In the Fed, more than Trading Floor experiences, we need Main-Street experiences.

Sir, Mohamed El-Erian writes “Let’s not forget some market participants’ growing interest in modern monetary theory, including the view that persistently low yields enable higher central bank financing of government deficits. But such comfort risks being short-lived.” “Attacks by Trump risk damaging the Fed’s credibility”, April 12.

El-Erian leaves me a bit confused. Does he think the “modern monetary theory” could be any source of comfort even if short lived? I myself consider it a prime example of a dangerous fake theory, probably concocted by redistribution profiteers, and that because it offers such an “Easy Street” has simply gone viral. If we had any respect for Edmund Burke’s holy intergenerational bond, we should all do our utmost to destroy it.

Then El-Erian speaks of the need of the Fed to have a “‘feel’ for markets — that is… officials on the Federal Open Market Committee who have been properly and comprehensively exposed to operational responsibilities on trading floors.”

He is surely right that some of the members of FOMC should have that experience but, even more important than that is the experience from Main-Street, like when entrepreneurs want to access bank credit. 

Had there been just one single of those in the Fed, he would most surely have asked: “Colleagues, why do you set the risk weighted capital requirements higher for that which is perceived as risky, and which precisely therefore have such difficulties getting credit from the banks, and so therefore are quite innocous to our bank system?” 

Had that question been posed with enough firmness in requiring a clear answer, the 2008 crisis would not have happened and the world would definitely look better than now.

@PerKurowski

The selection of independent central bankers should not be politicized, but neither should the criticism of the candidates be

Sir, you argue that Stephen Moore nor Herman Cain seem to be “remotely qualified to sit in the monetary cockpit of the world’s reserve currency”, “Trump must be stopped from packing the US Fed”, April 6.

Sir, you might very well be right, I know very little about those candidates but I do know that those who have been sitting there for the last decades were perhaps not sufficiently qualified either. 

The 2008 crisis was caused by the distortions in credit allocation produced by the risk weighted capital requirements for banks. To then having central bankers to inject huge amounts of stimulus by means of QEs and ultra low interest rates, without removing those distortions, does show they don’t have a sufficient understanding of what they are up to. Sir, what they have achieved is only to kick the crisis can forward and upwards. Let us pray it will not roll back too hard on us, our children or our grandchildren.

Sir, to be sincere, I do believe that FT’ team, with its silence, has lost any right it could have to throw first stones in the matter of who are suited or not to man the Fed, or any other central bank for that matter.

You argue: “The merest hint that Mr Powell is doing Mr Trump’s bidding is enough to corrode the Fed’s independence.” Sir, for the umpteenth time, when the Fed and other central banks, in 1988, Basel I, approved of risk weighted capital requirements for banks that assigned a risk weight of 0% to the sovereign and 100% to the citizens, they went statists and gave up their independence.

In truth they did exactly what a Hugo Chavez or a Nicolas Maduro would want a Venezuelan central banker to do, namely to be act under the presumption that any bank credit to the government is managed better than a credit to the private sector.

Look back three decades; have you seen any president anywhere who objects to such a Sovereign Debt Privilege?

Greece, a Eurozone nation that takes on debt in a currency that is de facto not its domestic printable one, was even more crazily assigned a 0% risk weight, and ECB knew about it, and kept silence on it. I do not remember you thinking ECB’s bankers as inept.

@PerKurowski

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

The Fed and bank regulators have done many times more harm to the real economy than the political leadership, President Trump included.

Sir, Rana Foroohar writes:“It is clear that the power of monetary policy to support the real economy has diminished. In lieu of better political leadership, the key task for central bankers in the years to come may be to roll up their sleeves and do the gritty work of bolstering not the markets, but Main Street.” “Central bankers refocus on Main Street” December 31.

That’s not likely to happen. The Fed and bank regulators have clearly evidenced they are not up to that task. Without the slightest consideration to how banks are to serve the real economy, and its needs for development, with their risk weighted capital requirements for banks, they blocked “the risky” Main Street’s access to bank credit, in order to favor all that which was perceived (or decreed) as safe… like residential mortgages (and the sovereign) 

Now every one of them will eagerly be trying to escape his or her responsibility, by blaming Donald Trump, who in many ways is acting as a perfect godsend scapegoat.

