Mr. Martin Wolf, what do you mean, is liberalism not broken?

Sir, I refer to “Liberalism is battered but not yet broken” Martin Wolf, FT January 10, 2024.

Since 1988, with Basel I, non-elected by the citizens bank regulators, with risk weighted bank capital requirements, in the name of making our banks safe, have allowed themselves to distort the allocation of bank credit to the economy. 

Wolf opines: “What liberals share is trust in human beings to decide things for themselves.” So, Mr. Wolf, why have you been silent on this clear breach of free market liberalism?

These days, in reference to the farmer’s protests in Berlin I have tweeted/Xd: “Would now John F. Kennedy have wanted to deliver his 1963 ‘Ich bin ein Berliner’ speech? - If the Berlin Wall was still up, would Ronald Reagan now have needed to tell Putin, ‘Tear down this wall’?”

My answer in both cases is NO! US and Russia – West and East Berlin, have been too long exposed to communistic weakening. But it’s coming to an end. More and more nations now need more public debt in order to service their current public debts, and are thereby, de facto, becoming zombie nations.

I pray someone with real political standing would dare to stand up and order: “Basel Committee, tear down your regulations.” I fear that might not happen until this “wall” has crumbled on its own. Those regulations have empowered bureaucracy autocracies, and way too many want to be members or beneficiaries of it. And by the way, if they speak up, they risk not being invited to the World Economic Forums in Davos; and we would not want to risk that, would we?

Sir, how can we make sure to capitalize on the opportunity of artificial intelligence helping to empower a citizens’ democracy? I mean before AI regulators decide to send it to Gulag too.

PS. I tweeted - Xd: "If there’s anything that could help focus on what has happened in the world, and on what’s going on, that is to have a record of all those who, since 1971, have assisted World Economic Forum #WEF meetings in #Davos."

By not asking all the questions that need to be asked, journalists also fail society.

Sir, Henry Manisty writes “financial journalism plays a vital role in upholding the integrity of financial markets”, “EU regulators have form on obstructing journalists” November 9.

Indeed, but in many respects, financial journalists have often failed society by not doing that. For instance, here are just three examples of questions that should have been posed directly to the regulators, long ago.

We know that those excessive bank exposures that can be dangerous to banks and bank systems are always created with assets perceived as safe, never ever with assets perceived as risky. Therefore, can you please explain your risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous than what’s perceived as safe?

Before risk weighted bank capital requirements credit was allocated on the basis of risk adjusted interest net margins and a view on the portfolio. After that it is allocated based on risk adjusted returns on equity; which obviously those that banks can leverage less with, e.g. “risky” SMEs and entrepreneurs. Explain how this does not distort the allocation of bank credit?

Even though none of Eurozone sovereigns can print euros on their own, for your risk weighted bank capital requirements you decreed a zero-risk weight for all of their debts. What do you think would have happened in the USA if it had done the same with its 50 states?

Sir, paraphrasing Upton Sinclair one could say that “It's difficult to get a journalist to ask something, when his salary, or being invited to Davos, depends on his not asking it.”

PS. My 2019 letter to the Financial Stability Board (FSB)

When experts on different aspects collaborate they should be able to disagree, not just join a mutual admiration club.

Sir, Tim Harford writes about “a flawed statistical study by Winston Churchill’s scientific adviser Frederick Lindemann that no one had both the technical skill and the political clout to challenge. [It caused] the allied bombing of dense urban areas in Germany during the war, which not only took a terrible toll on civilians but failed in military terms by sparing industrial targets.” “Real change requires experts to collaborate” May 4.

There is a document prepared by the Basel Committee on Banking Supervision dated July 2005 and titled “An Explanatory Note on the Basel II IRB Risk Weight Functions". It can be found on the web site of the Bank for International Settlements.

It is supposed to explain the standardized risk weighted capital requirements for banks decided upon in the Basel II agreements. It does nothing of that sort, mostly because those risk weights are impossible to justify.

For instance assets rated AAA to AA rated, which ex ante perceived safety could cause banks to build up excessive exposures that could be dangerous to the bank system if these turned out ex post risky are assigned a 20% risk weight while; for assets rated a below BB- and that because of their perceived riskiness banks will not voluntarily build up excessive exposures to, and therefore represent no risk to the bank system, even if they turn out even riskier than expected, have been assigned a whopping 150% risk weight.

But that explanation was never challenged. The fact that AAA to AA rated assets could be leveraged 62.5 times by the banks, when compared to the 12.5 times allowed leverage with unsecured loans to unrated entrepreneurs, created the incentive structure for the 2008 crisis, caused by the excessive exposures to the AAA rated securities backed with mortgages to the subprime sector in the US, which turned out very risky; or by the excessive exposures to assets covered by default guarantee sold by AAA rated AIG.

Even after that crisis, the silence on it has persisted. As is our bank systems are doomed to especially large crisis, caused by especially large exposures to assets perceived ex ante as especially safe, but against which when these turn out ex post to be especially risky banks hold especially little capital.

