To manage risks our bankers are always better free, in God’s hands, than in hands of some hubristic sophisticated besserwissers

Sir, Martin Wolf writes: “Market liquidity is likely to disappear when one needs it most. Building our hopes on its durability is risky. That is correct, but when he argues: “the absence of regulation exacerbated the liquidity boom and subsequent bust”, his implicit message is… that regulators should do something about it. “Beware the liquidity delusion” October 7.

I on the other hand have always worried about that bank regulators, when they act on their own perceptions of credit and liquidity risk, in any sort of complex form, introduce distortions, systemic risks, which can make everything so much worse. 

What feeds our credulity to believe something is more safe just because we perceive that something to be more safe? Is it not so that the safer an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby make that asset really risky?

What feeds our credulity to believe something is more liquid just because we perceive that something to be more liquid? Is it not so that the more liquid an asset is perceived, the more we can run the risk of everyone demanding it excessively, and thereby at one point make that asset absolutely illiquid… at absolutely the worst moment?

Wolf suggests: “It would be better if investors appreciated the risks of a freeze in market liquidity in riskier financial assets”. Yes, but one must also argue the importance for regulators to appreciate the risks of a freeze in market liquidity for “safe” financial assets. A freeze of those assets would obviously hurt much more. (Like what happened with the AAA rated securities collateralized with mortgages to the subprime sector)

Wolf suggests: “markets characterized more by longer-term commitments, and less by hopes of finding ‘greater fools’ willing to buy at all times, might be better for most of us. This will not be true for all assets — notably government bonds. But it will be true for many private instruments”. Indeed, more long-term commitments could be good, but why does Martin Wolf believe that government bonds could never become a dangerously overpopulated safe haven in which we all got stuck gasping for oxygen? Is it ideology?

Of course dangers surround us, our financial markets and our banks, all the times; many more than credit and lack of liquidity risks. To manage those risks I am convinced we are better of being free, in God’s hands, than in the hands of some sophisticated besserwissers suffering immense hubris. But that’s just me.

Does this mean I don’t want any regulations? Of course not! But keeping those simple, and essentially considering the unexpected instead of the expected, would go a long way. The expected always finds a way to take care of itself… though I must admit that sometimes that takes strangers going strange ways and using strange tools.

@PerKurowski ©  J

America, though undeserving, should remain a triple-A

Sir, Roger Altman in “Why America deserves to stay a triple A” August 4, argues as if a triple-A rating has something to do with a pure absolute and objective risk-free reality. Of course it hasn´t, and it can never thought have been meant so... except perhaps by some truly in the “In God we trust” minds. 

The reason why America, though quite undeserving, should remain a triple A is that if America is downgraded, all other countries would then also have to be downgraded, and the credit rating agencies would have to start adding letters to classify the bottom. 

Is John Auther a closet-paper-money-bug?

Why would John Authers categorize the buying of gold as an “irrationality”, an act of faith, and thereby imply it is entirely rational to trust a piece of paper issued by politicians and marketed with what seems more of a slogan to them namely the “In God we trust”, Remember 1980: all that glisters is not gold” October 23. Could it be that John Auther is a closet-paper-money-bug?

Gold is not a substitute for stocks and properties… but it sure can come in as a handy complement in times when most countries seem to want to win the devaluation race?

The safe-haven is always in the eyes of the beholder

Sir you conclude “Dollar worries” May 23 with “currency traders are pricing in the tail risk that the US will be forced to resort to the printing press”. Sir whether forced or not the fact is that with the Fed’s quantitative easing they are already using the printing press, a lot.

Do you have any idea where the rates would be if it had not been for the quantitative easing? It sure puts a big question mark when it needs to recur to quantitative easing in order to sell itself as a safe-haven. The greatest mistake made by the US government and Congress in their current handling of the crisis is that they might have taken the world’s wish for a temporary safe-haven as a wish for a permanent home.

