May 27, 2019

When are the Italians citizens to speak up against their statist central bankers and regulators?

Sir, Claire Jones and Miles Johnson write: “With economic growth non-existent and government debt at more than 130 per cent of gross domestic product, Italy would struggle without the aggressive monetary easing that Mr Draghi introduced.”, “Italy faces loss of influence in ECB after Draghi leaves” May 27.

Yes, short-term that’s true but, long-term, that’s much more questionable, especially if the regulatory distortions that favor bank credit to sovereigns over that to citizens are kept in place.

Sir, as far as I know, ECB/Draghi has never objected to that for the purpose of the risk weighted bank capital requirements, Italy has been assigned a 0% risk weight, and this even when its debt is not denominated in a domestic printable currency.

De facto that translates into expecting that Italian bureaucrats know better what to do with bank credit they are not personally responsible for, than what Italian entrepreneurs who would put their own name on the line can do with this; something that we all know can only weaken the economy, that is, unless you are a raving communist.

De facto it also translates into that, sooner or later, in the absence of galloping inflation in the Eurozone, the debt of Italy (and other sovereigns) will become unsustainable. When that happens Italy might have no choice but to give up the euro and return to the lira; something that could even bring the European Union down. If so, how sad that had to happen only because of inept statist central bankers and regulators, that way too few question.

PS. I wonder how many in the European Union Parliament have asked what would be my first question if I had been elected a first time EU parliamentarian?


May 26, 2019

What if Robert Smith had asked the college and its professors for some assistance in paying off the student debts?

Sir, I refer Andrew Edgecliffe-Johnson story on billionaire Robert Smith announcing during a graduation ceremony that he would pay off the for many students enormous debt. “Philanthropist with a gift for surprise” May 25

Indeed, it was a great initiative, at least for the fortunate students but, to evaluate its full significance, you would have to know what assets Smith had to sell, or what services he could not buy, in order to pay off those debts.

But, that said, had Robert Smith said he’d pay off 85% of all graduating Morehouse College’s students’ debts, if only their professors and that college, those who got all the money from that student debt, paid off the other 15%, that could really have been a game changer. 


May 25, 2019

The risk weighted bank capital requirements, is just a lean and mean “regression to the mean” machine.

Sir, Tim Harford when discussing luck and reversal of fortunes, holds that genius followed by mediocrity [is] likely a “regression to the mean”, or in simple terms, a return to business as usual. “It can be hard to discern luck from judgment” May 25.

Indeed, but sometimes that reversal to the mean, has nothing to do with such mystical issues as luck, but is a direct consequence of a distortion. 

As I have often written to FT about, allowing banks regulatory privileges when financing what’s perceived as safe, like sovereigns or houses, will result in too much financing of the safe, which will cause “the safe”, sooner or later to revert to become very risky.

In the same vein, those who without correcting for a crisis are now considered triumphant, like ECB’s Mario Draghi, only because they’ve managed to kick a crisis-can forward, will one day be held much accountable, when that crisis can rolls back on some, as it sure must.


May 23, 2019

Entrepreneurs should, as an absolute minimum, have the same chance for entrepreneurship than the State.

Sir, with much lower capital requirements for banks when lending to the sovereign than when lending to citizens, regulators de facto indicate they believe bureaucrats know better what to do with credit they are not personally responsible for, than entrepreneurs. And with that they are subsidizing sovereign borrowing paid by less access to bank credit for the private sector.

That is why I strongly oppose when Mariana Mazzucato opines: “The UK doesn’t lack strong economic foundations; it lacks investment opportunities… the entire government, particularly the Treasury… rather than obsessing about the fiscal deficit has to put innovation at the centre of how it thinks about economic growth [and] set bold and strategic goals.” “British industry needs its own version of the moon shot”, May 23.

Sir, way before the government takes on moon shot project, something which I absolutely do not oppose, we must clear away the regulatory distortion which impedes the market sending the correct signals on the costs of public debt, and gives entrepreneurs, as a minimum, an equal chance to have their risk adjusted interest payment offers accepted by banks, so that they too can do their own moon shots.


May 22, 2019

Why are tariffs on trade with others, worse than tariffs on access to bank credit for your own?

Sir, I refer to Martin Wolf’s spirited defense of free trade and not less spirited attack on Donald Trump for having turned the US into “a rogue superpower, hostile, among many other things, to the fundamental norms of a trading system based on multilateral agreement and binding rules.” “The US-China clash challenges the world” May 22.

Do I disagree? Not really, except noting that at least Trump follows the instinct to protect his own.