PS. “We are almost 10 years into a recovery cycle — the time when economic slowdowns typically occur”. That might be so, but it still sounds so expertly besserwisser. 

"Paga-peo" a Venezuelan name for a scapegoat

@PerKurowski

President Trump seems to be on route to become one of the greatest “paga-peos” (scapegoats) in history.

Sir, Gillian Tett writes that for her “money, there is another, darker, way to interpret this week’s [extreme volatility in US equity markets]. Two years into Mr Trump’s presidency, global investors are questioning the administration’s financial credibility…Steel yourself to cope with further turbulence triggered by Mr Trump”,“Expect more turbulence from Trump’s Fed fight”, December 28.

Indeed, president Trump is to be blamed for some of it, but the truth is that had the markets been more normal, not so much bubbled-up, he would only cause some ripples never Tsunamis.

That Trump has given indications to fire Jay Powell, the Fed chair, is bad in as far as it interferes with the necessary independence and credibility of a central bank. But, that said, let me also hold that, if a central banker or a regulator believes that what bankers perceive as risky is more dangerous to bank systems than what they perceive safe, and therefore use credit distorting risk weighted bank capital requirements, as they’ve done for a long time, that is a clear justified cause for their removal.

Venezuelan historians sometimes recount that in old days the refined ladies of the society always used to keep a young slave close by. Whenever they let out noisy and smelly gases, they would hit the slave hard and loudly on his head spelling out “Boy/Girl!” whichever applied. These useful blame-takers, scapegoats, were known as “paga-peos”, literally “fart-payers”.

Sir, President Trump clearly produces some gases himself, but he could also go down in history as one of the greatest paga-peos ever.

When booming equity markets, house prices and unsustainable debt levels everywhere, built up with easy bank credit, huge liquidity injections and ultra-low interest rates come crashing down, as they must, sooner or later, those who are much more to blame for it, could all jointly point at President Trump and shout “He did it!” and Ms. Tett might smilingly nod in agreement.

PS. Though in Spanish here you will find more interesting details about the “paga-peos” tradition and about how it can be used with even worse intentions.

@PerKurowski

Even the best central bankers can mess it up, royally

Sir, Tim Harford writes: “A flint-hearted technocrat can at times deliver better results for everyone. In the early 1980s, Fed chair Paul Volcker demonstrated the basic idea that inflation could be crushed by a sufficiently badass central banker.” “Stop sniping at central banks and set clear targets” December 16.

Indeed, and Paul Volcker was a hero of mine too, that is until I realized his role as the facilitator of the risk weighted capital requirements for banks.

In his book “Keeping at it”, penned together with Christine Harper, Paul Volcker writes: “The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be…. At the end of a European tour in September in 1986, at an informal dinner with the Bank of England’s then governor Robin Leigh-Pemberton… without a lot of forethought, I suggested to him that if it was necessary to reach agreement, I’d try to sell the risk-based approach to my US colleagues.”

And that was that! In that moment, accepting the European nonsense that what bankers perceive as risky is more dangerous to our bank systems than what banker perceive as safe, Paul Volcker, a central banker, helped condemn us to suffer especially severe bank crisis, resulting from especially large exposures, to what was especially perceived as safe, against especially little capital. I thank him not!

Harford opines “The health of our democracies demands that our politicians start taking responsibility again”

Absolutely! And with respect to bank regulations that requires the politicians to ask for explanations like: Why do you risk weigh the assets based on their perceived risk and not on their risk based on how bankers perceive their risk? Have you never heard about conditional probabilities?

PS. The Basel Committee document that provides an explanation on the portfolio invariant risk weighted capital requirements does not make any sense to me, but perhaps Tim Harford understands it. If so could you please ask him to explain it to us? 

@PerKurowski

Hercules Poirot, as a bank regulator, would be much more watchful of the “safe” than of the obvious risky.

Sir, Gillian Tett reminds us that “Any fan of Agatha Christie mystery books knows that distraction is a powerful plot device: if there was a commotion in the kitchen, detective Hercule Poirot would look for a body in the library, or other clues being hidden in plain sight, amid the noise.” “Federal Reserve attack is just a distraction”, November 30.

