Instead of looking out for fake news, which is a mission impossible, go after what motivates and facilitates it.

Pilita Clark writes that “Britain’s health secretary, Matt Hancock, later warned social media companies could be banned if they failed to remove harmful content [and] ministers were looking at new laws to force social media companies to take down false information about vaccines spread by ‘anti-vaxxers’”. “Facebook is not our friend, no matter what their adverts say” March 29.

Ok, they identified one fake-news. Congratulations! 

But let me assure you that for each one of these you are able to track down, at least one hundred new ones will be spreading like wildfire.

To stop fake news, as well as to stop that odious messaging of hate and envy by polarization and redistribution profiteers, you have to be able to identify who is making money on it, and make it harder for them to make money on it.

Two things are needed for that. First to set up a parallel social media in which only duly identified individuals can participate, so that they could be individually shamed; and then place a minimum minimorum access fee on each social media message, so that they can not operate with a zero marginal cost.

Where should that access fee go? Clearly to us citizens whose data is being exploited and not to some other redistribution profiteers, and much less to some on the web-ambulance-chasers.

Pilita Clark also refers to George Orwell’s “Nineteen Eighty-Four”. Rightly so, we need to read and reread it so as to fully understand that the worst that could happen to us citizens, would be these mega social media enterprises teaming up with Big Brothers here and there.

@PerKurowski

If only a cost benefit analysis had been performed on the risk weighted capital requirements for banks

Tim Harford while reviewing Cass Sunstein’s“The Cost-Benefit Revolution” mentions, “In 1981, Ronald Reagan signed Executive Order 12291, requiring administrative decisions to weigh the costs and benefits of action and maximise net benefits.”, “A valuable study of a quiet victory for technocrats”, September 17.

How sad the risk weighted capital requirements for banks were no subjected to such a cost benefit analysis.

On the cost side, one would have to include the possibility that, since it would impose a tariff, by means of higher capital requirements, on the lending to the risky, and therefore de facto create a subsidy for when lending to the safe, that this could seriously distort the allocation of bank credit to the real economy… financing too much the safer present and too little that indispensable riskier future.

And, when reviewing its supposed benefit, that of making the bank system safer, one would have had to consider the possibility that, since the risky would then have to pay higher relative risk premiums than usual, that this could make them even riskier; plus the possibility that since the safe would get more credit at lower rates, that meant the safe could get too much credit at too low risk adjusted premiums, and banks could build up that type of excessive exposures to the safe that has always been the stuff bank crises are made off.

Adding then to the costs these possible negative benefits would certainly have caused this silly and dangerous regulation to be rejected… and the 2007-08 crisis avoided.

Hartford mentions that “Hayek’s objection to central planning is that it cannot work because the planners will never have enough information” I agree, but I am also sure that central planning often fails, not for lack of information, but simply because of them not understanding they lack information; and all there planning carried out in a group-thinking mutual admiration club.

In the “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings, the author makes a reference to having heard Francis Fukuyama in a TV program saying that Daniel Moynihan opined “There are some mistakes it takes a Ph.D. to make”. And Dolnick also refers to George Orwell’s comment, in “Notes on Nationalism”, that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

Sir, time and time again I find reasons to be reminded of that book.

http://subprimeregulations.blogspot.com/2011/08/no-ordinary-man-could-be-such-fool.html

@PerKurowski

Our need to concern ourselves about the use of our personal data goes much beyond what’s in the Facebook/Cambridge Analytica entanglement

Sir, I refer to Hannah Kuchler’s “The anti-social network” March 24 and all other reports that will pop up on the Facebook/Cambridge Analytica entanglement.

For a starter, why should we be so concerned with Facebook losing control of data to third-party developers, when Facebook has all that data and even more on us, and on which we have handed over the control to Facebook?

Then, if there is something that should be of the greatest concern to us citizens, that is the possibility of Facebook and similar teaming up with governments in “Big Brother is watching you, and makes profits on you all” joint ventures.

In fact that seems already to be happening as Brussels wants in on the ad-revenues.

I pray there are no secret negotiations going on between Venezuela’s Maduro and Facebook’s Mark Zuckerberg. I mean if Goldman Sachs’ Lloyd Blankfein could finance such an odious human rights violating regime, without any important social sanctioning of him, why should not Zuckerberg thinks about selling data to it too?

Sir, it is clear that we have need for independent entities such as central banks, then an ironclad independency of an Agency Supervising Our Personal Data Usage, seems to me to be the mother of the needs for independency.

Down with all "Big Brothers are watching you". And it does not matter whether these are Public, Private or PPPs (Public Private Partnerships)!