But where was/is Martin Wolf when bank regulators, for instance, with Basel II, require banks to hold 8% in capital when lending to their own unrated entrepreneurs, but allow his banks to lend to any other sovereign AAA to AA rated against no capital at all, or to any other foreign AAA to AA rated entrepreneur against only 1.6% in capital?

Sir, anyone who argues those differences in capital requirements are not de facto tariffs on the access to bank credit, have no idea of what they are talking about.

Truth is that since trade is about today, but credit is about tomorrow, I truly believe the Basel Committee and their affiliate regulators are, with their tariffs on the access to bank credit, doing much more damage than a Donald Trump.

But of course you dare not to favor the opinion of little me over that of your own chief economic commentator.


May 20, 2019

A Universal Basic Income deserves to be implemented fast but carefully, little by little.

Sir, Lex writes:“Either the Universal Basic Income (UBI) has to be unrealistically low or the tax rate to finance it is unacceptably high. Suppose the US provided its 327m inhabitants with $10,000 a year. That would be less than the 2018 official poverty threshold of $13,064. But it would cost 96 per cent of this year’s federal tax take.”“{Universal basic income: } money for nothing” May 20.

Let’s face it, the UBI, being an unconditional payment, eats into the franchise value of the redistribution profiteers, and so there are many out there wanting it never to be launched or, if it is, to be unsustainable. The usual way to sabotage it, is precisely arguing that if it is too small it does not solve anything, or if it is too large, it is fiscally unsustainable.

In my mind UBI, the basing building block for the decent and worthy unemployments we need before social order starts to break down, and therefore such an immensely valuable social experiment, deserves to start small, but fast, and grow, slowly, to where the future will and can take it. 

1. That it helps all to get out of bed but that it never is so big so as to allow anyone to stay in bed. In other words that it is a stepping stool that helps everyone to reach up to whatever there is in the real economy.

2. That it starts small enough and grows little by little so as to guarantee its absolute revenue sustainability. It should never be an UBI for the current generation paid by future generations.

3. That its revenue sources should as much as possible be aligned with other social interests, like a carbon tax that helps fight climate change; or sources aligned with the new times, like taxes on robots, intellectual property and exploitation of citizens’ data.

Sir, the UBI should have as little as possible to do with government and politics, that because it should foremost be as a citizen to citizen’s affair.

PS. In countries blessed with high natural resource revenues, these should feed a much larger UBI, but that is because of the importance of reducing the concentration, in the hands of a centralized government, of income that does not come from taxes paid by citizens.


May 19, 2019

In EU the lines separating the real responsibilities between national and local politicians, and Brussels technocrats, are way too blurry, at least for the ordinary European citizens

Sir, Simon Kuper writes: “In recent years, we have improvised our way into an EU that works for most Europeans of our generation. We now have what Charles de Gaulle called a “Europe of nations”, in which the big decisions are made not by Brussels bureaucrats, or the European Parliament, but by national leaders acting in concert.” “Why today’s Europe of nations works” May 18.

I disagree. Because of the most probably very disastrous consequences for the euro and for the EU, the single most important decision that has been taken in the EU is, for the purpose of the risk weighted bank capital requirements, assigning to all eurozone sovereigns a 0% risk weight, and this even though they all have their debt denominated in a currency that de facto is not their own domestic printable one.

Sir, what German politician would like to be asked: why did you consider that German banks needed to hold eight percent when lending to German entrepreneurs but could lend to Greek bureaucrats against no capital at all. I venture the answer to that to be, no one!

In EU, technocrats and politicians will blame each other, whenever it’s convenient for any of them, but that is usual in most places. The real difference here is that in EU, the lines separating the responsibilities between national and local politicians, and the technocrats, are as blurry as can be. To know that it suffices to follow the European Commission twitter account, and therefore receive the most amazing barrage of publicity on it doing things that nobody could ever think was their responsibility.

Sir, those supporting Brexit could wrongly suppose too much decision power rests in EU, but those supporting Remain could be just as wrong supposing too much decision power remains in Britain. Who knows? Not me, but perhaps not you either.


May 18, 2019

On Brexit, as is usual these days in most issues, it would seem that both in Britain and EU, it is more profitable to divide than unite.

Sir, Martin Wolf writes that “In 2018 the EU’s exports to the UK were 79 per cent of its exports to the US and 153 per cent of its exports to China, though the UK economy was 14 per cent of that of the US and 21 per cent of China’s. The UK sent 47 per cent of its exports to the rest of the EU, against 13 per cent to the US and 6 per cent to China, though the US economy was 29 per cent bigger than the EU’s (excluding the UK), and China’s was only 16 per cent smaller.” “‘Global Britain’ is an illusion because distance has not died” May18.