Indeed, but she could rest assure that Poirot, if cast as a bank regulator, would laugh at his current colleagues who show so much concern with what seems obviously risky, like when they in Basel II assign a risk weight of 150% to what’s rated below BB-, and so little about what seems very safe, like giving only a 20% risk weight to what’s rated AAA and is, therefore, if wrong, truly dangerous for the bank system.

Ms. Tett argues here that President Donald Trump “uses weapons of distraction more effectively than almost any leader before him”

She could be right but also, when GDP and inflation data are fraught with may uncertainties or outright errors, to hear the Fed discussing the “neutral rate”, could also be an intent to distract from the fact that they find themselves in that “dark room” deputy Fed chair Rich Clarida is quoted to have mentioned, and so that they therefore have not the faintest idea about what’s going on, and much less about what to do. 

Sir, when not knowing the answer to a question, proceeding to with a firm voice give an answer nobody is guaranteed to fully understand, also qualifies as a high quality distraction.

PS. That 20% risk weight of the AAA to AA rated, translated to a capital requirement of only 1.6% (8%*20%) which meant the banks were allowed to leverage mindblowing 62.5 times with such assets (100/1.6) which translated in to the cause numero uno for the 2008 crisis. 

@PerKurowski

The world will come to deeply regret central bankers avoided a cleansing hard landing in 2008... and opted instead for kicking the crisis forward (and upwards)

Sir, Merryn Somerset Webb asks: “The consequences of those solutions found in 2008, one of which was to make rich people richer in the hope they would spend more, look like they could end up neutering capitalism — the greatest poverty destroying system ever. Was avoiding a few more years of recessionary misery after 2008 worth that?”, “A post-crisis cure that has stored up economic pain” September 15.

Somerset Webb then proceeds to contrast the fortunes of a middle-aged man with a large mortgage in central London in 2008 and an equity portfolio [who] has had a brilliant decade, with the hardships of cash savers and pensioners suffering the impacts of low interest rates, and the many tenants who know they can never save enough for a house deposit. She is, sadly, so absolutely right.

In 2006, when troubles started brewing, I wrote a letter that was published by FT and in which I briefly but clearly (I think) exposed the benefits of a hard landing. 

When the FED, and later ECB, decided that the best thing to do was to kick the crisis can forward, and proceeded with a huge stimuli package that included foremost quantitative easing and ultra low interest rates, I accepted it. What was I to do? 

But what I never thought would happen was that all that stimuli would be injected into the economy, without eliminating the distortions that had created the crisis in the first place. And I refer here of course, for the umpteenth time, to the risk weighted capital requirements for banks; those that favor banks lending to what is perceived or decreed safe, like AAA rated securities, residential mortgages and sovereigns; and to stay away from the risky, like entrepreneurs.

Because of that, the stimuli had no chance of yielding sustainable economic result and we are now fretting and waiting for that huge growing by the minute can to roll back, with vengeance, on us, on our children or on our grandchildren.

Somerset Webb opines that “the political conversation these days focuses not, as it surely should, on wealth creation but on long-term wealth redistribution: new property taxes; rises in capital gains taxes; more corporate taxes; workers on boards; the nationalisation of industries in the UK; higher minimum wages; maximum wage ratios; the limiting of the rights of people who are non-resident for tax purposes, and the like.”

I agree. After besserwisser statist regulators have messed it up so completely, the last thing we need is for redistribution profiteers to expand the value of their franchise.

As I see it some of our priorities are:

First, to work our banks out of that corner into which regulators have painted them in, something which, as it includes a statist 0% risk weight for sovereigns, is easier said than done.

Second, initiate, even with very low amounts an unconditional universal basic income scheme. That will allow us to begin creating those decent and worthy unemployments we will need, before society begins to break down.

Third, stop the populist from promising heavens, by asking them to explain clearly how wealth, mostly invested in assets, could be redistributed without unexpected negative effects.

Sir, you know I am from Venezuela. I have seen my homeland taken to pieces in less than two decades, and the many Chavez and Maduro there are in the world frightens me. I guarantee you they will stop at nothing once they begin.

