How can you hold governments accountable, while their borrowings are being non-transparently subsidized?

Sir, Aveek Bhattacharya discusses various options to improve the productivity and effectiveness of public spending. “A future case for the ‘retro’ policy of public sector reform” FT February 18, 2022.

He fails to mention: Current bank capital requirements are much lower for loans to the government than for other assets. This translates into banks being able leverage much more their capital – and so making it easier for them to earn higher risk adjusted returns on equity when lending to the government than when lending to the citizens. That, which de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g., small businesses, turns into a subsidy of the interest rates government has to pay on its debts. Top it up with that the quantitative easing carried out by central banks is almost all through purchases of sovereign debt, and then dare think of what sovereign rates would be in the absence of such distortions.

Sir, if you really want to make your government more accountable, have them at least know what their real borrowing costs are.

Sir, in a letter you published in 2004, soon two decades ago I asked “How many Basel propositions will it take before regulators start realizing the damage, they are doing by favoring so much bank lending to the public sector?” Do you think this only applied to developing nations? If so, please open your eyes.

@PerKurowski

Expert technocrats, like those in the Basel Committee, can be shameless and dangerous populists too.

Sir, Takeshi Niinami writes “Japan’s populism leads to mounting government debt and short-term solutions for immediate issues without a clear long-term vision for recovery. This is not unique to Japan. I believe that the US and EU will begin taking quite a similar path” “Japan has a unique form of populism” September 16.

1988’s Basel Accord gave officially birth to the risk weighted bank capital requirements. This regulation, with its much lower decreed risk weight of sovereign debt than of private debt, set all who applied it on a firm course to too much debt and too little growth. 

Just its denomination “risk weighted”, as if the real risks could be known, is of course just another sort of shameless populism. That the world fell for it, is clearly because the world wanted it so much to be true, that it never found in itself the sufficient will to question its basic fallacy; that it considered that which ex ante is perceived as risky to be more dangerous ex post to our bank systems than what is perceived as safe, something which obviously is not so, as all major bank crises in history evidence. 

As I so often have said, that faulty regulation imposed a de facto reverse mortgage on the economy, which extracted the value it already contained, as banks focused more on refinancing the safer past than the riskier future. By refusing those coming after us the risk-taking that brought us here, the intergenerational holy bond that Edmund Burke wrote about was violently violated.

@PerKurowski

Risk weighted bank capital requirements are anathema to neoliberalism

Sir, Rana Foroohar writes “we have spent decades of living in the old reality — the post-Bretton Woods, neoliberal one.” "Markets are adjusting to a turbulent world" August 19.

There are many definitions of neoliberal policies out there but they always include a large role for the hands of the free market and the reduction in government spending in order to increase the role of the private sector in the economy.

In 1988, for the banking sector, one of the most important economic agents, credit risk capital requirements were introduced by means of the Basel Accord. It gave incentives that distorted the allocation of bank credit to the real economy. For instance lower risk weights for the sovereign (0%) and for residential mortgages (35%) signifies subsidizing the sovereign and the safer present, by taxing the access to credit for the riskier future, like to entrepreneurs (100%). So I do not know what neoliberalism Ms. Foroohar refers to.

Ms. Foroohar, speculating on the possible “impact of an Elizabeth Warren or Bernie Sanders victory in the US primaries?” mentions a 13D Global Strategy and Research note that holds that such event would “fit perfectly into the cycle from wealth accumulation to wealth distribution”, something that Foroohar also believes “will be the biggest economic shift of our lifetimes.”

Sir, at the very moment income, through the purchase of assets, is transformed into accumulated wealth; there cannot be any significant redistribution of it, which means having to sell many of those same assets, without any significant destruction of wealth. If you’re scared of a deep recession, as we all should indeed be, then the last think you’d want to do is to deepen it with a wealth redistribution cycle.

So we cannot redistribute? Yes, we can, but that’s best done getting hold of the income before it is converted into assets, and then, preferably, sharing it out equally to all, by means of an unconditional universal basic income.

@PerKurowski

Central banks and regulators are wittingly or unwittingly imposing communism by stealth, at least in Japan.

