Why does the “Without Fear and Without Favour” FT, not ask bank regulators questions I have suggested for a decade?

Sir, Gillian Tett writes: “The financial world faces at least three key issues, with echoes of the past: cheap money has fuelled a rise in leverage; low rates have also fostered financial engineering; and regulators are finding it hard to keep track of the risks, partly because they are so fragmented. “The corporate debt problem refuses to recede” January 9

Sorry, it is much worse than “regulators finding it hard to keep track of the risks”. It is that regulators have no understanding of how they, with their risk weighted capital requirements for banks, have in so many ways distorted the reactions to risks.

And much more than cheap money fueling a rise in leverage, it is the bank regulators who, like with Basel II in 2004, allowed banks to leverage a mind-blowing 62.5 times with assets only because they possessed an AAA to AA rating, started it all. . 

And when it comes to financial engineering, it is the regulators who caused banks to send into early retirement many savvy loan officers, in order to replace these with skilled equity minimizer modelers, who allowed for the highest expected risk adjusted returns on equity (and the biggest bonuses). 

The regulators, by favoring what is “safe” on top of what is perceived as “safe” is usually favored, only guarantee that safe-havens will become dangerously overpopulated, against especially little capital. Great job chaps!

Why has Ms. Tett, or many other in FT, not asked regulators, for instance what I believe I the quite interesting question of: Why do you want banks to hold more capital against what, by being perceived as risky, has been made innocous to the bank system, than against what, precisely because it is perceived as safe, is so much more dangerous?

One explanation that comes to my mind is John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”, “Money: Whence it came, where it went” (1975)

Sir, the Basel Committees’ “With the risk-weighted capital requirements we will make banks safer”… is cheap and dangerous populism hidden away in technocratic sophistications. Sadly it would seem the Financial Times has fallen for it, lock, stock and barrel.

Oops! I guess I will never be invited to a "Lunch With FT" 

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

In order to revive the pioneering spirit of America, start by kicking out dangerous risk adverse bank regulators

Sir, Gillian Tett writes: “The US used to be renowned for having a more flexible and mobile workforce than Europe; in previous centuries millions of people travelled in search of land, riches and jobs. But mobility has declined… [and] if mobility keeps falling, the sense of political polarisation and rage in [some] places will rise”, “The pioneering spirit America would do well to revive” October 21.

Ms Tett argues that this is all a bit counterintuitive since “the internet is supposed to have created a hyperconnected world that makes it easier to connect workers with far-flung jobs”.

Not necessarily, for instance we do not know how many can thanks to Internet be working somewhere else, without having to move. Also, much the same way internet can inform about existing job opportunities, it can make it much harder to sell those illusions of other green valleys that stimulated much mobility in the past.

As a possible countermeasure Tett advances that “The next president may also need a 21st-century version of the 1862 Homestead Act — which offered land to settlers who went west — and find new ways to encourage workers to relocate.”

Ms Tett should not forget that “land” to settlers is just a resource, just like bank credit is; and that we live in a world where mindless risk adverse regulators, with their risk weighted capital requirements, have de facto hindered credit mobility; telling the banks to stay where it seems safe, and not to go where it could be risky.

For the umpteenth time I quote from John Kenneth Galbraith’s “Money: whence it came, where it went”,1975:

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.”

Clearly, the Basel Committee and the Financial Stability Board represent Galbraith’s “men of economic wisdom… [who serve] the needs of the respectfully affluent”.

So, if Ms Tett really wants the pioneering spirit of America to revive, then she should start by wanting to also allow credit to move freely; condemning the dangerous mumbo-jumbo preaches of the Basel Committee and the Financial Stability Board. That would in essence mean using one single percentage capital requirement for all assets, no matter in which risk-land these assets reside.

Unfortunately Ms Tett (and you too Sir) has been steadfastly mum on the issue of the regulatory distortion of bank credit, no doubt defending (“without favor”) her choice of “wise men” with their affluent and mostly Davos settled constituency.

“Wise men”? To know that unrated SMEs are risky to banks, is of knowledgeable men; but to understand that AAA rated assets are dangerous to bank systems, is of wise men.

@PerKurowski ©