Does Christine Lagarde really know about the zero risk weighting of eurozone sovereigns bomb?

Sir, Anne-Sylvaine Chassany writes how Christine Lagarde was interrogated in 2016 about an incident while she was the finance minister in France, related to a vital memo she missed, and which led to herfailing in “preventing an allegedly fraudulent €403m state payout”. “Although spared prison and a fine, she was found guilty of negligence, though the court decided the conviction would not constitute a criminal record” “Lagarde’s lesson in how to deal with imposter syndrome” July 10.

That must have been a very uncomfortable experience for Ms. Lagarde. And in this respect I wonder if she has for instance read what Sharon Bowles the then European Parliament’s Chair Economic and Monetary Affairs Committee opined in 2011?

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, 2 May 2011 Bowles said: 

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

Sir, that was eight years ago… and Mario Draghi or anyone else did not defuse that bomb and so it is still ticking.

A zero risk weighting of any sovereign bond, for purposes of bank capital requirements anywhere is lunacy to me, as it de facto implies believing that government bureaucrats know better how to use bank credit they are not personally liable for, than for instance entrepreneurs. But, when it is assigned to sovereigns who take on debt denominated in a currency that is not their domestic printable one, as is the case in the eurozone, then it goes way beyond lunacy.

Anne-Sylvaine Chassany writes that againChristine Lagarde faces a chorus of doubters. Ms Lagarde is not a monetary policy specialist or an economist by training, skills which, in a perfect world, ought to be part of the job description to succeed Mario Draghi at the helm of the European Central Bank.

That is of little concern to me; there should be more than enough monetary policy specialist or economists and, seeing what many of them have been up to lately, perhaps even too many. 

But does Ms Lagarde really know what she is getting into? Does she really think she can help defuse that zero risk weighting for eurozone sovereign bonds bomb that, if it explodes, will take down the euro, and perhaps the European Union with it?

Someone should ask her that. That is many times more important than the vital memo she missed seeing. Why not the Financial Times?

But then again would anyone really be able to defuse that bomb?

PS. Perhaps the title of this should be "Does Christine Lagarde know she might be on a suicide mission?

@PerKurowski

IMF, where’s the regulators’ discipline when needed to stop the procyclical risk weighted capital requirements for banks?

Sir, Chris Giles writes that IMF’s Christine Lagarde warning about “70 per cent of the global economy to experience a slowdown in growth… acknowledged that budgetary discipline in good times was difficult for finance ministers to achieve, but necessary to create “fiscal space to act in bad times”. “IMF Lagarde highlights risks to global economy” April 3.

Times are good, lesser the perceived risks; less the capital must banks hold; even though it is a good time to raise bank capital.

Times are bad, higher the perceived risks; higher the capital must banks hold; even though it is a bad time to raise bank capital.

But are regulators doing something to diminish this regulatory pro-cyclicality? No, or absolutely not enough. Why? Because doing so would require to admit that their risk weighted bank capital requirements are based on the nonsense that what is perceived as risky, when place on banks’ balance sheets, is more dangerous to the bank system than what is perceived as safe.

Sir, that slow down Ms. Lagarde speaks of is much the result of the obese growth that results from excessive exposures to what is perceived as safe. Muscular, sustainable growth requires, by definition, a lot of risk taking.

God make us daring!

@PerKurowski

Our banking systems have been made especially fragile, because of especially bad bank regulations.

Sir, Martin Wolf writes “The world’s economy and financial systems are fragile … the most important source of fragility is political… In country after country, populists and nationalists are in, or close to, power. Salient characteristics of such politicians are myopia and entrenched ignorance. Inevitably, they spread uncertainty.” “Politics puts the skids under bull market” October 17.

In April 2003, as an Executive Director of the World Bank I delivered a statement that contained the following: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

One of those “Best Practices” has been the risk weighted capital requirement for banks. These give banks incentives to create especially large exposures to what is perceived or decreed as especially safe, against especially little capital; making our banks, and the sector lending thereby favored, like sovereigns and houses, extremely fragile.

Populism? Sir, few things as brazenly populists as “We will make our bank systems with our risk weighted capital requirements because we sure know about risks. 

PS. Wolf, during the last annual meetings of IMF and the World Bank in Bali when interviewing Christine Lagarde, mentioned: “As a journalist I am paid to be skeptical”

But Wolf refuses to ask bank regulators about what they were thinking when they assigned a meager 20% risk weight to assets that because rated AAA represents great dangers to bank systems, compared to a whopping 150% for the so innocous below BB- rated. Sir, could it be you are not paying Wolf enough?