Of course the usage of our data supervisory agency must be managed by wise and common sense possessing individuals and not by dummies like those of the Basel Committee on Banking Supervision who are so not only convinced that what is perceived as risky is more dangerous to our bank system than what is perceived as safe, but also so easily manipulated by the banks.

PS. I forgot the first tweet I made on this, namely: How do we know this is not all fake news created in order to provide some polarization profiteers with new marketing material?

PS. Sir, I could be adding new comments to this post… so you might want to come back now and again to have a look at what’s in it.

PS. We must keep the ambulance chasers and the redistribution profiteers out of the business of fining the social media. All fines should go to fund a citizen’s Universal Basic Income

@PerKurowski

No one but a PhD or an MBA could have come up with the foolish risk weighted capital requirements for banks

Sir, Philip Delves Broughton in his “The business school tradition feels like an outdated Grand Tour”, October 7, refers to a book I am just to begin to read, Mihir Desai´s The Wisdom of Finance.

In that book Desai, writes about “how many of his MBA students avoid risk in order to retain their ‘optionality’... a concept they had picked up from finance… [but] often remain in companies saying to themselves, ‘Why not stay another year and create more options for down the road?’; ending up frustrated. The tool that was supposed to lead to more risk-taking ends up preventing it.”

Sir, I am not sure an option-searcher has ever in him to be a real risk-taker. That normally belongs to those who just close their eyes and jump at any opportunities in front of them. But, that said, I sure know of a tool that produces just the opposite. It was supposed to lead to less risk-taking, but ends up causing much more of it.

I mean of course the risk weighted capital requirements for banks. By giving banks the incentives to create excessive exposures, holding the least capital, to what has always caused major bank crisis, namely what was ex ante perceived as safe but that ex post turned out to be very risky, instead of reducing the risks to the bank system, it increased it exponentially.

Broughton also refers to a book by Will Dean, It Takes a Tribe, in which the author holds that entrepreneurs learn by doing, while MBAs fail by over-thinking. Will Dean is by far not the first to argue such a thing.

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

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

I am very happy with the MBA degree I received from IESA in Caracas 1974; but that does not stop me from being extremely disappointed with all MBA and Finance Schools all around the world, for not having been able to see, and much less stop, those regulations that are so dangerously distorting the allocation of bank credit.

Dolnick wrote: “Experts have little choice but to put enormous faith in their own opinions. Inevitably, that opens the way to error, sometimes to spectacular error.”

All of which leaves me with the problem that seemingly no ordinary financial reporters either, like those in FT, can really come to grips with believing, or even daring to believe, that experts could be such fools.

@PerKurowski

PS. My letter in 2019 to the Financial Stability Board 

Let us not allow group-thinking unaccountable technocrats operating in mutual admiration clubs decide for us voters

Sir, Tim Harford explains many reasons why a normal voter cannot be duly informed about all matters. Though that weakens democracy, it is a fact of life, and so he opines: “The workaround for voter ignorance is to delegate the details to expert technocrats.” “The man in Whitehall sometimes does know best” March 18.

I agree, except that I would have to add the caveat: As long as those technocrats operate transparently and can be openly questioned by any normal voter who happens to be interested in the subject.

And I say that out of experience. I consider the risk weighted capital requirements for banks that have come out of the Basel Committee to be about the most damaging and useless regulations ever; and I have a long list of questions that I have never been able to get a response to. Like for instance:

Why did the regulators not look at all empirical evidence that exists on what has caused all major bank crises? In that case they would not have assigned a risk weight of only 20% to what is so dangerous for the banking system as what is AAA rated, and one of 150% to the totally innocuous below BB- rated.

Why did the regulators not define the purpose of the banks before regulating these? In that case they would not have ignored the distortions in the allocation of bank credit this regulation causes?

Of course journalists, like those in the Financial Times, could play a vital role going between technocrats and voters… but what when they don’t want to do that for their own particular reasons?

PS. Harford writes “Better a flawed expert than a flawed amateur” Yes, but let us keep a watchful eye on the experts; let us never forget George Orwell’s comment, in “Notes on Nationalism”, “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool” or references to Patrick Moynihan opining “There are some mistakes it takes a Ph.D. to make”.

@PerKurowski

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

@PerKurowski

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

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

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

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

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

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

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

As an Executive Director in the World Bank I once stated: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind.” So, universities, please allow for imperfect and even inadequate minds, to also have a voice in your classrooms.

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

@PerKurowski ©

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

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

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

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

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

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

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

@PerKurowski

“No ordinary man could be such a fool”

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

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

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

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