Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.Sir, Martin Wolf writes: “we are missing a profound transformation in how macroeconomic stabilisation will have to be conducted. Whether we like it or not, we must rely on active fiscal policy.” “Restoring growth is more urgent than cutting public debt” December 14.

Of course, we need active fiscal policy, but what about the private sector? E.g. we must be able to rely on effective allocation of bank credit. And that, because of the risk weighted bank capital requirements, is simply not happening. Two examples: 

Much lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats/politicians know better what to do with credit they are not personally responsible for than e.g. entrepreneurs. And unless we are communist, or in love with taking decisions with other people’s money, we know that’s not true.

Banks are also allowed to leverage their equity much more with residential mortgages than with loans to small businesses/entrepreneurs, those who create the jobs that helps service mortgages and pay utilities. That favors the increase of house prices and weakens the economy. Insane!

Wolf argues: “It is essential to lock in low interest rates. The maturity of UK public debt has always been relatively long. The aim now should be to make it as long as possible, by taking advantage of exceptional borrowing conditions.”

But, those “exceptional borrowing conditions” are artificial. What would the free market rate on UK public debt in absence of QEs and the low bank capital requirements mentioned? And is not the difference between that rate and current ultra-low interests, de facto, not a well camouflaged tax, retained before the holders of those debts could earn it?

We all, Martin Wolf included, should be able to have confidence in that our banks are regulated by sensible and competent people. For a starter that requires regulators understanding that those excessive exposures that could be dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

Sir, July 12 2012, Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." 

Seemingly he still does not ​really ​understand what I meant.

My 2019 letter to the Financial Stability Board

@PerKurowski

What would the Milton Friedman of 50 years ago, have thought of the Martin Wolf of today?

Sir, I refer to Martin Wolf ‘s “Friedman was wrong on the corporation” December 9.

Wolf writes that among his contributions to the ebook Milton Friedman 50 Years Later, and in relation to what a “good game” would look like, that this is “one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; [and] one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises”.

Really? Would Friedman have promoted “addiction to opiates”?

Really? What is parked in tax havens? Profits, or titles to assets that are for the most, 99.99%, not parked in these tax havens?

But yes, the financial sector certainly lobbied for a low capitalization, but why should this sector be more blamed than those regulators who, based on the nonsense that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, allowed it?

Wolf quoted Friedman with “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Yes, that’s true. But what should not be allowed though are for instance regulators setting much lower bank capital requirements when lending to the government than when lending to citizens, something which de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs.

Wolf writes about "unbridled corporate power has been a factor behind the rise of populism, especially rightwing populism". For me worse is much more unbridled technocracy power. What's more populists than a Basel Committee telling the world: "We know all there is to know about what's to our bank systems, so we have decreed credit risk weighted bank capital requirements".

Sir, Wolf says he used to believe Friedman, but that he was wrong. I just wonder what Milton Friedman would have thought of the Martin Wolf of today

A final question, Martin Wolf, what if corporations taking upon themselves to act in a “corporate socially responsible way” generated less employment and had less profits, and therefore paid less taxes?

@PerKurowski

Thou shall not sell carbon emission indulgences

Sir you write: “Polluters can purchase “carbon credits” to mitigate the effects of their activities. This allows them to continue with their existing business while claiming that they are doing their bit to combat climate change” “The merits of a global carbon offset market” December 7.

For more than a decade I have argued that “carbon credits” are like the indulgences sold by the Catholic Church for the forgiveness of sins, and which Martin Luther protested. And carbon credits are currently much promoted by Germany.

In his 2015 Encyclical Letter LAUDATO SI’ Pope Francis wrote: "171. The strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors."

So, in a strange twist of history, it seems the Catholic Church is now telling the Lutheran Church “Thou shall not sell carbon emission indulgences”

Could the Basel Committee learn enough from puzzles and poker so as to correct their misinformation?

Sir, I refer to Tim Harford’s “What puzzles and poker can teach us about misinformation” FT Weekend December 5.

When deciding on what’s more dangerous to banks the regulators in the Basel Committee, with “expert intuition” and great emotion shouted out the “below BB-” and, for their risk weighted bank capital requirements, assigned these a 150% risk weight, and a very smallish 20% to what’s rated AAA.

But, with what type of assets can those excessive exposures that could really be dangerous to our bank systems built-up, with assets rated below BB- or with assets rated AAA?

Never ever with assets perceived as risky, always with assets perceived as safe.

Sadly, the regulators had missed their lectures on conditional probabilities.

And their “expert intuitions” are so strong that they were not able to understand the clear message sent by the 2008 AAA rated MBS. 

What does Tim Harford think regulators could learn from puzzles and poker to correct their misinformation?

PS. Trying to understand the how come of the so loony bank regulations, by reading Daniel Kahneman’s “Thinking, Fast and Slow” 2011.

@PerKurowski

The need for debt to equity conversions is an inescapable reality

Sir, Martin Wolf writes: “It will be crucial to deal with debt overhangs. As the OECD stresses, converting debt into equity will be an important part of this effort”, “A light shines in the gloom cast by Covid” December 1.

Indeed, with so much corporate debt in being pushed down by Covid-19 into junk rated territory, both debtors and creditors will need massive debt to equity conversions, in order to buy the time needed to reactivate assets, before these also become junk. And whether highly indebted companies, are important and viable enough to merit help from taxpayers, from money printers or from banks, by grants or other means, the proof in the pudding is precisely first seeing hefty debt to equity conversions.

The credit rating agencies could also be helpful by indicating how much of each investment grade rated bonds that has been downgraded to junk, should be converted into equity so as to have the remainders of those bonds recover an investment grade rating.

Now, with respect to the restructure emerging and developing countries’ debts, given the current very low interest rates, we unfortunately do not count with the highly discounted US 30 years zero coupon bonds, those which helped create the guarantees that allowed the Brady bonds to become so useful when restructuring many Latin American debts in 1989. 

@PerKurowski