PS. In a similar vein during the interview Mme Lagarde said, “In IMF’s view capital flow management measures should: not be first order of priority, only be used in exceptional circumstances, not be a substitute for macroeconomic and macroprudential policies.”

So why does IMF keep mum about the risk weighted bank capital requirements? In a letter FT published in November 2004 I wrote: “our bank supervisors in Basel are unwittingly controlling the capital flows in the world.” Could it be that IMF still does not understand that that regulation distorts, controlling credit flows in favor of the “safe” present and against the “risky” future

PS. Ref the same interview: Trade protectionism? What neo-Bretton Woods Conference will be needed to help us get rid of bank regulations made to protect banks but that only endangers bank systems?

PS. Ref the same interview: Balance sheet vulnerabilities. Are not the consequences of central banks huge liquidity injections, with QEs, especially for emerging countries, precisely the same as those of the 1974 to 1981 recycling of oil revenues surpluses?

PS. Ref the same interview: Is the eurozone crisis over? “No!” says Mme Lagarde. After 20 years way too little has been done about solving the challenges of the euro and that, if not solved could bring EU down… and still Wolf categorizes his homeland Britain as “my idiotic country” because of Brexit.

PS. Ref the same interview: With respect to Greece, not a word was said about the EU authorities 0% risk weighting of Greece, which doomed it to its excessive public indebtedness.

@PerKurowski

To save us from “calm waters” and recover economic dynamism, get rid of risk weighted capital requirements for banks

Sir, Tim Harford writes: “economic dynamism is at risk… John Haltiwanger has charted a fall since the early 1980s in the rate of start-ups, business exits, job creation and job destruction…Calm waters eventually stagnate. It is time to agitate the real economy…But how? …support for small-business finance, would all add much needed fizz to the economic system.” “Eerie quiet marks Black Monday’s anniversary” October 22.

That “how?” must include getting rid of the absolutely insane risk weighted capital requirements for banks

Sir, as a member of the Civil Society, during the Annual Meetings of World Bank and IMF, and for the umpteenth time during such occasions, I asked the following question:

“As the world’s premier development bank the World Bank must know that risk-taking is the oxygen of any development. So why is it still not speaking out against the risk-weighted capital requirements for banks that put a brake on risk-taking, like on the lending to SMEs small and medium sized enterprises…even though never ever has a major bank crisis erupted because of excessive exposures to something ex ante perceived as risky.”

After Jim Yong Kim gave a very valid answer, but not one that directly addressed my concerns, IMF’s Christine Lagarde jumped in with:

“I am actually tempted to address also this question, is that okay?

Because I think it is an important point and one that has very complex ramifications. It has complex ramifications in the banking regulations business, in the banking supervision business, and in the accounting business.

And then it is at the very junction of between sorts of self-established model by the banks versus models established by the supervisors. 

I think we both would agree that methods that would actually encourage the lending by banks and by insurance companies and by pension fund to SMEs, you know with the risk associated with it, should actually be very much in order.

At the moment the risk weighing methods and the models that are being used are discouraging from actually investing and taking risk to benefit the small and medium sized enterprises 

And that’s not necessarily the best avenue to support the economy and to support entrepreneurs who want to have access to financing.”

Sir, as you can see the IMF is finally opening up its eyes to the distortions in the allocation of bank credit that are produced by current bank regulations… those which FT has been so steadfastly silent on… even though I have over the years sent you about a thousand letters on this specific issue.

FT, when will you be fearless and without favour enough to take up this issue?

Here is a transcript of my question and the answers received during AM2017.

And here is an old homemade YouTube in which I try to give an explanation as simple as possible of what is so wrong with the risk weighting.

God make us daring!

PS. By the way are you not at all curious how regulators, in their standardized risk weights of Basel II, came up with only a 20% for those so dangerous AAA rated, and a whopping 150% for the so innocuous below BB- rated, those that bankers do not touch even with a ten feet pole?

@PerKurowski

Mme Lagarde. With regulations that distort the allocation of bank credit, any recovery is on shaky grounds.

Sir, I refer to Chris Giles’ “IMF chief warns of risks to recovery” July 6.

Of course, with regulations that distort the allocation of bank credit to the real economy, any recovery is on shaky grounds.

