Excessive “intellectual gravitas” can sometimes be just as dangerous, or even more, than an insufficient one.

Sir, James Politi writes: Greg Mankiw, a respected Republican economist, did not mince words when he posted his reaction to Donald Trump’s nomination of Stephen Moore for a seat on the Federal Reserve board saying: “Steve is an amiable guy, but he does not have the intellectual gravitas for this important job.” “Donald Trump’s Fed nominee faces broad backlash” March 25.

That reminded me (again) of Edward Dolnick’s “The forger’s spell” (2009), which makes a reference to Francis Fukuyama saying that Daniel Moynihan opined: “There are some mistakes it takes a Ph.D. to make”. 

The intellectual gravitas of all those at the Fed and of all their colleagues in the bank regulatory sphere, primarily in the Basel Committee, came up with: risk weighted capital requirements for banks based on the utter nonsense that what’s ex ante perceived as risky, is more dangerous to our bank systems than what’s perceived as safe. 

An outrageous example of it is how Basel II, in its standardized risk weights, to that so dangerous because it is rated AAA to AA, they assigned a meager 20% risk weight, while, to that which is so innocous, because it has been rated a below BB-, they smacked with a 150% one.

And now, 10 years after a crisis that broke out because of excessive exposures to AAA rated securities, or to assets to which an AAA rated entity like AIG had issued a default guarantee for, the intellectuals with gravitas, persist in their mistake.

Sir, I do not know Stephen More but, if he possesses common sense, some experiences on Main Street and the willingness to question, then his possible lack of intellectual gravitas should be welcome, as something of that sort is much needed to guarantee diversity able to help block some of the incestual thinking processes.

@PerKurowski

When facts do not make those who should be the most curious curious, like FT journalists, what are we to do?

Sir, Tim Harford discusses “agnotology”, a term coined by Robert Proctor, a historian at Stanford University, which refers to the study of how ignorance is deliberately produced. “The problem with FACTS”, March 10.

Harford writes: “Facts rarely stand up for themselves – they need someone to make us care about them, to make us curious… Mainstream journalists, too, are starting to embrace the idea that lies or errors should be prominently identified… [but] We journalists and policy wonks can’t force anyone to pay attention to the facts... Curiosity is the seed from which sensible democratic decisions can grow.”

Indeed but here follows two facts about which I have written to the Financial Times more than 2.500 letters over the last decade but that has not been able to raise its curiosity or perhaps belong to the group of the facts that shall not be checked.

First fact: Regulators, with their Basel II of 2004, for the purpose of setting capital requirements for banks, assigned a risk weight of 20% to what was rated AAA to AA and one of 150% to what carried a below BB-rating.

A below BB-rating ex ante indicates a very high risk, something which precisely make clients so rated to signify no risk at all for the banking system.

What is rated AAA to AA ex ante indicates a very low risk, something that precisely induces banks to generate those excessive exposures capable of causing a major crisis, if ex post it turns out to really be very risky.

Second fact: By allowing for different capital requirements, the regulators allow banks to leverage differently their capital with different assets. That produces expected risk adjusted returns on equity that are quite different from what would have been the case in the absence of such regulations; something which clearly must distort the allocation of bank credit to the real economy.

Harford mentions the presence of “motivated reasoning” distraction, and lies can help to cloud or even make impossible the understanding of truths. In the case of bank regulations and the 2007-08 crisis, two that stand out.

Motivated reasoning: we do not want banks to fail. Just the phrase “risk weighted capital requirements for banks”, if compared to “not risk weighted capital requirements for banks”, indicates something so much more prudent… and therefore likable. It is hard for most to understand that risk weighing can in essence mean nothing if the risk weights are wrong, as they sometimes are; and also that since the clearing for risks already occurs by means of sizes of exposures and risk premiums, the doubling down on the same perceptions, now in the capital, makes it impossible to adjust for risks… even if the risks are ex ante perfectly perceived.

Distraction: derivatives. Does it not sound so delightfully sophisticated when we speak of the dangers of derivatives? How can anyone dare questioning the expertise of someone capable of that?

A qualified lie: deregulation of banks. Banks were effectively somewhat deregulated with the repeal of the Glass-Steagall Act in 1998. But that “deregulation” was really insignificant when compared to the imposition of such intrusive and distortive regulation as the risk weighted capital requirements for banks. Never ever have banks been so miss-regulated as now.

Harford writes: “Agnotology has never been more important” “We live in a golden age of ignorance,” says Proctor today. “And Trump and Brexit are part of that.”. To this I would have to add, Bank Regulations!