How did the weavers in Basel manage to convince the world that with their regulations the bank systems were fully dressed, and that anyone not seeing that were unfit for their positions, stupid, or incompetent? I have, like the child in Hans Christian Andersen’s “The Emperor’s New Clothes”, shouted out innumerable times that our bank systems are now even worse of than if naked, but this has obviously not sufficed.

Harford opines “good policymaking is now a team effort. It requires different perspectives and a range of specialist expertise. We all must learn to work with people who see the world very differently”

Indeed, and there is of course more than enough “technical skill and the political clout to challenge” these regulations, but yet nothing happens. Could there perhaps be too many disincentives to do so? For instance like then not being invited to Davos? 

Sir, one day historians will scratch their heads trying to figure out the reasons for the world’s now more that thirty years silence, on the outright loony (and statist) risk weighted bank capital requirements. Do you not wonder what they in that respect could say about FT’s?

@PerKurowski

John Kenneth Galbraith would probably include Alan Greenspan among men of wisdom that missed the point.

Sir, Robert Gordon, reviewing Alan Greenspan’s and Adrian Wooldridge’s “Capitalism in America: A history” writes: “Three themes are highlighted — productivity as the measure of economic progress; the “Siamese twins of creation and destruction” as the sources of productivity growth; and the political reaction to the consequences of creative destruction.”, “After the gold rush”, October 20.

I have not read that book yet, I will; creative destruction plays absolutely an important role in the acceleration and sustainability of growth.

I do not know Adrian Woodridge, but, when it comes to the former Fed Chairman Alan Greenspan, I have an inkling that if John Kenneth Galbraith was still around, he would suggest Greenspan does not have all what it takes to write that book.

Let me explain that by quoting from Galbraith’s “Money: Whence it came where it went” 1975: “For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

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

Alan Greenspan clearly fits in with those “Men of economic wisdom” (of the East) who are distasted by unstable banking. To make banks stable, he supported risk-adverse risk weighted capital requirements, much lower for what’s perceived safe (the present) than for what’s perceived risky (the future). 

Sir, and if one is to tellthe real “full, epic story of America's evolution from a small patchwork of threadbare colonies to the most powerful engine of wealth and innovation the world has ever seen”; which is how this book is being promoted, one would need to begin with the willingness of its people to take risks.

What would have happened to America if banks with risk-weighted capital requirements had met its immigrants? Probably that imagined 1620 meeting in Davos about the future world, in which “one region goes unmentioned: North America. The region is nothing more than an empty space on the map” would not have found its way into this book.

The saddest part of all this is that our current generation of central bankers and regulators, like Alan Greenspan, those who prioritized bank stability over growth, as if these two aspects could be separated, anyhow did it totally wrong. With their risk weighted capital requirements, they only guarantee that banks will end up with especially big exposures, against what’s perceived as especially safe, against especially little capital; something which can only cause especially big crises, like that of 2007-08.

PS. Galbraith’s book also explained that, de-facto, regulators had also decreed inequality

PS. Gordon writes about “millions of immigrants being drawn in from Europe as the ever-expanding railroads, enjoying massive government subsidies in the form of free land, in turn subsidised the new arrivals so that they would populate the west.”.  I am not sure that amounted to “massive government subsidies”. If not zero, most of it must have been extremely low valued land. It was those migrants who with their sweat, inventiveness and willingness to take risks built up the value of that land.

PS. Gordon complains the book has “only a page or two reckons the human cost of underpaid labourers, including the consequences of malnutrition [and on] labour unrest”. That reads just like political correctness’ flag waving; and belief in that if only the task of development was assigned to the right kind of central planners, his kind, it would be achieved in a nice and fair way, with no sufferings and no inequality.

PS. In Venezuela, during a conference, 1978, forty years ago, John Kenneth Galbraith autographed “Money” for me. Mine was the only one he signed explaining he did so because it was a pocket book and much underlined  J His book inspired the first Op-Ed that I wrote, more than twenty years ago.

@PerKurowski

When will someone invited dare to pose the question that shall not be made at a Davos or Jackson Hole gathering?

Sir, Gillian Tett writes: “The International Monetary Fund calculates that between 1970 and 2011, the world has suffered 147 banking crises... But whatever their statistical size, the pre-crisis period is marked by hubris, greed, opacity — and a tunnel vision among financiers that makes it impossible for them to assess risks.”, “When the world held its breath” September 1.

Sir, and why should regulators, who impose risk weighted capital requirements for banks, and stress test these be less affected by that “tunnel vision”? 

If regulators knew about conditional probabilities, if they absolutely wanted and dared to distort the allocation of bank credit, they would have set their risk weights based, not on the perceived risks of assets, but on how bankers’ perceive and manage risks.

Tett quotes Alan Greenspan with “I originally assumed that people would act in a wholly rational way, that turned out to be wrong.” Shame on him, had he just done his homework, he would have known that what was perceived as risky never ever causes financial crises, that is always the role of what was thought as very safe.