To help Mme Christine Lagarde of the International Monetary Fund understand the issue, better, I have drafted a short and polite letter she could send to her friends the regulators in the Basel Committee and the Financial Stability Board. Their answer, or their no answer, should reveal a lot. 

Dear regulator.

You set your risk-weighted capital requirements based on the ex ante perceived risks already considered by bankers when determining the size of the exposure and the risk premiums to charge. Could that not imply that perhaps the ex-ante perceived risks are excessively considered?

I often wonder if it would not be wiser of you and your colleagues to set these based on those risk not having been adequately perceived, or that bankers are not capable of manage the risks they perceive; or with an eye to somewhat unlikely but nevertheless potentially catastrophic events.

You and I know that one vital function we expect our banks to perform is to allocate credit efficiently to the real economy. Remembering that context, I wonder if the risk weighting you and your colleagues customarily make in your regulatory function is perniciously, if also unintentionally, distorting capital allocation -- by favoring the safer? past over the riskier? future?

Sincerely,

PS. If they do not answer Mme Lagarde could find a summary of some of the mistakes with risk weighting here.

@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

Mario Draghi, you should be ashamed, as a bank regulator, you helped to leave behind, those left behind

Sir, Claire Jones and Alex Barker write that Mario Draghi, the president of the European Central Bank, Donald Tusk, the president of the European Council, and Christine Lagarde, the head of the International Monetary Fund…issued separate pleas yesterday to address the plight of those “left behind” by globalization”, “Draghi makes appeal for those ‘left behind’” September 14.

The fact is though that Mario Draghi, the former chair of the Financial Stability Board, and the current Chair of Governors and Heads of Supervision of the Basel Committee on Banking Supervision, is fully supporting the pillar of current bank regulations, namely the risk weighted capital requirements for banks.

That regulation has given a risk weight of 0% to the Sovereign, 20% to the AAArisktocracy, and 100% to We the People, like the SMEs and entrepreneurs.

John Kenneth Galbraith in his “Money: Whence it came where it went”, 1975, wrote: “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”.

And so, with their discrimination against “The Risky”, regulators, like Mario Draghi, decreed inequality. And so they have no right to try to bullshit us now with some deep-felt concerns with those left behind.

And to top it up, with his QEs, Draghi has mostly helped those who already had assets.

@PerKurowski ©

The Basel Committee’s risk weighted capital requirements for banks decreed the ‘new mediocre’, and boosted inequality

Sir you write: “Christine Lagarde, the IMF managing director, has warned that the recovery remains too slow and fragile — and that the world risks being trapped in a “new mediocre” of persistent low growth, with damaging effects on the social and political fabric of many countries.” “The high cost of settling for the ‘new mediocre’” April 6.

If asked: “Is risk-taking essential to the economy?” most experts and all wise men would say “Absolutely!”

And yet regulators de facto ordered banks to stay away from whatever that is ex ante perceived as risky. Because that is what happens when you allow banks to earn higher expected risk-adjusted earnings on what is “safe” than on what is “risky”. Because that is what happens when you allow banks to leverage equity more with what is “safe” than with what is risky.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926 

This week William Coen, the Secretary General of the Basel Committee, said in a speech: “We have spent several years developing a framework to make sure that banks' capital and liquidity buffers are strong enough to keep the system safe and sound.” And that describes precisely the problem; they have only cared about the condition of the banks, and not one iota about the fundamental social purpose of banks, which is that of allocating credit efficiently to the real economy.

As is banks will dangerously overpopulate safe havens and leave many promising but “risky” bays unexplored. As is banks no longer finance the riskier future, they just refinance the, for the very short time being, safer past.

And of course, negating the “risky”, like SMEs and entrepreneurs, fair access to the opportunity of bank credit can only boost inequality.

Sir, I cannot understand your, IMF’s, World Bank’s, economists’ and so many others’ silence on this issue. As I see it you should all be ashamed.

One day soon, your sadly unemployed children and grandchildren, will hold you accountable for it.

And don’t tell me I did not warn you. I have sent you way over 2,000 letters on the dangers of arbitrarily imposing distorting risk aversion on our banks, during more than a decade. 

@PerKurowski ©

For not questioning the IMF staff sufficiently, Christine Lagarde might, sadly, not deserve her second term

Sir, Vanessa Houlder lauds Ms Lagarde for having “frequently deferred to the fund’s staff in formulating policy” “Lagarde deserves her second term at the IMF” February 25.