Sir, you refer to that Bank of Japan’s holdings of government bonds are already at more than 40 per cent of the outstanding stock… and to “massive equity purchases” [by means of buying into the ETF market], and to“the government is the biggest beneficiary of the BoJ’s low interest rate policy” “BoJ risks falling out of sync on global easing” August 7.

Add to that the lower capital requirements for banks when lending to the government than when lending to citizens, and it all adds up to a huge gamble on that government bureaucrats know better what to do with credit/money than private enterprises. It sure sounds too much like communism by stealth for my liking. 

In 1988 the Basel Accord assigned 0% risk weight to sovereigns and 100% to citizens and we all believed that when in 1989 the Berlin Wall fell we had gotten rid of communism for good. How can the world have been so naïve? It will of course end badly.

@PerKurowski

The 0% risk weighting of sovereigns and 100% of citizens, decreed fiscal irresponsibility.

Sir, Martin Wolf, discussing Trump’s tax cuts writes that America’s longterm fiscal position [has become] fragile”, “Trump’s boom will prove to be hot air” July 10.

Fragile indeed. In 1988 when the Basel Accord assigned America’s public debt a 0% risk weight, its debt was about $2.6 trillion, now it owes around $22 trillion and still has a 0% risk weight. 

Wolf opines “it is not too soon to note where the US is heading. It is hard to imagine anybody standing up for fiscal prudence. The choice is rather between rightwing and leftwing Keynesians. In the long run, that is likely to end badly.”

I fully agree but I must add that the risk weighted bank capital requirements, which so much favors credit to the sovereign over for instance credit to entrepreneurs, created such distortions that made it impossible for markets to send out their timely warning signals.

One can argues as much as one like that the credit risk of the sovereign is much less risky than that of an entrepreneur, but, the other side of the coin of that risk weighting, is that it de facto also implies a belief in that government bureaucrats know better what to do with bank credit they’re not personally liable for, than entrepreneurs.

For instance, does Wolf believe the current fiscal sustainability outlook of for the eurozone sovereigns would be the same if there had been just one single capital requirements for all their bank assets? Would he think French and German banks would still have lent to Greece/Italy as much and at the interest rates they did?

Does Wolf not think the immense stimuli injected by central banks in response to the 2008 crisis, would have been much more productive without the distortions in the allocation of bank credit produced by the credit risk weighing?

Sir, Trump’s tax cuts might not be helpful but, in the great scheme of things Trump is, at least for the time being, a really minor player when it comes to be apportioned blame for fiscal fragility. For instance how is the US be able to get out of that 0% risk weight corner its regulators has painted it into?

Sir, In November 2004 you published a letter in which I wrote: “How many Basel propositions will it take before regulators 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.”

@PerKurowski

Current bank regulators are closer to a Vladimir Putin type of regime, than to any possible Western world liberal idea.

Sir, I refer to Lionel Barber’s and Henry Foy’s interview with Vladimir Putin. ‘The liberal idea has become obsolete’ June 28.

Putin is quoted with that “the liberal idea” had “outlived its purpose”.

Sir, there are way too many interpretation of what is “the liberal idea” to know for cartain what is meant by it. That “liberal idea” flag is often waved for quite opposite positions, like more or less government intervention, to assure more or less personal freedoms… to guarantee more or less some human rights… and so on. I guess “liberal” is also something in the eye of the beholder. 

But to me my kind of “liberal idea” took a deep dive, in 1988, with the Basel Accord, one year before the fall of the Berlin wall. Because that accord, Basel I, introduced risk weighted bank capital requirements, which decreed a 0% risk weight to the debts of some friendly sovereigns, and 100% to citizens’ debts.

That de facto implied a belief that government bureaucrats know better what to do with credit they are not personally liable for, than for instance our entrepreneurs. That de facto has much more to do with a Vladimir Putin type of regime, than with any possible Western world liberal idea.

@PerKurowski

FT journalists. Is this really the legacy you want to leave to your children?

