Are our brains wired so as to make us confuse ex-post real risks with ex-ante perception of risk?

Sir, James Macintosh writes: “When investors come to believe that the inherent uncertainty of markets or economies has gone away, it is usually a sign of trouble ahead, as it encourages excessive risk-taking.” Short view, June 19. And of course its opposite is the more uncertain economies seem to be, the less risk-taking will be done.

So I need to ask, once intellectually Mr Macintosh accepts that proposition, why is it so hard for him, and for others to take the leap and dare understand how utterly wrong current bank regulation is, with its more-risk-more-capital and less-risk-less-capital?

Is it something in our brains that confuses ex-post real risk with ex-ante perception of risk? Or is it something else. Like that it would require us believing experts could be 180 degrees wrong… and that is something too uncomfortable to accept?

Mr Macintosh, welcome to the real world where a Mario Draghi and many others, are just like any Chauncey Gardiner figure extracted from Jerzy Kosinski’s “Being There”. 

@PerKurowski

Europe, Western world, there’s no future in having banks investing in what widows and orphans should invest.

Sir, James Macintosh, in Short View of February 5, writes of Eurozone bonds the following: “Buy with a negative yield and sell to the ECB at an even more negative yield when quantitative easing starts next month… The result is likely to be lower yields everywhere, and the mispricing of risk.”

Mispricing of risk? Of course, but what about that monstrous mispricing of risk provoked by bank regulators with their senseless and purposeless portfolio invariant credit risk weighted equity requirements for banks, presented to the general public as the risk-weighted capital requirements?

The mispricing that resulted from allowing banks to earn higher risk adjusted returns on equity on “safe” than on “risky” assets not caused the crisis but also blocks the road for getting out of it.

A dangerous extreme risk aversion has now banks investing in what should be the investments of widows and orphans. Sir, as you should be able to understand, unless you are likewise risk-adverse, that is no way to build future.

Europe, are you sure Mario Draghi has a clear idea of what he is doing? Scary question eh?

Sir I refer to the latest ECB/Draghi measures “to save the eurozone from economic stagnation, as reported and commented on in several ways in FT on September 5.

In the Short View James MacKintosh writes “they should… perhaps encourage mortgage and business lending”. Mortgage lending, yes, business lending, NO! Because business lending requires banks to hold much more of that extremely scarce bank capital than what mortgage lending does.

In fact anyone that in Europe, with added liquidity and lower interests tries to help medium and small business, entrepreneurs and startups, to gain some access to bank credit, without considering eliminating completely the considerable differences in capital requirement for banks when lending to these “The Risky” than when lending to “The Infallible”, has no idea of what he is doing. Scary eh?

But perhaps Draghi knows. When Claire Jones and Christopher Thompson, in “Draghi pins hopes on ‘orphan child’ plan” write about asset backed securities and capital charges and that “Mr Draghi said that decision was in the hand of independent regulators and beyond central bank’s control”, it sure sounds like the former chairman of the Financial Stability Board is trying to wash his hands.

And you argue “Purchases of asset-backed securities will only make a difference… if loans are genuinely taken off strained bank balance sheets, freeing space for new lending”. I ask, what kind of new lending are you referring to? I guess all the bank lending we would see would be that which requires them to hold little capital.

In fact, I suspect that most of what that part of the ECB exercise would achieve, is to dress up the banks before the oncoming asset quality review and stress tests… Might ECB be getting nervous about what it might find? Indeed, ignorance is often bliss!

Dumb bank regulatory nannies… talk about a real hazard!

Sir, James Mackintosh in “ECB bazooka faces peripheral tests” writes about ECB’s recent “grand plan to save the euro” and of the moral hazard “that Spain or another beneficiary fritters away the savings from cheaper financing in order to please voters”. 

The hazard of that moral hazard is relatively small when compared to the hazard of having banks regulated by nannies who do not understand what they are doing. 

When a regulator allows a bank to have less capital, only because a borrower is perceived as “not-risky”, he is effectively, de facto, discriminating against those perceived as “risky”, like the small business and entrepreneurs. And, discriminating against the access to bank credit of these so needed “risky” risk-takers is, more or less, a death sentence to our economies.

To escape the no-growth trap, regulators must allow the “risky” to compete freely for access to bank credit

Sir, James Mackintosh, in “The world is halfway through a lost decade” August 11, writes: “The pressure is on for western governments to ease austerity plans, while the entire world seems ready for more aggressive monetary intervention. It is hard to see how this could lead to more than tepid growth, and there is an ever-present risk of a Spanish-style bond crisis.” 

I agree, the only way to escape the low-or no-growth trap is by eliminating the regulatory preferences for lending to the “not-risky” and thereby allow the “risky”, the small businesses and entrepreneurs, to compete freely for access to bank credit

Let the willing consumer in on the carbon trading principle!

Sir, James Macintosh in “The car industry needs carbon trading”, July 3, puts the full responsibility for carbon-trading on the car manufacturers and also mentions the problem that “automotive carbon trading might not provide politicians with the image boos they get from driving a hybrid car or filling up a car with ethanol from Iowa’s cornfields”. Well, he misses the most important part of the story. As the environmental conscientious consumers are the ones actually purchasing the hybrids and the ethanol, the most important thing to be done is to make them aware that there are more efficient ways for them to help out. Let them get their real image boost by placing a sticker on their window shield stating that though they drive normal cars, with normal fuel, they are contributing all of their cash savings from not using hybrids or ethanol, to smart and cost-efficient environmental projects, like for instance a reforestation of a couple of acres in Tanzania, and that they could perhaps even watch growing on the web.