The privileged subsidizing of sovereign debt that apparently shall not be named

Sir, let us suppose that as credit risks, banks perceived Martin Wolf and me as equally risky or equally safe. We would then, for the same amount of borrowings, be charged the same risk adjusted interest rate.

But then suppose that for whatever strange reason, regulators allowed banks to leverage much more with loans to me than with loans to Martin Wolf, and so banks would therefore obtain higher returns on equity when lending to me than when lending to Martin Wolf.

And also suppose that for some even stranger reason, Bank of England would buy my loans from the banks, but not those loans given to Martin Wolf.

Clearly the result would be that I would be able to borrow much more and at much cheaper rates from banks than what Martin Wolf could.

Would Martin Wolf in such a case opine that the higher interest rates he had to pay was the result of the market?

I ask this because Martin Wolf frequently makes reference to the very low rates that many sovereigns have to pay, and holds they should take advantage of it by borrowing as much as they can, in order to invest for instance in infrastructure.

And Martin Wolf seemingly refuses to consider those “very low rates” a consequence of regulatory favors of sovereign debts and QE purchases of it.

That distorts the allocation of credit in such a way that, de facto, regulators and central banks believe bureaucrats / politicians know better what to do with credit they’re not personally responsible for than for instance entrepreneurs. 

In the best case I would call that crony statism, in the worst outright communism. 

One day future historians will recount, and Paris’ Musée de L’Homme exhibit: “1988 Basel I: When Regulators introduced Financial Communism”

Our bank regulators, just like "Sulley" Sullivan and Mike Wazowski, fear the wrong thing.

Sir, Martin Wolf, discussing US-China relation ends with, “Our enemy is not China. Have confidence in our values of freedom and democracy. Understand that it is on the creation of new ideas that we depend, not the protection of old ones. That in turn depends on freedom of inquiry and openness to the best talent from around the world. If western countries lose these, they will lose the future. As the greatest US president of the 20th century declared: “The only thing we have to fear is fear itself.” “America must reset its rhetoric on China’s rise” October 31.

Absolutely! But why then it is so hard to get Mr. Wolf to understand that current risk weighted capital requirements for banks, which so dangerously distorts the allocation of credit to the real economy, is nothing but an expression of fear… and to top it up a completely unfounded one. 

Just as "Sulley" Sullivan and Mike Wazowski in Monsters Inc. thought that children were toxic to them, the regulators are convinced that what’s perceived as risky is what’s dangerous to our bank system. Of course it is what’s perceived as safe that poses the real dangers.

Wolf asks, “What has been the most important event of 2018 so far?” He answers “arguably, it was the speech on US-China relations by Mike Pence, US vice-president, on October 4.”

I would hold that the most disastrous important event during the last three decades was the introduction, in 1988, with the Basel Accord, of these so utterly silly and naïve risk adverse regulations. That year the Western world said no ti the risk-taking that has been the oxygen of its development.

Sir, again, let me remind you that just for a starter, had no banks been allowed to leverage with assets over 60 times only because these were AAA rated, or limitless with loans to sovereigns like Greece and Italy, we would all be in a much different and surely better world.

When is Martin Wolf going to stop protecting old senseless fears?

God make us daring!

To tell us “What really went wrong in the 2008 financial crisis” might require more distance to the events

Martin Wolf reviewing Adam Tooze’ “Crashed: How a Decade of Financial Crisis Changed the World” refers to the author’s question of “How do huge risks build up that are little understood and barely controllable?” “What really went wrong in the 2008 financial crisis?” July 18.

May I suggests as one cause, the nonsensical ideas that can be developed through incestuous groupthink in mutual admiration clubs of great importance, such as bank regulators gathering around with their colleagues of the central banks in the Basel Committee for Banking Supervision.

Wolf writes: “The crisis marked the end of the dominant consensus in favour of economic and financial liberalisation” 

Not so! The end in “favour of economic and financial liberalisation” happened much earlier when the regulating besserwissers decided they knew enough about making our bank systems safer, so as to allow themselves to distort the allocation of bank credit.

In 1988, the regulators, with the Basel Accord, Basel I, surprisingly, with none or very few questioning them, decided that what’s perceived as risky was more dangerous to our bank system than what’s perceived as safe, and proceeded to apply such nonsense with their risk weighted capital requirements for banks. More risk, more capital – less risk, less capital. 