Behind our backs bank regulators in Basel decided that lending to a triple-A rated government required zero bank equity while lending to an ordinary non-rated private company required 8 percent... and the governments loved it... wouldn’t they? The markets though requires x percent return for lending 100 to triple-A rated governments and y percent return for lending exactly the same 100 to a non-rated private company all without any reference to capital requirements.

Therefore though you can subsidize governments and temporarily confuse the market by means of arbitrary regulations in the long term you cannot simply instruct markets to behave as if a dollar lent to the government is any different than a dollar lent to a private company. Having then to reduce the current implicit subsidy to the governments contained in the minimum requirements for banks will also put further pressure to increase the interest rates on public debt... just when the world seems least to afford it.

The gorilla is there in the room roaring and pounding his chest... let’s pray we’ll never have to pay him off, informally, over the counter, with some gold coins.

China would collapse too if it loses faith in the dollar.

Sir Andy Xie is of course right saying that “If China loses faith the dollar will collapse” May 5 but he should also remember that because of the Ying-Yang relation between China and the US, if so happens, China would also collapse. We are all riding on an illusion where we need to feel sorry for him who gets off to early and sorry for him who gets off to late…never before with respect to currencies have the “In God we trust” seemed so appropriate.

The safe-haven must recycle its waters.

Sir you write of the need to “Reopen the taps of global finance” May 1, but that must surely be the responsibility of the current borrower of last resort, the USA.

Ricardo Hausmann, during the spring meetings of the World Bank, at a conference titled “Latin America and the Global Crisis: Towards a Rapid Regional Recovery” argued that the US should take on debt and relend to the world. Hausmann, coming from an oil rich country must have remembered that this was exactly what the oil countries did during the 1974-79 oil bonanza when foreign bankers virtually forced credits on them… and the oil exporting countries recycled and imported and recycled and imported... until.

But is this politically viable? Perhaps not, but even so there are major troubles brewing down the line.

First the US, as the safe-haven par excellence, cannot expect to crowd out the rest of the world from the financial markets, for a lengthier period, without its own waters becoming stale or even having the rest of the world starting to think in terms of sabotaging that safe-haven.

Second if the US, in order to reflate its own economy and which might also help to stop the world from deflating too much, for a while, does so by investing only in its own back-yard, then the returns from those overcrowded back-yards will not be sufficient to repay what will be owed, and so the US taxpayer will start to seriously object having to become the taxpayer of last resort…and with that, again, waive bye, bye to the sweet dollar safe-haven.

Let us not forget that in truth the dollar bill should have imprinted on it “In the American Tax Payer We Trust” but that the US Mint, more pragmatic, more marketing minded and much wiser preferred the much more fundamental “In God We Trust”.

The dollar is the whole world’s s.o.b.

The last of my 15 letters that the Financial Times published before I was silenced was the following dated October 4, 2006 and which said the following.

“Sir, Martin Wolf’s “America could slow us down” (September 27) somehow ignores the possibility that just as the Americans did when they accepted the “In God we trust” printed on their bills as an act of faith when the dollar abandoned its convertibility into gold, the world is now willing to live with an “In America we trust”, at least while there is such a world shortage of better alternatives. If this is so, one could argue that we have still far to travel on the roads of the American current account deficit currently used by the world to dollarize since the fact is that, if you want to lay your hand on a dollar, you have to sell or give something for it. Frightening? Yes, but is not the world itself a frightening place that needs many acts of faith in order to make life bearable?”

Today, after all what we now know, and seeing the world still placing so much trust in the dollar I would probably want to rephrase it by paraphrasing Roosevelt saying “The whole world knows the dollar is an s.o.b but (at least for the time being) the dollar is the whole world’s s.o.b.”

You need to stress-test the American taxpayer first

Sir in “America’s fate is not in its hands” April 16, you mention the stress tests of the financial sector. Much more important than that would be to stress-test the American taxpayer.

What the US dollar bill really should state is “In the American Taxpayer We Trust” and so the more pragmatic Americans have printed the “In God We Trust” on it.