Tett also quotes Paul Tucker, the former deputy governor of the Bank of England with, “There is a dynamic which pushes banking and the penumbra of banking to excess, over and over again”. That “dynamic” force was the regulators pushing bankers into excesses, for instance by allowing them to leverage 62.5 times if only an AAA to AA rating issued by human fallible credit rating agencies was present.

Tett recounts: “One day in the early summer of 2007, I received an email out of the blue from an erudite Japanese central banker called Hiroshi Nakaso”, who warned her “that a financial crisis was about to explode because of problems in the American mortgage and credit market.” 

Tett was astonished, though she did, by then, not disagree with the analysis. May 19th 2007 I wrote the following letter to FT, which was not published.

“Sir, after reading Gillian Tett’s “A headache is in store when the credit party fizzles out” May 19, it is clear we should all go down on our knees and pray for that she is right, in that it is only a headache that is in store for us. 

As for myself I have serious doubts that the consequence of this blissful-ignorance-bubble resulting from our hide-and-not-seek the risks with derivatives, is unfortunately going to be much more painful than that. When that day comes though, before putting the sole blame on the poor bankers earning their luxurious daily keep; I suggest we look much closer at the responsibility of our financial regulators.”

Sir, sadly, that suggestion has been way too much ignored until now. 

“Why do you require banks to hold more capital against what by being perceived as risky is made less dangerous to our bank systems, than against what by being perceived as safe, poses so many more dangers?” That is the questions that seemingly shall not be asked by anyone who markets his name in the debate and does not want to risk being left out from Davos or Jackson Hole gatherings.

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

@PerKurowski

Good global economic governance also depends on the Financial Times of the world doing their duty by questioning diligently.

Sir, you write “The world economy is in good health. Global economic governance is not. The first remains acutely vulnerable to the second… Davos produced few ideas on compensating for US destructiveness” “The gaping hole in global economic governance” January 27.

No! The world economy is not in good health. Just look at all current world debt contracted to kick the 2007/08 crisis can forward, to finance current consumption and to inflate stock markets with excessive dividend payments and buy backs; and then compare it to how little of that debt has been used to finance future production.

And whatever US destructiveness you want to identify, it would pale when compared to the destructiveness caused by bank regulators with their risk weighted capital requirements for banks.

Sir, in a world were sleaziness abounds everywhere and for so many reasons, you find it more worthy of the Financial Times to launch a full-fledged investigation “without fear and without favor” of an all male-charity dinner; than daring for years to ask bank regulators some basic questions like:

Why do you want banks to hold more capital against what has been made innocous by being perceived as risky, than against what is dangerous because it is perceived as safe? Is that not setting us up for too big to manage crises?

What went through your mind (what did you smoke) of the Basel Committee allowing with Basel II banks to leverage a mindboggling 62.5 times their capital only because an AAA to AA rating issued by human fallible rating agencies was present?

Is being a safe mattress under which to stash away our savings a more important objective for our banks than allocating credit efficiently to the real economy? “A ship in harbor is safe, but that is not what ships are for.” John A Shedd

Why should you, as a regulator, want with lower capital requirements favor bank credit to what’s already favored by being perceived as safe, and thereby cutoff more the credit to what is already disfavored by being perceived as risky?

Why did you assign a 0% risk weight to sovereigns? Is that not runaway statism? If it is because sovereigns can always print money to pay back their loans, don’t you know that is precisely one of the real and worst risks with sovereigns?

As is, don’t you know you are dooming our economies to subprime performance and our banks to end up gasping for oxygen in some overpopulated safe-havens?

And that’s just for starters:

FT is as much at fault as anyone for the absurdness of current global governance of banks. Sir, this could also be referred to as sleazy journalism.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

What magical misleading thinking could explain the Basel Committee’s bank regulation idiocy?

I refer to Andrew Hill’s “The magical thinking that misleads managers” November 27.

Sir, what magical misleading thinking could lay behind regulators wanting banks to hold the most capital for when something perceived risky turns out risky, when it really is when something perceived very safe turns out to be very risky, that one would like banks to have the most of it?

“Numerology…mumbo-jumbo”? Well if you read through the Basel Committee’s 2005 “An Explanatory Note on the Basel II IRB (Internal Rating Based) Risk Weight Function”, that could be it.

“Leaps of faith”? Absolutely. Believing that by allowing some few human fallible credit rating agencies to decide instead of millions of eyes, and thereby intrducing the mother of all systemic risks (as I warned in 2003 in a letter published by FT) was effectively one of the greatest centralized leap of faiths ever.

“Throw a coin and make a wish”? Believing that the risk weighted capital requirements would not distorts the allocation of bank credit can only remind me of “Three coins in the fountain”, although in that movie the girls' dreams came true.

“Chants and mantras”? The whole minute by minute growing and expanding Basel Committee’s regulations cannot but be a prime example of that.