That meant that banks could then leverage more their regulatory capital (equity) with “the safe” than with “the risky”; which translated into banks earning higher expected risk-adjusted returns on equity with “the safe” than with “the risky”. That would of course from thereon distort the allocation of bank credit more than usual in favor of the safe and in disfavor of “the risky”.

That of course ignored the fact that what is perceived as risky has historically proven much less dangerous to the bank system than that which is perceived as safe. 

Basel I, which already included much fiction, like assigning a 0% risk weight to sovereigns and 100% to citizens, was bad enough but then, in 2004, with Basel II, the regulators really outdid themselves allowing for instance banks to leverage 62.5 times their capital with assets that had an AAA to AA rating, issued by human fallible rating agencies was present.

We have already paid dearly for that stupidity, as can be evidenced by the fact that absolutely all assets that detonated the 2007/08 crisis had in common generating especially low capital requirements for banks, because these were perceived (houses), decreed (Greece) or concocted (AAA rated securities) as safe.

I have ordered it but of course I have not read Adam Tozze’s book yet. When I do I will find out if it makes any reference to this. If not, I might just have to wait for other historians who are more distant from the events.

@PerKurowski

Where would America be today had not bank regulators distorted credit and central bankers kicked the crisis can forward?

Martin Wolf, expressing concerns we all deeply share asks, “Who lost “our” America?” and he answers: “The American elite, especially the Republican elite… They sowed the wind; the world is reaping the whirlwind. “How we lost America to greed and envy” July 16.

I respectfully (nowadays not too much so) absolutely disagree. That because supposedly independent technocrats generated the two following events:

First, in 1988 regulators with their so sweet sounding risk weighted capital requirements, promised the world a safer bank system, but then proceeded to design these around the loony notion that what was perceived as risky was more dangerous than what was perceived as safe. That distorted the allocation of bank credits in favor of the "safer" present and against the "riskier" future. That must have stopped much of any ordinary social and economic mobility.

Then in 2007/08, instead of allowing the crisis to do its natural clean up, central bankers, starting with the Fed but soon to be eagerly followed by ECB and other central banks, just kicked the can forward, favoring sovereigns and existing assets. Just as an example, with their repurchase of the failed securities backed with mortgages to the subprime sector, they saved the asses of many investors and banks (many European) while very little of that sacrifice flowed back to those who, in the process, had been saddled with hard to serve mortgages.

Martin Wolf, and you too Sir, would benefit immensely in trying to imagine how the world would be looking now, without that unelected and inept technocratic interference! What had specifically Republicans, or Democrats, to do with that interference?

As I see it if that had not have happened Trump would not even have been thinking of running as a candidate.

PS. An aide memoire on some of the mistakes with the risk weighted capital requirements.

@PerKurowski

Citigroup’s Chuck Prince said: “As long as the music is playing, you’ve got to get up and dance”, but bank regulators insist on playing the same 30 years old song.

Sir, Andrew Hill worries about how many of today’s banker class remember it, let alone worry, about the complacency expressed in Chuck Prince’s “As long as the music is playing, you’ve got to get up and dance. “James Gorman, chief executive of Morgan Stanley “Amnesia dooms bankers to repeat their mistakes” June 24.

Hill hopes Gorman “is experienced enough to have detected the echoes of 2007 in the current soundtrack of rising share prices and lowering regulatory burdens… and that he teaches “more of his younger, fresher-faced staff to recognize the tune and know when to bow politely and leave the dance floor.

As for me I would much rather prefer the regulators stopped playing that very same old song of the “risk weighted capital requirements for banks”, composed in 1988 by the Basel Accord, and otherwise known as “You earn higher returns on the safe than on the risky”. That song drove bankers into an intense maniac polka, in pursuit of the very high expected risk adjusted returns offered on what was perceived (houses), decreed (Greece 0% risk), or concocted (AAA rated securities) as safe.

PS. Hill refers to John Kenneth Galbraith’s The Great Crash 1929 account of the willful errors and self-interested speculation of the great investment banks. But Galbraith also wrote “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.” Money: Whence it came, where it went” (1975)

@PerKurowski

Predictability, in bank regulations, is more a dangerous threat than help

Sir, I refer to Robin Wigglesworth’s excellent discussion on the difficulties and hard choices central banks face when communicating their feelings and policies “Central banks might benefit from a healthy dose of ‘constructive ambiguity’”. May 14.

