February 28, 2019

Bank regulators insist on feeding the systemic risk of credit ratings, even after it became tragically evident.

Sir, Kate Allen writes “Funds that allocate capital based on instruments’ investment grades and index weighting may look as if they are playing it safe but they are, in fact, taking a gamble, creating towers of risk, any floor of which could prove unstable… do not look to the canaries in the financial markets’ coal mines to sound an early warning. By the time the downgrades come, it will be too late” “Tail Risk” February 28.

Indeed by the “time issuers’ credit ratings were downgraded, [banks] were already staring the worst-case scenario in the face.

Basel II’s standardized risk weights for the risk weighted bank capital requirements:
AAA to AA rated = 20%; allowed leverage 62.5 times to 1.
Below BB- rated = 150%; allowed leverage 8.3 times to 1

Absolute lunacy! With the same risk weight banks would anyway build up much more exposure to what they ex ante perceived as very safe, than against what they perceived as very risky.

As is, that regulation dooms our bank systems to especially large crisis, resulting from especially large exposures, to what is perceived as especially safe, against especially little capital. 

Allen observes: “An investment structure that is revealed to have done a bad job only when disaster arrives, as in the financial crisis”. Unfortunately no. Bank regulators blamed the credit rating agencies, and not themselves for betting too much on these, and so that so faulty regulations that should have been eliminated with a big “Sorry!” is still very well active. 

PS. In FT January 2003: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

PS. At World Bank: April 2003: "Market or authorities have decided to delegate the evaluation of risk into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"


February 27, 2019

Will there now be opportunities for gig unionists?

Sir, Sarah O’Connor thinks the unions might have a good chance to adapt to the gig economy “Gig economy deals promise a brighter future for trade unions” February 27.

I am not so sure. There is a de facto class war in the real economy between those with jobs wanting better conditions and those just wanting a job. And that is what nourishes the gig economy.

Imposing on the gig economy benefits, is just like raising minimum wages, it just raises the bar for the offer of jobs. An unconditional universal basic income would instead provide a step stool to better reach up to whatever jobs are offered.

Of course those who benefit, politically or financially, from a conditional redistribution, or from negotiating on behalf of workers, do not like that option as it clearly erodes their job opportunities. 

How will unions handle it? I have no idea; perhaps there will be some gig unionists.

PS. In the same vein, perhaps Alexandria Ocasio-Cortez is a gig politician. We’ll see if she lands a second term. Having helped New York lose Amazon’s 25.000 well paying jobs does not bode well for here there. Perhaps she will get a call from another state.

PS. Amazon is one of those entities automating and robotizing the most. So it is a bit surprising to read that Alexandria Ocasio-Cortez opines “We should not be haunted by the specter of being automated out of work. . . . We should be excited by that”


February 25, 2019

More than between left and right, the division is between tax paying citizens and witting or unwitting possible redistribution profiteers

Sir, Wolfgang Münchau writes, “Liberal democracy is in decline for a reason. Liberal regimes have proved incapable, of solving problems that arose directly from liberal policies like tax cuts, fiscal consolidation and deregulation: persistent financial instability and its economic consequences” “The future belongs to the left, not the right” February 25.

The risk weighted capital requirements placed on top of any natural risk aversion distorts the allocation of bank credit in favor of what is perceived as safe and against what’s perceived as risky, has nothing to do with liberal policies. The risk weights of 0% the sovereign and 100% the citizens, just puts crony statism on steroids.

Münchau also “The euro, too, was a liberal fair-weather construction.” That could be but when EU authorities assigned a 0% risk weight to all public debt of eurozone sovereigns, denominated in a currency that is not their domestic (printable) one no one could call that a liberal construction. It was idiotically dooming the euro to failure.

Sir, I feel left or right labels do not really define what we citizen are up against. Our real adversaries are those I have come to call redistribution profiteers. In my home land Venezuela, where the central governments some years has received 97% of all export revenues, that is easy to see. But even in the rest of the world that is happening, unfortunately without being sufficiently understood. Much of it is the result of citizens lacking the most basic societal information, namely how much their central and local government receive in income, from all taxes, per citizen. 

