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

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

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

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

@PerKurowski

The Stock Exchange should report, in real time, the current average holding period for each security.

Sir, Megan Greene writes: “The average holding period for a security on the New York Stock Exchange has fallen from two months in 2008 to just under 20 seconds today, according to analysis from Cumberland Advisors” “Passive investing is storing up trouble” August 3.

I had no idea we were into holding periods measured in seconds. Some years ago U.S. Sen. Mark Warner mentioned "The average time someone used to hold a share of stock back in the ’60s was eight years.”

Seeing this, it’s clear the stock market should begin to report the individual holding period for each security. Any ordinary investor, who makes his own slow analysis to come up with a decision whether to buy or sell, I assume would not really want to be competing against computers working in milliseconds… distant from fundamentals.

And Megan writes about the systemic risk present in “Passive investments… Often set up to mimic an index, ETFs have to buy more of equities rising in price, sending those stock prices even higher…creates a piling-on effect as funds buy more of these increasingly expensive stocks and less of the cheaper ones in their indices — the polar opposite of the adage “buy low, sell high” … [with] no regard for underlying fundamentals”.

In that Megan is not very far away from that systemic risk I so often write to you about, namely that of higher capital requirements for banks against what is perceived safe than against what is perceived risky. First, those capital requirements take no consideration of the purpose of the credit; and second they are the polar opposite of what they should be, since what is perceived as safe is in fact much more dangerous to our bank systems than what is ex ante perceived as risky.

@PerKurowski

Amazing how an anthropologist, like Gillian Tett, can believe that our financial markets are driven by lust for risks

Sir, Gillian Tett writes: “if we want to avoid a replay of 2007, we must keep questioning our assumptions — and peering at the parts of the system that seem “boring”, “geeky” and “dull”. Our mental bins can sometimes hold time-bombs” “The next crash risk is hiding in plain sight” August 10.

Indeed! And one of the greatest drivers of such time-bombs is confusing ex ante perceived risks with ex post risks.

But Ms. Tett also writes “Sometimes, market shocks occur because investors have taken obviously risky bets — just look at the tech bubble in 2001”. What? Does FT’s in house anthropologist really believe investors were taking “obviously risky bets”? Was it not much more the illusion of very high-risk adjusted returns that caught the investors’ attention?

But Ms. Tett also writes: “Most investors assume that Treasuries are the risk-free pillar of modern finance”. What? If there is anyone who has really assumed that, it is the bank regulators when they, in 1988, with Basel I, began to assign 0% risk-weights to sovereigns.

Ms. Tett also writes “precisely because the system has become so flush with cash — and seemingly calm — there is complacency; and not just about the dangers of clearly risky bets (say, Argentine bonds), but about the perils of “safe” assets too”.

Not really, the complacency about clearly risky bets is almost non-existent when compared to that related to safe assets.

As an example of riskiness Tett points out “an obscure “Inverse Vix” ETF that benefits from low volatility… the world’s 34th most actively traded equity security…[and] that has returned almost 100 per cent this year. What? Is she really arguing that something which offered the expectations of large returns and that has actually provided almost 100 per cent return this year, is riskier than holding 10 year German bunds yielding certain negative rates?

Sir, it is so hard to understand how Ms. Tett, and most of you, even when acknowledging that “The next crash risk is hiding in plain sight”, seem unable to wrap your minds around the fact that what is really dangerous, for instance to our banking system, is what is perceived as safe… and that therefore the current risk weighted capital requirements, besides dangerously distorting the allocation of bank credit to the real economy, are incredibly dumb.

Sir, were you a part of the inquisition, you would most certainly be prosecuting Galileo.

@PerKurowski