The lack of statistical significance tests, p-value, does indeed allow much more, for “Irrefutable nonsense [to] rule”

Sir, Anjana Ahuja writes: “generally only studies with p-values lower than 0.05 are deemed to be of ‘statistical significance’. This magic number has calcified into the pivot on which science principally turns. Now, academics, [because of] “p-hacking”: cherry-picking experimental methods, slicing data and contorting statistical analyses to yield a desirable p-value, are arguing for “the entire concept of statistical significance to be abandoned”. “Beware making a fetish of an arbitrary number”, March 28.

But “John Ioannidis, from Stanford University, defends it a “convenient obstacle to unfounded claims”. Its absence, he warned, may unleash worse: ‘Irrefutable nonsense would rule.’”

What’s the p-value of the risk weighted bank capital requirements for banks not measuring the dangers to our bank systems correctly? I have no idea but I am sure that null hypothesis would not be rejected by a very long shot.

In fact to test, as null hypotheses, the current regulatory premises, that of what is ex ante perceived as risky being dangerous to our bank system, and that of what is ex ante perceived as safe being safe for our bank system, would surely return very low p-values and be rejected.

But Sir, no such statistical analysis was performed and so, in its absence, the “irrefutable nonsense [of the Basel Committee’s risk weighted capital requirements [does indeed] rule.”

PS. But anyone who has heard that saying attributed to Mark Twain of “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”, would not really do research to understand the issue.

PS. Another null hypothesis that could be tested is roulette will survive the pay out for its different bets to be tilted in favor of "safer" bets on colors and against "riskier" bets on numbers.

@PerKurowski

Who sold IMF the fake idea that risk weighted capital requirements for banks do not distort the allocation of credit?

Sir, Shawn Donnan, referring to a IMF paper recently released by Christine Lagarde, “Gone with the Headwinds: Global Productivity”, writes that IMF economists warn: “The world’s economy is caught in a productivity trap thanks to an abrupt slowdown caused by the 2008 global financial crisis, which will yield more social turmoil if it is not addressed hold that” “IMF raises fear of slowing productivity” April 4.

Bank assets, based on how they are perceived ex ante, can be divided into safe and risky assets. The “safe”, by definition, currently include sovereigns and corporates with good credit ratings, and residential mortgages. The “risky” include what is unrated or what does not possess very good ratings… like loans to SMEs and entrepreneurs. It is also clear that she safe includes more of what is known; meaning what’s in the past or present, and the risky more of what is unknown, meaning what lies in the future.

Then suppose regulators had transparently told the banks: “We hate it so much when you take risks so that, from now on, if you finance something that is perceived as safe and stay away from what is perceived as risky, we will reward you by helping you to make you much higher risk adjusted returns on equity”.

In such a scenario, could it not be reasonably expected that IMF would be identifying regulatory risk aversion as something that could be slowing productivity? I mean, as John A Shedd said: “A ship in harbor is safe, but that is not what ships are for"

But, rewarding the banks for going for the safe, and staying away from the risky, is exactly what the current risk-weighted capital requirements for banks does.

And the IMF, even though here the report mentions: “Growing misallocation during the pre-global- financial-crisis financial boom [and] The global financial crisis might have worsened capital allocation further by impeding the growth of financially constrained firms relative to their less constrained counterparts.” says nothing about distorting bank regulations having something to do with this misallocation; an only produces second-degree explanations such as “banks may have “evergreened” loans to weak firms to delay loan-loss recognition and the need to raise capital”. How come?

April 3, in FT, Anjana Ahuja in reference to Robert Hare’s 1993 “Without Conscience: The Disturbing World of the Psychopaths Among Us,” wrote the following:

“Uncertainty is unsettling and certainty is alluring. Beware anyone who offers the latter with charisma, especially at this jittery juncture. Arm yourself against the charlatans…not only criminal psychopaths but the white-collar kind — who overstate their abilities, denigrate subordinates, have a tenuous grip on truth and seek greater power with shrinking oversight.”

Could it really be that one or more of these spellbinding salesmen of certainty illusions, technocratic besserwissers, managed to enthrall and blind the whole IMF? If so, Mme Lagarde owes herself and the IMF to find who they were… and to put a stop to it.

May I suggest she starts doing so by sending around to all those in the IMF that have had anything to do with bank regulations, some of those questions that, without any luck, I have tried to get answered, many times even in the IMF. Here’s the link: http://subprimeregulations.blogspot.com/2016/12/must-one-go-on-hunger-strike-to-have.html

But perhaps IMF already knows who those “charlatans” were, and just want to spare some members of their mutual admiration club some very deep embarrassments. If so then IMF is not fulfilling its responsibilities, as it should.