Of course taxes are needed but such per citizen data, published regularly, would also put pressure on improving the day-to-day quality of government bureaucracy. I mean we want our taxes to be spent well. Don’t we?

PS. As a self declared radical of the middle, or extremist of the center, I feel the best hope we now have to improve our societies is by means of an unconditional universal basic income. That UBI should be 100% paid for, be large enough to help all reach up to jobs in the real economy and be small enough so as not allow anyone to stay in bed.


February 24, 2019

FT journalists. Is this really the legacy you want to leave to your children?

Not daring to ask bank regulators to explain why they've decided that what’s ex ante perceived as risky, is more dangerous ex post to our bank systems than what’s ex ante is perceived as safe

February 20, 2019

If QE seems to have turned into irreversible and the economy even needs a QE4, does that not point to something not going right?

Sir, Michael Howell writes:“Modern financial systems have grown dependent on huge central bank balance sheets… our concern today is a growing shortage of central bank liquidity caused by the deliberate unwinding of the QE policies put in place to replace the private sector funding that evaporated in 2007-08” “Liquidity drain will force central banks towards ‘QE4’” February 20.

What does this mean? That ever growing central bank balance sheets are now to be a standard feature in our economy? If QEs is to replace private sector funding, are we not heading into central bank statism?

What has QEs achieved? Because of the risk weighted capital requirements, the liquidity injected has resulted in way too little financing of the “riskier” future (entrepreneurs) weakening the real economy; and too much to the “safer” present (mortgages, buybacks, AAA rated securities and public debt) creating bubbles.

If it comes down to a QE4 let’s pray regulators admit their mistake and throw out forever the idiotic risk weighting.

Idiotic? Yes, consider the following tail risks.

The best, that which perceived as very risky turning out to be very safe.
The worst, that which perceived as very safe turning out to be very risky.

And the risk weighted capital requirements for banks kills the best and puts the worst on steroids… dooming us to suffer an weakened economy as well as an especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.


February 19, 2019

If Germany’s euro debt gets to be redenominated in Deutsche Marks, what would happen to its commercial surplus?

Sir, Kate Allen writes: “German bonds, or Bunds… are the eurozone’s safe asset… the spread against equivalent Italian bond yields to about 2.9 per cent.” “Tail Risk” February 19.

So if Bunds is the Eurozone’s safe asset, how come EU authorities assign it a risk weight that is just the same as all other Eurozone sovereigns’ debts, namely 0%? And this even when they all are indebted in a currency that is not really their own domestic (printable) one.

That 0% risk weight translates into that European banks do not have to hold any capital against debts of the Eurozone sovereigns… a clear subsidy... especially to those sovereigns most remote from earning that 0%.

So, had that not been the spreads of many eurozone sovereigns against Bunds would have been much larger, and in such case many of those sovereigns, like Greece, like Italy, like Spain, like Portugal would have had to borrow less, and would therefore have had to reduce their commercial deficits, reducing by that Germany’s commercial surplus.

Allen opines: “Investors need to put their money somewhere and [if there are not enough Bunds they are forced into substitutes which then rapidly become overloaded and suffer price bubbles.”

Indeed but when we consider that much of that investment money was supplied by ECB buying European sovereign debt, including Bunds, perhaps we should start by looking there before we might add fuel to a dangerous fire.


February 17, 2019

If only regulators had analyzed their risk weighted capital requirements for banks in terms of bets.

Sir, Tim Harford refers to Nassim Taleb, warning of “the ‘ludic fallacy’ — treating the unknown risks of life as though they were the known risks of a game of chance”, “Experimental living beats thinking in bets” February 17.

That is somewhat like when regulators treated the unknown risks in banking and set their risk weighted capital requirements. 

Harford also mentions Annie Duke’s recommendation “that we should always be willing to ask ourselves, ‘do I want to bet on that’ — it’s easy to be overconfident if there are no obvious consequences for being wrong. A bet forces us to think about the odds and the possibility that someone else may know better.”

