers” April 25.
The Basel Committee for Banking Supervision decided banks need to hold more capital, which is like a sort of tax, whenever they lend money to something risky, like to SMEs and entrepreneurs; and this even though banks charge higher risk premiums and give smaller loans whenever engaging with the risky.
And so it does because even though “the risky” are clearly riskier individually to banks, the BCBS ignores that it is those perceived as safe but that could turn out risky, which represent much greater danger to the banking system.
So lucky Lucy Kellaway, that a Basel Committee for Transport Supervision does not regulate her cycling. Because, if it did, she would be taxed by much more than the “to avoid car doors and lorries turning left [and] wear all the safety gear” she taxes herself with when riding a bike.
And that because, like the BCBS, a BCTS could similarly regard cycling as much more dangerous than any other means of transport, even though most other means of transport, for instance cars, certainly cause more deaths in London than those “more than a dozen cyclists die each year” Kellaway refers to.
So if Lucy Kellaway had to pay a BCTS cycling tax, she might not get back on her bike, and she would then feel “angry, depressed, cynical, possibly prone to heart attacks and musculoskeletal disorders”… a bit like the banks and our economies end up feeling after being submitted to BCBS’s dumb rules.
PS. An alternative explanation is that the Basel Committee for Transport Supervision would pay Lucy Kellaway and the rest of Brits a subsidy in order for them to safely travel immobile on their bottoms and avoid the risks of cycling. Would Britain be better for it?
Sir, Wolfgang Münchau writes: “Another shock has been the global financial crisis — a consequence of globalization — and its permanent impact on long-term economic growth.”, “The revenge of globalization’s losers” April 25.
Yes that is the result of idiotic global bank regulations that:
1. Allowed banks to leverage more with assets perceived, decreed or concocted as safe; and thereby make banks earn higher expected risk adjusted returns on equity with these “safe” assets; and thereby gave the incentives that by generating excessive exposures against too little capital, caused the crisis.
2. Require banks to hold more capital against what is perceived as risky, like SMEs and entrepreneurs, and thereby earn less risk-adjusted returns on equity that what they can earn with “the safe”. And obviously such distortion must impact long-term economic growth.
But Wolfgang Münchau seemingly insists in thinking these risk weighted capital requirements are great. Could it be because he sees himself as a soon to be retiree? I say this because the risk aversion implicit in the risk weighing is precisely what a financial advisor would recommend to someone with a much shorter life expectation than young professionals’.
Sir, I am just asking, in case I have missed a reason for your strong opposition to a Brexit.
I mean if Germans cannot think of Greeks and themselves as being Europeans, and Europe being their home; and Greek cannot think of Germans and themselves as being Europeans, and Europe being their home… is there not something fundamental lacking with a EU that, among other, is to “enact legislation in justice and home affairs”?
Simon Samuels writes about bank financial reports of 600 pages, “Too much information makes finance hard to grasp” April 25.
Sir, since the 2007-08 crisis, I have read at least 50 editorials, articles or research papers, written by first class newspapers, experts or renowned academicians, that have compared the capital to assets ratios of banks of before the 90s, with the capital to risk weighted assets of the Basel I, II and III… in order to show how bank capitalization has evolved.
In fact even prominent regulators have fallen in their own trap.
For instance in this letter I pointed out the mistakes of Alan Greenspan.
Besides, what’s the use of risk weighted capital to asset ratios if no one understands what the risk weights are and how these came into being, like for instance the zero percent for sovereigns?
Sir this is the prime example of how regulation has distorted information and makes the finance information on banks hard to grasp.
PS. Do you want me to review my blog and count the times FT and its people got it wrong but ignored my letters on it?
PS. By the way in my letters I have found that Simon Samuels, related to the Financial Stability Board, seemingly has not much against the concept that regulators should act as risk managers for the world. Boy it does takes a lot of hubris for that!
April 23, 2016
Sir, Tim Harford discusses “How to manage industrial decline” April 23.
In my mind the golden rule is that the sooner you find its substitutes, the less you have to go through the convulsions of managing it.
But how on earth do we explore new opportunities when bank regulators have decided to deny explorers like SMEs and entrepreneurs fair access to bank credit, just on account that these are risky?
It is truly hard for me to understand how who has written “Adapt… why success always starts with failure” is not up in arms against the risk weighted capital requirements for banks.
Could it be some “not with my banks in my backyard” syndrome? NWMBIMBY?
As for the “give them money… a topic for next week” I sure hope to see something about a Universal Basic Income scheme… I mean we have more than enough redistribution profiteers.
The crash was not caused by casino capitalism but by bank regulators who manipulated the odds at the casino
Sir, Simon Schama writes of “a crash engineered by the worst excesses of casino capitalism”, “New revolutionaries generate much heat but little action” April 23.
That “casino” reference is so utterly wrong!
In roulette, absolutely all bets have the exact same expected value, and if not so, there would be no casinos in which to play roulette.
In the same way all bank credits used to have the same expected risk adjusted return. That is, before regulators came up with the risk-weighted capital requirements for banks. By allowing banks to leverage their equity more with what was perceived, decreed or concocted as safe, than with what was perceived as risky, suddenly banks made higher expected risk adjusted profits with The Safe than with The Risky.
