What the world needs is to introduce true diversity in its financial architecture.

Sir, I refer to “The world needs a new fin­an­cial archi­tec­ture” by Michael Krake, the exec­ut­ive dir­ector for Ger­many at the World Bank.

What if, keeping the UN, World Bank and IMF, we instead reform these institutions? As is, these are managed and governed by bureaucracy autocracies. 

November 2004, at the end of my short two-year term as an executive director in the World Bank, FT published a letter in which I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

I had often expressed this at the World Bank Board but, those colleagues who understood what I referred to, and nodded in agreement, could do nothing. How could they, they were nominated by governments and most expected, and needed, to return to the government. What did not exist was real diversity. Not diversity based on gender or race, but diversity based on interests, life experiences and needs. 

Then I often suggested substituting some on the current executive directors with e.g., a plumber or a nurse; or at least to give a place at the board to that migrant community that, by means of its remittances, provided development countries with much more financial assistance than the multilateral financial entities could ever dream to do.

Now 2024, if I had the blessing to again be at that board of directors, I would drive my fellow directors to despair by, over and over again mentioning: “Give me ten seconds, I want to see what my friend ChatGPT opines on this.”

Would, “Without Fear and Without Favour” FT, be willing to publish a letter on what ChatGPT thinks?

http://voiceandnoise.blogspot.com/2006/05/world-bank-needs-to-go-truly-global.html

http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

@PerKurowski 

What if there had been a plumber and a nurse in the Basel Committee for Banking Supervision? Would the 2007-08 crisis have happened?

Sir, I refer to Andy Haldane’s “Diversity versus merit is a false trade-off for recruiters” July 23.

After just a couple of months as an Executive Director of the World Bank, I told my colleagues that since most of us seemed to have quite similar backgrounds (although I came from the private sector), if by lottery we dismissed two of us, and instead appointed a plumber and a nurse, we would have a better and much wiser Board. That of course as long as the plumber and the nurse had sufficient character to opine and ask, and not be silenced by any technocratic mumbo jumbo. 

For example what if when the Basel Committee for Basel II in 2004 set their standardized risk weights for the AAA rated at 20% and for the below BB- at 150%, a plumber or a nurse had been present to ask the following three questions:

1. Has that credit risk not already been very much considered by the banker when deciding on the size of their exposures and the risk premiums they need to charge?

2. My daddy always told me of that banker that lends you the umbrella when the sun shines and wants it back when it looks like it might rain, so is it not so that what is perceived as safe is what could create those really large exposures that could turn out really dangerous if at the end that safe ends up being risky?

3. And is credit risk all there is about banking? What if that below BB- rated has a plan on what to do with a credit that could mean a lot for the world, if it by chance turns out right? Are you with these risk weights also not sort of implying that the AAA rated is more worthy of credit?"

Those very simple questions could have changed the course of history as the banks would not have ended up with some especially large exposures to what was perceived (houses) decreed (sovereigns) or concocted (AAA rated securities) as safe, against especially little capital (equity), dooming the world to an especially serious crisis.

Sir, how do we get some nurses and plumbers, meaning real diversification, not just gender or race diversification, into the Bank of England and the Basel Committee? These mutual admiration club types of institutions, with their groupthink séances, urgently need it 

https://teawithft.blogspot.com/2004/11/basel-is-just-mutual-admiration-club.html

https://subprimeregulations.blogspot.com/2018/05/if-only-these-four-simple-questions-had.html

@PerKurowski

If you want real profound gender diversity at company boards, think of nominating housemothers

Sir, Daniel Thomas discusses the issue of having more women on corporate boards “Shareholders can do more to bring about boardroom diversity”, June 2.

More than a decade ago, as an Executive Director at the World Bank, I told my colleagues “We all have, more or less, quite similar backgrounds. If we were by means of a lottery substitute a plumber and a nurse, for two of us directors at the board, I am sure we would have a much wiser board”. I do not remember what my colleagues replied… or if they did.

Now, hearing the currently so frequent demand for more gender diversification, I feel the same. Having women educated similarly to the men they are to substitute for, brings much less diversity into the boardroom than what could be expected. 

If you want deeper meaning gender diversification, then invite housemothers to work some hours as board directors. The challenges mothers have to confront in their daily routines are way often much harder and much different from those that their then men board colleagues face.

Also, as an economist, to guarantee more gender income equality, start by arguing for parents, most usually women, to be remunerated for their socially so important work of taking care of their children or elderly. Unfortunately housemothers, just as the unemployed, do not have unions to take care of their interests. 

