The pulmonary capacity of banks went from unlimited, through 62.5, 35.7 to 12.5 times of allowed leverage. Where do you think bubbles were blown?

Sir, I refer to John Authers review of “Ray Dalio’s” “A Template for Understanding Big Debt Crises” September 22, 2018.

I have not read the book, and something in it could apply to other bubbles but, if Dalio left out mentioning the distortions produced by the risk weighted capital requirements for banks, those that caused the 2008 crises, he would surely have failed any class of mine on the subject.

Sir, let me be as clear as I can be. 100%, not 99%, 100% of the bank assets that caused the 2008 crisis were assets that, because they were perceived as especially safe, dumb regulators therefore allowed banks to hold these against especially little capital. 

The allowed leverages, after Basel II, that applied to European banks and American investment banks like Lehman Brothers were:

AAA rated sovereigns, including those the EU authorities authorized, like Greece, had a 0% risk weight, which translated into unlimited leverage.

AAA rated corporate assets, were assigned a risk weight of 20%, signifying a permissible 62.5 times leverage.

Residential mortgages were assigned a risk weight of 35%, translating into a 35.7 allowed leverage.

Of course, after the crisis broke out, any few “risky” assets banks held, like loans to entrepreneurs, those that banks could only leverage 12.5 times with went through, (and still do), a serious crisis of their own, when banks began to dump anything that could help them improve that absolutely meaningless Tier 1 capital ratio.

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

Yes, cities can be great, but these can also be dangerous bombs in the making.

Sir, Edward Luce writes about how trying to attract big companies like Amazon to the cities might make it harder on the poor in the city. “Beauty contest reveals ugly truths” June 6.

Yes, of course, the weaker, the poorer, they will always be relatively more squeezed by any development that occurs in cramp conditions where there will be a fight for space.

But it is when Luce quotes Richard Florida with, “America’s most dynamic cities have played right into the company’s hands, rushing to subsidise one of the world’s largest corporations rather than building up their own economic capacities.” where the real discussion should start.

Why would a city want to bet so much of its future on so few actors as would here be the case with Amazon? Have they not seen what happened to Motor City Detroit? If you want to use incentives to attract jobs, which is of course to start “a race to the bottom”, why bet all on a number, would you not be better off diversifying your bets? 

If I was responsible for a city, one of the first things I would be doing is to analyze how its riskiness would be rated compared to other cities? For instance, what are the chances that suddenly another city offers your city’s wealthy, the possibility of moving to a place that has not accumulated impossibly high debts that will need to be served, supposedly primarily by them?

And, if your city faces a financial crash, what would be ones’ first priorities, to help the poor, or to make sure the rich do not leave without being substituted for by other rich?

PS. Luce writes: “Big fund managers… are putting cash into global urban real estate portfolios. As a result, property prices are becoming a function of global capital movements rather than local economic conditions”

Again, for the umpteenth time, what initially feeds high property prices is the inordinate ease of access to financing it, provided among others by regulators allowing banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs. 

The fund managers are just following the results of it… when that regulation-easing plan begins to be reversed, which will happen sooner or later, they run the risk of being left holding the bag. 

@PerKurowski

Few things are as risky as letting besserwisser technocrats operate on their own, without adult supervision.

Sir, Martin Wolf when discussing Mariana Mazzucato’s “The Value of Everything: Making and Taking in the Global Economy” writes: “In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.” “A question of value” April 28.

Indeed. Let me, for the umpteenth time, refer to those odiously stupid risk weighted capital requirements that the Basel Committee and their regulating colleagues imposed on our banks.

Had not residential mortgages been risk-weighted 55% in 1988 and 35% in 2004 while loans to unrated entrepreneurs had to carry a 100% risk weights, the “funded zero-sum competition to buy the existing housing stock at soaring prices” would not have happened.

Had not assets, just because they were given an AAA rating by human fallible credit rating agencies, been risk-weighted only 20%, which with Basel II meant banks could leverage 62.5 times, the whole subprime crisis would not have happened.

Had not Basel II assigned a sovereign then rated like Greece a 20% risk weight, and made worse by European central bankers reducing it to 0%, as it would otherwise look unfair, the Greek tragedy would only be a minor fraction of what happened.

Had not bank regulators intruded our banks would still prefer savvy loan officers over creative equity minimizers.

Had not regulators allowed banks to hold so little equity there would not have been so much extracted value left over to feed the bankers’ bonuses.

Having previously observed Mariana Mazzucato’s love and admiration for big governments, who knows she might even have been a Hugo Chavez fan, I am not surprised she ignores these inconvenient facts. But, for Martin Wolf to keep on minimizing the distortion, that is a totally different issue. 

The US public debt is certainly the financial risk with the fattest tail risk. It was risk weighted 0% in 1988, when its level was $2.6tn. Now it is $21tn, growing and still 0% risk weighted… and so seemingly doomed to become 100% risky. Are we not already helping governments way too much?

@PerKurowski

The Basel Committee’s tariffs of 35% risk weight on residential mortgages and 100% on loans to entrepreneurs, is pure protectionism.

Sir, Martin Wolf, with respect to President Trumps’ indication that “he would sign an order this week imposing global tariffs of 25 per cent on steel and 10 per cent on aluminum” writes “This is a purely protectionist policy aimed at saving old industries” “Trump’s follies presage more protectionism” March7.

Absolutely! I could not agree more. But what I cannot understand is why Wolf does not react in the same way against the protectionism imbedded in the bank regulators’ risk weights? For instance is not a 35% risk weight on residential mortgages and of 100% risk weight on loans to entrepreneurs represent even a worse protectionism than Trump’s?

That protectionism allows banks to leverage their capital 35.7 times with residential mortgages and only 12.5 times with loans to entrepreneurs.

That protectionism has banks avoiding financing the "riskier" future in order to refinance the older "safer present". Does that not sound extremely dangerous?

PS. And a 0% risk weight of the sovereign and 100% the citizens, is that not the mother of protection of statism?

@PerKurowski