So Mr Undercover Economist, and you too Sir, why not begin by some fact checking on your own fact avoidance.

PS: Harford quotes Molière “A learned fool is more foolish than an ignorant one.” George Orwell also wrote in “Notes on Nationalism”: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

And according to Edward Dolnick, Francis Fukuyama has heard Daniel Moynihan opining: “There are some mistakes it takes a Ph.D. to make”

@PerKurowski

Universities, allow imperfect and perhaps even inadequate minds, to have a voice in your classrooms. That's diversity!

My daughter, an art fanatic, on hearing my explanation about the monstrous mistake of credit-risk weighted capital requirements for banks, pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Was she right!

In it Dolnick makes a reference to Francis Fukuyama having heard Daniel Moynihan opining: “There are some mistakes it takes a Ph.D. to make”. And Dolnick also speculates that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that of: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

That is why when now Della Bradshaw reports about “a growing recognition that the world’s intractable problems need business solutions means MBA directors are searching for students with a more diverse background to fill their classrooms” I say: “Way to Go!” “More variety is the spice of classroom life” October 5.

Of course we must inject some confident ordinary minds in the classes in order for these to pose the questions that must be made. My impression is that experts never really try sufficiently to convince other experts of why they are right and others wrong, but they do their utmost when it comes to convincing the non-experts that they are the best experts.

Oh if I only had been in those classes where the minds of sophisticated future bank regulators were trying to estimate unexpected losses in the same direction as those expected losses derived from perceived risks.

My ordinary mind would not have been able to hear such foolishness and keep silence. Don’t you know that out there, in the real world, what is really risky is that what we can wrongly perceive as absolutely safe? I have never heard of a substantial number of persons dying because of bungee jumping. Have you?

As an Executive Director in the World Bank I once stated: "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.” So, universities, please allow for imperfect and even inadequate minds, to also have a voice in your classrooms.

That said, be careful though with what the calls for diversity really means. It could be modern Giuseppe di Lampedusa types wanting to diversify only in order to remain the same.

@PerKurowski ©

The more qualified experts become, like the Fed’s, the more in awe will too many be of their inscrutable mumbo jumbo.

Sir, Sebastian Mallaby writes: “By toggling short-term rates, the Fed hopes to guide the more important long-term ones that matters to homebuyers and businesses, but the transmission mechanism is unstable” “Whether they raise or hold, central bankers are due a fall” September 12.

But the transmission mechanism has been also made more unstable than usual by means of very faulty bank regulations that have been imposed on banks.

Mallaby writes: “Gone are the days when the Fed was a holding pen for cronies and chancers… modern bankers have become more scientific and sophisticated [but] there is a danger in pushing this reverence too far”

Indeed, Edward Dolnick in his “The forger’s spell” wrote about Daniel Moynihan opining “There are some mistakes it takes a Ph.D. to make” and also quoted George Orwell, from “Notes on Nationalism”, with: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.”

And the pillar of current bank regulations, the portfolio invariant credit-risk weighted capital requirements for banks, is a truly great example of the kind of mumbo-jumbo that can be produced by experts.

John Kenneth Galbraith wrote in his “Money: Whence it came, where it went” 1975: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.” And one of the great dangers of these times of ample access to information is that the number of those pretending knowledge is increasing exponentially.

@PerKurowski

“No ordinary man could be such a fool”

My daughter Alexandra, an art fanatic, on hearing my explanation about the mistake of the Basel Committee pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Boy was she right! 

In that book Dolnick makes a reference to having heard Francis Fukuyama in a TV program saying that Daniel Moynihan opined “There are some mistakes it takes a Ph.D. to make”. And he also speculates, in the footnotes, that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

And that comprises about the most appropriate explanation I have yet seen so as to understand why our bank regulators were able to commit their huge mistake that got us into this financial and economic crisis that threatens the Western World. No “ordinary man” would have told his children to beware about what he knew his children were afraid of, and stimulated them to go more where they wanted to go as it seemed safe… which is precisely what the current capital requirements for banks do when they are quite sizable whenever the perceived risk of default is high and small or even inexistent whenever the perceived risk of default is low. 

And then, just like to force down our throats, Dolnick writes “Experts have little choice but to put enormous faith in their own opinions. Inevitably, that opens the way to error, sometimes to spectacular error.” All of which now leaves me with the problem that also “no ordinary” FT reporter can come to grips with believing that experts could be such fools.