Not daring to ask bank regulators to explain why they've decided that what’s ex ante perceived as risky, is more dangerous ex post to our bank systems than what’s ex ante is perceived as safe

What I as a former Executive Director, pray that any new President of the World Bank understands

A letter to the Financial Times

Sir, I was an ED at WB from November 2002 until October 2004. During that time Basel II was being discussed. It was approved in June 2004. 

I was against the basic principles of these regulations that had begun with the Basel Accord of 1988, Basel I. That should be clear from Op-Eds I had published earlier, transcripts of my statements at the WB Board, and in the letters that I wrote and FT published during that time. Here is a brief summary of all that 

Since then I haven't changed my mind... that package of bank regulations is almost unimaginable bad.

I pray the next president of the world’s premier development bank, whoever he is, and wherever he comes from, at least, as a minimum minimorum, understands:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements, will distort against banks taking the risks that help to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.”, John A Shedd.

Second, that what’s perceived as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large exposures to what is especially perceived (or decreed) as safe, against especially little capital.

Sir, would you not agree that mine is a quite reasonable wish?

@PerKurowski

Even the best central bankers can mess it up, royally

Sir, Tim Harford writes: “A flint-hearted technocrat can at times deliver better results for everyone. In the early 1980s, Fed chair Paul Volcker demonstrated the basic idea that inflation could be crushed by a sufficiently badass central banker.” “Stop sniping at central banks and set clear targets” December 16.

Indeed, and Paul Volcker was a hero of mine too, that is until I realized his role as the facilitator of the risk weighted capital requirements for banks.

In his book “Keeping at it”, penned together with Christine Harper, Paul Volcker writes: “The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be…. At the end of a European tour in September in 1986, at an informal dinner with the Bank of England’s then governor Robin Leigh-Pemberton… without a lot of forethought, I suggested to him that if it was necessary to reach agreement, I’d try to sell the risk-based approach to my US colleagues.”

And that was that! In that moment, accepting the European nonsense that what bankers perceive as risky is more dangerous to our bank systems than what banker perceive as safe, Paul Volcker, a central banker, helped condemn us to suffer especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital. I thank him not!

Harford opines “The health of our democracies demands that our politicians start taking responsibility again”

Absolutely! And with respect to bank regulations that requires the politicians to ask for explanations like: Why do you risk weigh the assets based on their perceived risk and not on their risk based on how bankers perceive their risk? Have you never heard about conditional probabilities?

PS. The Basel Committee document that provides an explanation on the portfolio invariant risk weighted capital requirements does not make any sense to me, but perhaps Tim Harford understands it. If so could you please ask him to explain it to us? 

@PerKurowski

Europe, if you spoil your kids too much they will not grow strong. That goes for banks too.

Sir, Patrick Jenkins analyzes several concerns expressed about European banks when policymakers gathered to mark the retirement of Danièle Nouy from ECB’s Single Supervisory Mechanism (SSM); who is to be succeeded by Andrea Enria as the Eurozone’s chief banking regulator. “As European banks regulator retires, six big challenges remain” December 11.

The former Grand-Chair of the Federal Reserve, Paul Volcker, in his recent book “Keeping at it”, co-written with Christine Harper, recounts the following when, in 1986, the G10 central banking group tried to establish an international consensus on bank regulations and capital requirements:

“The US practice had been to asses capital adequacy by using a simple “leverage ratio”-in other words, the bank’s total assets based compared with the margin of capital available to absorb any losses on those assets. (Historically, before, the 1931 banking collapse, a ten percent ratio was considered normal)

The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be.”

Sir, even though the Basel Accord was signed in 1988 and further developed in 2004 with Basel II, and with which the European risk weighting was adopted, I am sure we can trace the differences between US and Europe banks to these original differences on capital requirements. The US has been much more strict on capital than Europe. In fact the problems with American banks during the 2008 crisis were mostly restricted to those investment banks, which supervised by the SEC, had been allowed in 2004 to adopt Basel II criteria.