But let me focus (for the umpteenth time) on the concluding note “Predictability may be a hindrance rather than a help”

The Fed’s Governor Laid Brainard, in a recent speech “An Update on the Federal Reserve's Financial Stability Agenda” said: “The primary focus of financial stability policy is tail risk (outcomes that are unlikely but severely damaging) as opposed to the modal outlook (the most likely path of the economy).”

That is how it should be, but it is not! That the riskiness of bank assets, for instance with the help of credit rating agencies, could be somewhat predicted, tempted regulators into creating risk weighted capital requirements for banks; but that same “predictability” also blinded them completely to the fact that the safer something is perceived, the more dangerous does its fat-tail-risk become. For instance they assigned a risk weight of only 20% to the AAA rated and one of 150% to that which was rated below BB-. Is not the fat-tail-risk of what has been rated below BB- almost inexistent?

Governor Leal Brainard also writes: “Treasury yields reflect historically low term premiums--. This poses the risk that term premiums could rise sharply--for instance, if investor perceptions of inflation risks increased.” 

Indeed, but to that we must also add the possibility of the investor perceptions of Treasury infallibility changes for the worse.

When in 1988 the regulators, with Basel I, decided to assign a 0% risk-weight to some sovereigns they painted these into a corner. If that risk weight is not increased, then sovereigns will become, sooner or later over-indebted, and risk will grow until it hits 100%. If that risk weight is increased, ever so slightly, markets will be very scared. How to get out of that corner is the most difficult challenge central banks and bank regulators face. Let us not forget that in 1988 US debt that was $2.6 trillion. Now it is US$21 trillion, growing, and still 0% risk weighted.

PS. The only way to solve the 0% sovereign risk weight conundrum that I see, is to increase the leverage ratio applicable to all assets, until that level where the risk weighted capital requirement totally loses its significance.

PS. Brainard also stated “Regulatory capital ratios for the largest banking firms at the core of the system have about doubled since 2007 and are currently at their highest levels in the post-crisis era.” Regulatory capital ratios, when risk weighted, might mean zilch.

@PerKurowski

Does not “safe(ish) activities such as holding government bonds” contain the fattest most dangerous tail risks?

Sir, Gillian Tett writes “the Fed and the Office of the Comptroller of the Currency introduced proposals to “tailor leverage ratio requirements to the business activities and risk profiles of the largest domestic firms”. In plain English, this means banks can operate with a little less capital to absorb losses, provided they focus on safe(ish) activities such as holding government bonds.” “Trump’s mixed record on rolling back bank reform” April 13.

The Fed’s Governor Laid Brainard, in a recent speech “An Update on the Federal Reserve's Financial Stability Agenda”said: “The primary focus of financial stability policy is tail risk (outcomes that are unlikely but severely damaging) as opposed to the modal outlook (the most likely path of the economy).”

So let me ask: What is the tail risk of “safe(ish) activities” compared to that of riskier activities?

How fat or dangerous is the tail risk of what is rated below BB-? Very skinny indeed.

How fat or dangerous is the tail risk of what is rated AAA? Very, very fat indeed.

Government bonds? When in 1988 the regulators, with Basel I, decided to assign a 0% risk-weight to some sovereigns they painted themselves into a corner. If that risk weight is not increased, then sovereigns will become, sooner or later over-indebted, and their risk will grow until it hits 100%. If that risk weight is increased, ever so slightly, markets will be very scared. How to get out of that corner is the most difficult challenge central banks and bank regulators face. Let us not forget that in 1988 US debt that was $2.6 trillion. Now it is US$21 trillion, growing, and still 0% risk weighted.

PS. The only way to solve the 0% sovereign risk weight conundrum that I see, is to increase the leverage ratio applicable to all assets, until that level where the risk weighted capital requirement totally loses its significance.

@PerKurowski

Jan Zielonka, yes, the ‘enlightened’ and not accountable to anyone besserwisser ‘experts’, are taking our world order down.

Martin Wolf writes that Jan Zielonka, in “Counter-Revolution”, holds that “liberal democracy and neo-liberal economics, migration and a multicultural society, historical ‘truths’ and political correctness, moderate political parties and mainstream media, cultural tolerance and religious neutrality…is under attack” and that he “is particularly critical of the EU, a “prototype of a non-majoritarian institution led by ‘enlightened’ experts”. “Project backlash”, February 3.

“Enlightened experts”? Absolutely! In 1988, without any real meaningful consultations, without thinking about the purpose of the banks, and without thinking thru its possible consequences, G10’s central bankers and regulators introduced risk weighted capital requirements for banks.