PS. Thank God Lehman Brothers collapsed when it did. Can you imagine if the AAA rated subprime mortgages securities craze, that regulators allowed banks to leverage a mind-blowing 62.5 times with, would had gone on for one or two years more?

Where would America be today had not bank regulators distorted credit and central bankers kicked the crisis can forward?

Martin Wolf, expressing concerns we all deeply share asks, “Who lost “our” America?” and he answers: “The American elite, especially the Republican elite… They sowed the wind; the world is reaping the whirlwind. “How we lost America to greed and envy” July 16.

I respectfully (nowadays not too much so) absolutely disagree. That because supposedly independent technocrats generated the two following events:

First, in 1988 regulators with their so sweet sounding risk weighted capital requirements, promised the world a safer bank system, but then proceeded to design these around the loony notion that what was perceived as risky was more dangerous than what was perceived as safe. That distorted the allocation of bank credits in favor of the "safer" present and against the "riskier" future. That must have stopped much of any ordinary social and economic mobility.

Then in 2007/08, instead of allowing the crisis to do its natural clean up, central bankers, starting with the Fed but soon to be eagerly followed by ECB and other central banks, just kicked the can forward, favoring sovereigns and existing assets. Just as an example, with their repurchase of the failed securities backed with mortgages to the subprime sector, they saved the asses of many investors and banks (many European) while very little of that sacrifice flowed back to those who, in the process, had been saddled with hard to serve mortgages.

Martin Wolf, and you too Sir, would benefit immensely in trying to imagine how the world would be looking now, without that unelected and inept technocratic interference! What had specifically Republicans, or Democrats, to do with that interference?

As I see it if that had not have happened Trump would not even have been thinking of running as a candidate.

PS. An aide memoire on some of the mistakes with the risk weighted capital requirements.

@PerKurowski

Rana Foroohar. Please ask yourself a question and, if you cannot answer it, do ponder why.

Sir, I refer to Rana Foroohar’s “Three questions for the Fed’s Powell” February 26.

Ms. Foroohar (and you too Sir) should ask herself: why do regulators want banks to hold more capital against what, by being perceived as risky, has been made quite innocous, than against what, because it is perceived as safe, is so much more dangerous?

And if could not come up with a truly convincing answer, then that should give her a clue on that something very strange is going on in the field of bank regulations.

And if she had gotten to that point, then it should not be too hard for her to begin to understand how those different capital requirements, which allows for some assets to be leveraged much more than others, might distort the allocation of credit to the real economy… and thereby affect its “real non-financialised growth”

And at that point she would surely add, that same question she could not answer, to those three she proposes to ask Powell.

Foroohar also references companies “buying up the higher-yielding bonds of riskier companies at a favourable spread and holding those assets offshore [and that now after] President Donald Trump’s new tax rules… They will simply be able to move their money wherever they want, whenever they want, in cash.”

“Cash”? In order to become cash, all those assets the companies have bought and held offshore must be sold. Would that not have any consequences?

@PerKurowski

Banks now invest based on the risk-adjusted yields of assets adjusted for allowed leverages; that distorts the allocation of credit to the real economy.

Sir, Lawrence Summers, when writing about the challenges Jay Powell will face as Fed chairman mentions “Even with very low interest rates, the normal level of private saving consistently and substantially exceeds the normal level of private investment in the US” “Powell’s challenge at the Fed” February 5.

Not too long ago, markets, banks included, invested based on the risk adjusted yields they perceived the assets were offering. Some more sophisticated investors also looked to maximize the risk adjusted yield of their whole portfolio.

But, then in 1988 with Basel I, and especially in 2004 with Basel II, the regulators introduced risk based capital requirements for banks. As a consequence, banks now invest based on the risk-adjusted yields adjusted for the leverage allowed that they perceive the assets offer. As banks are allowed to leverage more with safe assets, which helps to increase their expected return on equity, they now invest more than usual, and at lower rates than usual, in “safe” assets like loans to sovereigns, AAA rated and mortgages. And of course, banks also invest less than usual, and at even higher rates than usual, in loans to the “risky” like entrepreneurs and SMEs.

