March 30, 2019

Instead of looking out for fake news, which is a mission impossible, go after what motivates and facilitates it.

Pilita Clark writes that “Britain’s health secretary, Matt Hancock, later warned social media companies could be banned if they failed to remove harmful content [and] ministers were looking at new laws to force social media companies to take down false information about vaccines spread by ‘anti-vaxxers’”. “Facebook is not our friend, no matter what their adverts say” March 29.

Ok, they identified one fake-news. Congratulations! 

But let me assure you that for each one of these you are able to track down, at least one hundred new ones will be spreading like wildfire.

To stop fake news, as well as to stop that odious messaging of hate and envy by polarization and redistribution profiteers, you have to be able to identify who is making money on it, and make it harder for them to make money on it.

Two things are needed for that. First to set up a parallel social media in which only duly identified individuals can participate, so that they could be individually shamed; and then place a minimum minimorum access fee on each social media message, so that they can not operate with a zero marginal cost.

Where should that access fee go? Clearly to us citizens whose data is being exploited and not to some other redistribution profiteers, and much less to some on the web-ambulance-chasers.

Pilita Clark also refers to George Orwell’s “Nineteen Eighty-Four”. Rightly so, we need to read and reread it so as to fully understand that the worst that could happen to us citizens, would be these mega social media enterprises teaming up with Big Brothers here and there.


March 28, 2019

If universities and professors had in payment to take a stake in their student’s future, you can bet students’ merits would mean more than parents’ wallets.

Sarah O’Connor writes: “Those in the top 1 per cent of the income distribution complain that the growing wealth of the “0.1 per cent” has priced their children out of the sort of private education and housing that they themselves enjoyed.”“We must stop fighting over scarce educational spoils” March 27.

They are wrong! All the income of the growing wealthy “0.1 per cent”, is immediately returned to the real economy, when they buy a lot of assets, like yachts, and services, like yacht crews, which are all really not of much real interest, or use, to the 99.9 per cent rest of the economy.

And if there is anything that really has helped price out private education and housing, that’s the excessive availability of financing. For instance if the risk weights for the bank capital requirements when financing residential mortgages, 35%, were the same as when financing an unrated entrepreneurs, 100%, houses would be more homes than investment assets, and people would have more jobs with which service mortgages or pay utilities.

But that truth does not stop polarization and redistribution profiteers from stoking the envy levels in the society, especially when it can often be done on social media in an anonymous way, and at zero marginal costs.

Now if you really want less discrimination against those who poor might use education better, align the incentives better, and don’t let universities and professors collect all upfront.


The lack of statistical significance tests, p-value, does indeed allow much more, for “Irrefutable nonsense [to] rule”

Sir, Anjana Ahuja writes: “generally only studies with p-values lower than 0.05 are deemed to be of ‘statistical significance’. This magic number has calcified into the pivot on which science principally turns. Now, academics, [because of] “p-hacking”: cherry-picking experimental methods, slicing data and contorting statistical analyses to yield a desirable p-value, are arguing for “the entire concept of statistical significance to be abandoned”. “Beware making a fetish of an arbitrary number”, March 28.

But “John Ioannidis, from Stanford University, defends it a “convenient obstacle to unfounded claims”. Its absence, he warned, may unleash worse: ‘Irrefutable nonsense would rule.’”

What’s the p-value of the risk weighted bank capital requirements for banks not measuring the dangers to our bank systems correctly? I have no idea but I am sure that null hypothesis would not be rejected by a very long shot.

In fact to test, as null hypotheses, the current regulatory premises, that of what is ex ante perceived as risky being dangerous to our bank system, and that of what is ex ante perceived as safe being safe for our bank system, would surely return very low p-values and be rejected.

But Sir, no such statistical analysis was performed and so, in its absence, the “irrefutable nonsense [of the Basel Committee’s risk weighted capital requirements [does indeed] rule.”

PS. But anyone who has heard that saying attributed to Mark Twain of “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”, would not really do research to understand the issue.


March 27, 2019

The developed world, with their statist bank regulators, has no right to preach market reforms to developing countries.

Sir, Jonathan Wheatley writes that in Mexico: “López Obrador — the old-school leftist has pushed ahead with proposals that… have caused alarm among investors, who worry that overspending will call into question the country’s investment-grade credit ratings.”“Delays to reform threaten prospects of emerging economies” March 26.