“Human sacrifice”? Though they never ever cause a major bank crisis how many millions of entrepreneurs have not been denied the often life changing opportunity of a credit in the name of this so badly understood stability.

“Hero worship”? Just look at all those members of that mutual admiration club of technocrats who are able to promote themselves even in the face of a financial crisis that resulted from allowing banks to leverage so excessively when lending to the 0% risk weighted “infallible” sovereigns, the 20% risk weighted AAArisktocracy and the 35% risk weighted financing of houses?

Hill ends arguing that “humble deference to unpredictable and poorly understood outside forces would be healthy”. Indeed, but how is that to happen if public opinion makers, like the Financial Times, refuse to hold the regulators accountable, perhaps because they all like to be seen as part of thei exclusive network... and be invited to Davos.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

To parade badly failed global bank regulators wearing dunce caps, is one right way to silence dangerous nationalism

Sir, I am all for globalization. My father a polish soldier saved from Buchenwald by the Americans; I was born in Venezuela; with high school and university (economist) in Sweden; an MBA in Venezuela, spent over a year as an intern in a British Merchant Bank in London (and LSE and LBS); also a Polish citizen; a financial and strategic consultant in Venezuela; a representative in Caracas for a Chilean bank; having worked for corporations and investors from and in many places; a former Executive Director of the World Bank who wanted migrants to have a seat at its Board so that the world at large would have more representation; since 15 years living in Washington; and now happily with a grandfather of two Canadians, I am, de facto, probably as globalized as you can be.

But, if what’s put on my plate is dumb and dangerous globalism, then I swear I have no problem whatsoever going very local, in order to defend to my very best, my many diverse national interests, of course, primarily, those of my grandchildren.

So now, when I see Martin Wolf, in “The economic perils of nationalism” January 18, writing that those (Davos/Basel Committee) globalizers who created a “financial crisis” have seen “their reputation for probity and competence… devastated” I cannot but say: “My oh my, what a lie!”

There all still there. Those who retired might have written well-reviewed books, or had positive books written about them, and those who have not retired, have actually been promoted.

I am totally for trade, and so I fully agree with Martin Wolf in that “one might gain more from foreigners than fellow citizens”. But that does not have to mean you give foreign citizens the opportunities you deny your own.

When bank regulators introduced their risk weighted capital requirements for banks, they gave banks more incentives to finance “The Safe”, like sovereigns and AAArisktocracy, no matter where these found themselves on the globe, than to finance “The Risky” of their localities, like SMEs and entrepreneurs. And that was wrong, and that did not serve any purpose. If I am going to have to suffer a bank crisis, I prefer a thousand times that to be the result of banks having financed my locals too much, than for instance, in the case of European banks, these having financed the US residential subprime sector too much.

Sir, what’s our real problem? It is that there is more accountability on the local level than on the globalized one, and that of course, opens up the door for any misguided populism.

To for instance start parading bad global bank regulators down our avenues, wearing dunce caps, instead of giving them a red carpet treatment in Davos, would be a good way to begin silencing dangerous nationalism.

PS. That parade would perhaps also have to include all those who have so much favored regulators by keeping so mum about their failures. Mi capisci?

@PerKurowski

Would Hollywood allow those responsible for a 2007/08-crisis box-office-flop to walk down a Davos red carpet?

Sir, Chris Giles writes: “Almost all countries are failing to improve growth rates” … Responsive leadership — [is] the theme of this year’s World Economic Forum in Davos” “Economies need to heed wrath of the ‘left behind’” January 17.

And Giles also quotes 1994’s Paul Krugman with…“Productivity growth isn’t everything, but in the long run it is almost everything”

Sir, how can you not leave too many behind, and make it harder for productivity to grow, when regulators give banks incentives to refinance the safer past and present economies, but not to take risks on the “riskier” future.

Their 20% risk weighting for AAA rated and sovereigns like Greece, while handing SMEs a 100% weight handicap, caused the crisis, and has hindered a better recovery.

Neither Hollywood nor Bollywood, would ever have allowed the script writers, producers, actors or directors, responsible for such an box office-flop as the 2007-08 crisis, to walk down the red carpet. Why can those in Davos do so? The answer is that those besserwisser experts are self-appointed, and therefore not subject to be vetted by a box-office… and so now populists looking for votes are vetting them.

PS. I hear there is some confusion going on in the Basel Committee. Some members are nervously starting to ask each other: “Could it really be that what’s perceived safe is riskier for banks than what’s perceived risky?”

@PerKurowski

Are we supposed to be very impressed with the intellectual capacity of Davos’ besserwissers?

Sir, in Wikipedia we can read that Martin Wolf “has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999.” If that’s true, which it does not necessarily have to mean in these days of fake-news, Mr. Wolf is as much a “Davos” man as anyone else of them.

I make a note of this because now Wolf writes: “weakening of globalisation partly reflects the exhaustion of easy opportunities for global commerce and the feeble growth of demand since the crisis. But it also reflects shifts in policy: the post-crisis re-regulation of finance has had a pronounced home bias, with reduced support for cross-border activities.” “Populism will not lead to a better world” January 17.