In Europe meanwhile banks could do with much less capital, which meant that much more was left over for bankers’ bonuses. In essence, Europe’s banks were dangerously spoiled. The challenge these now faces is having to substitute their equity minimizing financial engineers with good old time loan officers; and convince the capital markets of that. Good luck!

@PerKurowski

Our bank regulators, just like "Sulley" Sullivan and Mike Wazowski, fear the wrong thing.

Sir, Martin Wolf, discussing US-China relation ends with, “Our enemy is not China. Have confidence in our values of freedom and democracy. Understand that it is on the creation of new ideas that we depend, not the protection of old ones. That in turn depends on freedom of inquiry and openness to the best talent from around the world. If western countries lose these, they will lose the future. As the greatest US president of the 20th century declared: “The only thing we have to fear is fear itself.” “America must reset its rhetoric on China’s rise” October 31.

Absolutely! But why then it is so hard to get Mr. Wolf to understand that current risk weighted capital requirements for banks, which so dangerously distorts the allocation of credit to the real economy, is nothing but an expression of fear… and to top it up a completely unfounded one. 

Just as "Sulley" Sullivan and Mike Wazowski in Monsters Inc. thought that children were toxic to them, the regulators are convinced that what’s perceived as risky is what’s dangerous to our bank system. Of course it is what’s perceived as safe that poses the real dangers.

Wolf asks, “What has been the most important event of 2018 so far?” He answers “arguably, it was the speech on US-China relations by Mike Pence, US vice-president, on October 4.”

I would hold that the most disastrous important event during the last three decades was the introduction, in 1988, with the Basel Accord, of these so utterly silly and naïve risk adverse regulations. That year the Western world said no ti the risk-taking that has been the oxygen of its development.

Sir, again, let me remind you that just for a starter, had no banks been allowed to leverage with assets over 60 times only because these were AAA rated, or limitless with loans to sovereigns like Greece and Italy, we would all be in a much different and surely better world.

When is Martin Wolf going to stop protecting old senseless fears?

God make us daring!

If Paul Volcker leaves an explanation for why a person like he never saw the dangers of the risk weighted capital requirements for banks, it would be a truly important legacy.

Martin Wolf, the Chief Economics Commentator of the FT, rightly praises Paul Volcker for his gigantic work, as chairman of the Federal Reserve between August 1979 and July 1987 of slewing the run away inflation of those years. How could one like me who in 2006 wrote about the long-term benefits of a hard landing, disagree with that? “The last testament of Paul Volcker”, October 30.

But then Wolf opines: “Yet, unlike many who should have known better, he understood that the central bank is responsible for financial stability, too. The book is full of Volcker’s painful experiences with the financial sector and his deep doubts about it… 

It would be too much to insist that the financial crisis would not have happened if Volcker had been Fed chairman in the 2000s. But he would have done his best to prevent it.”

And there Wolf and I part ways, sadly, because Volcker was also a true hero of mine. As I found out, in March 2016, Volcker is one of the main original driving forces behind the insane risk weighted capital requirements for banks; so he sure helped to cause the crisis.

What could have come into the mind of a man like Wolf describes, “endowed to the highest degree with what the Romans called virtus (virtue): moral courage, integrity, sagacity, prudence and devotion to the service of country”, to consider that this way of interfering in the allocation of bank credit to the real economy, could bring stability without risking any other serious consequences? An effort to answer that would also be something very valuable to see included in a Paul Volcker’s testament,

PS: Charles Goodhart’s “The Basel Committee on Banking Supervision: A History of the early years 1974-1997” 2011, Cambridge Press Goodman (p.167) refers to Steven Solomon’s “The Confidence Game: How Unelected Central Bankers Are Governing the Changed Global Economy” (1995). In it we read:

On September 2, 1986, the fine cutlery was laid once again at the Bank of England governor’s official residence at New Change… The occasion was an impromptu visit from Paul Volcker… When the Fed chairman sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital…

At dinner the governor’s hopes had been modest: to find areas of sufficient convergence of goals and regulatory concepts to achieve separate but parallel upgrading moves… 

Yet the momentum it galvanized… produced an unanticipated breakthrough of a fully articulated, common bank capital adequacy regime for the United States and United Kingdom. This in turn catalyzed one of the 1980’s most remarkable achievements – the first worldwide protocol on the definitions, framework, and minimum standards for the capital adequacy of international active banks…

They literally wiped the blackboard clean, then explored designing a new risk-weighted capital adequacy for both countries… 

It included… a five-category framework of risk-weighted assets… It required banks to hold the full capital standard against the highest-risk loans, half the standard for the second riskiest category, a quarter for the middle category, and so on to zero capital for assets, such as government securities, without meaningful risk of credit default.”