It is not that very clear who depends most on whom for exports, Britain on EU, or EU on Britain? And I doubt you could really deduct that from these figures.

Nonetheless, that clearly evidences that it should also be in the interest of EU to come up with a counteroffer that could allow most of those who voted for Brexit to accept a Remain. As far as I know, there’s been nothing of that sort… even though, let me be very clear about it, neither does it seem Brexit proponents/negotiators have tried hard to propose something to EU that would make the Brexiters to accept a Remain.

In July 2017 in a letter to you I wrote: “I wonder why Martin Wolf, and most other influential Brexiters and Remainers, British foremost, supposedly, are not out there marketing the need for a very amicable Brexit, among all those Europeans that might wish the same, and who also the last thing they need, is for additional complications in their already hard as it is life.”

So why the lack of wanting to develop proposals that could bridge the differences between Brexiters and Remainers? Could it be, as is way too usual these days, that there is more political and financial profits in dividing than in uniting?

Sir, if so, what do we do about is, as that can only end up tragically bad, for all?


May 17, 2019

When compared to Venezuela’s oil reserves, Citgo is nothing.

Sir, Colby Smith refers to Citgo as “the last-remaining crown jewel of Venezuela” “Stakes rise for Venezuelan assets stateside” Alphaville May 17.

Frankly, Venezuela has what has been reported as the largest oil reserves in the world. What is Citgo compared to that? Absolutely nothing!

What’s valuable for Venezuela is its oil, but the value of it has been greatly diminished, first and foremost because the government handles the redistribution of all net oil revenues, but then also because way too many have wanted to profit from doing something with our oil, for instance refining it, abroad.

“Until someone convinces me of something different, I insist that anything else the Venezuelan state tries to do with oil, means a loss or a net reduction of the benefits brought by the first phases of the operation, [its extraction].

Because of that and the fact that I have seen the corporation's reports, I still can't understand the economic reasons for having bought and kept Citgo. There is evidence in the reports that it is being subsidized by PDVSA. 

And, for those who argue so much in favor of privatizing PDVSA, I challenge them to make an IPO for Citgo, subject to their obligation to purchase oil products at market prices."

Sir, we have millions of our young growing up undernourished and still some try to hang on to a very high hanging fruit as Citgo, so my current tweet sized proposal is: 

So that Venezuelans can eat quickly, hand over Pdvsa (and Citgo) to Venezuela’s creditors quickly, to see if they can put all that junk to work quickly, to see if they can collect something quickly, and pay us Venezuelans, not the bandits, our oil royalties quickly.

The Iraq Study Group established by the U.S. Congress, reported in 2006 the following: "There are proposals to redistribute a portion of oil revenues directly to the population on a per capita basis. These proposals have the potential to give all Iraqi citizens a stake in the nation's chief natural resource." Sadly it came to nothing

Sir, if that were to be implemented in Venezuela, then Venezuelans would live in a truly independent nation, and not just in somebody else’s business.

PS. A couple of years ago I gave a speech to transfer price specialists in Washington recounting the very curious thing of Venezuela´s state PDVSA that sold petrol at lower than market prices to their then recently acquired refinery subsidiary in the US, CITGO, paying unnecessary taxes to another than their own tax man, probably just because they wanted to show the Venezuela public that Citgo was such a good investment. Crazy? Yes of course, but that´s life in a tropical country.


May 15, 2019

How does the European Commission propose Eurozone’s sovereigns get out of that corner into which many of them have been painted by 0% risk weights?

Sir, Mehreen Khan reports that the European Commission’s Spring forecast warned last week that: “The geographical make-up of the euro area’s fiscal stance does not reflect the adjustment needs in the high-debt member states” “The eurozone’s fight for stimulus” May 15.

If so, for how long will the European Commission back those 0% risk weights that for the purpose of bank capital requirements have been assigned to all eurozone sovereigns, even when these de facto are indebted in a currency that is not their own domestic printable one?

That risk weight translates into signaling lower interest rates for the eurozone sovereigns that what would have been the case without these distortions.

That has caused many of the eurozone sovereigns to be painted into a corner. How does the European Commission propose they get out of it? 


Three questions for Angus Deaton, the chair of The Institute for Fiscal Studies’ wide-ranging review of inequalities in UK

Sir, I refer to Angus Deaton’s “Inequality in America offers lessons for Britain” May 15.