The Basel Committee then favored the sovereign with the outrageously statist risk weight of 0%; and, in 2004, the AAArisktocracy with 20% and the financing of residential houses with 35%; while disfavoring loans to unrated citizens, SMEs and entrepreneurs with a 100% risk weight.

Did those regulators ever explain why they should want to favor with lower capital requirements for banks that which is already favored by being perceived as safe, and thereby discriminate against that which is already disfavored by being perceived as risky? No. They are such besserwissers they don’t even hear the question.

These regulations seriously distorted the allocation of bank credit to the real economy by stimulating the banks to finance much more the “safer” present consumption than the future “riskier” production… something that truly constitutes a shameful intergenerational treason.

Besides a slowing economy, the only thing the risk weighting guarantees is that when banks systems really find themselves in trouble, which is when something perceived as very safe turns out to be very risky, banks will stand there with especially little capital. Brilliant eh?

Martin Wolf ends with “We can see the crisis of liberal democracy most clearly in the fact that so ardent, yet disappointed, a proponent offers not much more.”

Mr. Wolf what about your duty of “without fear and without favor” using your throne of influence to force the Basel Committee regulators to answer the questions that I have posed in thousand of letter to FT, and mostly to you?

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

Per Kurowski

In terms of causing the undoing of the west’s liberal democracy and global order, Trump (until now) is nothing compared to the Basel Committee

Sir, Martin Wolf holds that: “political developments have fractured the west as an ideologically coherent entity” “Global disorder and the fate of the west”, January 3.

I argue that much more than recent political developments the west, as we knew it, at least as I thought of it, was fractured in 1988 when regulators, with the Basel Accord, came up with risk weighted capital requirements for banks.

The following were Basel II’s capital requirements for banks on exposures to sovereigns according to their credit ratings: AAA to AA = 0%; A+ to A = 1.6%; BBB+ to BBB- = 4%; BB+ to B- = 8%; Below B- = 12%; Unrated = 8%.

What have that regulation to do with “A liberal democracy [where] the participants recognise the legitimacy of other participants common…[and] rests on a neutral rule of law”?

That someone like Walter Wriston could argue, "Countries don't go bankrupt," does not mean that some sovereigns have the right to declare themselves infallible. That was never part of any (recent) global order… nor was that those citizens who perceived as safe were already so more favored than those perceived as risky when accessing bank credit, would gain additional advantages by generating lower capital requirements for banks.

The development of the west like all development does required a lot of risk-taking. The day regulators layered on their purposeless risk aversion on top of already risk adverse banks… they doomed the west to a standstill, a “relative decline”, which, with time, will turn into a fall unless we can stop that dangerous nonsense. God make us daring!

Sir, what Trump, until now at least, might be doing to cause the undoing of the west’s global order is chicken shit when compared to what the Basel Committee has done. Martin Wolf does not think so because he considers it the duty of bankers to do what is right and ignore the incentives they are given to provide a high risk-adjusted return on equity to their shareholders.

And talking about populism, is not “We have risk weighted the banks’ capital for you so that you can now sleep calm” pure outrageous technocratic populism?

@PerKurowski

Bank regulators, imposing irresponsible insane rules, are prime destroyers of the rational liberal rules-based world order

Sir, Martin Sandbu writes of “opponents of the liberal, rules-based world order built up over 70 years” and that “The anti-liberal front’s undisputed leader, is the US under President Trump”, “The battles of ideology for our age”, December 27.

Sir, forget it, whatever President Trump might have done until now with respect to breaking down a rules-based world order, is nothing when compared to the damage bank regulators have done when trying to impose their own petit committee concocted regulatory rules on the world.

What they did, namely to allow banks to leverage more with assets perceived as safe than with assets perceived as risky; something which allows banks to earn higher risk adjusted returns on equity on assets perceived as safe, is something absolutely irresponsibly insane.

First, because that distorts the allocation of bank credit with serious consequences for the real economy, like favoring “safe” financing of houses over “risky” financing of “risky” entrepreneurs; which results in many basements for the young to live with their parents but few jobs for them to afford their own upstairs.

Second, by decreeing the risk-weight of the sovereign to be 0%, while that of the citizens on which that sovereign depends were weighted 100%, they effectively, 1988, one year before the fall of the Berlin wall, introduced through the backdoor, a mechanism to provide the financing to sustain (for some time) runaway statism.

Third, because since major bank crisis never ever result from excessive exposures to what was ex ante perceived as risky, it all serves absolutely no stability purpose at all.

