It’s sad when we need to remind regulators to prepare for the unexpected

“The time to prepare for the next threat is now”, that’s how Bill Emmott ends his “How to build global resilience after the pandemic” FT, May 25.

Sir, Mark Twain, supposedly, said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it looks to rain”

Today, if alive, with respect to Basel Committee’s risk weighted bank capital requirements, Mark Twain would have opined: “A bank regulator is a fellow who allows banks to hold little capital when the sun shines, so these can pay lots of bonuses and dividends and buy back lots of stock, but wants banks to hold much more capital, the moment the rain starts”

PS. Emmott writes “But there must be an international accord on debt restructuring, akin to the Brady Plan in the early 1990s.” I lived through that restructuring. It was made feasible by developing countries being able, because US$ interest rates were high, to very inexpensively purchase US$ 30 years zero coupon bonds issued by the US, in order to guarantee the repayment of the principal of their debts. In a world of ultra-low, even negative interest rates, what’s the price of such bonds?

@PerKurowski

Should the Louvre, a homage to inequality, have to be culturally cancelled?

Sir, I refer to Ruchir Sharma’s “The billionaire boom” FT Weekend, May 15.

In this case, as so often happens in articles about the wealthy, it is illustrated with yachts.

As likewise always happens, the fact that the wealthy froze their earned in “good or bad industries” money, or their outright ill-gotten money, by handing it over to those building or selling the yachts, and most probably committing to employing a yacht crew, is an issue of no interest. 

Just as with respect to taxes on wealth the question of what assets and to whom are the wealthy to sell these in order to raise the money to pay for the taxes on wealth it, is scrupulously avoided by the tax proponents.

Where the wealthy’s money flows, should be an integral part of the overall analysis. Then we would be more alert to the possibility that taxing it, and handing over the money to bureaucrats, for them to decide on its use, could lead to the most unproductive use of wealth.

Sir, a personal anecdote. Walking around the museum Louvre in Paris I suddenly saw an 1560 by Pierre Reddon for King Charles IX. I then asked myself who in his sane mind would request this type of absolutely useless shield? Clearly it had to be someone extremely wealthy and powerful, someone who did not care one iota about his own security being threatened on a close range, or about its enormous costs.

https://collections.louvre.fr/en/ark:/53355/cl010117233

In that moment it suddenly dawned on me that basically nothing of what I was seeing at the museum would exist, if it had to be produced by a society where income and wealth was equally distributed. In other words, all this art around me, to have become a reality, has actually required a very unequal society. 

In other words, Shhh... just between you and me Sir... since the museum of Louvre is, unwittingly, a homage to inequality, should it be cancelled?

PS. Sharma writes “Sweden has long abandoned central elements of the social democratic agenda, including wealth and inheritance taxes, as impractical.” There might indeed have been certain policy intermezzos, but legend holds that when Otelo Saraiva de Carvalho, chief strategist of the 1974’s Carnation Revolution in Lisbon, told Sweden’s social democrat leader Olof Palme: “In Portugal we want to get rid of the rich”, Palme replied, “how curious, in Sweden we only aspire to get rid of the poor”

PS. And, as I have written to you soon 3.000 times, those “subprime banking regulations”, with their risk weighted capital requirements, impede that much of that money the wealthy are sloshing around, is efficiently allocated to the real economy. Now, whose fault is that?

@PerKurowski

The “Parable of talents” is currently quite inapplicable to any wealth tax.

Sir, I refer to “Why the toughest capitalists should root for a wealth tax” Martin Sandbu, FT, May 10.

Much of the current wealth is the direct result of huge liquidity injections, and which are distorted by risk weighted bank capital requirements that, among other, so much favors the debts of the government over debts to the citizens… all as if bureaucrats/politicians know better what to do with credit for which repayment they are not personally responsible for, than e.g., small businesses and entrepreneurs.

To favor such wealth tax, besides removing such distortions, I would also like to know what assets, and to whom, the wealthy should sell in order to raise the money to pay such taxes… and what would be the resulting overall productivity of such resource transfer. I believe a full review of the current productivity of all government spending is long overdue.

So, in this respect, taxing wealth with its revenues seemingly not being sufficiently productive, an understatement, sort of reminds me of a Harry Belafonte & Odetta song titled A hole in the Bucket

Sandbu also writes that “a net wealth tax…is the tax version of the New Testament’s parable of the talents” I’m not at all sure that’s currently really so.

I extract the following from Matthew 25: 24-27: 24 “Master,’ 25 I was afraid and went out and hid your gold in the ground. 26 “His master replied, ‘You wicked, lazy servant! So, you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned, I would have received it back with interest.”

First, we now have regulators who, with bank capital requirements, tell banks that when they scatter and sow, they should be risk averse, guarding it all in safe gold, e.g., loans to governments and residential mortgages; staying away from what’s risky, e.g., entrepreneurs and small businesses.

Second, to top that up, with QEs central banks are injecting money thereby keeping interest rates ultra-low.

So, are we allowing bankers to exploit their talents? No! 

Will that produce good interest rates for the depositors? No! 

And if inflation takes off, will they receive their real money back? No!

Sir, with respect to risk taking, and even though I am a protestant, let me finally quote Pope John Paul II: Our hearts ring out with the words of Jesus when one day, after speaking to the crowds from Simon's boat, he invited the Apostle to "put out into the deep" for a catch: "Duc in altum" (Lk 5:4). Peter and his first companions trusted Christ's words, and cast the nets. "When they had done this, they caught a great number of fish" (Lk 5:6).

Will this tweet be ignored by FT?

How much hubris is needed for regulators to impose risk weighted bank capital requirements, as if they know what the risks are?

How much wishful hoping is needed when even Nobel Prize winners in Economic Sciences believe that the regulators do know?

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html