Sir, López Obrador is not the only leftist in town… in Basel, there are plenty of them.

Basel II assigns a standardized risk weight of 50% to a sovereign rated like Mexico BBB+. This means that the Basel II capital requirement for holding debt of Mexico is 4% (50%*8%). The Basel II standardized capital requirements for lending to any Mexican entrepreneur rated the same BBB+, is 8%. And so, according to the Basel Committee banks are allowed to leverage their capital 25 times their when lending to Mr López Obrador’s government, than when lending to a BBB+ or an unrated Mexican entrepreneur.

So please, do not come and preach us about internal market reforms in developing nations when external global regulators impose such statist and distorting regulations on them.

In 2007, at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled “Are the Basel bank regulations good for development?”. My answer was a clearly argued “No!” But, of course, my chances to be heard by a U.N. Commission on Reforms of the International Monetary and Financial System chaired by Professor Joseph Stiglitz were none.


March 25, 2019

Excessive “intellectual gravitas” can sometimes be just as dangerous, or even more, than an insufficient one.

Sir, James Politi writes: Greg Mankiw, a respected Republican economist, did not mince words when he posted his reaction to Donald Trump’s nomination of Stephen Moore for a seat on the Federal Reserve board saying: “Steve is an amiable guy, but he does not have the intellectual gravitas for this important job.” “Donald Trump’s Fed nominee faces broad backlash” March 25.

That reminded me (again) of Edward Dolnick’s “The forger’s spell” (2009), which makes a reference to Francis Fukuyama saying that Daniel Moynihan opined: “There are some mistakes it takes a Ph.D. to make”. 

The intellectual gravitas of all those at the Fed and of all their colleagues in the bank regulatory sphere, primarily in the Basel Committee, came up with: risk weighted capital requirements for banks based on the utter nonsense that what’s ex ante perceived as risky, is more dangerous to our bank systems than what’s perceived as safe. 

An outrageous example of it is how Basel II, in its standardized risk weights, to that so dangerous because it is rated AAA to AA, they assigned a meager 20% risk weight, while, to that which is so innocous, because it has been rated a below BB-, they smacked with a 150% one.

And now, 10 years after a crisis that broke out because of excessive exposures to AAA rated securities, or to assets to which an AAA rated entity like AIG had issued a default guarantee for, the intellectuals with gravitas, persist in their mistake.

Sir, I do not know Stephen More but, if he possesses common sense, some experiences on Main Street and the willingness to question, then his possible lack of intellectual gravitas should be welcome, as something of that sort is much needed to guarantee diversity able to help block some of the incestual thinking processes.


March 23, 2019

The 0% risk weight assigned by Eurozone authorities to Greece’s sovereign debt helped put that nation’s weaknesses on steroids.

Sir, Tony Barber quotes Roderick Beaton’s Greece: Biography of a Nation, with a Greek former government minister saying in 2017 that the homegrown causes included “poor governance, clientelism, weak institutions [and] lack of competitiveness”. For his part, Beaton observes: “Systemic problems . . . combined in a toxic way with structural weaknesses in the European project, particularly the systems devised to oversee the single currency without a single fiscal authority for the eurozone.” “Greece’s eternal conflict”, March 23.

I have not read the book but, if a former government minister can describe Greece as he does it should be absolutely clear that such sovereign does not merit a 0% risk weight, much less so when it is taking in debt denominated in a currency that de facto is not it domestic (printable) one. 

But yet the Eurozone authorities did so, which of course only could help to feed “poor governance, clientelism, weak institutions [and] lack of competitiveness”

The sad part is that those authorities have refused to recognize their mistake, and so Greece has been forced to take the full blame for its crisis. EU, what a Banana Union! 


March 22, 2019

If Brexit ends in tears, Theresa May is clearly not the only one that should be blamed and not be forgiven.

Sir, Martin Wolf writes that Theresa May needed to begin Brexit negotiations “from the interests of the country. She has failed to do so… If the result is no deal, Mrs May could not be forgiven. “May is set on taking a hideous gamble” March 22.

Yes, for an outsider like me, Theresa May seems indeed to have managed very badly Brexit negotiations. But just as Lubomir Zaoralek the minister of foreign affairs of the Czech Republic wrote July 2016 in FT “Europe’s institutions must share the blame for Brexit”, the EU Brexit negotiators, like Michel Barnier, cannot be said to have no blame in any failure. 