I have three questions for him:

Regulatory subsidized credit for the purchase of houses, which has helped morph houses from being homes into investment assets, how much increased inequality has that caused between those who own houses and those who do not?

The increased benefits for those who have jobs, how much increased inequality has that caused when compared to those without jobs?

The risk weighted capital requirements for banks, which very much favors the financing of the “safer” present over the riskier future, how much inequality is it producing between current and future generations?


As a consequence of too much regulatory subsidized credit, whether by deflation or inflation, both houses and sovereign debts will be worth much less.

Sir, Martin Wolf writes: “monetary policy fosters risk-taking, while regulation discourages it — a recipe for instability.” “How the long debt cycle might end” May 15

Over the last decade I have written hundreds of letters to Wolf and other at FT about the dangerous waste of any stimuli package when you simultaneously distort the allocation of bank credit to the real economy, as is currently done with the credit risk weighted capital requirements for banks.

Just looking at some of the risk weights: like 0% for the sovereign, 20% for anything rated AAA to AA, 35% or less for residential mortgages and 100% for loans to unrated entrepreneurs, should have sufficed to know where we would end up, namely:

A banking sector abandoning much of its traditional “risky” lending in favor of what is perceived, decreed or concocted as safe; forcing most of those that used to keep to what was perceived as safe, like individual private savers, pension funds and even insurance companies, to get into the world of what’s risky, something for which they are much less prepared than banks.

And excessive bank exposures, as usual, morph what is very safe into being very risky. Having, with too much financing, pushed houses from being homes into being investment assets, have made households house-rich and money poor. Just wait till many of current owners, out of need must convert houses into main-street purchased power at any cost. Whether by deflation or inflation, those houses will be worth much less.

Of course, lower bank capital requirements for loans to sovereigns than for loans to citizens, translates, de facto, into a belief that bureaucrats know better and are more responsible than citizens about how to use bank credit, and will therefore cause excessive sovereign debts. 

With respect to it Wolf writes: “Those in emerging countries are particularly vulnerable, because much of their borrowing is in foreign currencies”. That is so but let me also add to that the Eurozone nations who, de facto, do not take on debt denominated in a domestic printable currency. 

But, let us be clear, a nation printing itself out of excessive public debt, does also expose itself to inflationary pressures and so again, whether by deflation or inflation, in real terms, that sovereign debt will be worth much less than what its buyers’ paid for it.

Sir, finally, Martin Wolf opines that those who recommended another route of adjusting than with the stimuli package to the 2008 crisis were “fools”.

That could be but, as a consequence of taking “the smart way”, the world just kicked the crisis can forward and renounced to the long-term benefits of a hard landing. There will come a time when too many will regret not having taken the fools’ way.


May 09, 2019

Sooner or later redistribution profiteers will meddle with any wealthy sovereign wealth fund.

Sir, with respect to “the world’s largest sovereign wealth fund” Norway’s, Richard Milne writes: “The danger is that one of the few sovereign wealth funds based in a democracy could be weakened by political meddling.” “Wealth fund’s abode at risk of becoming Norway political saga” May 9.

I quote from my book “Voice and Noise” from 2006. “My name was put forward as a candidate for the post of Diversification Manager in the Venezuela Investment Fund that was being created in 1974 to handle the oil income surpluses of the nation. I entered the Fund its very first day, and I left a couple of weeks later the same day my desk arrived, utterly frustrated when the Fund was requested [by the politicians in government] to analyze, and obviously endorse, [in one week] the economic feasibility studies of a 4 billion dollar investment known as the Fourth Plan of SIDOR, the big Venezuelan iron and steel complex. With an “if something goes wrong with this project the Venezuelans might have the right to hang us in Plaza Bolívar, and I’m much too young for that” I slammed the door on the public sector …”

Sir, sometimes politicians (redistribution profiteers) will meddle with a sovereign wealth fund after just two weeks, sometimes it will take decades for that, but sooner or later that will always happen, you can bet on that.


May 08, 2019

FT, when helping covering up for bank regulators’ mistakes, do you lie awake, or do you sleep like a baby?

Sir, Sarah O’Connor writes “We could use more leaders in politics and business who doubt themselves, who seek the opinions of others and who lie awake worrying about the consequences of their actions.” “A spot of ‘polish’ is not going to transform the lives of state school pupils” May 8.

Indeed. The regulators in the Basel Committee decided they had the right to distort the allocation of bank credit because they thought that what was ex ante perceived as risky is more dangerous ex post to our bank systems than what is perceived as safe.