That has helped to push the “risk free” down, and also explains much of the lowering of the neutral rate. Since the regulators now de facto block the channel of banks to the “risky” part of the economy, there is a lot of private investment that simply is not taking place any longer.

It is sad and worrisome that neither the leaving Fed chairman, Janet Yellen, nor the arriving one, Jay Powell (nor Professor Summers for that matter) can apparently give a clear direct and coherent answer to the very straight forward questions of: “Why do regulators want banks to hold more capital against what’s been made innocous by being perceived as risky, than against what’s dangerous because it’s perceived as safe? Does that not set us up for slow growth and too-big-to-manage crises?

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

@PerKurowski

Ms. Janet Yellen, like other recent bank regulators who have just faded away, will leave the Fed without answering THE QUESTION

Sir, you write: “The Federal Reserve can take some blame for failing to see risks building up in the years preceding the global financial crisis. But perhaps more than any other major policymaking institution in the world, the Fed has acquitted itself well in the decade since”, “The unfortunate exit of an exemplary Fed chair”, November 29.

As you might suspect, I profoundly disagree. The Federal Reserve has yet not understood (or has been willing to acknowledge it) the fact that the “risks building up in the years preceding the global financial crisis” were a direct consequence of the distortions introduced by bank regulations, primarily Basel II, 2004.

If you allow banks to leverage almost limitless when lending to sovereigns, (like European banks lending to Greece); when financing residential housing; and over 60 times to one just because a human fallible rating agency has issued an AAA rating, that crisis, just had to happen.

And since capital requirements for banks have remained higher for what is perceived as risky than for what is perceived, decreed or concocted as safe, that odious distortion wasted most of the stimulus quantitative easing and low interest could have provided.

Over the last decade, how many SMEs and entrepreneurs have not gained access to that life changing opportunity of a bank credit, only because of these odiously discriminating regulations? Who can believe that America would have been able to develop as it did, if these regulations had been in place since the time of the pilgrims?

And now Janet Yellen, like other regulators have done in the recent past, will leave the Fed without answering us why banks should hold the most of capital against what is perceived as risky, when it is when something perceived very safe turns out very risky, that one would really like banks to have the most of it.

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

Sir, thanks for all the help you have given me over the last decade, forwarding that question without fear and without favour.

@PerKurowski

Leonardo da Vinci, smiling, must be harboring great gratitude to the Fed and ECB for helping his Salvator Mundi to become so highly valued.

Sir, I refer to Josh Spero’s and Lauren Leatherby’s “Record price sparks hunt for Da Vinci painting buyer” November 17.

Surely Leonardo da Vinci wherever he find himself must be smiling and extending his deepest gratitude to Fed’s Janet Yellen and ECB’s Mario Draghi for their QEs and ultra low interest rates. That has allowed him see his Salvator Mundi valued at US$ 450 million much earlier than he could have expected.

And Janet Yellen and Mario Draghi and their colleagues must surely be smiling too. Since Dmitry Rybolovlev bought that painting in 2011 for $127.5m, its current price hints at being successful at reaching an inflation rate target they never dared dream of.

The art curious still do not know who the buyer is, but be sure the redistribution profiteers are also looking after these US$ 450 million to find out how that money escaped their franchise.

Since the latter will surely soon again be talking about inequality I take the opportunity to advance my usual question of: How do you morph such a valuable piece of art into street purchasing power again; that can be used for food and medicines, without the assistance of another extremely wealthy?

@PerKurowski

Mr. Powell. Tear down that wall of risk weighted capital requirements that destroy bank systems and economies

Sir, Sam Fleming writes that Jeremy Stein, a Harvard academic describes Jay Powell, the newly appointed chairman of the Fed, as curious, incredibly collegial, and willing to learn. “A safe pair of hands takes over the Fed” November 4.

Sir, for the umpteenth time: All major bank crisis have resulted from unforeseen events, like major devaluations or wars, criminal behavior or excessive exposures to something that was perceived as safe when incorporated in the balance sheets of banks. Never ever from excessive banks exposures to something ex ante perceived as risky.