And also, again for an outsider like me, I have seen little to nothing of all those Remainers giving, “from the interests of the country”, any constructive advice or cooperation in order to reach a more satisfactory solution. As I see it, the Brexit-failure political profiteers, as well as those eager to enhance their reputation by being able to point out “I told you so”, have refused to cooperate or to give any constructive advice, and so all they should also share the blame of a failure… and “not be forgiven.”

As far as I know a Hard Remain option that could have alleviated some of the Brexiters’ main justified concerns was never developed.

PS. A question: If because of the insane 0% risk weighting of their sovereigns the Eurozone breaks up, and drags down EU with it, would Britain be better off having Brexited or having remained in EU? 


March 21, 2019

Magical thinking is not limited to political actors from right or left, many technocrats indulge in it too.

Sir, Edward Luce referring to “brassy slogan” and “fabulism” among politicians of all sides writes: “Facebook’s algorithm rewards magical thinking” “Magical thinking crosses party lines” March 21.

Yes, solid common sense thinking and truth generates much less advertising revenues than grandiose idiocy or mindboggling fake news.

So what are we to do? There’s no easy answer. 

I would suppose that limiting some social media use to duly identified citizens, would at least reduce all the anonymous noise that is so much harder to put to shame, when it should be shamed. 

Also charging a truly minuscule fee for each web access would help limiting the polarization and redistribution profiteers from marketing their messages of hate and envy at zero marginal cost. (That fee could help fund a universal basic income).

But, magical thinking is not limited to political actors from right or left, or needing the web for its promotion.

The Basel Committee’s risk weighted bank capital requirements are pure unabridged utterly dumb magical thinking, imposed by a bunch of loony technocrats.

Their magical thinking guarantees us a weak economy, and especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital.


We need student debt service data, for each university, so as to allow the market to help correct some education failures.

Sir, Dennis Gerson, in reference to a recent article by Sheila Bair on student debts writes: “What she fails to address is the repayment of the income share agreements by college graduates earning the minimum wage, service industry minimum wage plus tips, or those who fail to graduate from college. A substantial portion of student debt and defaulted debt falls into these categories.” “US universities need to fix cost problem they created

For a starter if university students end up earning too little or do not graduate, then that could be as much or more the failure of the university than the student’s. By just putting out information of each university indicating the respective overall default rate of their students, the market would help to correct much of what is going on... not all.


March 20, 2019

As long the mistake that caused a crisis gets to be treated as one that shall not be named, it is doomed to become a Groundhog Day event.

Sir, Martin Wolf writes “financial regulation is procyclical: it is loosened when it should be tightened and tightened when it should be loosened. We do, in fact, learn from history — and then we forget”“Why further financial crises are inevitable” March 19.

Yes and no!

Yes, it is procyclical especially when allowing banks to leverage more with those who, thanks to good times are perceived as safer, and much less in bad times with all those that then are perceived as risky, which of course includes many former very safe.

No, we have not learned from history, because there is too many interested in putting a veil on the mistake with the risk weighted capital requirements. And there is too many who do not want to admit they fell for the populist that told them to relax, because they have weighted the risks.

Even though a leverage ratio has been introduced, the following Basel II risk weights that which evidences an absolute lack of understanding of the concept of conditional probabilities have not been changed, and this even after a crisis that exploded in AAA rated territory.

AAA to AA rated = 20%; allowed leverage 62.5 times to 1.
Below BB- rated = 150%; allowed leverage 8.3 times to 1

Also, the distortion the risk weighting creates in the allocation of credit to the real economy is mindboggling. Just 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 so the risk weighted capital requirements kills the best and puts the worst on steroids… dooming us to suffer from a 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.

Wolf writes: “The bigger the disaster, the longer stiff regulation is likely to last. [But] Over time, regulation degrades, as the forces against it strengthen and those in its favour corrode.” I agree, but I would have to add something to it, namely, the bigger the disaster the more the running away from responsibilities… and accountability. 


March 19, 2019

If the inflation-measured basket used house prices instead of rental costs, the story would be different.

Sir, Rana Foroohar points to “The latest Consumer Price Index figures show that almost all core inflation… was in rent or the owner’s equivalent of rent (up 0.3 per cent) [while] Core goods inflation, meanwhile, was down 0.2 per cent” and argues “that the housing market is once again completely out of sync with the rest of the economy.” “America’s new housing bubble” March 18.