@PerKurowski

FT echoes accusations of “knowingly profiting from murder” against World Bank, but not mistakes by bank regulators?

Sir, Shawn Donnan’s “Lawsuit” of March 9, has left me dumbstruck.

In 2002-2004 I was an Executive Director at the World Bank (IFC) occupying the Chair that, among others, represents Honduras. In 2003, surely before Dinant and its late owner Miguel Facussé times, I have never heard about them, I visited some of those palm plantations in the Bajo Aguán region of Honduras.

In an Op-Ed I then wrote, I stated that I found these to be horrible, appalling; basically because to me it looked like that it “could be the mother of all poverty traps”, “ the borderline of lowest overall marginal cost, that is, where the least is paid to farmers for their labor”; and also because I always felt that “if we let globalization simply pursue the lowest marginal cost of labor, then Great Bad Deflation will inevitably come”.

But, as to the World Bank or the IFC “knowingly profiting from the financing of murder”? And of these being a detonator? “Lawyers lay out a build-up of violence before and after the IFC began lending to the company” I have to say no, no and no!

Could IFC, the World Bank, be lured into lending or investing in something that has something awful going on behind the curtains? Yes, that could happen to anyone. 

Could some individual from IFC and the World Bank be involved in something criminal? Of course, but from there to launch this type of accusations against the institutions as such, only damages without serving any purpose. How much seed of suspicions can you seed before you do irremediable damage?

Also could it not be that someone is knowingly exploiting some poor suffering Honduran farmers, in an ambulance chasing type of action? I do not know EarthRights, and I have absolutely no reason to suspect anything but good intentions on their part, but profiteering happens, and so one needs to always proceed with utmost care.

I am no longer an ED, and since I am no longer capable, in my profession, of making one to my conscience honest living in my Venezuela… I now belong to a Civil Society (don’t ask me to explain precisely what that means). And as a member of it I do my best to generate constructive advice to valuable institutions such as the World Bank (and, disclaimer, absolutely not only because my wife works there).

Sir, let me get back to how I have titled this letter: The Basel Committee for Banking Supervision has made some mindboggling and very dangerous mistakes. FT has not shown a willingness to clearly echo my concerns or even ask bank regulators for some very basic explanations. But, “without fear and without favour”, you now allow this against the World Bank to be published. How come the differential treatment? Could not bad regulations be a murder weapon?

PS. Nowadays I hope for robots to take care of those palm plantations; and by taxing a bit those robots, be able to provide the poor farmers of Honduras a better chance to place themselves closer to something more profitable for them, and foremost for their children and grandchildren.

@PerKurowski

In Miami Florida USA, when stores display “Hablamos inglés”, that evidences the global importance of English

Sir, during my two short/long years as an Executive Director of the World Bank, I don’t recall a more enjoyable moment than listening to a colleague’s, the Executive Director for France, Pierre Duquesne's wonderful spirited defense of the budget allocation for translating English documents into French. And that is why I felt a streak of bad conscience when I caught myself discreetly smiling when reading Jeremy Paxman’s “Voilà — a winner in the battle of global tongues” April 8.

Of course English has won the battle. It is such an important language that even in Miami Florida USA, the stores display signs that read: “Hablamos inglès”, “We speak english”.

What has me a bit surprised though, is that I have not yet heard Mr Paxman suggesting an English Language Empire, as a Brentrance to Brexit.

That Empire would, Professor Higgins allowing, at least save itself most of the costs of translations.

@PerKurowski ©

A world obsessed with Best Practices may calcify its structure and break with any small wind

In reference to Mr. Flash Crash’s supposedly malevolent disruption of the market in 2010, John Plender writes interestingly about globalization, regulations and fragility “Global financial regulation meets a cul-de-sac” April 23.

In this respect I would like to recall a written statement that I delivered as an Executive Director of the World Bank on April 2, 2003, while discussing its Stategic Framework 04-06. In it I wrote:

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg.

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. Who could really defend the value of diversity, if not The World Bank?"

http://subprimeregulations.blogspot.com/2003/03/my-comments-on-world-banks-strategic.html

@PerKurowski

Undercover Economist Harford, instead of "the volatility express" the rest of us we have, thanks to regulators, the volatility ball and chain.

Sir, in October 2004, in a written formal statement at the World Bank, as an Executive Director, I warned: “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.”

And so I believe that, whether you like it or not, few have such credentials to talk about volatility.