Too much is at stake! More than ever the world need to develop the capability of filtering out any fake experts, no matter how nice they are and no matter how important the networks they belong to.

PS. Twice I have had the opportunity to ask Mme Lagarde on this subject, and twice she kindly answered me, but nothing seems to have come out of it 

http://subprimeregulations.blogspot.com/2011/09/my-question-at-civil-society-townhall.html

http://subprimeregulations.blogspot.com/2013/10/my-question-for-umpteenth-time-to-world.html

PS. In December 2016, during the IMF’s Annual Research Conference, Olivier Blanchard also agreed with me there were needs to research how these capital requirements distort.

http://subprimeregulations.blogspot.com/2016/11/olivier-blanchard-agrees-there-is-need.html

@PerKurowski

It would seem our bank regulators should be subjected to a full psychiatric evaluation before allowed to regulate.

Sir, I refer to Anjana Ahuja’s brief message on Robert Hare’s 1993 “Without Conscience: The Disturbing World of the Psychopaths Among Us,” “Text messages: nine business books to help you through turbulent times” April 3.

Ahuja harrowingly writes: “Uncertainty is unsettling and certainty is alluring. Beware anyone who offers the latter with charisma, especially at this jittery juncture. Arm yourself against the charlatans by revisiting the work of the psychologist who pioneered the study of psychopathy. Hare’s short classic covered not only criminal psychopaths but the white-collar kind — who overstate their abilities, denigrate subordinates, have a tenuous grip on truth and seek greater power with shrinking oversight.”

I have often referred to our current bank regulators as dumb, ignorant, inept, stupid, even dangerous, but never ever as psychopaths, and so this really scares me.

But the truth is that white-collared technocrats, overstating with much hubris their abilities, have been able to exploit the “Uncertainty is unsettling and certainty is alluring”, in order to cajole so many, or even most in the world, into firmly believing that their risk weighted capital requirements for banks, based on ex ante perceived risks, with certainty combats, at no cost, that uncertainty that can cause banking crises.

Sir, I immediately ordered a copy of Robert Hare’s book, but really Anjana Ahuja’s brief message should suffice to understand the benefits of subjecting bank regulators to a full psychiatric evaluation before they are allowed to regulate. Airplane pilots must go through many psychological tests before they are allowed to pilot planes, and that even though they would cause so much less hurt and pain than what some misfit bank regulators could cause… or have caused.

PS. Oops I just discovered that I recently did recommend you a psychological assessment. I assure you that had nothing to do with psychopaths.

@PerKurowski

Current bank regulating technocrats posing as scientifically knowledgeable are just vulgar impostors.

Sir, Anjana Ahuja refers to how Galileo was imprisoned by the Roman Catholic Church for his conviction that the Earth went round the Sun, and warns scientists may well feel the heat from those in power once again, referring here clearly to Donald Trump. “Echoes of Galileo in the populist retreat from reason” December 7.

Sir, careful there, often those in power masquerade as scientists. For instance bank regulators of the Basel Committee and the Financial Stability Board, behave much more like theologians than the scientists they purport themselves to be. Their creed is: Assets perceived ex ante perceived as risky are ex post risky, and so banks should therefore hold more capital against these.

And if a third, or much lesser class Galileo like me, dares to argue that what is perceived as risky, becomes less dangerous precisely because of that ex ante perception; while what is perceived as safe becomes more dangerous precisely because of that ex ante perception, then he has to be ignored and his questions should not be answered. 

Sir, you want further proof about these fake scientists? Ahuja writes: “Why is science under siege? One possible explanation is that it favours objective evidence over subjective experience.” Well, the Basel Committee never even researched in order obtain objective evidence of what has caused all previous major bank crises, before adopting their own subjectivity as their guiding light.

Lately I have been wondering whether I need to go on a hunger strike or take similar extreme actions, in order to get some response to some very basic questions from the impostors. But perhaps I should refrain from doing so, since I could be burned at the stake… and without the science respectful FT, perhaps also feeling alleviated, not even reporting on the incident.

Like Martin Luther I might just nail my questions on some Church door in Basel, and take it from there.

PS. Let us not forget that Galileo's views were at one moment considered "alternative facts" or "fake news"

@PerKurowski

Britain’s Royal Statistical Society, for our sake, please give also bank regulators a course in statistics.