What? Do we now have a “pronounced home bias”? What about Basel II’s risk weights of 0% the Sovereign, 20% the AAArisktocracy, and 100% “We the People” and that are mostly still in place?

No, though I might run the risk of being be tilted a vulgar populist by Davos’ Wolf, I assure you Sir that I do not find much wrong in reducing the regulator’s pronounced risk aversion bias; that which have them favoring the lending to “safe” corporates wherever they are, or to friendly and “safe” Sovereigns, over the lending to “risky” SMEs and entrepreneurs in their own localities.

And what’s that running around like chickens, scared of some possible horrors of neo-protectionism, in a world that has been so much changed? Do the Davos intellectuals really think that Trump would be able to impose really major increased costs on the American consumers? Like telling its kids “the price of an I-phone will be 50% higher because it has to be made in America… and you must now wait one year more to have it delivered? Forget it! That would be like introducing a 50% tax on all purchases on the web, so as to defend the local mom and pop stores. The smuggling of drugs and fake goods would then be minor compared to that of the so many new entrants.

What Davos should be doing though, is to analyze the need for new solutions in a world in which, because of increased automation, there will be more and more structural unemployment; and also one in which, for sustainability reasons, perhaps some consumers’ aspirations must be reduced.

I believe a Universal Basic Income might indeed be one of the best tools available. I fret though about leaving the discussions on such beautiful and delicate solutions that can so easily be distorted into a monster, in the hands of the so many redistribution profiteers and besserwissers always present in Davos.

PS. Basel II assigned a risk weight of 20% to those rated AAA-AA; and one of 150% to those rated below BB-. Sir, are we supposed to be impressed by the intellectual capacity of the Davos group that saw nothing wrong in considering those perceived as very risky a much bigger threat to the banking system than those perceived as very safe? You tell me!

@PerKurowski

When will an Artificial Intelligence Agent declare humans too dangerous drivers and too dumb emission measurers?

Sir, I refer your “From diesel emissions to omitting the driver” January 15.

It is clear, not withstanding only one side will pay for it, that in the case of the failed carbon emission controls, both the measured and the measurers are to blame. Any regulation, if it fails in any shape or form, should bring on some consequences for the regulators… let us say a 50% salary reduction.

As is, just look at the case of bank regulators, those who set risk weights of 20% for what is AAA-rated, and 150% for what is below BB- rated. That evidenced they had (have) no clue about what they were doing; and so they caused the AAA rated securities backed with mortgages to the subprime sector crisis. But they are still going to Davos, flying business class the least, to lecture the world on what to do. 

It is also clear that one of the biggest challenges for the safety of driverless cars is that these might also encounter human drivers on the road. So either is the driverless-cars equipped with software that handles human-driving whims, or, sooner or later, some Artificial Intelligence Agent will take us humans off the road. Is that good or bad?

My answer to that question goes somewhat along this line. If absolutely all humanity is taken off the road, and so we all lose entirely the abilities needed to drive, so be it. But, if some humans were still allowed to drive, why would I want those to be somebody else’s grandchildren and not mine? 

PS. About driverless cars, the issue of how to tax these, so as not to lose out on the taxes we currently collect, for instance from PhDs driving taxes in New York, is also pending.

@PerKurowski

Trump should make certain that “risky” Main-Street borrowers, like he, are invited to Basel, Davos or a Dagenham.

Sir, Robert Shrimsley writes: “the Financial Times has learnt the sensational and entirely fictional news that next year’s pilgrimage has been moved from Davos to the rather more earthy and economically deprived location of Dagenham in east London. The move was the brainchild of Sir Nigel Farage, who said it would help the global liberal elite get back in touch with the real world” “A Davos for the Donald — do it in Dagenham, mate” December 2. 

That’s not so farfetched: We have regulators who for the purpose of setting the capital requirements for banks, use risk weights such as: 0% the Sovereign, 20% what is AAA rated, 35% house financing, and 100% for We the People, like SMEs and entrepreneurs. 

Those regulations make it much harder for those who, precisely because they are perceived as riskier, already face great difficulties accessing bank credit. 

Around the world, over the last decade, those discriminatory regulations against have impeded many millions of SMEs or entrepreneurs to have access to bank credit, and if they got it, they have had to pay much more for it, in order to compensate for this unfair regulatory tax. 

I have no specific information about Trump or his enterprises own bank borrowings, but I am absolutely sure that, over the years, he has had to pay millions and millions more in interests to banks, than what he would have had to pay in the absence of these regulations. 

De facto the Basel Committee’s bank regulations represents a wall which impedes all fiscal and monetary stimulus to reach were it should, in order to create a new generation of jobs and move our economies forward, so as these do not stall and fall. 

Obviously “the risky” SMEs and entrepreneurs, have never been truly consulted about their needs, by for instance regulators in the Basel Committee or the Financial Stability Board, much less have they been invited to places like Davos. 

