Does Martin Wolf’s “The tragedy of two failing superpowers” conform with FT’s beautiful motto of “without favour”?

Wolf opines about Donald Trump in terms of “a malevolent incompetent” and for this looks for the support of that totally unbiased Jeffrey Sachs who writes about “devastatingly of the ill will and ineffectiveness on display”. “The tragedy of two failing superpowers” April 1.

Sir, if this is what it comes down to, let me be clear that I much prefer the support of a highly incompetent but more principled Donald Trump, against our evidently thousand times more malevolent incompetents, like Hugo Chavez and Nicolas Maduro, than the support given to them by “extremely competent” Barack Obama and Jeffrey Sachs.

Wolf then writes: “For those of us who believe in liberal democracy” Really? Are we to believe that anyone who, for purposes of bank capital requirements, agrees with assigning a risk weight of 0% to his sovereign’s debt and 100% to fellow citizen’s debts, something which de facto implies that bureaucrats knows better what to do with credits for which’s repayment they're not personally responsible for than for example entrepreneurs, could be defined as a believer in a liberal democracy? I don’t think so, to me he would just be a disguised communist.

@PerKurowski

Ms. Gillian Tett, what is that we really have, capitalism or statism?

Sir, Gillian Tett lectures us interestingly with “If you want to understand what is at stake in this debate, it pays to consider the original meaning of the word ‘company’”... “a society, friendship, intimacy; body of soldiers”, “one who eats bread with you” “in other words initially synonymous with social ties”. “Capitalism — a new dawn?” September 7.

Yet, over the years I cannot rememer Ms. Tett saying a word about that our banks are regulated exclusively so as to be safe mattresses in which to put away our savings, without one single consideration given to their vital social purpose of allocating bank credit efficiently to the real economy. “A ship in harbor is safe, but that is not what ships are for”, John A Shedd.

And Ms. Tett also writes “the 2008 financial crisis had undermined faith in unfettered free markets.” What? Like those “unfettered free markets” with Basel II regulations that when in order to borrow from banks, borrowers would have to remunerate an amount of bank capital of 0% if sovereigns, 1.6% if AAA rated, 2.8% if residential mortgages and 8% if unrated entrepreneurs?

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

@PerKurowski

In 1988 one year before the Berlin Wall fell another wall was constructed, one which separated sovereign and private bank borrowings.

Sir, I refer to Ben Hall’s “State ownership back in vogue 30 years after fall of Berlin Wall” August 15.

The only real competitive advantage those in favor of SOEs can argue, is that governments usually have cheaper access to credit, so why put it in the hands of private investors who need to expect higher returns. 

But in 1988 by means of the Basel Accord 1988 the risk weighted bank capital requirements were adopted. With these banks were allowed to hold sovereign debt against much less, sometimes even zero capital, than what these had to hold against loans to the private sector. As a result the interest rate differences between private and public debt started to grow and with it, the SOE’s competitive advantage, and so we should not be too surprised about these being “back in vogue”. 

To illustrate my point just let me ask: Sir, where would the interest rates now be for the 0% risk weighted sovereign Italy, this even though it takes on debt not denominated in a domestic printable currency be, if Italian banks needed to hold as much capital against these as what they must hold against loans to Italian entrepreneurs?

PS. Here my letter to the Financial Stability Board

PS. Here my recent letter to the IMF

@PerKurowski

Central banks and regulators are wittingly or unwittingly imposing communism by stealth, at least in Japan.

Sir, you refer to that Bank of Japan’s holdings of government bonds are already at more than 40 per cent of the outstanding stock… and to “massive equity purchases” [by means of buying into the ETF market], and to“the government is the biggest beneficiary of the BoJ’s low interest rate policy” “BoJ risks falling out of sync on global easing” August 7.

Add to that the lower capital requirements for banks when lending to the government than when lending to citizens, and it all adds up to a huge gamble on that government bureaucrats know better what to do with credit/money than private enterprises. It sure sounds too much like communism by stealth for my liking. 

In 1988 the Basel Accord assigned 0% risk weight to sovereigns and 100% to citizens and we all believed that when in 1989 the Berlin Wall fell we had gotten rid of communism for good. How can the world have been so naïve? It will of course end badly.