@PerKurowski

September 2008 when the crisis bomb exploded is not as important as the dates when the bomb was planted

Sir, Philip Stephens writes: “The process set in train by the September 2008 collapse of Lehman Brothers has produced two big losers — liberal democracy and open international borders. Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse”. “Populism is the true legacy of the crisis”, August 31.

I agree with most of what Stephens writes, especially on how “central bankers and regulators, politicians and economists, have shrugged off responsibility” for the crisis. What I do take exception of is for the date of the collapse since much more important than when a bomb detonates, is when the bomb is planted. In this respect three dates come to mind. 

1988 when regulators announced: “With our risk weighted capital requirements for banks we will make our bank system much safer” and a hopeful world, who wanted to believe such things possible, naively fell for the Basel Committee’s populism.

April 28, 2004, when the SEC partially delegated their authority over US investment banks, like Lehman Brothers, to the Basel Committee. 

June 2004, when with Basel II, the regulators put their initially mostly in favor of the sovereign distortions on steroids, like for instance allowing banks to leverage a mind-blowing 62.5 times with assets that managed to acquire from human fallible credit rating agencies an AAA to AA rating. And EU authorities decided that all EU nations, like Greece should, in an expression of solidarity be awarded a 0% risk weight.

Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”? 

PS. Here is somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

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

To tell us “What really went wrong in the 2008 financial crisis” might require more distance to the events

Martin Wolf reviewing Adam Tooze’ “Crashed: How a Decade of Financial Crisis Changed the World” refers to the author’s question of “How do huge risks build up that are little understood and barely controllable?” “What really went wrong in the 2008 financial crisis?” July 18.

May I suggests as one cause, the nonsensical ideas that can be developed through incestuous groupthink in mutual admiration clubs of great importance, such as bank regulators gathering around with their colleagues of the central banks in the Basel Committee for Banking Supervision.

Wolf writes: “The crisis marked the end of the dominant consensus in favour of economic and financial liberalisation” 

Not so! The end in “favour of economic and financial liberalisation” happened much earlier when the regulating besserwissers decided they knew enough about making our bank systems safer, so as to allow themselves to distort the allocation of bank credit.

In 1988, the regulators, with the Basel Accord, Basel I, surprisingly, with none or very few questioning them, decided that what’s perceived as risky was more dangerous to our bank system than what’s perceived as safe, and proceeded to apply such nonsense with their risk weighted capital requirements for banks. More risk, more capital – less risk, less capital. 

That meant that banks could then leverage more their regulatory capital (equity) with “the safe” than with “the risky”; which translated into banks earning higher expected risk-adjusted returns on equity with “the safe” than with “the risky”. That would of course from thereon distort the allocation of bank credit more than usual in favor of the safe and in disfavor of “the risky”.

That of course ignored the fact that what is perceived as risky has historically proven much less dangerous to the bank system than that which is perceived as safe. 

Basel I, which already included much fiction, like assigning a 0% risk weight to sovereigns and 100% to citizens, was bad enough but then, in 2004, with Basel II, the regulators really outdid themselves allowing for instance banks to leverage 62.5 times their capital with assets that had an AAA to AA rating, issued by human fallible rating agencies was present.

We have already paid dearly for that stupidity, as can be evidenced by the fact that absolutely all assets that detonated the 2007/08 crisis had in common generating especially low capital requirements for banks, because these were perceived (houses), decreed (Greece) or concocted (AAA rated securities) as safe.