And today I refer to Tim Harford’s “The volatility express” July 5. In it, Harford correctly describes the dangers for the financial sector of low volatility, in that it can foster a false sense of security; and the benefits for the economy of low volatility, as it can provide for the stable environment investors need in order to take risks.

But what the Undercover Economist, and you yourself, fail to understand, is that regulators, with their risk-weighted capital requirements for banks create not only an artificial false low volatility which becomes extra dangerous for banks, while at the same time, with the same risk-weights, they block the access to bank credit to those most willing to take risks when volatility is low.

And so, instead of the volatility express the “rest of us” would all like to see, we now have, thanks to regulators, the volatility ball and chain.

When restructuring the World Bank you might want to start even higher than its presidency.

Sir, I refer to your editorial “Restructuring hell at the World Bank”, April 10.

You end it stating “If there is a silver lining to the bank’s turmoil, it is this: the Bretton Woods Institutions belong to the world. From now on, they must be headed by the best people available”

Not so fast! When presenting my book Voice and Noise, May 2006, in which I reflected on my experiences as an Executive Director of the World Bank, 2002-2004 this is what I said:

“Although we proudly name ourselves the World Bank, the fact is that we are more of a “Pieces of the World Bank”, with 24 Executive Director representing parochial interests. As a consequence I sadly had to conclude in that the World itself, call it Mother earth if you want, in these times of globalization, is in fact the Bank’s most underrepresented constituency.

This needs to be fixed, urgently, as we need to be able to stimulate a profoundly shared ownership for the long-term needs of our planet; that is if we want to survive as a truly civilized society worthy of the term civilization. As I see it, adding a couple of truly independent seven-year-term Executive Directors, whose role would be to think about the world of our grandchildren, way beyond the 2015 of the Millennium Development Goals—could be what the World Bank most needs now.”

And Sir, I still stand by that. 

The way the World Bank’s Executive Directors are nominated by ministries, does not guarantee the existence of sufficient intellectual and independent diversity at the Board. And that is the number one condition that needs to be satisfied in order for any international finance institution, to become something more than a well intended mutual admiration club, run by an also well intended management in natural pursuit of their own and perhaps even more parochial objectives.

PS. I have been asked by a representative of the civil society, whatever that now means, to add some additional straight to the point explanations of what I mean, and so here it is:

1. I guarantee that if one Joe the Plumber or one Nancy the Nurse, selected through lottery from 25 plumbers or 25 nurses, substituted for one of the 25 current executive directors, chosen also by lottery, we would have a 75% chance of ending up with a more commonsense and wise Board of Executive Directors at the World Bank, and less than a 1% chance to end up with something meaningfully worse.

2. If the Basel Committee for Banking Supervision (or perhaps the IMF) had counted with one biologist or an expert in the contagion of diseases, they would never ever have introduced something as dumb as the risk-weighted capital requirements for banks which, besides distorting the allocation of bank credit, amplify dramatically the consequences of any insufficient or any excessive ex ante perception of risk. And the world would have been saved from the current crisis. The ongoing intellectual incest is so bad that even 7 years after the outburst of the crisis they still do not realize what they have done.”

3. With reference to William Easterly’s 'The tyranny of experts', the real nightmare is to be in the hands of a group of similar experts on the same subject.

4. One of the best ways to control for the dangers of group-think, is to subject the group to the authority of some who is guaranteed not to belong to the group, and has no reason for wanting to belong to the group.

PS. Whenever you click on to social media, say this little prayer: “Please God, save me from becoming a victim of intellectual incest”

If the ordinary citizen, not just “civil society”, is not part of the climate change challenge, we are all toast.

Sir, my first reaction when I read Nicholas Stern’s “World leaders must act faster on climate change” September 30, was “How could they? There are none.

When about a decade ago I was an Executive Director at the World Bank, I often held that since at our board no one spoke for the world at large, and really only parochial interests were represented, we should perhaps in the name of transparency, rename us the World Pieces Bank, or perhaps the World Puzzle Bank.

And I also held and hold that if we allow acting on climate change to become just another rent seeking opportunity, or a political agenda pushing opportunity, we are all toast!

Having had the opportunity of flying over many environmentally affected areas, I really do not need a lot of scientifically studies to know that something is very wrong with how we maintain our planet, or our pied à terre as I like to call it. But what can we do about it?

I have no definitive answers of course, but I do firmly believe that impeding “climate change” to become an issue which belongs solely to an elite, and engaging the full attention of the ordinary citizen, is an absolute must.

For example when reading about the Copenhagen Climate Change Conference of 2009, I got upset about how often it was implied that the solution was the exclusive responsibility of the rich countries, as if the poorest human being, in the poorest of the countries has not exactly the same right, and duty, as an indigenous of the world, to participate in the challenge.

