Stop blaming low productivity on the “bonus culture” there are even worse cultures, like the Basel Committee’s

Sir, I refer to Andrew Smithers’ “Executive pay holds the key to the productivity puzzle”. May 29.

Smithers writes: “Productivity improves with the amount of capital per employee, and the efficiency with which it is used…. We do not know how to improve the efficiency with which capital is used”.

Yes we do! And the first thing to do is to eliminate those odiously manipulating credit-risk-weighted capital requirements for banks, which distorts all the allocation of bank credit to the real economy.

Of course bonuses distorts but, in the great scheme of things, there is little to be achieved correcting for that, in the bigger companies where the problem is present, if we do not allow all “the risky” SMEs and entrepreneurs to have fair access to bank credit, because of outrageously dumb regulations.

Really, unless blessed with eternal ignorance, how can bank regulators live with themselves knowing what they are doing?

@PerKurowski

Risk weighted capital requirements for banks guarantee excessive exposures against little capital

Sir, I refer to Martin Wolf’s lunch conversation with Andrew Smithers, “I don’t have any faith in forecasts” March 1.

In it Wolf quotes Smither saying “There’s a chapter in the new book on what I think economics should be about, which is not forecasts. It’s about not taking the wrong risks. You don’t know what’s going to happen but you can avoid excessive risk-taking and this, unfortunately, has not been the policy of the Federal Reserve”… and I would have to add, and neither of the Basel Committee.

Bank regulators, with their risk-weighted capital requirements, which are not even based on forecasts but on current ex ante perceptions of risks, guarantee excessive risk taking, against very little capital, to what is perceived as absolutely safe.

I am not copying Martin Wolf with this as he has expressed not wanting to hear more from me about risk-based capital requirements… he knows it all, at least so he says, but, since the above is precisely what Wolf seems unable to understand… perhaps you should copy him.

Distorting bank regulations makes a mockery out of rational capital allocation.

Sir, John Authers quotes Andrew Smithers in that contemporary bonus culture has introduced a short-termism that is threatening the economy misallocating capital on the back of distorted profit statements, “Distorted profits make mockery of call for UStax cuts” August 20. 

Indeed that is serious, but how it really impacts a market that looks a lot to the growth potential of future earnings is hard to tell. That said, what is really misallocating capital in our economy are bank regulations which so much favor what is officially perceived as not-risky, prominently the “infallible” sovereigns and discriminates against what is officially perceived as “risky”, like the small businesses and entrepreneurs. 

Unfortunately from its refusal to address it, FT seemingly does not care about this issue.

Current bank regulations cause less new growth and more inequality

Sir, John Plender in “Corporate cash power is holding the state hostage”, August 17, discusses the excessive savings of corporation produced “by investing less than the sum of its retained profits… well into an upturn”… and which forces governments “to accommodate these surpluses by running large fiscal deficits”. 

As a possible explanation Plender cites Andrew Smithers of Smithers & Co., who advances that this “has been driven by the dramatic growth of the bonus culture” which creates a bias in favor of short term profits and which are maximized by refraining from investing. 

That plays a role but it is small when compared to that that utter nonsense of allowing, like it is done now, bank regulation bureaucrats to decide what should be considered “not-risky” and be favored, and what should be considered “risky” and be discriminated against, and all that without any consideration given to the purpose of banks. 

The perceived as “not-risky” are normally related to past successes and current wealth, and the “risky”, like small businesses and entrepreneurs, harbor more often the possible future successes and those in need of bank credit. Favor the “not-risky” and discriminate the “risky” and you will get less new economic growth and more inequality. It is as simple as that! 

Regulators have no problems when bankers and market understands... their role is not so much understanding what is happening but preparing for when no one understands. A regulator that accepts being dumb, is immensely better than a regulator who believes himself to be smart.

Is there no cost in avoiding bubbles?

Sir though I agree with much of Martin Wolf’s “How mistaken ideas helped to bring the economy down” October 28, I have serious difficulties on understanding how one should be implementing the bubble-busting. Are the regulators now going to appoint bubble-measurers? Are we going to have these assets bubble-meters being showed off in Times Square?

Much the same way it sounded so utterly reasonable to have the credit rating agencies influence how much equity banks should have, and look where it led us, this reasoning assumes that a bubble is a bubble and that there are no risks derived from pre-announcing that a bubble will not happen. And what if the prime motor of development is the belief in the possibilities of the next bubble? If we eliminate ex-ante the possibility of a bubble will some then just stay in bed while other countries with no qualms about crisis go forward?

If there is something truly lacking in the current discussion on regulatory reform is the appreciation of the good things that come with risk-taking and now, the good things that come from bubbles.

Me, I would love the world to keep on taking risks- and blowing bubbles even at the cost of suffering huge setbacks as long as that takes us forward. Because of this, more than worrying about where the next precipice might be, I would try to make much more certain we are heading in the right direction. Others, on the contrary, seem to be satisfied with what they have achieved and settle for keeping it.

Bumpy roads indeed!

Sir Martin Wolf writes that “Big bumps lie ahead on the road to recovery and reform” October 7. Though I sort of agree, on most, for me the biggest real bump for recovery is that of not knowing yet what kind of growth is sustainable, given the two bottlenecks of oil and climate change. Some countries could resume growing as if these constraints do not exist, but that might very well not take us where we want to go. Yes, we want to stimulate the world, but we also want it to take off in the right direction.

Then of course we have the problem with the monetary system, most particularly for the US, the exporter of the currency the world most trusts in lieu of other alternatives, and that therefore has to live with the safe-haven curse. All of us who come from resource cursed nations know there are serious difficulties living with a curse, not the least the fact that those resources are finite, and though we know that one morning investors might wake up finding the safe-haven unsafely overcrowded, there is little to be done until that happens. Just like they could not stop until they had chopped down the last tree on Easter Island.

But where I might disagree completely with Wolf is when he quotes Andrew Smithers arguing to “force banks to raise the needed capital and if they cannot, let government provide it” if with this he implies he believes public bank capital is the same as private bank capital. What we most need in term of reforms is to eliminate any bureaucratic interference with the risk and capital-allocation mechanism of the market, like those of the minimum capital requirements for banks based on perceived risk of default. What is most needed, especially in the “comfy” countries, is for a banking sector willing to take risks on those few willing to take risks.