Sir, Anjana Ahuja reports that “Britain’s Royal Statistical Society has launched the #ParliamentCounts campaign, offering all MPs a free training course in statistics”, “Our collective innumeracy adds up to a big problem”, April 20.

What a marvelous initiative. I just hope they could follow it up with a similar course for our bank regulators. I say this because the regulators, while trying to make our banks safer by setting their risk-weighted equity requirements for banks, have been looking at the completely wrong series of statistics. Instead of looking at why banks failed, they have been looking at the risks of bank assets, how bank clients fail, and all of us who have some basic knowledge about statistics know very well that c'est pas la même chose.

That lack of elemental statistical knowledge caused bank regulators to set higher bank equity requirements against assets perceived as “risky” when in fact, what is truly dangerous for banks, have always been assets erroneously perceived as absolutely safe.

PS. April 21 I send the Members of the Royal Statistical Society a letter requesting an urgent Statistical Literacy Initiative

Our young unemployed, in order not to become a lost generation, might depend on artificial intelligence entering the Basel Committee.

Sir, though the theme was in general quite worrisome for a human, there was at least some source of hope when reading that Anjana Ahuja believes “Thinking machines are ripe for a global takeover” June 11.

Any remotely smart machine, if invited into the Basel Committee, would immediately detect two major flaws with the risk-weighted capital requirements which is the pillar of current bank regulations.

First, by simply looking at empirical data and observe that all major bank crisis have always resulted from excessive exposures to what was ex ante perceived as “absolutely safe”, and never ever because of excessive bank exposures to what was ex ante perceived as “risky”; it would conclude in that the risk-weights of 0 to 20 percent for the “infallible sovereigns” and the AAAristocracy must have gotten mixed up with the 100 percent risk weights for the medium and smaller businesses, entrepreneurs and start-ups.

Secondly it would probably also ask the human regulators why they were looking at perceived risks that were already being cleared for by the bankers, by means of interest rates size of exposure and other, something which is bound to distort the allocation of credit in the real economy; and why they were not looking instead at some of the important though usually ignored risks, like that of the credit risks not being correctly perceived by bankers and credit rating agencies.

If so, and if the Basel Committee did not throw the thinking machine out, and in all modesty accepted their natural intelligence was not sufficient and proceeded to correct those mistakes… then perhaps our current unemployed young would not have to become a lost generation.

PS. And of course FT will also find it much easier and digestible to believe in “Eugene Goostman” the machine, than to believe in Per Kurowski the human.

Note: June 2023 I began to dialogue with AI - ChatGPT and Grok.

No! Anjana Ahuja, academicians can be completely flawed too…like those used by the Basel Committee.

Sir, Anjana Ahuja writes that “Academics know precisely what it means for a study to be ‘flawed’”, “Politicians have learnt to lie in the language of scientists” November 28.

No, not always! When I see capital requirements for banks based on studying the failure rates associated with the assets of a bank and not on studying what made the banks fail, then I simply cannot be so sure about the quality of the academicians, at least not those used by the Basel Committee or the Financial Stability Board.

Italy’s earthquake vs. financial earthquake - outrageous punishment vs. outrageous forgiveness

Sir, I refer to Anjana Ahuja’s “Jailing the seismic seven will cause tremors beyond Italy”, October 25. 

If we transport what happened in Italy to the financial sector, we can observe that: the credit rating agencies correspond to the seismologist, the regulators who gave the credit rating agencies so much importance and credibility to those regulators that flouted building regulations and, all those who assured the world all was fine and dandy to Bernardo Bernadinis. 

As that major financial earthquake which was for some of us, perhaps not scientist but ordinary laymen, absolutely doomed to happen, “just follow the AAAs”, and that quake has produced immensely more widespread damages than those tragically produced in L’Aquila, the question which remains is: 

What is worse, outrageous punishment or outrageous forgiveness? 

The credit rating agencies made mistakes which one way or another should have had some type of consequence. The bank regulators should have been ashamed and not simply authorized to keep on regulating, using the same silly paradigms, as if nothing had happened. And, if the Bernardo Bernardinis’ of this world do not understand they need new advisors, they should just be sent home, for being too dumb. 

PS. In October 2004 in a formal written statement delivered at the Executive Board of the World Bank I warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions”. And, if little me sort of knew it, should regulators and credit rating agencies have known it? I dare you to read it. It contains more relevant comments.