So, if anyone would want to make a reality of moving “Davos to the rather more earthy and economically deprived location of Dagenham”, the guest list should be much revised, and Dagenham marketed as “The best access to Main Street and the real economy” 

If Trump would then appear in a Dagenham, to speak out on behalf of “the risky”, then perhaps the whole world would learn to appreciate the fact that there are conflicts of interests that can be truly helpful… and should perhaps even be nurtured. 

Sir, I can almost already hear Trump shouting out: “Basel… tear down that wall!” 

@PerKurowski

Governments best take big decisions, when there’s no conflict of interest, no stupid groupthink, and contestability.

Sir, I come from an country, Venezuela, where privatizations of public owned utilities were based not on who would provide us citizens the best services, but on who would provide the state with the highest upfront payment… an anticipated tax revenue for the government, to be paid later by us citizens by means of higher than needed tariffs, for decades to come. And, to top it up, that was accused of being odious neo-liberalism product of the Washington Consensus. 

That’s why when I read Martin Wolf’s “Big energy decisions are best taken by government, not the market” of September 16… I immediately reacted… “Hold it there, take it very easy!”

If government is going to take big decisions, as it should, we must make sure all its possible conflicts of interest are removed, and that the decision process is transparent and guarantees contestability, and not just the result of a small mutual admiration club of technocrats/bureaucrats.

For instance, allowing bank regulators to impose their statism of a 0% risk weight for the Sovereign and a 100% risk weight for “We the People”, was wrong.

And allowing bank regulators to impose risk weighted capital requirements for banks based on the ex ante perceived risks of bank assets, and not on the ex post risks conditioned on the ex ante perceived risks, was utterly stupid. What’s the chance of something really bad happening from something perceived as “safe”, and what is it for something “risky”?

Wolf lectures us: “Rational risk-taking by individual financial businesses will create substantial threats for others. This, too, is a spillover, or “externality”. Financial regulation has to internalise such externalities, thereby reducing the likelihood of crises and making them more manageable when they arrive. One way to do so is to raise capital requirements far above what profit-seekers would wish”

I argue that much more important than that, is to get rid of the credit-risk weighting of the capital requirements that only distorts the allocation of bank credit to the real economy while serving no bank safeness purpose, much the contrary. Wolf, in spite of hundreds of letters I have sent him over a decade on this issue, has yet to understand that.

And Wolf ends “The government must have the courage to make… difficult decisions and the wisdom to make them well.” Yeah, yeah, yeah, but what if the decision makers are dumb and we are not allowed to correct them… because so many want to suck up to them nevertheless (like in Davos)… or because some are interested in exploiting that dumbness? 

@PerKurowski ©

If they do not belong to her The Group, the tribe, Gillian Tett does not seem to read what her readers write to her.

Sir, Gillian Tett writes “Echoes of 2008 as danger signs are ignored ” and mentions the “Jackson Hole tribe barely mentioned these at all”. “We had all better hope that by the summer of 2017 a debate about finance gets a proper billing at Jackson Hole” September 2.

I invite you here to read the probably more than hundred letters I have sent Ms Tett over the years, but that she has decided to ignore, probably because I do not belong to her The Group.

Who am I? Just a former Executive Director of the World Bank who, in October 2004, in a formal statement delivered at the Board wrote:

“Phrases such as ‘absolute risk-free arbitrage income opportunities’ should be banned in our Knowledge Bank. 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.”

In January 2003, in FT, I warned “that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

Here are more of my documented early opinions (1997-2004) on bank regulations

So what would I like Ms Tett to do? To be more than a groupie and do her job asking those she might meet in Jackson Hole, Davos and similar The Group meetings, some of the too many questions that have gone unasked by journalists over the last soon 30 years, like:

How have you defined the purpose of banks before regulating these?

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

Why do you base your capital requirements on the ex ante perceived risks?

“May God defend me from my friends. I can defend myself from my enemies” Voltaire.

Had Tett, or any other important financial journalist, like Martin Wolf, asked some of these questions much earlier, we might not have the need to even reference 2008.

The Basel Accord, Basel I, 1988, set the risk weight of the Sovereign at 0% and that of We the People at 100%... which de facto means that regulators believe government bureaucrats give better use to bank credit than the private sector… something that most of us on Main Street and who are not runaway statists, would find sort of questionable.

@PerKurowski ©

At least Lucy Kellaway defends with honor the “Without fear and without favor” motto of the Financial Times

Sir, Lucy Kellaway does great living up to “Without fear and without favor” when she socially sanctions all the full of themselves experts, and those who socially suck up to these. Well done! “Boneheaded aphorisms from Davo’s windy summit.” February 1.

It is a real pity there are not many more like her at FT. The world could benefit a lot if the journalists at FT dared to, for instance, question more current bank regulators on what they are up to… like for instance with their zero risk weight to sovereigns and the 100 percent risk weight for that private sector that makes the sovereign strong.