As the 2008 crisis provided more than sufficient examples of, this is clearly not the case.

But, do these regulators lie awake because of the consequences for the real economy of what they did, or do they do so because of the consequences for themselves, if their mistake is found out?

Sir, let me ask, since with your silence you’ve helped cover up for this costly mistake, so much that it has not yet been corrected, do you lie awake, or do you sleep like a baby?


Central banks, when targeting, should start by making sure they are targeting the correct target; and the last thing they should do, is to promote distortions in the allocation of bank credit.

Sir, Marie Owens Thomsen writes: “Today, governments tend to run only budget deficits, making them rather structural. This leads to ever-rising debt levels and poses a potential policy dilemma. Thanks to the blissfully low rate of inflation, it is possible to ignore this fact. But should inflation hypothetically shoot up, it would quickly become apparent. Central banks could find themselves unable to raise policy rates enough to combat price increases without causing a debt sustainability crisis at home.” “Central banks need to be less dogmatic on inflation targeting” May 8.

Scary stuff, but even more so when one considers the following:

First, that the targeting of inflation is based on an entirely subjective measure of inflation. Just as an example it is based on the cost of renting houses but not the price of houses.

Then second, the artificially imposed risk weighted bank capital requirements, which among other much favor “safe” sovereign debt over “risky” loans to entrepreneurs and SMEs, is distorting the allocation of bank credit to the real economy, and sends out the wrong interest rate signals. For instance had the EU authorities not assigned a 0% risk weight to all Eurozone sovereigns, even though these were getting indebted in a currency that de facto is not their domestic (printable) one, Greece would never have been able to build up the exposures to German and French banks that doomed it to a crisis.


May 05, 2019

When experts on different aspects collaborate they should be able to disagree, not just join a mutual admiration club.

Sir, Tim Harford writes about “a flawed statistical study by Winston Churchill’s scientific adviser Frederick Lindemann that no one had both the technical skill and the political clout to challenge. [It caused] the allied bombing of dense urban areas in Germany during the war, which not only took a terrible toll on civilians but failed in military terms by sparing industrial targets.” “Real change requires experts to collaborate” May 4.

There is a document prepared by the Basel Committee on Banking Supervision dated July 2005 and titled “An Explanatory Note on the Basel II IRB Risk Weight Functions". It can be found on the web site of the Bank for International Settlements.

It is supposed to explain the standardized risk weighted capital requirements for banks decided upon in the Basel II agreements. It does nothing of that sort, mostly because those risk weights are impossible to justify.

For instance assets rated AAA to AA rated, which ex ante perceived safety could cause banks to build up excessive exposures that could be dangerous to the bank system if these turned out ex post risky are assigned a 20% risk weight while; for assets rated a below BB- and that because of their perceived riskiness banks will not voluntarily build up excessive exposures to, and therefore represent no risk to the bank system, even if they turn out even riskier than expected, have been assigned a whopping 150% risk weight.

But that explanation was never challenged. The fact that AAA to AA rated assets could be leveraged 62.5 times by the banks, when compared to the 12.5 times allowed leverage with unsecured loans to unrated entrepreneurs, created the incentive structure for the 2008 crisis, caused by the excessive exposures to the AAA rated securities backed with mortgages to the subprime sector in the US, which turned out very risky; or by the excessive exposures to assets covered by default guarantee sold by AAA rated AIG.

Even after that crisis, the silence on it has persisted. As is our bank systems are doomed to especially large crisis, caused by especially large exposures to assets perceived ex ante as especially safe, but against which when these turn out ex post to be especially risky banks hold especially little capital.

How did the weavers in Basel manage to convince the world that with their regulations the bank systems were fully dressed, and that anyone not seeing that were unfit for their positions, stupid, or incompetent? I have, like the child in Hans Christian Andersen’s “The Emperor’s New Clothes”, shouted out innumerable times that our bank systems are now even worse of than if naked, but this has obviously not sufficed.

Harford opines “good policymaking is now a team effort. It requires different perspectives and a range of specialist expertise. We all must learn to work with people who see the world very differently”

Indeed, and there is of course more than enough “technical skill and the political clout to challenge” these regulations, but yet nothing happens. Could there perhaps be too many disincentives to do so? For instance like then not being invited to Davos? 

Sir, one day historians will scratch their heads trying to figure out the reasons for the world’s now more that thirty years silence, on the outright loony (and statist) risk weighted bank capital requirements. Do you not wonder what they in that respect could say about FT’s?