I have ordered it but of course I have not read Adam Tozze’s book yet. When I do I will find out if it makes any reference to this. If not, I might just have to wait for other historians who are more distant from the events.

@PerKurowski

The Basel Committee stupidly made banks substitute savvy loan officers with equity minimizing financial engineers

Sir, John Plender, reviewing Philip Augar’s “The Bank That Lived a Little” writes: Not so long ago banking was a relatively simple business whose main focus was on deposit-taking and lending. Then in the 1980s everything changed as a powerful tide of deregulation swept through the industry… courtesy of Ronald Reagan and Margaret Thatcher”, “Head rush”, July 7.

Was it “deregulation” or plain missregulation? The main change that was introduced in banking, in 1988, with the Basel Accord, was the risk weighted capital requirements for banks. 

That meant that from there on, the risk-adjusted returns on bank equity were not to be maximized by savvy loan officers, but by equity minimizing financial engineers.

And clearly “increasing amounts of risk in relation to dwindling cushions of capital” allowed the bonuses of bankers to be so much higher.

Has banking “turned into an ethics-free zone”? Yes, but blame the regulators for much of that. Now, 30 years later, I would think there is no room to put the blame on Ronald Reagan or Margaret Thatcher. 

Frankly, since FT has not dared to ask regulators why banks have to hold more capital against what is dangerous perceived as safe than against what is made innocous by being perceived as risky, as I see it, FT is so much more responsible for all this mess.

@PerKurowski

If regulators, or even FT, do not questions the 0% risk weight of sovereigns, why should ordinary citizens care about public sector deficits?

Sir, Janan Ganesh writes“Americans no longer care about deficits, or at least no longer care enough. Their concern about them has waned since the mid-nineties” "How America learnt to love the budget deficit” June 28.

In 1988, with the Basel Accord, regulators introduced risk weighted capital requirements for banks and for that purpose assign risk weights to sovereigns of 0%. And European central banks assigned such 0% even to Greece, and Greece drowned in public debt, and yet no one, not even FT questions that 0% risk weight.

So Sir, why should ordinary Americans care about fiscal deficits when supposedly these can be financed with a 0% risk… because the government controls the money-printing machine?

Ganesh should not worry solely about America, with these statist bank regulators we are all being set up for a horrible crash. 

@PerKurowski

It’s not the role of regulators and central banks to help governments fund their operations, behind the back of citizens

Sir, Kate Allen writes that “euro-area financial institutions” have reduced their holdings of public debt “17 per cent in the past two years [but] the ECB made nearly €1.5tn of cumulative net purchases of eurozone public sector bonds through its quantitative easing programme — effectively replacing the purchasing role that banks had played. “Post-crisis reforms force European governments to curtail size of debt sales” January 5.

It all forms part of the same statist subsidizing of public debt. 

What would sovereign rates be if banks had to hold the same capital against sovereign debt than against loans to citizens; and if ECB had not purchased “eurozone public sector bonds through its quantitative easing programme”? The answer would have to be rates much higher, which would send quite different risk-free-rate signals.

In 1988, with Basel Accord, statist regulators, with their 0% risk weighted bank capital requirements, began subsidizing immensely government borrowings. When the 2007/08 crisis came along, central banks, perhaps in order to hide own their regulatory failures, with their quantitative easing purchases generated, wittingly or not, new sovereign debt subsidies.

This has dramatically changed the economical relations between governments and private sectors. It amounts to statist hanky-panky behind the backs of citizens. Since besides needing servicing it consumes, for nothing really special, sovereign indebtedness space that could be urgently needed tomorrow, it might become deemed as high treason by future generations. Where this is going to end is anyone’s guess, but it sure won’t be pretty.

@PerKurowski

In terms of causing the undoing of the west’s liberal democracy and global order, Trump (until now) is nothing compared to the Basel Committee

Sir, Martin Wolf holds that: “political developments have fractured the west as an ideologically coherent entity” “Global disorder and the fate of the west”, January 3.

I argue that much more than recent political developments the west, as we knew it, at least as I thought of it, was fractured in 1988 when regulators, with the Basel Accord, came up with risk weighted capital requirements for banks.