@PerKurowski ©

Martin Wolf, as elite, why have you not spoken out against lousy bank regulators and redistribution profiteers?

Sir, Martin Wolf cries out: “Elites have become detached from domestic loyalties and concerns, forming instead a global super-elite. It is not hard to see why ordinary people… are alienated. They are losers, at least relatively; they do not share equally in the gains… After the financial crisis and slow recovery in standards of living, they see elites as incompetent and predatory. The surprise is not that many are angry but that so many are not… Elites need to work out intelligent responses. It might already be too late to do so” “The losers are in revolt against the elites” January 27.

Of course Wolf is absolutely right… but that requires the elite to be willing to call out the truth, even when that truth hurt other in their mutual admiration club of elites.

For instance, how can the elite gather in a Davos WEF event, year after year, and not tell central bankers and banks regulators in their face, that it is outright stupid to distort the allocation of bank credit to the real economy, especially based on credit risks already cleared for by banks.

For instance, has Martin Wolf himself dared to ask Mark Carney, Mario Draghi, Jaime Caruana, Stefan Ingves about why they believe ‘highly speculative’ below BB- rated assets pose more dangers to the banking system than those ex ante perceived as ‘prime’ AAA rated?

And what about “The wealth of 62 richest equals that of 3.6 billion poorest” message sent out this year by some “NGOs” to all those in Davos. Who said anything there about that being a deviously false and odiously divisive statement?

I do not claim to belong to any elite, especially not the wealthy elite, but, as a father and a grandfather, I know we cannot sit still and not do anything about the growing inequalities, whether the local or the global.

But I also know that if we are going to do something effective about it, we cannot afford to keep failed bank regulators blocking opportunities, or fall into the traps of redistribution profiteers.

December 31, 2009, on the eve of the new decade, FT published a letter I sent titled “The monsters that thrive on hardship haunt my dreams” In it I basically shared and expressed the same concerns Martin Wolf is expressing now. What happened?

@PerKurowski ©

Can journalists wash their hands about the (dis)empowering of citizens and of keeping failed elite in power?

Sir, Gillian Tett referring to “how the global elite converged on Davos this week” writes: “The most interesting issue revolves around something the WEF calls the “(dis)empowered citizen”. This arises because the internet makes voters feel more powerful than ever… The bitter irony is that although the internet gives people the impression they have a voice, in most countries power remains firmly with the elite.”, “The big illusion of empowerment for the masses”, January 22.

Tett holds “This creates disappointment and frustration: ordinary people have the illusion they are vocal. But although they use their mobile phones to exercise power over some issues, they cannot easily use them to change important issues such as politics.”

But, do journalists have no role to play in that? Are they not suppose to in many ways represent ordinary people in front of the elites?

For instance I do not call the Financial Times on the mobile phone (except perhaps when I will travel and suspend my subscription for a week or so) but I have sent thousand of letters to FT, including to Ms. Tett on issues like the following:

Four very important central bankers in Europe; ECB’s Mario Draghi and BoE’s Mark Carney, former and current chairs of the Financial Stability Board; BIS’ Jaime Caruana and Sveriges Riksbank Stefan Ingves, former and current chair of the Basel Committee for Banking Supervision, with their approval of risk-weighted capital requirements for banks, believe that ‘highly speculative’ below BB- rated assets are far more dangerous to the bank system than ‘prime’ AAA rated assets.

Since ex ante perceived ‘highly speculative’ below BB- rated assets have never ever set of a major bank crisis, as these have always resulted from excessive exposure to something ex ante deemed as safe but that ex post turned out very risky; that should raise some very serious questions about the risk management capabilities of those four highly empowered technocrats.

But, would Ms. Gillian Tett raise such question when meeting them? I don’t think so but, if she has, and has not reported back on the answers, to me or to you Sir, then she is just much more complicit in the cover up of the elite’s blunders than I thought possible.

@PerKurowski ©

#WEF, the world needs some ordinary people (like me) to ask the salon experts in #Davos2016 some awkward questions.

Sir, John Thornhill titles his review of World Economic Forum’s Klaus Schwab’s recent book, “The world’s problems solved the Davos way”, January 18. 

And he begins it with: “The World Economic Forum does a remarkable job of forging the conventional wisdom among the global elite. The trouble is that conventional wisdom is invariably wrong.”

Indeed, and that is especially true considering that among the experts there gathered, there will always be too many who, in John Kenneth Galbraith’s words, qualify as those who by pretending to knowledge they do not posses, cannot ask for explanations to support possible objections.

And there are many urgent questions waiting to be made about the nakedness of experts. Among these the following:

Regulators currently allow banks to leverage their equity, and the support the society gives them with deposit insurance schemes and implicit bailout promises, much more when lending to what is deemed or perceived as safe, like infallible sovereigns and the AAArisktocracy, than when lending to the risky, like SMEs and entrepreneurs.

