Three questions for Angus Deaton, the chair of The Institute for Fiscal Studies’ wide-ranging review of inequalities in UK

Sir, I refer to Angus Deaton’s “Inequality in America offers lessons for Britain” May 15.

I have three questions for him:

Regulatory subsidized credit for the purchase of houses, which has helped morph houses from being homes into investment assets, how much increased inequality has that caused between those who own houses and those who do not?

The increased benefits for those who have jobs, how much increased inequality has that caused when compared to those without jobs?

The risk weighted capital requirements for banks, which very much favors the financing of the “safer” present over the riskier future, how much inequality is it producing between current and future generations?

PS. Decreed inequality

@PerKurowski

The “midlife crisis” of Generation X or the Millennials, could be piece of cake when compared to what seems to await for them down the years.

Tim Harford, making reference to a new research paper from Angus Deaton, Nobel laureate in economics, argues that “people who would have their wellbeing most improved by a cash injection are the middle-aged, people between their forties and their sixties.” “A monetary remedy for the midlife crisis” March 31.

It is a fun argument for Harford to use when “I will have a word with my father and my children”.

But what would Harford say if the answer he got from his children was: “Daddy, in terms of where you find yourself in your lifecycle, you are the one living most over your means… so no cash for you… spend less… save more (so that you might leave some to us as your father left to you)… and for God’s sake get rid of those risk weighted capital requirements for banks that hurt us so much.”

That mentioned piece of regulation, by favoring banks to finance the present safer consumption over the “riskier” future production, has already placed a reverse mortgage on the current economy, which is jeopardizing everyone’s future.

And also, since it amounts to a gross violation of Edmund Burke’s holy intergenerational contract, I would suggest Harford and his generation begin to prepare a very good defense speech for when they will have to respond to their children why they allowed that to happen.

And Harford, as a retiree, or at least his generation of retirees, will also suffer because, as I have argued so many times, there is no better pension plan than having children who love you and are able to work in a reasonable healthy economy.

Sir, my grandchildren will at least know how much their grandfather, obsessively, fought against that crazy risk aversion. Will yours?

PS. If you dare to see how the elderly could so unexpectedly for them be suffering horrors, have a look at what is happening in Venezuela.

Post-Crash Economics Society: Risk models & credit ratings are not wrong, the credence bank regulators give these is

Sir, since I was travelling I missed David Pilling’s “Crash and learn: should we change the way we teach economics?” October 1.

It discusses the Post-Crash Economics Society that was created by students at Manchester university, mostly in response to “glaring failure of mainstream economics [that failed] to explain, much less foresee, the financial crash of 2008.”

In it Pilling quotes Andrew Haldane, chief economist at the Bank of England: “We all became overly enamoured of a particular framework for thinking, or a modelling approach… It became something of a methodological monoculture [that] was not well equipped for dealing with economies or financial systems close to, or at, breaking point.”

That sounds about right. It was not the models’ faults, but the fault of those using the models.

For instance bank regulators, with mindboggling hubris, and blind faith in the models, using only knowledge, decided that the capital requirements for banks should be based on risk models using ex ante perceived risks. That was dumb. Clearly any regulatory wisdom would have indicated that those capital requirements, should be based on the so much more dangerous consequences to the bank system that could be caused if those risk models or risk perceptions, like credit ratings, turned out to be wrong.

The faster that is understood, the faster we can bridge the differences between those who, like Angus Deaton, though accepting that “economics is a broad church” yet argue that it “needs to be kept rigorous”, and those who, like Joe Earl, want it to be “more an exploration of ideas, and less a training in the economic priesthood.”

Of course, that will require bank regulators to declare much mea-culpa, or in other ways upsetting a lot the cozy relations in their mutual admiration club.

Here a more extensive aide memoire on some of the monstrosities of such regulations.

@PerKurowski ©

Loony technocrats told countries: “In order for you to develop and grow, your banks must avoid taking risks”

Sir, Professor Angus Deaton writes: “The ‘what works’ agenda also runs of the risk of replacing what (local) people want by what (often foreign) technocrats think they ought to have. It is these unintended consequences that explain why many projects succeed while the country fails.” “There is a solution to the aid dilemma” August 3.

What if one of these foreign technocrats would tell a developing country the following:

"You should require your banks to hold more capital against what is perceived as risky so that it earns higher risk-adjusted returns on its equity on what is perceived as safe, like the government and the financing of houses; and so that they stay away from lending to the risky, like SMEs and entrepreneurs."

With that these foreign bank regulation technocrats would de facto have told a developing country that it must foster risk aversion among its banks. Absolutely crazy! To give a developing country such recommendations is criminally dumb, but that is precisely what the Basel Committee has and is instructing.

Of course these regulations affects developed countries too, as it hinders them from further climbing up the ladder of development, but, in their case, they have at least reached an fairly reasonable height… although that also means the fall could be bigger.

In October 2007, in the High-level Dialogue on Financing for Developing at the United Nations, I protested this regulatory risk aversion... but no one really wanted to listen. 

PS. Let me quote the following from John Kenneth Galbraith’s “Money: “whence it came, where it went” (1975):

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Per Kurowski

The bank regulatory absurdity, and the journalistic irresponsibility of FT ignoring it are both of epic proportions.

Sir, Angus Deaton writes: “the role of politics needs to be understood, and built in to any careful interpretation of the data. We must always work from multiple sources, and look deep into the cogs and wheels.”, “Statistical objectivity is a cloak spun from political yarn” November 3.

Indeed and among those most responsible for “looking deep into the cogs and wheels” must be the press, the journalists. But too often they don’t.

For instance, during the last decade I have sent the Financial Times over 2.000 letters that on my Tea with FT blog have the label of “subprime banking regulations”.

In these letters I have argued that the credit-risk weighted capital requirements for banks, introduce a regulatory credit-risk aversion that dangerously distorts the allocation of bank credit to the real economy. And because the risk weights are based on the intrinsic riskiness of the assets, and not on the risk for the banks of those assets, it does not help the banking system to become any safer, in fact, just the opposite.

For instance Basel II had a basic 8 percent capital requirement. That, when risk weighted 20% for what was rated AAA to AA, resulted in a 1.6 percent capital requirement, an authorized 62.5 to 1 leverage. And, when risk weighted 150 % for what had a credit rating of below BB-, it resulted in a 12 percent capital requirement, an authorized leverage of 8.3 to 1.

Sir, explain to me, what kind of analysis can justify that loans to those rated below BB-, always awarded in much smaller amounts and with much higher risk premiums, are 7.5 times riskier than huge exposures, with very low risk premiums, to what is AAA to AA rated? 

When have ever those rated below BB- represented more dangers than those rated AAA and who could have a too good credit rating?

Minds capable of such regulatory nonsense should clearly not be allowed to regulate our banks… or promoted to other important posts. Bankers might quite often be dumb, but in general they are not suicidal.

Sir, the Basel Committee’s regulatory absurdity is of epical proportions. And FT’s journalistic irresponsibility ignoring that absurdity is equally of epical proportions.

On April 24, I thought you had finally understood what all was about, when you published your “Banking cannot prosper within a culture of fear”, but seemingly I was wrong.

PS: The capital requirement for banks when holding AAA to AA rated sovereign debt was set at zero percent in Basel I and II. If a bank held only these safe assets, with current negative interests, this would break the bank in just a few days.

@PerKurowski ©