The following were Basel II’s capital requirements for banks on exposures to sovereigns according to their credit ratings: AAA to AA = 0%; A+ to A = 1.6%; BBB+ to BBB- = 4%; BB+ to B- = 8%; Below B- = 12%; Unrated = 8%.

What have that regulation to do with “A liberal democracy [where] the participants recognise the legitimacy of other participants common…[and] rests on a neutral rule of law”?

That someone like Walter Wriston could argue, "Countries don't go bankrupt," does not mean that some sovereigns have the right to declare themselves infallible. That was never part of any (recent) global order… nor was that those citizens who perceived as safe were already so more favored than those perceived as risky when accessing bank credit, would gain additional advantages by generating lower capital requirements for banks.

The development of the west like all development does required a lot of risk-taking. The day regulators layered on their purposeless risk aversion on top of already risk adverse banks… they doomed the west to a standstill, a “relative decline”, which, with time, will turn into a fall unless we can stop that dangerous nonsense. God make us daring!

Sir, what Trump, until now at least, might be doing to cause the undoing of the west’s global order is chicken shit when compared to what the Basel Committee has done. Martin Wolf does not think so because he considers it the duty of bankers to do what is right and ignore the incentives they are given to provide a high risk-adjusted return on equity to their shareholders.

And talking about populism, is not “We have risk weighted the banks’ capital for you so that you can now sleep calm” pure outrageous technocratic populism?

@PerKurowski

Those in 1989 so illusioned with the fall of the Berlin wall, never saw the Basel Accord that had hit the West 1988

Sir, Edward Luce writes: “We returned to England in 1989, hungover, each carrying a small chunk of the Berlin wall…We were infected with optimism.” “When west isn’t the best” Life & Arts, May 6.

And now, soon thirty years later Luce is so disappointed with what has happened thereafter, that he even writes such nonsense as “Others… in Caracas… share Russia’s hostility to western notions of progress”. Mr. Luce, dare go to the street of Venezuela and see for yourself how more than 80 percent of that country is risking their lives on the streets, fighting to maintain liberal values you hold, all in order to demolish a Havana-Beijing-Moscow-Teheran wall built by thugs, and which has destroyed a beautiful nation.

Luce ends with: “The west’s crisis was not invented in 2016. Nor will it vanish in 2017. It is structural and likely to persist. Those who gloss over this are doing liberal democracy no favours”; and that’s having already stated: “The self-belief of western elites saps their ability to grasp the scale of the threat.”

Sir, let us put the house in order. Luce writes: “The year 1215, the year of the Magna Carta, is today seen as the “year zero” of liberal democracy… By limiting the power of the king, the Magna Carta set a precedent for what would later be known as “no taxation without representation.”

Limiting the power of the king? In 1988, one year before Luce chipped away at the Berlin wall, the Basel Committee for Banking Supervision managed to get the Basel Accord agreed… and that accord, for the purpose of the capital requirements for banks, risk weighted the king, the sovereign, with 0% and its subjects, the citizens with 100%. From that moment on the statists’ wet dreams were realized and, amazingly, the western elite said nothing about this rape of the Magna Carta.

But Basel’s bank regulations did not only favor the king, it also introduced a risk aversion that had nothing with that “God make us daring!” attitude that made the west great.

That also realized the wet dreams of bankers, namely that of leveraging the most with what was perceived as safe, so as to be able to earn the highest risk adjusted returns on equity on what was perceived as safe, so as not having to lend the credit umbrella to risky SMEs and entrepreneurs.

Of course the west, with banks no longer financing the riskier future but only refinancing the safer present and past, and the sovereign, could, after that, only go in one direction, namely down, down and down.

Add to that the complications created by robots and automation. Those, on top of having to create jobs, now also require us to create decent and worthy unemployments.

The challenges for the west loom immense. To face these requires a neo Magna Carta that probably has to include something about a universal basic income, and of course getting rid of that insane mindset that came up with current bank regulations. That because, as Einstein said: “No problem can be solved from the same level of consciousness that created it”.

@PerKurowski