We need capital requirements for banks based on saving our planet and creating jobs ratings

Sir, Jeffrey Sachs writes “the system of financial intermediation is broken” and therefore the financial needs for the many infrastructure investments required to face climate change challenges, cannot be satisfied. “We risk more Haiyans if we ignore climate change” November 17.

I agree. For more than a decade I have argued that capital requirements based on perceived risks, only distorts the allocation of bank credit in the real economy, favoring “The Infallible” and odiously discriminating against the risky. And to top it up, for no purpose, since never has a major bank crisis resulted from excessive exposures to what was perceived as “risky”, they have all originated in excessive exposures to what was perceived as absolutely safe.

And in this line I have proposed that if bank regulators must distort (to earn their keep or satisfy their egos) they should at least try to do so in favor of what society needs, like safeguarding our planet earth (and creating jobs).

And that the regulators could to that by allowing banks to have less capital when financing based on an assets project’s sustainability (or potential-of–job-creation) ratings.

Because that, would allow the banks to earn their highest-risk adjusted returns on equity, where they can be the most helpful to the society.

I have sent out my proposal to the UN’s Sustainable Development Solutions Network, and I hope it gets there… and is understood there

http://ourpiedaterre.blogspot.com/2013/10/if-regulators-absolutely-must-distort.html

The only acceptable antidote against tax-havens should be tax-heavens

Sir, Jeffrey Sachs’ unrestrained attack on tax-havens, shows there are many ways of exploiting tax havens. “Austerity exposes the global threat from tax havens” April 30.

As a citizen, I have for a long time held that the best enemy of tax havens is the existence of tax heavens, by which I mean countries in which a government respectfully earns its fiscal revenues by delivering good government. 

I come from a country, Venezuela, which in the 80s I saw rescued after its governments, after being excessively financed by foreign banks, had submerged into a total crisis, precisely because its citizens had saved abroad, and were able to return resources to their nation when they felt conditions so merited, instead of allowing these resources also to get wasted.

And I sure pray that for instance in Greece’s case, there is also a lot of Greek private capital in safe havens, ready to return to their country. And so, in this respect Sachs should start by making sure we have good and worthy politicians, before closing the escape doors on desperate citizens, which can otherwise most probably lead to having even worse politicians.

Also, over and over again in these debates about tax-havens we read about immense amounts tucked away, implying that if only governments could lay their hand on it, the world would be saved. In this case “Recent estimates by the Tax Justice Network suggest that deposits are in the range of $21tn.” Deposits… what deposits? All that money is placed somewhere and so if it was recovered by governments in its entirety it might very well just mean that $21tn was taken out of private management, like the stock markets, and handed over to perhaps inept and corrupt governments. Would that save the world? Forget it.

Finally, I would wish to remind Professor Sachs that public greed can easily be even much more destabilizing than private greed.

But neither would Lord Keynes have agreed with the bank regulators' super potent bubble blowing machine

Sir, Jeffrey Sachs writes “Hayek was prescient: a surge of excessive liquidity can misdirect investments that lead to boom followed by bust” “We must look beyond Keynes to fix our problems” December 18.

Absolutely, but add to that the fact that bank regulators, by means of capital requirements based on perceived risks, also decided to direct, through the banks, most of the excessive liquidity to “The Infallible”, like the AAA rated or prime sovereigns, and you will be able to better understand what an incredible bubble blowing machine has been created, because, of course, there is never a boom and a bust in what is perceived as “risky”, these always happen where it is perceived to be absolutely safe.

But neither should we imply that Lord Keynes would have agreed with what the regulators were up to, he was much too intelligent for that. Anyone who wrote “There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them”, cannot have approved of the crazy idea of bank regulators doling out risk-weights in order to determine different capital requirements for banks.

And Keynes, an aggressive speculator in the stock market, who for instance obtained what has been termed as impressive but volatile capital growth of King´s College Chest Fund, knew very well about the importance of risk-taking… definitely not like our bank regulators whose bedroom fantasies are about a world with no risks and absolutely no volatility.

Bank regulators, allow America to be the Home of the Brave

Sir, Jeffrey Sachs in “The US has already lost the battle over government” August 16, writes “ Mr. Ryan’s budget is nothing short of heartless in the face of the dire crisis facing America’s poor”. 

Hold it there Professor Sachs! I get too nervous about the poor, when someone recurs to arguing considerations based on the heart in order to service their needs. What was much worse for them than any heartlessness was the senselessness of bank regulators, that which caused the current crisis. 

By allowing banks to hold minimal capital when lending or investing in what was officially perceived as not-risky, regulators effectively discriminated against those perceived as “risky”, like small businesses and entrepreneurs, and doomed the banks to useless and obese exposures to what was or is still officially perceived as not risky. 

If there is anything that Republicans and Democrats should offer, as Americans, that is to wipe away the regulatory discrimination against what is perceived as risky and allow the US to fully be “the Home of the Brave” again… and that by the way would also do Europe a lot of good. 

And, if your bank regulator absolutely must mess around with market signals, so that they feel they have earned their salary, then why do you not ask them to base their capital requirements for banks on job creation and environmental sustainability ratings instead? That way they would at least serve a purpose.

The odious and arbitrary regulatory discrimination of risks must stop… now!