Sir, if the “liberal internationalist camp working to defend a multilateral system of collaborative rules-based governance for economic openness to mutual advantage” is to go anywhere, that must begin by forcing bank regulators to satisfactorily respond the very straightforward question of: Why do you require banks to hold more capital against what has been made innocous by being perceived as risky than against what’s made dangerous by being perceived as safe?

Sandbu correctly argues: “In a global battle of ideas, liberals must show urgently that the existing order can be made to work for everyone”. But, injecting quantitative easing liquidity and low interest assistance, while such distorting regulations are in place, guarantees these will not be made to work for everyone, but only for those already in possession of safe assets, like the parents’ houses.

@PerKurowski

Sadly, banks must now to take on board rules that were not adjusted to what caused the crisis.

Sir, Martin Arnold, your Banking Editor writes: “In the coming year, much of the alphabet soup of post-crisis financial regulation will be completed — including Basel III, IFRS 9 and Mifid II — giving the industry the most clarity for almost a decade on the rule book it must follow.” “Lenders take on board rules of a post-crisis world” December 30.

We are soon three decades after regulators in 1988 with Basel I, concocted risk weighted capital requirements for banks, and 13 years after they put these on steroids with Basel II’s risk weights of 0% for sovereigns, 20% for AAA rated, and 35% for residential mortgages. That caused irresistible temptations for banks to create excessive exposures to these “safe” assets, which resulted in the 2007/08 crisis. And yet there is almost no discussion about that monstrous regulatory mistake.

So the risk weighting is still part of the regulations; and therefore the 0% risk weighted bank exposures to sovereings keeps growing and growing; as well as is the disortion of bank credit in favor of the “safer” present and against the “riskier” future. 

In this respect if I were to title something of this sort at this moment it would be more in line of “Lenders take on board rules that have not been adjusted to the crisis and therefore guarantee a world with even larger bank crises”

The irresponsibility and lack of transparency evidenced by the members of the Basel Committee is amazing. The lack willingness of media, like the Financial Times, to pose some simple questions to these regulators, is just as incomprehensible. 

When the next bank crisis, or the next excessive exposure to something perceived as very safe blows up in our face, how will your bank editor then explain his silence on this?

@PerKurowski

Its worse! To central banks’ holdings of public debt we must add that of normal banks holding it against zero capital

Sir, Kate Allen and Keith Fray with respect to the QEs write that “The Fed’s balance sheet has expanded significantly several times in the past, including during the second world war when it soaked up debt sales in a bid to improve market conditions. But the current era is the first time in history that such a large group of central banks has undertaken such a substantial volume of co-ordinated buying over the space of nearly a decade.” “Decade of QE leaves big central banks owning fifth of public debt” August 16.

That’s not the only “first time in history” event. Thomas Hale and Kate Allen, in “Europe weighs potential ‘doom loop’ solution” write “A critical factor in deciding demand for sovereign bonds is risk weightings, which determine how much capital a bank needs against its investments in different kinds of asset. Sovereign bonds in Europe have benefited from a zero risk weighting, making them highly attractive to banks, many of which borrowed cheaply from the European Central Bank to buy sovereign debt after the crisis.”

That should make clear for anyone not interested in hiding it that, to whatever public debts the central banks hold, we must add those that all banks hold only because they are allowed to do so against zero capital. Q. What is a 0.1% return worth if you can leverage it 1000 times? A. 100%

Sir, as I have told you umpteenth times before, in 1988, one year before the Berlin wall fell, that which was taken to be a big blow to statism, bank regulators, through the back door, introduced a zero risk weighting of sovereign debt. The statists have been playing us for fools ever since.

And now, when reality is catching up, they want to package and hide all this public debt in some securities they have the gall to name these European Safe Bonds “ESBies”, issued in order to “make the continent’s financial system safer”. Or, as Gianluca Salford, a strategist at JPMorgan disguises it, to “transport sovereign risk to a place where it’s more manageable”.

Sir, try to sell all central banks’ and banks zero weighted held public debt into a free market and see what rate you get. Taking current artificial public debts for real, or for being revenue neutral rates, or for being risk free rates, or for justifying public investment in infrastructure, is either stupidity or a shameful manipulation of truth. 

Sir, the day our citizens discover what is being done by these statist they will flee all sovereign debts and governments will be left, like Maduro in Venezuela, with central banks that can only print money to keep the can rolling and rolling until…

PS. Mr Salford argues: “Securitisation is not an innately bad thing — it can be used well as a stabilising source” No! If securities are sold at their correct securitized risks they do not provide remotely as much profits as those sold incorrectly offering securitized safety. In other words, suffering from innately bad incentives damns these.