That is indeed laudable, but that does not exonerate her from posing the questions that need to be made.

On several occasions I have had the opportunity to ask Ms Lagarde, and IMF staff, about the wisdom of credit risk weighted capital requirements for banks imposed by bank regulators.

Specifically, as an example, here follows two simple question the General Manager of IMF should make and should expect the staff of IMF to answer in unequivocal terms:

Question 1: Why do you think that the risk-weighted capital requirements for banks, which allow banks to earn higher risk-adjusted returns on equity when lending to "the safe" than when lending to "the risky", like SMEs and entrepreneurs, do not dangerously distort the allocation of bank credit to the real economy?

Question 2: If no bank crisis ever has resulted from excessive bank exposures to what was ex ante perceived as "risky", as these have always resulted from too large exposures to what was ex ante perceived as "safe", why do you require a bank to hold more capital when lending to "the risky" than when lending to "the safe"?

If only Ms Lagarde had officially asked those simple questions, not allowing for any type of evasion, then perhaps bank regulations might have look quite differently; and the world’s economy be in a much better shape.

But she, apparently, has not!

PS. For a starter IMF research should try to answer: How many bank loans to SMEs and entrepreneurs have not been awarded worldwide, during the last decade, only because of the risk weighted capital requirements for banks: ten thousands, hundred thousands, millions?

@PerKurowski ©

Mme Lagarde, IMF owes Greece and it’s creditors, to explain and correct what was done wrong with bank regulations

Sir, Shawn Donnan writes: “There is broad agreement that the fund and its European partners badly miscalculated the extent of the negative impact of the punishing reforms and severe austerity imposed on Greece”, FT Big Read IMF “Lagarde eyes new act in Greek drama” August 14.

In 2011 during a Civil Society Town Hall meeting at the IMF I asked Mme Lagarde: “If bank regulators had defined a purpose for banks before regulating, we might have had a very different bank crisis, but not as large, systemic, and dangerous as this one…when are you going to require the regulators in the Basel Committee to openly and explicitly define the purpose of our banks… to see if we all agree? 

And Mme Lagarde answered: “My sense is that the most critical mission for the banks--and that is what we are trying to say when say that banks have to rebuild their capital buffers--is to actually finance the economy, first and foremost, and that should be really the critical mission”.

As is, now, some years later, banks still have to operate under the influence of credit-risk-weighted capital requirements, something that of course has absolutely nothing to do with adequately “financing the economy”.

So how can IMF or its European partners get anything right about Greece, if it does not want to acknowledge, or even dare to understand, how current regulations distorts the allocation of bank credit?

Those distortions, by favoring so much public debt, caused the Greek tragedy and, by discriminating against the fair access to bank credit of the “risky”, like SMEs and entrepreneurs it, stops the Greek tragedy from ending.

Mme Lagarde: IMF owes the Greek, and Greece’s creditors, to explain and to correct what was done wrong when regulating banks. That must come before anything else.

What I would do? Make sure banks needed to hold slightly less capital when lending to the private sector than when lending to government bureaucrats.

@PerKurowski

IMF, Mme. Lagarde, Martin Wolf: Get it! Bank regulators have prescribed the “new mediocrity”.

Sir, I refer to Martin Wolf’s “How to do better than the new mediocrity” October 15.

Wolf writes: “It is important not to exaggerate the story of slowdown in the world economy. Yet it is also vital to avoid a progressive downward slide in growth. To address this risk it is necessary to launch well-crafted reforms in both emerging and high-income economies...”

Current capital requirements for banks direct banks to hold assets, not based on their pure economic returns, but based on those higher risk adjusted equity returns they can obtain by adjusting to the ex ante perceived credit risks, those which have already been cleared for in interest rates and size of exposure. And that IMF, Martin Wolf and so many others cannot understand that excessive credit-risk aversion can only lead to mediocrity, is a real mystery to me.

And so the number one reform the world needs is to abandon all credit risk weighing when setting the capital (equity) requirements for banks.

That would unfortunately not be an easy task because, while bank credit redirects itself to serve the needs of the real economy and not the wishes of the Basel Committee; and while banks are made to have stronger capital (equity) levels, it is important to make certain that the overall liquidity provided by banks does not shrink and become a recessionary factor.

In the absence of such reform, “more public investment in infrastructure” capitalizing on regulatory subsidies that makes public debt less expensive that it would otherwise be, and like what the IMF and Martin Wolf with so much gusto propose, could make it all so much worse… and, of course, so much more mediocre.