Yes and no! No! “Rent” in much is a laggard response to the price of houses, and so it would be more precise for the arguments made by Foroohar to compare core goods inflation to what is happening to those prices.

Yes! “Hyman Minsky would have had a field day [more precisely many field years] with his Financial Instability Hypothesis that [argues] two kinds of prices — prices for goods and services, and asset prices.”

And yes, Daniel Alpert is correct: “What we have now is a form of inflation that’s never been seen before — it’s all concentrated in housing.”

To explain that with as “something the US Federal Reserve has actually exacerbated (albeit unintentionally) via low interest rates and quantitative easing that boosted housing prices in the very cities where the best paying jobs are located”, is correct but quite incomplete.

If banks needed to hold as much capital against residential mortgages as against for instance loans to entrepreneurs, something that was the case before the Basel Committee got creative, that would be happening much less.

PS. In a letter I wrote and that FT published in 2006 (before it stopped doing so) titled “The information Mr Market receives could also be neurotic” I argued:

“Inflation as they, our monetary authorities, know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money. 

For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”


High interest rates on sovereign bonds are often just vulgar kickbacks offered by corrupt regimes.

Sir, Jim Sanders correctly points out “Where the money from sovereign bonds goes within developing country governments is rarely, if ever, the subject of reporting in the financial press. Nor does there appear to be a regulatory regime in place to monitor how money raised from bond issues is spent.” “Emerging market bonds are a risky business” March 19.

Of course not, way to often lenders, attracted by profit opportunities, quite on purpose turn a blind eye on that, much preferring the bliss of ignorance. 

Just as an example in May 2017, Goldman Sachs handed over about US$800 million to the notoriously corrupt, criminal and human rights violating government of Venezuela, in order to obtain $2.8billion Venezuelan bonds paying a 12.75% interest rate, which if repaid would provide GS with about a 42% yearly return, 2.000% more than what US pays.

It is clear that when it comes to our sovereigns taking on debt, that perhaps our children will have to repay, we citizens much more than credit ratings need ethic ratings; and a clear definition of what should be considered as odious credits, and the consequences for any credit that ends up qualified as such.

Personally I consider a level of sovereign debt that allows for contracting it in emergencies at reasonable rates, as a strategic asset, which no one should take away from future generations, without overwhelming reasons.


March 17, 2019

In USA, for the patterns of default, differences between states as to “deficiency judgments”, should matter.

Wikipedia: “A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full.”

Sir, the default patterns Gillian Tett refers to in “Driven to default”, March 14 will, in the USA, of course much depend of in what state the defaults occur, given the great differences in allowing or not “Deficiency Judgments”

Has there been any research on this issue? Not that I know off. But that is not surprising given how the fundamental mistake with current risk weighted capital requirements has also been widely ignored.


“Any populism yours can do, mine can do better; mine can do populism better than yours” “No he can’t!” “Yes he can, yes he can, yes he can!!!!”

Sir, Simon Kuper ends his “Secrets from the populist playbook” March 16, with “Some new politicians, notably the new Democrat congresswoman Alexandria Ocasio-Cortez, can rival Trump for engagement. To some degree, we are all populists now.” “Secrets from the populist playbook”, March 16.

Indeed but the populists must also be measured with respect to the success they have when selling their populism.

For instance, our current bank regulators must be some of the most successful populists ever. Just think how they have managed to convince the world (most or all in FT included) that by imposing risk weighted capital requirements for banks, they are reducing the risks for our bank system. With that they have distorted the allocation of bank credit all over the world, weakening the economies and increasing the dangers of a systemic meltdown of our banks. 

Sir, I am from Venezuela, and so unfortunately I know too much about populists, but, when compared to the Basel Committee on Banking Supervision’s and the Financial Stability Board’s populism, Hugo Chavez was just a quite gifted amateur.


March 15, 2019

Yes, higher education must be much more of a joint venture, for all involved.

Sir, Sheila Bair is absolutely right that “proceeds from student debts go to colleges, while the risk of repayment falls on borrowers and, if they default, on taxpayers provides little incentive for schools to contain costs [which] provides little incentive for schools to contain costs.” As a solution she refers to “income share agreements” where universities provide some funding and students pay back a small share of their income over some years. “An investment model to put US students through college”, March 15. 

That said I would not leave it solely as a student to college/university level. I believe that professors should also have skin in the game, and so perhaps their retirement plans should include a clear linkage to how their students did.