There is no way that the current American generation, having been brought up as the consumers of last resort in the world, would now turn around and accept to be the world’s taxpayers of last resort… at least not with the current taxes and any stress-test of them would show you that.

The US government should be much more conscious of this before launching itself on a fiscal spending stimulus binge which, if allowed by the markets, will build up its public debt to a totally unsustainable level.

That said I believe the market is going to say NO much earlier than that, since one thing is to be searching for a safe temporary haven and another quite different to be trapped in a permanent home.

And that is why, before the US Dollar loses its AAA rating, that the US, and the world, should work hard in developing a totally new generation of taxes that can be perceived as legitimate, that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy.

Will the world trust the American taxpayer?

Sir Mohamed El-Erian in respect to the Federal Reserve being “prepared” to buy Treasury bonds asks “Will the world be comfortable with two US public agencies offsetting operations that ultimately must be supported by someone else?”, “Era of policy activism opens door to global co-ordination” February 17.

That is either a slightly coward or a too kind way to phrase the issue since that “someone else”, when push comes to shove, is no one else but the American taxpayer.

The US dollar instead of “In God we Trust” should state “In the American taxpayer we trust and thereafter in God’s will”. What will the markets do when they realize the real picking order?

Can we trust the taxpayer?

Sir, Martin Wolf in “Governments have at last thrown the world a lifeline”, October 15, though duly acknowledging all the many risks still has the rose-tinted glasses on, especially when comparing the size of the estimates of how much the financial systems needs to be helped with that of the overall size of the economies. Nothing wrong with that, in fact, a good citizen-journalist has a responsibility to keep on smiling even when it is with a stiff upper lip.

But thinking about the growth of other fiscal demands; the decrease in fiscal offerings that the current crisis will create; and being less optimistic than Martin Wolf about the government’s capacity to claw back the fiscal assistance they now provide, without the help of “creative” fiscal accounting, it is also time to responsibly talk about the lifeline to governments, namely the taxes.
The dollar bills, for which value the US is responsible, have printed on them the brief prayer of “In God We Trust”. A more substantial version would be “In God We Trust to see that the politicians and the bureaucrats do not print and circulate more dollars that what the economy could back or, otherwise, that the American taxpayer finds it in him the capacity and the willingness to pay taxes so as to make up any shortfalls.”

Can we trust the taxpayer? I am not at all sure of that. I have the impression that the various “bubbles” have also helped to disguise that our tax systems have lost much of their credibility, and the world seem to be screaming for more progressiveness of taxes, at least so as to take care of the fat-cats.

In this respect we need to find new equitable taxes that are aligned with the new global realities, and that interfere as little as possible with the functioning of a competitive economy. Thought there has been some loose talk of flat-tax, carbon-taxes and financial transaction taxes we have not really seen much of tax-development for many decades now.

A subprime dollar? Not the end of the world; but a change of collateral may be asked for

Sir Martin Feldstein’s “The dollar may be falling at just the right time” March 28, is a timely reminder that it is not necessarily that bad for the dollar doing upon other currencies what other currencies have done to the dollar; and that there is no need to look at it all as the end of the world… even though it might be the end of that money that was backed only by the trust in the government and that has had a run for almost 40 years now, some say amazingly.

"In the US we trust" becomes global term of economic faith

Sir, Martin Wolf’s “America could slow us down” (September 27) somehow ignores the possibility that just as the Americans did when they accepted the “In God we trust” printed on their bills as an act of faith when the dollar abandoned its convertibility into gold, the world is now willing to live with an “In America we trust”, at least while there is such a world shortage of better alternatives. 

If this is so, one could argue that we have still far to travel on the roads of the American current account deficit currently used by the world to dollarize since the fact is that, if you want to lay your hand on a dollar, you have to sell or give something for it.

Frightening? Yes, but is not the world itself a frightening place that needs many acts of faith in order to make life bearable?

Published in FT, October 4 2006 (Censored?)

PS. That is of course as long as USA does not lose its military supremacy