For instance with Basel II, banks could leverage as much as they wanted with OECD sovereigns, over 60 times with what’s rated AAA, 12 times with what is not rated, and 8 times with what’s rated below BB-.

And that of course allows banks to earn much higher risk adjusted returns on equity when lending to “the safe” than when lending to “the risky”.

Why do regulators allow that?

Does that not, by distorting the allocation of bank credit to the real economy, impede banks to perform well what is perhaps their most important social function?

How on earth can something rated ‘highly speculative’ below BB-, be considered more dangerous to the banking system than something rated ‘prime’ AAA?

Do not regulators know that banks already took into consideration credit risk when setting interest rates and size of exposures, before requiring these to double down on ex ante perceived credit risk in their capital?

Do not regulators understand that all risks, even if perfectly perceived, cause the wrong actions if excessively considered?

Regulators know that bank equity is to cover for unexpected losses. Do they not understand that the safer something is perceived the larger its potential to deliver unexpected losses?

Do not regulators and central bankers understand that, while this distortion is in place, whatever fiscal or monetary stimulus they provide will be wasted and not reach where it is most needed?

Do not regulators understand that by favoring “the safe” over “the risky” they will increase inequality?

Do not regulators understand that by doing this, banks will no longer sufficiently finance the riskier future, which is what our young need, but will mostly keep to refinancing the safer past?

World Economic Forum, during #Davos2016, for the good of the world, especially for our young, have someone ask these questions to Stefan Ingves, Mark Carney, Mario Draghi, Jaime Caruana, Janet Yellen, Martin Gruenberg, Christine Lagarde or any similar experts present… and press them for full answers.

WEF/Davos. Clarify the mystery of how global regulatory lunacy invaded the Basel Committee for Banking Supervision.

Sir, Gillian Tett referring to the turmoil in China, low oil prices and the dramatic drop in the Baltic Dry Index writes: “the elites breezing into Davos for the World Economic Forum next week should take note… that globalisation does not always proceed in a straight line” “Globalisation moves in mysterious ways” January 15.

“Mysterious ways” indeed. The elites in Davos would do well asking themselves how on earth the development of bank regulations to be applied globally, the Basel Committee, landed in hands of “experts” who think that what is rated ‘highly speculative’ below BB-, is much more dangerous to the banks and to the banking system than what is rated ‘prime’ AAA?

In Basel II the capital requirement for what was rated AAA to AA was 1.6 percent while for below BB- it was 12 percent.

In Basel II, banks could therefore leverage over 60 times their equity with what was rated AAA to AA and 8 times with what was rated below BB-.

So with Basel II banks could obtain much much higher risk adjusted returns for what is rated AAA to AA than for what is rated below BB-.

And neither has the Financial Stability Board found something curious with that regulatory concept that so distorts the allocation of bank credit to the real economy.

And here we are with a financial crisis that originated in AAA land, and a real economy that is weakening because of lack of access to bank credit for “risky” SMEs and entrepreneurs. How many #Davos201x will it take to ask the right questions?

@PerKurowski ©

Nial Fergusson, do not blame Keynes, Keynesian economists do not give Keynesian policies a fair chance to work.

Sir, Niall Ferguson holds that Keynesians have lots of egg on their face after the elections in the UK where the conservatives won, by a lot “Labour should blame Keynes for their election defeat” May 11.

Indeed they should have, but the reason for it has little to do with what Ferguson thinks or wants to imply.

No Keynesian policy on earth, could deliver real positive and sustainable results, when bank regulations impede the liquidity their spending policies generate, to reach those who could make the most of it.

In 1988 with the Basel Accord, sort of when everyone was busy attacking the Washington Consensus for its private sector bias, the regulators (for ideological reasons), for purposes of defining the equity banks had to hold against assets, decided that the risk weight of the infallible sovereign was to be zero percent, while the risk weight for lending to the fallible citizen was to be 100%.

With that the regulators privileged government bureaucrats’ access to bank credit over the others in the markets.

Later, in 2006, with Basel II, they “half mended” it, by stating that some AAArisktocrats were good enough to have a risk weight of only 20%.

And so then everyone met happily in Davos, where of course no lowly “risky” SMEs are invited.

And here we are with for instance Paul Krugman preaching us about inequality, but keeping mum on the fact that the risk-weighted equity requirements for banks, by killing the opportunities of the risky to access bank credit in fair terms, is a great inequality driver.

The real problem might be that many of current Keynesians want much more statist governments than Keynes ever considered, and so the zero percent risk weighting of sovereigns, attracts them too much… and so they do not want to even give Keynesianism a fair chance to work.

Of course, the free-market defendants who failed to see how distorted the allocation of bank credit has become; or who do not want to cross banker friends who just adore the concept of being able to leverage immensely what is ex ante perceived as safe, and therefore keep silence on all this, will also end up having egg on their faces. (You too Niall Ferguson?) 

PS. How can you give a zero credit risk weight to a debtor who, right in your face, is pursuing financial repression, inflation (just another kind of haircut)?

@PerKurowski