Oh, if only our bank regulators have asked themselves: “Do we want to bet our bank systems on that what gets an AAA to AA rating, issued by human fallible credit rating agencies, is so safe we should only need to require banks to hold 1.6% in capital against such assets and so allow them to leverage 62.5 times with these?” Had they posed that question, the crisis resulting from excessive exposures to AAA rated securities backed with mortgages to the subprime sector would not have happened.

“We have risk-weighted the capital requirements for banks in order to make our bank system safer.” Someone has either played tricks on them or they are bluffing. The sad part is that so few dare to call them out on it. And, when I do that, many just brush me off with a “he’s just got an obsession”.

Though Harford accepts that “Thinking in bets is a rigorous and admirable habit” for many cases he favors “Thinking in experiments [as that] allows us to learn [and might be] less painful.

In case of bank regulations experiments are not needed. Just go out and look at all the crises and try to find one that was caused by excessive exposures to something perceived as risky when placed on the balance sheets of banks. None! Should that not tell you something about our unwillingness to learn when the lessons are hard to swallow? 

Sir, using Edward Thorp’s real casino risks, in banking, the Basel Committee represents “the crooked dealer” and the risk weighted capital requirements “the poisoned coffee” 

Casino games, like roulette, are all based on offering all possible bets exactly the same expected payout adjusted for their respective probabilities. If it was not so, no casino would survive. So it was in banking, until risk weighted capital requirements offered banks higher risk adjusted return on equity for what was perceived, decreed or concocted as safe (betting on a color), than for what was perceived as risky (betting on a single number). The consequence? Our bank systems will fail especially bad, by building up especially large exposures to what is especially perceived as safe, against especially little capital. The 2008 crisis, and Greece, were just canaries in that mine.

PS. Here is the current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.


February 15, 2019

For social harmony, in our time, we need a big enough and a small enough universal basic income.

Sir, Chris Giles refers to a “1994 OECD study [which] contained a warning of the dangers in store for countries that failed to tackle problems in their labour markets. “It brings with it unravelling of the social fabric.” “Improve employment rates to tackle inequality” February 15.

Giles opines, “Flexibility and social protection is a winning combination for advanced economies. While it does not prevent all employment problems, whether you take a right-of-centre “work not welfare” attitude or a left-of-centre “a hand up not a handout” stance, in general the combination works.”

I agree! An unconditional universal basic income, large enough to allow many to reach up to whatever jobs are available, is “a hand up not a handout”.

And an unconditional universal basic income, small enough so as not allow many to stay in bed, is also “work not welfare”.

So what’s keeping an UBI from being implemented?

To begin there’s not sufficient recognition of the real conflicts, basically a class war, between those who having a job want better pay and those who want a job at any pay.

But, first and foremost, it is those who profit, politically and monetary, on imposing their conditionalties when redistributing tax revenues, who strongly oppose a UBI, since it, naturally, would negatively affect the value of their franchise.

PS. The Chavez/Maduro regimes are clearly outliers among the redistribution profiteers but just as an example I once calculated that the 40% poorest of Venezuela had received less than 15% from the Bolivarian Revolution than what should have been their allotment had Venezuela’s net oil revenues been shared out equally to all. On the other side many of the odious profiteers pocketed many thousand times what should have been their share.


February 12, 2019

A tweet dedicated to all those in FT that write the column of "Tail Risk"

Two tail risks:

The best, that which perceived as very risky turns out to be very safe.

The worst, that which perceived as very safe turns out to be very risky.

Risk weighted capital requirements for banks, kills the first and puts the worst one on steroids.


February 07, 2019

FT, do you really mean it?

FT, do you really mean that if David Malpass becomes president of the World Bank the Asian Infrastructure Investment Bank (AIIB) dominated by China will become a worthier development bank than WBG?

Sir, in “US makes a poor choice for World Bank chief” February 7, you lash out that if David Malpass becomes president of the World Bank, that will lead to a “dysfunctional organisation that will encourage its activity to shift to other development banks, including the Asian Infrastructure Investment Bank.” Really? Has this do to with David Malpass, or has this to do with someone else who is not to your liking?