And to stimulate such citizen participation, and by which I mean immensely more than “civil society”, creating a visual aide, such as an environmental Google-map that tracks the climatic and environmental changes, and make it accessible in all schoolrooms around the world, could help.

If the threat to our earth is truly serious, something that I have no real evidence to doubt, it is clear that we cannot leave its solution to politicians, and green rent seekers. If we do so we are toast.

Italy’s earthquake vs. financial earthquake - outrageous punishment vs. outrageous forgiveness

Sir, I refer to Anjana Ahuja’s “Jailing the seismic seven will cause tremors beyond Italy”, October 25. 

If we transport what happened in Italy to the financial sector, we can observe that: the credit rating agencies correspond to the seismologist, the regulators who gave the credit rating agencies so much importance and credibility to those regulators that flouted building regulations and, all those who assured the world all was fine and dandy to Bernardo Bernadinis. 

As that major financial earthquake which was for some of us, perhaps not scientist but ordinary laymen, absolutely doomed to happen, “just follow the AAAs”, and that quake has produced immensely more widespread damages than those tragically produced in L’Aquila, the question which remains is: 

What is worse, outrageous punishment or outrageous forgiveness? 

The credit rating agencies made mistakes which one way or another should have had some type of consequence. The bank regulators should have been ashamed and not simply authorized to keep on regulating, using the same silly paradigms, as if nothing had happened. And, if the Bernardo Bernardinis’ of this world do not understand they need new advisors, they should just be sent home, for being too dumb. 

PS. In October 2004 in a formal written statement delivered at the Executive Board of the World Bank I warned: “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”. And, if little me sort of knew it, should regulators and credit rating agencies have known it? I dare you to read it. It contains more relevant comments.

The World needs a World Bank

Sir, as a former Executive Director of the World Bank, 2002-2004 I would like to add to the many insightful comments of Sarah Murray, on the difficulties of being a president of a World Bank, “Leaders face a set of complex challenges” April 26. 

As I see it, and in much as I experienced it, the real problem of the World Bank is that, at its Board of Executive Directors, the World at large, and its humans, are not truly represented, only parochial governmental interests are. 

If we are going to have a chance to rally support for such global critical issues as world-wide sustainability and job creation for our youth, I do believe we need some sort of World’s World Bank, and, a good start, just for starters, could be adding to the Board some independent voices who do not report to a government, or, much worse, to a single ideology. 

Would such a proposal be feasible? I haven’t the faintest! But, if we cannot get the human beings to cooperate and work as one, on some vital issues, across the borders, our chances of all humans making it are much reduced… let’s not kid ourselves.

We had a monstrously dumb and stupid, government failure

Sir, Samuel Brittan in “A credo for a revived capitalism” May 7 reminds us that we need to discuss more about “government failure”. He is absolutely right.

In October 2004, as an Executive Director of the World Bank, I who am not an investment banker, nor a financial regulator, presented at the Board a written statement were I opined: “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.”

And long before that and during my whole term as an ED I repeated, as much as I could, bordering on annoying, that the ratings issued by the credit agencies were just a new breed of systemic error to be propagated at modern speeds… and that we should not follow the money but follow the triple-As.

The real question now is what keeps the world from listening when the innocent child screams out “the emperor is naked”?

Look at the European governments, accepting the dictates of the Basel Committee and allowing their banks a 62.5 to one leverage when stocking up on Greek debts and alike… if that is just not a monstrously dumb and stupid government failure, what is?

Global leadership should be global

Sir, when in “A chance to exert global leadership” July 5, you argue against the fact that Belgium has more votes in the International Monetary Fund than India “despite the fact that it does not even have its own currency” you really get it wrong. Belgium does indeed have their own currency, the Euro, and the fact that they are willing to share it with others could perhaps even argue in favour of them having more votes.

But what really bugs me is the déjà vu feelings I get reading the article, as I am sure that exactly the same things were said when Rodrigo Rato was appointed and, worse yet, that the day when voting rights finally get reshuffled using a new geo-economical realities, we will discover it really did not mean that much. In order to take the IMF and the World Bank to the next level of multilateralism in a globalized world what is needed is a formula more helpful to break those geographical ties that keeps them so chained to sometimes very parochial issues. Besides, if whom you are going to appoint to the IMF’s Executive Board are just central bankers you will never get any real diversity, no matter what country they come from and which just implies of course the slowly build up of another systemic risk.