@PerKurowski

The case against insane globalism also remains strong.

The purpose of the Basel Committee for Banking Supervision BCBS, established in 1974 is to encourage convergence toward common approaches and standards. That sure reads as it could qualify as that global cooperation Martin Wolf asks for in his “The case for sane globalism remains strong” July 16.

But what if it is not sane?

BCBS has basically imposed on the world the use of credit risk weighted capital requirements for banks.

Since perceived credit risks are already considered by bankers when deciding on the interest rate and the size of exposures they are willing to hold, basing the capital requirements on the same perceived credit risks, means doubling up on perceived credit risks. 

And Sir, as I have argued for years, any risk, even if perfectly perceived, causes the wrong actions, if excessively considered. 

I dislike the concept of any kind of weighted different capital requirements, because that distorts the allocation of credit with many unexpected consequences. But if we wanted to have perceived credit risk to decide bank capital, it would of course have to be based on the conditional probability of what bankers are expected to do when they perceive credit risks, and these might be wrongly perceived.

Would we in such a case assign a 20% risk weight to what is rated AAA and a whopping 150% to what is rated below BB- as in Basel II’ standards? Of course not!

And if we did not think that government bureaucrats know better what to do with bank credit they are not personally liable for, than entrepreneurs, would we then assign the “safe” sovereign a 0% risk weight and the “risky” not rated entrepreneur a risk weight of 100%, which would clearly send way too much credit to sovereigns and way too little to entrepreneurs? Of course not!

And if we thought having a job as important or even more so than owning a house, would we then allow banks to leverage so much more with residential mortgages than with loans to small and medium enterprises, meaning banks can obtain easier and higher risk adjusted returns on their equity by financing “safe” houses than by financing “risky” job creation? Of course not!

Sir, in 2003, when as an Executive Director of the World Bank I commented on its Strategic Framework I wrote: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

Does this mean that I do not agree with Martin Wolf when he argues in favor of multilateral co-operation? Of course not! But it sure argues for being much more careful when going global with plan and rules.

By the way in those same 2003 comments at the World Bank I also wrote: “Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market”. And it did not take the world long before drowning in 2007 and 2008 in the AAA rated securities backed with mortgages to the subprime sector in the U.S.

But have those who concocted those ill suited risk weighted bank capital requirements ever admitted a serious mea culpa? No, they have blamed banks and credit rating agencies.

And in EU the authorities assigned a 0% risk weight to all Eurozone sovereigns even though they all take up debt that is not denominated in their local printable currency. And no one said anything?

Sir, in the whole world, I see plenty of huge dangers and lost opportunities that can all be traced back directly to BCBS risk weighted bank capital requirements. 

So, besides having to be very careful when going global, we also have to be very vigilant on what the global rulers propose. Of course, for that our first line of defense are the journalists daringly questioning what they do not understand or like.

Has FT helped provide sufficient questioning about what the Basel Committee has and is up to? I let you Sir answer that question.

http://subprimeregulations.blogspot.com/2003/03/my-comments-on-world-banks-strategic.html

@PerKurowski

The 0% risk weighting of sovereigns and 100% of citizens, decreed fiscal irresponsibility.

Sir, Martin Wolf, discussing Trump’s tax cuts writes that America’s longterm fiscal position [has become] fragile”, “Trump’s boom will prove to be hot air” July 10.

Fragile indeed. In 1988 when the Basel Accord assigned America’s public debt a 0% risk weight, its debt was about $2.6 trillion, now it owes around $22 trillion and still has a 0% risk weight. 

Wolf opines “it is not too soon to note where the US is heading. It is hard to imagine anybody standing up for fiscal prudence. The choice is rather between rightwing and leftwing Keynesians. In the long run, that is likely to end badly.”

I fully agree but I must add that the risk weighted bank capital requirements, which so much favors credit to the sovereign over for instance credit to entrepreneurs, created such distortions that made it impossible for markets to send out their timely warning signals.

One can argues as much as one like that the credit risk of the sovereign is much less risky than that of an entrepreneur, but, the other side of the coin of that risk weighting, is that it de facto also implies a belief in that government bureaucrats know better what to do with bank credit they’re not personally liable for, than entrepreneurs.