Therefore I pray Jay Powell is curious enough to ask the following question:

Colleagues, the standardized Basel II risk weights sets 20% for what is AAA rated and could be very dangerous; and 150% to what is below BB-, that which seems so innocous because bankers would not touch it even with a ten feet pole. Could you please explain the thinking process that supports such risk weights?

If he does, I hope Mr Powell will not be hindered by too much collegiality, so that he is able to realize that the absence of a convincing answer to that question should make him seriously suspicious of some of his colleagues. 

And if he then wants to learn something I would offer him as an appetizer offer him the following:

Mr. Powell, the future problems of the Fed (and other central banks) will be insurmountable if we persist in using risk weighted capital requirements for banks.

Credit is not flowing to where free markets offer the highest risk adjusted net margins but, since 1988, Basel I, and most specially since 2004, Basel II, it is flowing to what offers the highest risk adjusted returns on capital, something which totally distorts when banks are allowed to leverage assets differently, depending on how their risk have been perceived, decreed or concocted as safe.

And the distortions are alive and kicking in Basel III too.

That impedes the economy to realize its full potential and also does not in any way guarantee financial stability, much the contrary.

Our savvy bank loan officers have now been replaced by saddening bank equity minimizing, bonuses maximizing officers.

And for a more complete explanation I would refer Mr. Powell here

@PerKurowski

It is in our best interest to keep Yellen, Draghi and other failed regulators out of tackling financial instability

Sir, I refer to Sam Fleming’s and Claire Jones “Yellen to tackle financial stability at Jackson Hole” August 24. Is the title a Freudian slip? Does “tackle” not refer to a problem, such as financial instability?

I argue that since Yellen, as part of that bank regulatory brotherhood that with risk weighted capital requirements for banks helped to cause financial instability, is simply not capable enough to help out achieving financial stability.

The idea of requiring banks to hold less capital (equity) against what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential houses, than against what is perceived as risky, like SMEs and entrepreneurs, is absolutely cuckoo.

That means that when banks try to maximize their risk adjusted return on equity they can multiply (leverage) many times more the perceived net risk adjusted margins received from “the safe” than those from “the risky”. As a result clearly, sooner or later, the safe are going to get too much bank credit (causing financial instability) and the risky have, immediately, less access to it (causing a weakening of the real economy). 

Anyone who can as regulators did in Basel II, assign a 20% risk weight to what is AAA rated and to which therefore dangerously excessive exposures could be created, and 150% to what is made so innocuous to our banking systems by being rated below BB-, always reminds me of those in Monsters, Inc. who run scared of the children. I wish they stopped finding energy in the screams of SMEs and start using instead the laughters of these.

The report also includes a picture of some activists holding a “We need a people’s Fed”. Yes, we sure do! Assigning 0% risk weight to the sovereign and 100% to any unrated citizen is pure statist ideology driven discrimination in favor of government bureaucrats and against the people. But perhaps the activists depicted are not into that kind of arguments. 

Draghi and Yellen might discuss problems associated to ECB’s and Fed’s large exposures to sovereign that their QEs have caused. If they were honest about the size of the problem, they should in the same breath include all sovereign debts and excess reserves held by banks only because of a 0% risk weight. Sir, if that’s not financial instability in the making what is?

PS. Those in Monsters Inc. all finally figured it out. Our bank regulators in the Basel Committee and the Financial Stability Board have yet to do so, even 10 years after that crisis produced mostly by AAA rated securities backed by mortgages to the US subprime sector. and loans to sovereigns like Greece 😩

 

@PerKurowski

One day, Stanley Fischer, like most current central bankers and regulators, will ask himself, why did I not see that?

Sir, Sam Fleming writes: “Fischer worries about attacks by lawmakers on global regulatory bodies such as the Financial Stability Board, arguing that the rules it proposes are good for the world if everyone adopts them.” “Lunch with the FT Stanley Fischer ‘It’s dangerous and short-sighted’” August 19. Like Gershwin wrote it, “It ain’t necessarily so!”

In November 1999 in an Op-Ed in Venezuela I wrote: “The possible Big Bang that scares me the most, is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

In April 2003 as an Executive Director of the World Bank I argued that Board that "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."