In support of your doom you mention that Malpass’ “judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under” 

Sir, like many he had confidence in those AAA rated securities that SEC, which supervised investment banks in the US, allowed, based on recommendations of the Basel Committee, Bear Sterns to hold against only 1.6% in capital, to leverage over 62.5 times. I have not read much about you judging the regulators’ specialty wanting.

As for the World Bank you argue that its role is “providing global public goods such as managing scarce water supplies, combating pandemics and coping with the effects of climate change.”

No, its role is not to substitute for governments? The World Bank is a development bank, which means, at least in my book, its role is to help and assist financing countries to develop their own capacities to manage scarce water supplies, combate pandemics and cope with the effects of climate change.

Sir, you know I have a concern about the World Bank, namely that it does not object to the current risk weighted capital requirements for banks. I hold that it should, because risk taking is the oxygen of any development.

Who knows, perhaps someone who has seen first hand what happens if you trust what’s “safe” too much to be safe, might be exactly what the World Bank needs.


February 06, 2019

I hope David Malpass, nominated by USA, if confirmed as president of the world’s premier development bank, understands that risk-taking is the oxygen of all development.

Sir, Robert Zoellick writes: “If policymakers overlook the experience of developing countries during the crisis, they are less likely to consider emerging market dynamics, understand developing economies’ sources of resilience and appreciate vulnerabilities” “Who ever runs the World Bank needs a plan for emerging markets” February 6.

Of course no one should overlook experiences obtained during crises but, focusing excessively on these, puts a damper on the potential growth between the crises.

In his book “Money: Whence it came, where it went” (1975), John Kenneth Galbraith, referring to the accelerated growth experienced in the western and south-western parts of the United States during the 19thcentury, argued that it was the result of an aggressive banking sector working in a relatively unregulated environment. “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

For instance when banks are required to hold more capital when lending to their “risky” entrepreneurs, than when lending to their “safe” sovereign, as current Basel regulations mandate, that is bad enough in developed countries, but, in developing/emerging countries, it is absolute lunacy.

While an Executive Director in the World Bank 2002-2004, a time during which Basel I was discussed I did what I could to alert to the huge mistakes of its pillar, the risk weighted capital requirements for banks. Unfortunately I was not able to convey my warnings, and these were approved in June 2004.

I hope that David Malpass, now nominated by USA, if confirmed as the next president of the World Bank, fully understands the following:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements impede banks from taking efficiently the risks that are needed to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd.

Second, that what’s perceived ex ante as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large bank exposures to what is especially perceived (or decreed) as safe, against especially little bank capital.

PS. Here is a brief summary of what I had to say on this issue before and during my term as an ED. It includes two letters published by FT


February 04, 2019

Carrot: We will pay you $xxx for each Kalashnikov you hand over. Stick: If we find you one after x you’ll go to jail for ten years!

Sir, in your “Broad front needed to address Venezuela crisis” you opine that the “Diplomatic effort requires reasonable balance of carrot and stick” February 5.

Indeed! In 2007 the degenerated Hugo Chávez decided to weaponize his supporters, the “colectivos”, by importing 100.000 Kalashnikovs from a willing salesman, Russia.

For Venezuela to come out reasonably well from its current predicaments, those rifles must be collected.

If all those who oppose the possession of guns in their own country dedicated just three percent of their efforts to help Venezuela to collect those rifles so as to have these destroyed, they might provide more human assistance than shipping many tons of foods and medicines.

If that’s not done all food or medicines sent might not reach those unarmed Venezuelans who most need it.


February 03, 2019

Redistribution profiteers have a vested interest in us ignoring the wealthy already redistribute their purchase capacity.

Sir, Tim Harford writes “One academic paper produced by Emmanuel Saez (a star in the study of inequality) and Peter Diamond (a Nobel laureate and colleague of Mirrlees) estimated that the combined rate of tax on the income of high earners could be 73 per cent in the US without proving counter-productive…[for that they] assume that a dollar is 25 times more valuable to a person on about $50,000 a year than to a person on $500,000.” “The super-rich are an easy target for tax rises” February 2.