For instance, does Wolf believe the current fiscal sustainability outlook of for the eurozone sovereigns would be the same if there had been just one single capital requirements for all their bank assets? Would he think French and German banks would still have lent to Greece/Italy as much and at the interest rates they did?

Does Wolf not think the immense stimuli injected by central banks in response to the 2008 crisis, would have been much more productive without the distortions in the allocation of bank credit produced by the credit risk weighing?

Sir, Trump’s tax cuts might not be helpful but, in the great scheme of things Trump is, at least for the time being, a really minor player when it comes to be apportioned blame for fiscal fragility. For instance how is the US be able to get out of that 0% risk weight corner its regulators has painted it into?

Sir, In November 2004 you published a letter in which I wrote: “How many Basel propositions will it take before regulators start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

@PerKurowski

FT, Western liberalism might not be obsolete but it sure isn’t what it was a couple of decades ago.

Sir, with respect to Vladimir Putin’s recent claim — “that liberalism is obsolete” you opine his “triumphalism is misplaced. Not all of liberalism is under threat. The superiority of private enterprise and free markets — at least within individual nations — in creating wealth is no longer seriously challenged.” “No, Mr Putin, western liberalism is not obsolete” June 29.

You are only partly right, because nowadays-Western liberalism is not what it was. 

When regulators allow those that are perceived, decreed or concocted as safe, to be able to offer their risk-adjusted interest rates to banks leveraged many times more than those perceived as risky, as has been the case since 1988, that has absolutely nothing to do with free markets.

And assigning for the risk weighted bank capital requirements a 0% risk weight to sovereigns, and one of 100% to citizens, has nothing to do with “superiority of private enterprise” either. Those risk weights de facto imply that bureaucrats know better what to do with bank credit they are not personally liable for, than private sector entrepreneurs, and that has much more to do with statist a la Putin regimes.

@PerKurowski

Compared to the Basel Committee’s, Thomas Gresham’ manipulations seem minor.

Sir, Jerry Brotton in reference to John Guy’s biography of Thomas Gresham “Gresham’s Law: The Life and World of Queen Elizabeth I” quotes Guy in that “Gresham’s financial achievements werea harbinger of a world to come: one in which national sovereignty is answerable to the machinations of the market”. “Man with the Midas touch” June 21.

Greshham“halved the national debt in nine months in a remarkable manipulation of Europe’s markets that would dazzle today’s Brexiters”

I am not so sure of that. Slightly more than 400 years later, in 1988, with the Basel Accord, for the purpose of risk weighted capital requirements, banks regulators managed to impose on a clearly not alert enough world, a risk weight of 0% for their sovereign and 100% for the citizens.

The resulting ability of banks to leverage so much more their equity with sovereign debt, reduced the risk adjusted interest rate they charged sovereigns and, of course made them so much more willing to lend to the sovereigns. More than thirty years have gone by, and yet there is almost no questioning of that 0% risk weight, be it by Brexiters, Remainers or financial journalists. 

Sir, I am certain that had Gresham heard about this for him most surely a feat, he might consider his achievements minor in comparison.

@PerKurowski

Current bank regulators are closer to a Vladimir Putin type of regime, than to any possible Western world liberal idea.

Sir, I refer to Lionel Barber’s and Henry Foy’s interview with Vladimir Putin. ‘The liberal idea has become obsolete’ June 28.

Putin is quoted with that “the liberal idea” had “outlived its purpose”.

Sir, there are way too many interpretation of what is “the liberal idea” to know for cartain what is meant by it. That “liberal idea” flag is often waved for quite opposite positions, like more or less government intervention, to assure more or less personal freedoms… to guarantee more or less some human rights… and so on. I guess “liberal” is also something in the eye of the beholder. 

But to me my kind of “liberal idea” took a deep dive, in 1988, with the Basel Accord, one year before the fall of the Berlin wall. Because that accord, Basel I, introduced risk weighted bank capital requirements, which decreed a 0% risk weight to the debts of some friendly sovereigns, and 100% to citizens’ debts.

That de facto implied a belief that government bureaucrats know better what to do with credit they are not personally liable for, than for instance our entrepreneurs. That de facto has much more to do with a Vladimir Putin type of regime, than with any possible Western world liberal idea.

@PerKurowski