Mme Lagarde, bank regulators also violate basic ethical norms, and prize short term security over long term prudence.

Sir, I suppose you held your “Conference on Inclusive Capitalism” without one word referencing how the risk-weighted capital requirements for banks, in the name of stability, exclude “the risky” from having fair access to bank credit, even though “the risky” have never ever caused a major bank crisis. 

Emily Cadman and Sharlene Goff report that reeling off a list of recent scandals including money and the manipulation of Libor, Ms Lagarde said: “some prominent firms have even been mired in scandals that violate the most basic ethical norms”. And Mme Lagarde also stated “The [financial] industry still prizes short-term profit over long term prudence” “IMF’s Lagarde attacks financial sector for blocking reforms”, May 27.

Mme Lagarde is absolutely right, but, as I see it, the truth is also that on both counts, bank regulators are even guiltier, as a result of imposing risk-weighted capital requirements on the banks. That risk weighting allow banks to earn much higher risk-adjusted returns on equity when lending to “the infallible”, than when lending to “the risky”. 

And that causes of course a highly unethical discrimination against “the risky” and, since it distorts the allocation of credit in the real economy, it also evidences that regulators prizes much more short term security than long term prudence.

And in fastFT we also read that Mark Carney the governor of the Bank of England stated “there is growing evidence that relative equality is good for growth. At a minimum, few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined” 

Absolutely, but frankly, who is Mark Carney to talk about this? As a chairman of the Financial Stability Board, he has for many years approved these risk-weighted capital requirements for banks, which so favours the access to bank credit of the “infallible sovereign” and the AAAristocracy elite.

And Mark Carney also stood there straight faced and said “Banking is fundamentally about intermediation – connecting borrowers and savers in the real economy” Have these regulators who so distort the intermediation no shame?

Sir, as a former Executive Director of the World Bank, now Civil Society, whatever that means, I have formally directed question related to these capital requirements, twice to Mme Lagarde and once to her predecessor Strauss-Kahn … and both responded as if they sort of understood what I was talking about.

On October 7, 2010, and on September 22, 2011 and on October 9, 2013

And to that add, at least, 50 events at the World Bank at the IMF and others like this during which I have questioned these capital requirements… and of course on IMF's blog... but clearly to no avail.

And so in this respect may I argue that IMF’s silence on the risks of risk-weighting, is blocking as much or even more than the financial sector, the so much needed reforms.

FT argues IMF should be listened to because of its consistency, but fails to apply the criteria to others.

Sir, in “The Solomonic advice of the IMF”, October 12, though you accept that IMF “like most other forecasters has been proved over-optimistic on the strength of the recovery” you still argue that its advice deserves a serious hearing, primarily because of its “consistency”. 

Now I have, as you know, very consistently, argued from before the crisis that regulators were dooming us to a crisis, even in FT, and then that there was no way of recovering any sturdy and sustainable economic growth with bank regulations that discriminate in favor of what is ex-ante perceived as not risky, “The Infallibles”, and against “The Risky”, the small businesses and entrepreneurs. 

And from what I see, read and hear, the reigning majority of IMF economists, have still no complete idea about how we got into this mess, and so, clearly, much less a complete idea on how to get us out of the mess. 

But still, I do not get any brownie points for consistency, because that is not really what it is all about, and so my arguments are silenced by FT, consistently

By the way "Solomonic": “Exhibiting or requiring the wisdom of Solomon in making difficult decisions”, come on, I respect IMF, though I sure hope they would be smarter, but is that not taking it all a bit too far?

The worst austerity is the regulatory risk-taking-austerity imposed on banks.

Sir, Claire Jones and Peter Spiegel report that “German finance minister criticizes Lagarde call to ease up on austerity”, October 12.

Sincerely, it would sure do all those present at the IMF and World Bank Meetings in Tokyo much good to discuss the “austerity” that hurts the most. I refer to that of the risk-taking-austerity which results from current capital requirements for banks based on ex-ante perceived risk.

Those risk-taking austere regulations caused the crisis, by giving banks extraordinary incentives to lend to “The Infallible” and avoid lending to “The Risky”, the small businesses and entrepreneurs. 

And at this moment of extremely scarce capital, those regulations, and now made even worse because of liquidity requirements based on the same perceived risk, are discriminating more than ever against The Risky, and completely locking them out from having access to bank credit in competitive terms.