@PerKurowski

Could the Venezuelan National Assembly sue Goldman Sachs on behalf of Venezuelans for aiding and abetting a dictator?

Sir, Mitu Gulati writes: “a judge could find that the holders of Maduro bonds must have known that they were transacting with an unrepresentative or illegitimate agent of the people… Agency law goes beyond merely voiding the contract between the principal and the third party; a third party who suborns a betrayal of trust by the agent may be answerable in tort to the principal”, “Maduro bonds” Alphaville July 8.

So, could the Venezuelan National Assembly sue Goldman Sachs on behalf of Venezuelans for aiding and abetting a dictator and the violation of human rights?

Gulati also writes: “It is the Constituent Assembly itself and all of its works that the post-Maduro government must argue are unauthorized, invalid and illegitimate. And the longer that the Constituent Assembly stays in power, and makes the laws of the country, the more it begins to look like the real legislature”

That begs the question, if a President of USA, like Donald Trump had managed to create something as odiously farcical as Venezuela Constituent Assembly, how long would it take for it to begin to look like the real legislature? 100 years?

PS. A simple but complex question from a humble Venezuelan economist to an outstanding Venezuelan international lawyer

@PerKurowski

No one saw how the liberal/free-market 1989 fall of the Berlin Wall was pitted against the statist 1988 Basel Accord

Sir, ‘end of history’ Francis Fukuyama, when referring among other to that “systems designed by elites — liberalised financial markets” writes: “Today, the greatest challenge to liberal democracy comes not so much from overtly authoritarian powers such as China, as from within” “US against the world? Trump’s America and the new global order”, November 12.

If Fukuyama, like most other discussing the post 1989 world had taken notice of the 1988 Basel Accord, their conclusions would have been quite different. As a minimum they would not be referencing a liberal world order.

That is because the introduction of risk-weighted capital requirements for banks, which set a risk weight of 0% for the sovereign and 100% for the We the (risky) people, has obviously nothing to do with a liberal order, and much more to do with runaway statism.

Sir, the so often mentioned and disavowed neoliberalism is simple froth on the surface. Pure and unabridged statism is the real undercurrent that guides our economies.

If only researchers, for instances at the IMF, had researched what those bank regulations have signified to lower the interests on public debt, and to make it harder for SMEs and entrepreneurs to access bank credit, our current financial policies, and consequently our economies, would have looked quite different.

@PerKurowski

The Basel Accord’s statism and misregulation trumped all neoliberalism and deregulation

Martin Wolf writes: “banks remain highly fragile businesses. By their nature, banks are highly leveraged entities with ultra-liquid liabilities and far more illiquid assets…What remains disheartening is that shareholders and a few small fry among the employees have been punished, but the decision makers who ran these institutions have escaped more or less unscathed.” “Deutsche Bank offers a tough lesson in risk” October 5.

Wolf is totally correct on that! But, may I ask, what about the responsibility of regulators who, against all common sense, allowed banks to leverage their equity and the support they received from society; limitless when lending to its own or to a friendly sovereign; over 35 to 1 when financing residential mortgages; and 62.5 to 1 only because a human fallible agency rated a creditor AAA to AA?

There’s been absolutely nothing of holding those regulators accountable, worse yet they are still in charge of the most important monetary policy decisions.

And what about the responsibilities of leading opinion makers like Martin Wolf himself, when they refuse to acknowledge the extremely serious distortions in the allocation of bank credit to the real economy risk weighted capital requirements for banks produce?

I am currently reading Philip Ther’s interesting “Europe since 1989”. Already I do not how many times in the very first chapters I have seen neoliberalism and deregulation mentioned. What a difference a year makes! Had Ther began his history in 1988, he might have had to include the Basel Accord with its risk weights of 0% for the Sovereign and of 100% for We the People. Frankly, when all is said and done, the Basel Accord’s statism and miss-regulation has trumped all neoliberalism and deregulation.

As for the Deutsche Bank, its best chance for a sturdier future, lies in regulators telling all banks to abandon the business model of maximizing returns on equity by minimizing capital that their regulations promoted.

Let us pray, for our children’s and grandchildren’s sake, that banks return soon to earn their returns on equity by evaluating risk adjusted interest rates and size of exposures, without any considerations to capital requirements.

@PerKurowski ©