And why leave it at that? Why not think of securitizing those possible future participations in earnings so as to provide some upfront money to cover expenses? And what about insurance companies investing in these? And what about some students crowdfunding their tuition fees?

Where I do part though from Bair’s opinion, is on the concept that high earning students could/should subsidize the study costs of lower earning professions. That could cause some unexpected distortions, and it is much more a general societal responsibility, which the higher earning - higher tax paying already share.


March 13, 2019

Capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs doom the world to secular stagnation.

Sir, Martin Wolf writes: “the financial mechanisms used to manage secular stagnation exacerbate it. We need more policy instruments. The obvious one is fiscal policy. If private demand is structurally weak, the government needs to fill the gap. Fortunately, low interest rates make deficits more sustainable.” “Monetary policy has run its course” March 13.

No! Secular stagnation is guaranteed by capital requirements for banks that favor the financing of the safer present like houses and sovereigns, over the riskier future like entrepreneurs. The subsidies implicit in having assigned a 0% risk weight to public debt translate into artificial low market rates. Weigh the sovereigns equal to citizens, at 100% and you will immediately see those rates shoot up.

Of course kicking the can further down with more fiscal spending based on more public debt will give our economies a breather, but for what purpose? Had central bankers and regulators accepted in that loony 62.5 times allowed bank leverages for anything rated as AAA, and insane 0% risk weight assigned to Greece that caused the crises; and gotten rid of their risk weighting based on ex ante perceptions and not on ex post possibilities, our economies would be in a much better shape. But no, their huge liquidity injections seem to have mostly been put in place in order to cover up for their mistakes. And statist journalists backed them up by solely blaming banks, credit rating agencies and markets. 


Venezuela poses a unique opportunity, for all citizens of the world, to clearly define what should be considered as odious credits, and how these should be treated.

Sir, Colby Smith and Robin Wigglesworth quote a holder of Venezuelan debt with: “The ultimate objective is to reach a point where [Venezuela] regains market access at market-determined terms without the risk of renewed default”,“Venezuela debt fight pits veterans against hot-headed newcomers” March 13.

It is absolutely clear Venezuela needs much financing to reconstruct its entire run down basic infrastructure but, as a citizen, having seen how much public indebtedness goes hand in hand with corruption and waste, and how it so often makes it harder for the private sector to finance its needs, I would not mind Venezuela not reaching that “ultimate objective” for a long-long time, especially not as long as the government already receives directly all oil revenues.

Our Constitution clearly establishes that all “Mineral and hydrocarbon deposits of any nature that exist within the territory of the nation… are of public domain, and therefore inalienable and not transferable” and yet 99% of the debt it contracts is implicitly based on its creditors having access to the revenues produced by extracting Venezuela’s non-renewable natural resources, mainly oil. 

So now, the least our legitimate creditors could do, is to help us extract oil; and to that effect the following is a message I have been tweeting for about two years: “For Venezuelans to be able to eat quickly, starts by quickly handing over PDVSA’s junk to its and Venezuela’s creditors, so that they quickly put it to work, to see if they are able to quickly collect something, so to pay us citizens, not bandits, some oil royalties quickly”

But, that said, what is most important is to classify all Venezuela’s debts. Many of these were not duly approved; others had a large ingredient of corruption and lack of transparency and so all these must be scrutinized in order to establish their legitimacy.

For example, when Goldman Sachs in May 2017 handed over $800 million cash in exchange for $2.8billion Venezuelan bonds paying a 12.75% interest rate, to a notoriously corrupt and inept regime that was committing crimes against humanity. Especially since Lloyd Blankfein cannot argue an “I did not know”, that to me is as odious as odious credits come.

Sir, it behooves all citizens of the world to use this opportunity to set up an adequate defense against governments anywhere, mortgaging their future with odious credit/odious debts.

That also includes stopping statist regulators from distorting with a 0% risk weight the allocation of bank credit in favor of the sovereign, against the 100% risk weighted citizens. 


March 11, 2019

Thanks to bank regulators, if in need, there are now way too little defences to deploy in a countercyclical way

Sir, you hold that there are “reasons to be wary [as bank] regulation is, once again, being eased just at the moment when it ought to be tightened” “Easing financial controls is cause for wariness” March 11.