How on earth do they think we can get out of this economic mess they helped to place us in without the help of “The Risky”?

Why don´t regulators stop helping the banks from doing what they do not want them to do?

Sir, Philip Stephens refers to Christine Lagarde, the French Finance minister as saying that banks should “contribute properly to economic recovery, to curb bonuses and to bolster their own capital”, “Critics will shut up when the banks pay up” February 1.

I wonder why the “formidable” Lagarde does not simply request the Basel Committee to eliminate those capital requirements for banks that so discriminate in favor of what is perceived as having a low risk of default; allowing for 60 to 1 and even higher bank leverages when triple-A ratings are involved? That is what has hindered and hinders the banks from allocating capitals more efficiently in order to create a more sustainable economic recovery; that is what has allowed and allows generating the huge bank profits which breeds huge bonuses; that is why the banks have been able and are able to grow too-big-to-fail with little capital.

Mme Christine Lagarde, the crisis demands we think things over more carefully, from scratch!

Sir who would disagree with Mme Christine Lagarde´s call that “The crisis demands we finish what we started” October 8, that is of course as long as it does not mean finishing us off completely.

Strangely enough, when Mme Lagarde rightly focuses on the issue of cutting unemployment, the first concrete results she points out is “150 tax information exchange agreements have been signed and the number of tax havens has been drastically reduced.” There is nothing wrong with fighting tax evasion but, what it has to do with job creation beats me, unless she is referring solely to the creation of jobs for public servants. The funds hanging around the tax-havens are not sipping cocktails on the beach but creating jobs somewhere.

Also in the same vein no one would disagree with her when she writes “we need to make sure that requiring banks to hold more and better capital does not hinder their ability to lend to individual and companies” but how can she then say in a congratulatory tone that “The Basel II framework for banking capital has now been accepted by all and the heads of states have committed to applying it to the most important financial centres by 2011.”? Is she totally unaware of that the Basel II framework sabotages the risk-taking needed to create jobs? And that many of us consider the Basel II framework as the main explanation for this crisis?

No Mme Christine Lagarde, the crisis, what it really demands, is that we think things over more much more carefully, from scratch and without being stuck in the past.

FT… how come?

Sir I refer to your Special Report World Economy 2008 published with occasion of the meetings of the World Bank and the International Monetary Fund in Washington this week.

In it Paul J Davies in "High noon chimes for collateral with no name" says "A system that simply trusts in collateral without regards to its particulars is one that fosters the creation of ever more hideously complex problem". Since the principal reason for the current turmoil is not that the system trusted too much the collateral but that it trusted too much others to do their job of analyzing it, I would have worded it instead as "A system where participants are led to believe so much in the opinions of some few credit rating agencies…"

Also Norma Cohen in “Race against the storm” mentions that “The infection in the credit markets, by all accounts, began with mortgages, specifically those to borrowers with poor and patchy credit” but this completely ignores the fact that most of the market did not lend to borrowers with “poor and patchy credits”, most of the market bought AAA rated securities.

UNCTAD for instance is perfectly clear about what has happened and in their policy brief titled "The Crisis of the Century", released on October 6 they state "There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque."

Now in your 12 page special report, surprisingly, the credit rating agencies are referenced only once, and that is when you have to report on the opinions of Christine Lagarde, France’s finance minister.

How come? What strange and dark silencing forces are in action at the Financial Times? They seem to be much present at the World Bank and IMF meetings too.

I have saved a copy of this Special Report by the Financial Times as evidence… though I do not know of what, yet.

Are the bank regulations from the Basel Committee an unqualified success?

Sir Christine Lagarde, France’s minister of economy, finance and employment in her “Securitisation must lose the excesses of youth” October 9 says that “In Europe, regulations initiated by the Basel Committee have served us well” and the question that begs the answer is “who are us?

By their minimum capital requirements methodology what Basel has primarily managed is to introduce a layer of regulatory arbitrated bias against risks and, long term, I do not know of any nation or continent that has been well served per se by more risk adverseness.

Yes it might be true that Basle has been able to reduce in the financial system what Alan Greenspan recently has referred to as the “benign turbulence”, but this could just have the effect of providing more stimulus to the camouflage or the hiding of the risks in other places than the commercial banks’ balance sheets, resulting in less transparency and the possibility of a dangerous accumulation of risks that could end in some real malignant turbulence.