How many Greece will it take before the bank-sovereign doom loop is really discussed and then dismantled?

Sir, Isabel Schnabel, a member of the German Council of Economic Experts writes about a “contentious issue: the regulation of banks’ sovereign exposures. Currently, this benefits from regulatory privileges, being exempt from capital requirements and large exposure limits. The result is high volumes of sovereign debt on banks’ balance sheets, with a strong bias towards domestic bonds… it is up to the European Commission to shift this important issue to the top of the agenda”, “How to break the bank-sovereign doom loop”, August 29.

About time! It is now thirty years since regulators, with the Basel Accord, Basel I, introduced risk weighted capital requirements for banks; and thereto assigned risk weights of 0% to sovereigns and 100% to citizens, and so gave birth to the bank-sovereign doom loop.

It was European Authorities who assigned a 0% risk weight to Greece and thereby doomed it to its current tragedy.

If there is something the EC firsts need to come clear with, is how that happened.

When I first heard rumors about that regulatory statism, around 1997, I just did not believe it… I mean did not the Berlin wall fall in 1989? 

In a letter published by FT in November 2004, soon 14 years ago, I wrote: “We wonder how many Basel propositions it will take before they 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.” And of course that applies to developed nations too.

Why has this issue never really been discussed? How come the world has allowed itself to be painted into a corner with sovereign risk-weights it dares not change scared of that would on its own set off a crisis? Why did Greece have to pay for a EU mistake? Is that a way to treat a union member? And thousands of questions more.

Sir, how do we stop this "I guarantee you and you lend to me (against no capital)” incestuous relationship between sovereigns and banks?

@PerKurowski

When frozen in other types of “cash”, it is hard to free up cash to spend on good causes without losing much value

Sir, I refer to “Debt Collectors” September 16, in which Eric Platt, Alexandra Scaggs and Nicole Bullock search to explain what could happen to the “portfolio of cash, securities and investments worth roughly $840bn, held outside the US by just 30 US companies, because of tax reform designed to … encourage American companies to bring back jobs and profits trapped overseas”.

The article, though it refers to difficulties such as the “repatriation process itself could involve selling bonds” and the impact of that on interest rates, fails to illustrate the whole truth.

The reality is that all that “cash”, as well as all that “cash” held by other wealthy (for instance in Panama) except for the less than 1% that could be in real cash, is in other assets like securities investments, perhaps even in art collections.

So, in order to convert all that “cash” into real cash, those other assets have to be sold to others who are then required to give up their real cash for these. And, in that process, clearly a lot of the value of the “cash” would just change hands or disappear.

Why are these difficulties of converting “cash” into cash not more discussed? Because doing so would be sort of inconvenient for those redistribution profiteers who try to sell their politically beneficial envy, for instance that present in the “one percenters being against all us 99 percenters” theme.

What is a £20 million flat in London or a US$200 million Picasso hanging on a wall but the voluntary freezing of millions in alternative purchase power that could be out there in the economy competing for consumer goods… and generating inflation? Is a lowering of the value of hard-assets the inflation driver central banks want?

PS. Of course the above does not take away one iota of the need to relentlessly pursue those who have accumulated “cash” assets illegally, and might hold these in places like in Panama.

https://teawithft.blogspot.com/2016/04/tett-get-it-whats-stashed-away-in.html

https://perkurowski.blogspot.com/2016/10/i-tweeted-how-do-you-morph-200-million.html

http://perkurowski.blogspot.com/2016/01/the-wealth-of-62-richest-equals-that-of.html

Tax the 1 per cent with no other changes and all you get is the 1 per cent of the 1 per cent becoming even wealthier.

Sir, I refer to Richard Robb´s “If you tax the 1 percent it is the middle class who will suffer” May 16.

He is absolutely right and I have myself made similar arguments in an Op-Ed published in Venezuela about a month ago.

That said, what Robb misses is that 99 percent of the 1 percent would, though quite bearable, suffer too, because unless the current wealth concentration channels are altered, the resulting flows would just signify that the 1 percent of the 1 percent, the real plutocrats would become wealthier.

http://perkurowski.blogspot.com/2014/04/avoid-merchants-of-poverty.html