In support: “Many market participants, moreover, think credit and market cycles are at their peak — just the time when counter-cyclical defences might be deployed”

Sir, is it really when markets are at their peak that we should kick off its drop, by tightening regulations? At the peak of the market, what we really should have is our ordinary defences, like bank capital, to be at their highest levels, so that adequate counter-cyclical defences can be deployed if needed. Are these defences now at the highest? Absolutely not!

Why? Among others, the results from an absolute incapacity to comprehend the pro-cyclicality of many regulations, such as those of the risk weighted/ credit ratings capital requirements for banks. These are based on the ex ante perceptions of risk when times are good, and not on the ex post possibilities when times are less good. The result, in terms of deployable counter-cyclical defences, is total unpreparedness.

Sir you write: “A Financial Times series has highlighted the risks of the rapid expansion of credit to lowly rated, more indebted companies.” No that is wrong! It were the “good times”, made possible by low interest rates and huge liquidity injections, which allowed for too many securities to be rated, ex ante, as being of investment grade, which caused a rapid expansion of credit. What, ex post, perceived rougher times cause, is a rapid expansion of those securities becoming rated as junk.


March 08, 2019

Does not common sense dictate that in good times we want our banks to be weary about what they perceive as safe? Does not what’s seen as risky take care of itself?

Joe Rennison writes: “Investors and rating agencies have warned that companies might struggle to refinance huge debt burdens, resulting in downgrades from triple B into high yield or “junk” territory.” “BIS sounds alarm on risk of corporate debt fire sale” March 6.

What does that mean? Namely the risk that ex ante perceptions of risk might, ex post, turn out really wrong.

Also, “Bond fund managers could then have to sell the bonds as many are bound by investment mandates barring them from holding large amounts of debt rated below investment grade. ‘Rating-based investment mandates can lead to fire sales,’ warned Sirio Aramonte and Egemen Eren, economists, in the BIS quarterly review released yesterday.”

And what does that mean? Clearly procyclicality in full swing! Just like the insane procyclicality caused by the risk weighted capital requirements for banks.

Sir, does not common sense tell you that in good times we want our banks to be weary about what they perceive as safe, as what they perceive as risky takes care of itself? And in bad times, do we not want our banks not to be too weary of the risky, and burdened with having to raise extra capital when it could be the hardest for them?

Sir, so what are regulators doing allowing banks to hold less capital against what they in good times might wrongly perceive as safe, and imposing higher capital on what they would anyhow want to stay away from, especially in bad times?

Sir, for literally the 2,781 time, why does not the Financial Times want to dig deeper into unavailing what must be the greatest regulatory mistake ever

Are you scared of then not being invited to BIS’s Basel Committee’s and central banks’ conferences? “Without fear and without favour” Frankly!


The 2008 crisis had little or nothing to do with a tax bias in favour of debt finance

Sir, Martin Wolf discussing a system where for tax purposes “no deduction would be allowed for financial costs” writes “there would no longer be today’s bias in favour of debt finance, which creates significant risks to economic stability, as the financial crisis demonstrated.”“The world needs to change the way it taxes companies

One could sure argue there should not be a bias in favour of debt finance, and that it has had an important role in creating excessive corporate debt, but to argue that it caused the financial crisis is clearly wrong.

Does Mr Wolf really think that all those in the subprime sector who bought houses on credit, and whose mortgages got packaged into ex ante AAA rated securities, which ex post turned out not to be AAA securities, and which set off the 2008 crisis, did so because of tax considerations?

And does Mr Wolf think that the reason banks held so little capital against these securities was that the dividends they were to pay were not tax deductible? Was it not that the US investment banks and the European banks were allowed to hold these AAA rated securities against only 1.6% capital?


March 06, 2019

Should we prohibit divergent perceptions of credit risk? No and yes!

Sir, Martin Wolf writes: “In a recent paper, Marcello Minenna of Con-sob (Italy’s securities regulator) argues that divergent perceptions of credit risk across member states reinforce divergent competitiveness in goods and services. This puts businesses in peripheral countries at a persistent disadvantage, which becomes worse in times of stress.” “The ECB must reconsider its plan to tighten” March 6.

So should we prohibit divergent perceptions of credit risk? No and Yes!

Absolutely no! The existence of divergent perceptions of credit risk is crucial for an effective allocation of credit.

Absolutely yes! Bank capital requirements based on divergent perceptions of credit risk guarantees an inefficient allocation of credit.

