Will Jackson Hole Conference 2017 also ignore the distortions produced by the risk-weighted bank capital requirements?

Sir, Michael O’Sullivan, when speculating on Paul Volcker’s presence during this year’s Jackson Hole conference, writes that: “he might well look askance at the actions of contemporary central bankers. Volcker was an inflation crusher, a rate-riser (to 20 per cent) and, we can suspect, someone who believed that investors and economies had to bear the consequences of their choices”, “Jackson Hole offers central banks a chance to hand over baton” August 22.

Indeed but we should not forget that the Fed’s Paul Volcker, teaming up with the Bank of England, was the one who promoted the risk weighted capital requirements for banks… those who have, and still are, horrendously distorting the allocation of bank credit to the real economy.

Basel I, with its 0% risk weight, allowed banks looking to maximize returns on equity, to leverage infinitely the net risk adjusted margins, when paid by a friendly sovereign.

Basel II, for whenever an AAA to AA rating was present in the private sector, authorized a mindboggling 62.5 times leverage.

Basel I and II assigned a risk weight of 100% to risky SMEs and entrepreneurs’ allowing these borrowers’ net risk adjusted margins to be leveraged just 12.5 times.

So banks are going overboard lending and investing in what is perceived, decreed or concocted as safe, the present; while abandoning financing “the risky”, the future.

And all this because silly risk adverse regulators just can’t get their hands on the difference between ex ante and ex post risks. When you argue with them that what is perceived as very risky becomes by that fact alone safe, and that what is perceived as safe becomes risky, their eyes go blank… and they ignore you.

Bankers who are having their wet dreams of earning the highest ROEs on what is “safe”, with so little shareholder capital that it leaves much over for their bonuses, also keep an interested mum on this.

Sir, the immense stimulus offered by central banks has been wasted because the can was kicked down the wrong roads of increasing asset prices and government debts, and not down the road of those who can best help us to a better future.

Risk taking is the oxygen of development. God make us daring!

In the name of my constituency, my grandchildren, I can only say, “Damn those bank regulators”

@PerKurowski

To parade badly failed global bank regulators wearing dunce caps, is one right way to silence dangerous nationalism

Sir, I am all for globalization. My father a polish soldier saved from Buchenwald by the Americans; I was born in Venezuela; with high school and university (economist) in Sweden; an MBA in Venezuela, spent over a year as an intern in a British Merchant Bank in London (and LSE and LBS); also a Polish citizen; a financial and strategic consultant in Venezuela; a representative in Caracas for a Chilean bank; having worked for corporations and investors from and in many places; a former Executive Director of the World Bank who wanted migrants to have a seat at its Board so that the world at large would have more representation; since 15 years living in Washington; and now happily with a grandfather of two Canadians, I am, de facto, probably as globalized as you can be.

But, if what’s put on my plate is dumb and dangerous globalism, then I swear I have no problem whatsoever going very local, in order to defend to my very best, my many diverse national interests, of course, primarily, those of my grandchildren.

So now, when I see Martin Wolf, in “The economic perils of nationalism” January 18, writing that those (Davos/Basel Committee) globalizers who created a “financial crisis” have seen “their reputation for probity and competence… devastated” I cannot but say: “My oh my, what a lie!”

There all still there. Those who retired might have written well-reviewed books, or had positive books written about them, and those who have not retired, have actually been promoted.

I am totally for trade, and so I fully agree with Martin Wolf in that “one might gain more from foreigners than fellow citizens”. But that does not have to mean you give foreign citizens the opportunities you deny your own.

When bank regulators introduced their risk weighted capital requirements for banks, they gave banks more incentives to finance “The Safe”, like sovereigns and AAArisktocracy, no matter where these found themselves on the globe, than to finance “The Risky” of their localities, like SMEs and entrepreneurs. And that was wrong, and that did not serve any purpose. If I am going to have to suffer a bank crisis, I prefer a thousand times that to be the result of banks having financed my locals too much, than for instance, in the case of European banks, these having financed the US residential subprime sector too much.

Sir, what’s our real problem? It is that there is more accountability on the local level than on the globalized one, and that of course, opens up the door for any misguided populism.

To for instance start parading bad global bank regulators down our avenues, wearing dunce caps, instead of giving them a red carpet treatment in Davos, would be a good way to begin silencing dangerous nationalism.

PS. That parade would perhaps also have to include all those who have so much favored regulators by keeping so mum about their failures. Mi capisci?

@PerKurowski