And in January 2003, FT published a letter in which I stated: “Everyone knows 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”

Sir, had regulators not introduced their risk weighted capital requirements for banks, made worse by the importance given to some few human fallible credit rating agencies, the 2007/08 crisis would not have happened; and the economy, net of automation and demographic factors, and considering the outlandish stimuli, would not be as stagnant as it is now.

PS. That Op-Ed I referred to above also included: “I recently heard that SEC was establishing higher capital requirements for stockbroker firms, arguing that “. . . the weak have to merge to remain. We have to get rid of the rotten apples so that we can renew the trust in the system.” As I read it, it establishes a very dangerous relationship between weak and rotten. In fact, the financially weakest stockbroker in the system could be providing the most honest services while the big ones, just because of their size, can also bring down the whole world. It has always surprised me how the financial regulatory authorities, while preaching the value of diversification, act in favor of concentration.”

Let me translate that into the current risk weightings. “It establishes a very dangerous relation between risk and the right to access credit. The “risky”, like SMEs, could be providing the most important additions to the real economy, while sovereigns and AAA rated, just because of their perceived “safety”, could bring the whole world down.”

@PerKurowski

ECB’s Mario Draghi’s star quality would evaporate had he to publicly answer some hard questions on bank regulations

Roger Blitz writes: “Mario Draghi, president of the European Central Bank, will be the star at the annual Jackson Hole symposium in Wyoming this year.” “Weak dollar remains centre stage” August 5.

Sir, if Mario Draghi, a former chair of the Financial Stability Board, and the current chair of the Group of Governors and Heads of Supervision (GHOS) of the Basel Committee, and therefore one of the most responsible for current bank regulations is the star of anything, that is only because he has never been made to fully answer some questions about current bank regulations in public, by his peers or by for instance FT’s journalist.

There are many many questions I could think of, but let me just indicate two:

First: Mr. Draghi. Do you not think that allowing banks to leverage more their equity with the net margins offered by those perceived safe than with those same margins when offered by those perceived risky; which means it is easier for banks to obtain higher returns on equity with “the safe” than with “the risky” does not distort the allocation of credit to the real economy?

If Draghi answers no, then there is nothing to do, as he would be evidencing he is clueless about finance on Main Street. If he answers yes then follow up with: Don’t you think this could be dangerous for the real economy and who authorized you and your colleagues to do so?

Second: Mr. Draghi, obviously current risk weighted capital requirements for banks, more perceived risk more capital, less risk less capital, indicates you the regulators believe that what is perceived as risky, is what is risky for the bank system. So, will you please tell us when there has ever been a bank crisis that has resulted from excessive exposures to what was perceived as risky when placed on the balance sheets of banks? As far as I gather from history all bank crisis, no exceptions, have been caused by unexpected events, criminal behavior or excessive exposures to what was perceived as safe when incorporated on banks’ balance sheet but that later, ex post, turned out to be very risky.

If Draghi answers yes, then he is deaf and has not heard the question. If he answers no, then ask him to explain why Basel II assigned a standard risk weight of 20% to what was AAA to AA rated and a 150% to what was rated below BB- and would therefore not be touched by bankers even with a ten feet pole.

Sir, Mario Draghi at ECB and others at the Fed with QEs and low interest rates, have just been kicking the 2008 crisis can down the road. The risk weighted capital requirements have caused that can to roll on the wrong roads. That is an act of terrorism against our economies.

@PerKurowski

The risk weighted capital requirements give banks great incentives to hide risk from their regulators.

Sir, Eric Platt and Alistair Gray write “US regulators have joined investors in voicing concern over risky bank lending… particularly when projections make a company appear more creditworthy… ‘The agencies continue to see cases of aggressive projections used to justify pass ratings on transactions that examiners consider non-pass’… although they said the number of cases was “at much lower levels than in prior periods” “Wall Street watchdogs sound alarm over risky bank lending” July 4.

In good old banking days, around 600 years, before Basel Committee’s risk weighted capital requirements, bankers argued their clients riskiness in order to collect higher risk premiums. Now banks argue more their clients safety, in order to convince regulators that they can hold less capital. That distortion makes the efficient allocation of bank credit to the real economy.