The truth is that businesses in peripheral countries are less at disadvantage for their countries being perceived risky, than for the regulators, or other authorities, considering that there are others much safer. The risk weight for the Italian sovereign, courtesy of the EU authorities is 0%, while the risk weight of an Italian unrated entrepreneur is 100%. Need I say more?

Wolf opines, “The painful truth is that the eurozone is very close to the danger zone [as] the spectres of sovereign default and ‘redenomination risk’ — that is, a break-up of the eurozone — may re-emerge”. Indeed, and the prime explanation for that is precisely the 0% risk weights assigned to its sovereigns, those de facto indebted in a currency that is not denominated in a domestic (printable) currency.

We’ve just celebrated the 20thanniversary of the Euro. The challenges its adoption posed were well known. What has EU done to really help confront those challenges? Very little to nothing! In truth, with its Sovereign Debt Privileges, they have managed to make it all so much only worse. Sir, considering that, for someone who truly wanted and wants the EU to succeed, it is truly nauseating to see the daily self-promoting tweets from the European Commission.


Much needed bank capital reforms are hindered by bank lobbying, and by regulators unwilling to discuss their mistakes.

Sir, Benoît Lallemand, Secretary-General of Finance Watch writes: “European bank supervisors last year found ‘unjustified underestimations’ of risk in nearly half of the 105 banks they investigated” “Banks should submit to logic of reform on capital allocation”, March 6.

For those regulators who assigned a risk weight of 150% for what is so innocuous for our bank systems as what is rated below BB-, is not assigning a meager 20% for what could really endanger our bank systems, precisely because it is ex ante rated a very safe AAA to AA, a much worse ‘unjustified underestimations’ of risk?

Surprisingly Lallemand opines that “Risk-based capital measures could still serve their original purpose: as an internal instrument to guide banks’ capital allocation processes.

What? Where in all Basel I or II regulations has he seen stated their purpose was of being “an internal instrument to guide banks’ capital allocation processes”?

It is only the complete elimination of risk weighting that could “encourage banks to lend more productively because it would lessen the regulatory skew towards seemingly safe assets, which has done so much to deprive the real economy of capital, inflate housing and land prices, and feed financial instability.”

Because, even with a 5% leverage ratio, something Lallemand favors, keeping risk weighting would keep on distorting the allocation of bank credit on the margin, there where it matters the most.

Lallemand ends arguing, “that such reforms have still not happened is testament to the power of the banking lobby”. No, much more than that, it has been the refusal by bank regulators to admit their mistakes.

Would there have been any type 2008 crisis if European and American investment banks had not been allowed to leverage a mind-blowing 62.5 times with assets rated AAA to AA, or with assets for which an AAA rated entity like AIG had sold a default guarantee? The answer to that is, an absolute definitive, NO!


March 05, 2019

Bad bank regulations have placed the procyclicality of credit ratings on steroids

Sir, Joe Rennison writes: “Big US companies [have] spent the years since the financial crisis gorging on cheap debt [forgoing] higher credit ratings and [slipping] down into the lower reaches of borrowers deemed “investment grade”, which implies a relatively low risk of default. Growing debt piles have fed fears among investors that… worsening economic conditions… could potentially send credit ratings even lower, into the junkyard of ‘high yield’ [which would make the financing more expensive and thereby increase the difficulties]” “Investors urge debt-bloated US companies to shape up” March 5.

Good times allow good credit ratings giving an easy going; bad times produce worse credit ratings causing harder goings. No doubt credit ratings are procyclical. But then consider the fact that current risk weighted capital requirements for banks, better credit ratings less capital – worse credit ratings more capital, places an additional level of procyclicality on top of it all, and one of the principal faults of Basel Committee’s should lay bare in front of you. 


March 04, 2019

We might need to parade current bank regulators down our avenues wearing cones of shame.

Sir, Patrick Jenkins writes: “Bill Coen, secretary-general of the Basel Committee on Banking Supervision… said auditors should be given responsibility for checking banks’ calculations [so as to have] another line of defence to ensure assets are [given] the proper risk weighting”, “Metro Bank sparks call for external checks on loan risks” February 4.

I totally disagree, auditors look at ex post realities, on what banks have already incorporated into their balance sheets, What most matters are the ex ante perceptions of risk. 

Jenkins opines here “The error at Metro was to put some loans into standard risk-weighting buckets, determined by the UK regulator”. Sir, I ask, is that not evidence enough that we should get rid of current bank regulators?