Indeed, and that‘s why those with much higher income sometimes buy shoes that are 25 times more expensive than those earning much less. But, where does that type of analysis take us? Should jobs producing expensive manually produced shoes be prohibited? Should we have dollars with sensors that measure the value we assign to them? 

The problem with all the “resolve poverty and inequality by taxing the wealthy” is that it ignores the fact that all the purchase power that the income of the wealthy contains, is immediately returned to the real economy when purchasing assets and services. 

In this sense those prescribing higher taxes on wealth are, at the end of the day just arguing, they are better redistributors than the wealthy. Are they? Perhaps yes, perhaps no. In Venezuela those redistributing wealth have clearly done so in order to get their hands on the wealth. In Venezuela we have a saying that goes “The one who cuts the cake in order to distribute the cake, keeps the best part of the cake.

PS. Thomas Piketty should visit the Museum of Louvre in his Paris, and make a checklist of how much would not have existed there, had it not been for some “filthy rich”


Lie Detectors, many journalists would also benefit from lessons on fake news.

Sir, Simon Kuper describes the experiences of Belgian journalist Valentin Dauchot when dispatched to discuss fake news with classes of 10 and 11-years-old in Europe. Lie Detectors, a Brussels-based NGO that sends journalists to do that, finds that “children are often internet-savvier than teachers, and probably more so than old people”. “A lesson in fake news”, February 2.

Sir, I wonder how those children would classify the following information:

“Since your teachers have decided that dark forests are much more dangerous for all of you to enter, than staying out playing in an open field, anyone of you who enters the darkness of such forest, will be forced to eat broccoli and spinach for a full month. Anyone of you staying in the sunlight of the open field, will be rewarded with chocolate cake and ice cream each day for a whole month”. True or fake?

The children would respond: “Of course we wish it was true of course but, unfortunately, it has to be fake. Who would give us chocolate and ice cream for staying where we want to be, and spinach and broccoli for not entering what we already find to be scary?

Correspondingly, how would adults respond when they hear that regulators have risk weighted the capital requirements for banks, allowing these to hold much less of it against safe assets than against risky assets?

Most adults would say surely “True” “Great!”, and this even if anyone who has read anything about bank crises know well that the worst of these always result from excessive exposures to something ex ante perceived as very safe but that, ex post, turns out to be very risky, e.g. AAA rated securities.

Of course bankers, in this case being the children, cannot believe their luck with such fake regulations being decreed true by the Basel Committee. Imagine, earning the highest risk adjusted returns on equity on what’s perceived as safe! Imagine being able to hold much less equity against what we most love to hold, which of course leaves much more for bonuses to us!

Sir, how could Lie detectors help the adults, including of course journalists, like many in FT, to be more alert to the truthfulness of news and regulations? A good place to start would be with a full explanation of confirmation bias… that here resulting from most loving much too much the populist message of: “We have risk weighted the bank capital requirements for you so as to make these safer” 


When restructuring Venezuela’s debt, start with identifying all odious credits.

Colby Smith writes “analysts reckon Venezuela has some $140bn debt outstanding with over $65bn owed to bondholders and another roughly $40bn due to China and Russia.” “Venezuela’s welter of debt will mean a messy restructuring” February 2.

The key word here is “reckon”… because the indebtedness of Venezuela has clearly not followed a transparent process. Frequently there are references to odious debts, but very rarely or never to the fact that these most often arise from odious credits that should never have been awarded. That “odiousness” extends from a shameful lack of due diligence to outright participation in corrupt acts.

All citizens in the world would greatly benefit from having a clear definition of what should be considered odious credits, and of its consequences. Without it, any Sovereign Debt Restructuring Mechanism (SDRM) similar to the one proposed 2002 at the IMF by Anne O. Kruger, would be found wanting.

PS. Because Robin Wigglesworth has touched on this theme I am copying him.