“The Fed and its fellow regulators… give deals a pass or non-pass rating which is then used to build a picture of banks’ lending activities.”

Considering that bank crisis only result from unexpected events or excessive exposures to something perceived, concocted or decreed as safe, and never ever from something perceived as risky, does this pass or non-pass rating activity make any sense? Absolutely not! It is as silly as can be… except for those who earn their livings from working on bank regulations. 

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

If banks keep on thinking on how to for instance pass some ratings, so as to be able to leverage more their capital in order to obtain higher rates of return on equity, than on the real risks of their clients… they will again, like in 2007/08, go very wrong, more sooner than later.

“the agencies said that risks had declined slightly but remained “elevated”. Lending considered to be non-pass had fallen from 10.3 per cent to 9.7 per cent of the overall shared national credit portfolio” As I see it, we could just as well argue that where the real dangers lie, increased from 89.7% to 90.3%.

Sir, again for the umpteenth time, without the elimination of the insane risk weighted capital requirements, there is no way our banks will recover their sanity. I am amazed on how you have decided to keep silence on this.

@PerKurowski

Why should technocrats seemingly be exempt from U-turn requirements, even in the face of horrendous mistakes?

Sir, Tim Harford writes: “For many government policies, it’s important to have an emergency stop to prevent bad ideas getting worse”, “In praise of changing one’s mind” May 27.

The worst idea, of the last century at least, has been that of, in order to make the banks safe, one needs to distort the allocation of bank credit by favoring, as if that was needed, banks’ exposures to what is perceived safe over those to what is perceived risky.

That meant that when the ex ante perceptions of risk, of especially large exposures, ex post turned out to be very wrong, that banks would stand there with especially little capital.

That meant that those rightly perceived as risky, like SMEs and entrepreneurs, those so vital for conserving the dynamism of the economy, would find their access to bank credit much harder than usual.

The 2007/08 crisis caused by excessive exposures to what was perceived or decreed as safe, 2007/08, AAA-rated, Greece, and the economies lack of response to outrageous stimulus thereafter clearly evidences the above.

But nevertheless, the concept of risk weighted capital requirements for banks, although somewhat diluted, still survives distorting on the margin as much, and in some cases even more than before.

When one reads Basel II’s risk weight of 20% for what is AAA rated and 150% for what is below BB- rated, the only conclusion one who has walked on Main Street could come to, is that a 180 degree turn into the directions of the risk-weighting would seem to make more sense.

Sir, why is it so easy for journalists to mock changes of minds of public political figures like Trump and May, and not the lack of change of mind of for instance the technocrats of the Basel Committee, the Financial Stability Board, BoE, ECB, IMF, Fed and so on?

Could it be because the latter “experts” tend to find themselves more in the journalists’ networks? Or could it be because of NUIMBY, no U-turn, no changing my mind, never ever in my own back yard. 

Sovereigns were handed a 0% risk weight! Why do we have to keep on reading references to deregulation or light-touch regulations, in the face of one of the heaviest handed statist regulations ever? Could it be because most journalists are also runaway statists at heart?

Why do "daring" journalists not dare to even pose the questions that must be asked?

@PerKurowski

Just as there is room for higher taxes, there is also room for much lower margins for the redistribution profiteers

Sir, Rana Foroohar writes: “It is likely that companies would put any extra money from a lower rate on repatriation of foreign cash into share buybacks. The 2003 dividend tax did not increase investment, but the 2004 repatriation holiday bolstered buybacks 21.5 per cent.” “The case for higher taxes” May 22, 2017

What? Does she mean that the “foreign cash” is in cash (stashed away under a mattress) and not already deployed in assets like for instance US Treasury Bills?

What? Does she mean that was has bolstered the immense buyback we have seen over the last decade has more to do with repatriation than with the low interest rates imposed on markets by the Fed, by means of QEs and bank regulations?

Clearly there is room for higher taxes, but never ever crazy 83% ones, and not those that enrich the redistribution profiteers, but those that would allow to initiate the payment of a Universal Basic Income, perhaps starting at only $300 per month, and then taking it from there.

That could help growth and that could help reduce inequality.

@PerKurowski