If somebody is to blame, that is precisely the Basel Committee who with its risk weighted capital requirements for banks decided that what bankers perceived ex ante perceived as safe, was so much safer to our bank system than what they perceived as risky.

Basel Committee’s Bill Coen should be asked to explain the rationale of a standardized 20% risk weight for what, rated AAA, is dangerous to our bank systems, and 150% for what, rated below BB-, becomes so innocous. 

Jenkins opines: “The error at Metro was to put some loans into standard risk-weighting buckets, determined by the UK regulator”. Sir, I ask, is that not evidence enough that it behooves us to hold our bank regulators very accountable, perhaps even by parading them down our avenues wearing cones of shame? Perhaps hand in hand with those unable or unwilling to question them.


March 02, 2019

Bank regulations placed populist socialism on steroids, but neo-class-wars represent challenges

Sir, David McWilliams writes:“Mr Bernanke’s unorthodox “cash for trash” scheme, otherwise known as quantitative easing, drove up asset prices, left baby boomers comfortable, but the millennials with a fragile stake in the society they are supposed to build… spawning a new generation of socialists. Soaring asset prices, particularly property prices, drive a wedge between those who depend on wages for their income and those who depend on rents and dividends “‘Cash for trash’ was the father of millennial socialism”, March 2.

I agree. With QEs central banks renounced to all possible cleansing benefits a hard landing could provide, and decided to kick the can forward. But that is not the whole story. 

By distorting the allocation of bank credit with risk weighted capital requirements, which much favored the “safer” present/properties over the riskier future/ventures, it was de facto bank regulators who caused the crisis.

As a brief background, after Basel II in 2004, for all European banks and for US investment banks, the following were the standardized allowed leverages for banks: a) for loans to sovereigns rated AAA-AA the sky was the limit; b) 62.5 times when holding AAA rated securities; c) 62.5 times when holding any asset, no matter how risky, if it had a default guarantee issued by an AAA rated entity, like AIG; d) 35.7 times when holding residential mortgages and e) 12.5 times when lending to unrated entrepreneurs or SMEs.

The 2008 crisis was caused, exclusively, by excessive bank exposures to assets perceived as safe, and that could be held against the least of capital. In US and Europe it was the b, c, d and e assets, and a bit later in Europe, sovereigns, like Greece, that not withstanding it did not have an AAA rating, not withstanding it was taking on debt in euros, which de facto is not their domestic printable one, was assigned by EU authorities a risk weight of 0%.

After the crisis, with Basel III, some new capital regulations were introduced, notoriously a minimum leverage ratio, but the distortions produced by the risk weighted capital requirements are still alive and kicking a lot on the margin, there were it means the most.

As a consequence the can has been kicked forward in precisely the same wrong direction from where it came. Therefore, the day it begins to roll back on us, it could be so much worse.

McWilliams opines: “One battle ground for the new politics is the urban property market”. Indeed, there is a de facto class war going on between those who want their houses to be great investment assets too, and those who simply want to afford to own a home. Just as there is a de facto new class war between those who want higher minimum wages and those unemployed who want any job.

For the time being the old and new socialists on the scene have not been forced to take sides in these wars, as they still gather that going after the filthy rich will suffice to become elected. But the more voters realize that what the wealthy have is not money but assets, and that converting those assets into redistributable money can have serious unexpected consequences for the value of assets, some of which could trickle down on every one… that day redistribution driven populism will lose some power.

Hear this question: “Do you want us young to afford houses or do you want our parents’ houses to be worth more? Make up you mind, you cannot serve both.”


March 01, 2019

My tweet on why the world is becoming a much angrier place than what’s warranted by the usual factors.

Sir, Chris Giles writes “Britain is an angry place: furious about its politics, unsure of its place in the world and increasingly resigned to a grinding stagnation of living standards” “Anger and inequality make for a heady mix” March 1.

Giles analyzes the increasing discontent as a function of the economy, in terms of economic growth, inflation, income inequality, weak productivity and employment rates, whether existing or expected.

That is certainly valid but, sadly and worrisome, there is much more to the much higher levels of anger brewing than could seem be warranted by that. That goes also for the rest of the world. 

Sir, what is happening? Here is my own tweet-sized explanation of that.

Shameless polarization and redistribution profiteers, sending out their messages of hate and envy through social media, at zero marginal cost, are exploiting our confirmation bias, namely the want or need to believe what we hear, up to the tilt. It will all end very badly.”