It was that manipulation of the odds, which promoted the “safe” like AAA rated securities, sovereigns like Greece and mortgages, that caused the crisis 2007-08.
And it is that manipulation of the odds, which hinders the access to bank credit of the risky like SMEs and entrepreneurs that blocks the road for an effective recovery.
All other manipulations like that of Libor put together have not caused even a fraction of the damages the full of hubris and besserwisser manipulating regulators have caused.
Sir, I refer to Gillian Tett’s “Can China’s buildings turn green?” April 23.
What I have understood talking with friends who might just be besserwissers as unknowledgeable on these matters as I am; China uses a lot of concrete when building, and cement generates massive amounts of carbon. If they built more houses with tree then they could instead be capturing carbon.
Is it so? Who knows, in the fight against climate change, we must be very careful, there are many climate change profiteers.
And that, to keep profiteers away, is why I am supporting a big tax on gas, distributed by means of a Universal Basic Income. That would also align the incentives in the fight against climate change with those in the fight against inequality.
What pay rules can we impose on regulators who insist on distorting the allocation of credit to the real economy?
Sir, you write “US federal regulators this week proposed new pay rules intended to limit excessive risk-taking” “Investment banks can endure tougher times” April 23.
Time again to understand what “excessive risk-taking” is being referred to.
One thing is the risk of dangerously large exposures to what is perceived, decreed or concocted as safe, and which allow for very small capital requirements. Those were the risks that caused the 2007-08 crisis, AAA rated securities, residential housing finance and sovereigns like Greece.
Another thing is the risk of the risky, like SMEs and entrepreneurs. These risks, because they generate higher capital requirements, are risks not sufficiently taken, and the economy suffers from that.
Do regulators really know what “excessive risk-taking they want to limit? I seriously doubt it. The “more-risk less-pay” and the “less-risk more-pay” is just the typical kind of intervention that brings on unexpected consequences.
More-risk more-capital less-pay. Less-risk less-capital more-pay. We will all end up suffocating in some over-populated safe haven!
It is obvious, at least to me, that the greatest current source of risk to the banking system, and to the economy, are the risk weighted capital requirements for banks, which so distorts the allocation of credit. Are there some pay rules on regulators we could apply?
April 21, 2016
The risks with the risk weighted capital requirements for banks distortions' are much larger than those of a Brexit.
Sir, Bank of England’s mandate is to “promote the good of the people of the United Kingdom by maintaining monetary and financial stability” and therefore Chris Giles holds that “The Bank of England needs to speak up on Brexit” April 21.
But there you have BoE steadfastly supporting the Basel Committee’s risk weighted capital requirements for banks, which so dangerously distorts the allocation of bank credit to the real economy.
The merchant bankers that helped England prosper would currently not be able to do so, because all they would be doing, like the rest of banks, is investing in public debt and residential mortgages or lending to some AAArisktocracy.
Now you do not have banks that finance the riskier future, they only refinance the for the short time being safer past.
Frankly, when compared to that regulatory reality, the risks with Brexit, though these could be large, sound minor to me.
Few months ago Stefan Ingves, the current chair of the Basel Committee, innocently used the story of an infamous Swedish warship, the Vasa, in order to illustrate the work of the Basel Committee. Ingves is totally unaware of how applicable that story still is.
Sir, even if soon two decades ago I wrote an Op-Ed titled “A new English Language Empire” that does not mean I have suggested such thing.
That said I do not understand why, even though you qualify it with that Obama “does not have to spell it out explicitly”, you argue he should “legitimately make it clear that a post-Brexit UK will not be able to rely on an alternative transatlantic or Anglospheric framework of trade and security to replace its connections with Europe.” “Obama tells home truths over the EU referendum” April 21.
Is it because you might feel such possibility could be dangerously attractive and therefore stimulate a Brexit, or is it because you find such possibility contemptuous?
I do not come from an English speaking country but, if Englishman, and if Brexit happens, then I would certainly look with interest at the possibility of a Brentrance into such an Empire.
PS. If Brexit, should EU have the right to keep English, or do you see a fight breaking out between German and French?
April 20, 2016
Sir, I refer to Martin Wolf’s “Britain’s friends are right to fear Brexit” April 20.
I reread it several times, and of course, if it is Brexit, and nothing more, then UK has the right to be very concerned about the consequences. But, it doesn’t have to be that way.
For instance Britain could try to explore the possibilities of strengthening the bond that the English language represents. For instance when Wolf remind us of how “US resources and will sustained the west during the second world war and the cold war”, I have to ask myself if that was more because of Europe, or because of England, and frankly I do not really know the answer.
Also Europe itself suffers severe existential problems. As you Sir and Martin Wolf know, I believe that the risk aversion implicit in the risk weighted capital requirements for banks basically amounts to a decision to lie down and die. And so if Brexit would come hand in hand with a Baselexit, then surely UK would come out as a winner.
Wolf is right that the UK would always have the option of existing the EU, but our kids and our children cannot afford to wait for better possibilities to find jobs that those lousy bank regulations permit.
As with the wall Trump wants to build, you are never ever really sure on which side of it you rally want to find your family.
PS. By the way could EU keep as its main language a language of a non-member? J