Sir Jeffrey Sachs in “It is time to plan for the post-Keynesian era” June 8, in his list of proposals, ignores the fundamental change that must occur in our financial regulations.

It just cannot be that our regulators allow banks to lend to fancy AAA rated sovereigns with zero capital requirements, or to sovereigns rated like Greece the last five years with only 1.6 percent of capital, while requiring the banks to hold 8 percent in capital when lending to the small businesses and entrepreneurs.

That odious and arbitrary regulatory discrimination must end now; the coward market discriminates more than enough when pricing for risks; and our financial regulators should immediately be removed as they seem absolutely incapable to understand that there are other risks in life than “the risk of default”.

Let all citizens of all countries in on the climate change human race challenge!

Sir Jeffrey Sachs “Hold the rich nations to their world” December 16 clearly views fighting against climate change as a government issue. But, if the threat of climate change is as serious as told and which from what I at least have been able to see with my own unscientific eyes I have few reasons to doubt, then clearly the only way to have a chance to succeed in that battle is by making it a citizens issue.

In this respect when Jeffrey Sachs now rightly complains in respect to climate change that “rich-country leaders want to sneak by on minimalist commitments… not consistent with global needs or international commitments” similar to what has happened to “rich-country pledges on development aid”, he would do well reflecting on whether the citizen of rich countries were sufficiently involved when making those commitments… or does the need of participation and ownership that is so much preached on by the development community only apply to poor countries.

Also these days we heard comments from the US with respect to the difficulty of monitoring Chinese commitments on containing carbon emissions, but if in this case we can’t understand that the only real effective climate change monitoring that can be done in China or in any country is that which is performed by their own citizens, then I believe we have already lost the battle.

Let’s hurry back to the drawing board and start talking with the people of the world and not the Jeffrey Sach’s or the governments of the world… pas la même chose.

Do the poor not have the human right to share the obligations of the human race?

Sir Jeffrey Sachs in his letter “Poor pay for the sins of the rich” December 8, writes about “Pushing the developing countries into a climate accord based on tiny sums today and vague financial promises for the future”. It makes one wonder about what is wrong with the developing countries doing what they feel they should and can do in fighting climate change without being paid anything. Do they not have the human right to help out when the human race and the world is faced with a challenge?

It is all part of the same preaching that has it that the poor should not have to pay for the water when having a water meter installed is perhaps the best chance the poor can start feeling that he is becoming a citizen.

Instead of offering the poorest of the poor in a developing country a payoff I rather see them shaming the rich and poor in developed countries into taking on their full share of responsibilities.

Also much more honest is to tell the poor in the developing countries that they are “on their own” instead of giving them some illusions about that some champions will convince the world to help them out. Or is Jeffrey Sachs willing to give the poor his word that he will be successful?

And frankly I cannot think about something less constructive to get us working together as the indigenous to the earth all we humans are, than phrasing the funding of the efforts needed to combat the climate change threat in terms of it being “a compensation for damages caused mainly by the rich world”.

Does this mean that I object to Mr Sachs motives and that I disagree with all he does? Of course not!

To get the real jobs you have to also be willing to take on the real risks on main-street.

Sir Jeffrey Sachs in “Obama has lost his ways on jobs” November 11, makes very clear and relevant observations, from a central-planners point of view. That said there are many other difficulties on main-street, and these should not be forgotten. Our real job creating machines, the small businesses and entrepreneurs, are being crowded out from access to bank credits, while the banks are rebuilding their capitals, and the financial regulators, even while they were so recently cheated, insist on their love affair with what they think are “low-risk clients”.

When banks lend to a triple AAA rated corporation they are required to hold 1.6 percent capital but, when they lend to a BB+ or lower rated risk or an unrated entrepreneur, the banks are required to hold 8 percent, in other words 400 percent more capital.

The difference of 6.4 percent in bank equity, if the cost of bank equity is 15 percent represents about a one percent regulatory tax on perceived risk, and which has to be added on to whatever interest rate spreads the market already charges for perceived risks. This, unlawful, discrimination against risk, is something that Jeffrey Sachs would do well to add on his list.

Money, money, and money.

Sir Jeffrey Sachs is absolutely right when in “The Tarp is a fiscal straitjacket”, January 28, he urges for a “sound medium-term fiscal framework”. Since the markets quite often even when such a framework is spelled out do not believe in it, they have their statistically valid reasons for that, can you imagine how spooked they could get when asked by the stimulators to join a spending crusade without even hearing a word on taxes?

Indeed, since taxes seem to have reached a real low point in terms of credibility, having lost so much of their real progressiveness over the years, the first thing to do is to make a careful inventory of the supplies and to figure out how to get them to the troops, in time. As Prince Montecuccoli taught “To wage war, you need first of all money; second, you need money, and third, you also need money.”

Mr. Sachs let us though avoid stabilizing underdevelopment.

Sir The introduction by the Basel Committee of the minimum capital requirements for banks and which is based on some vaguely defined risk of default only reflects, at its best, the perspectives of a developed country that has a natural desire to keep all that it has gained under the belt; and has nothing to do with the risk-taking a developing country needs in order to place at least something under its belt.

Add to the previous the empowerment of the credit rating agencies as the official guides in the world of risks, and which directed trillions of dollars in capital to the supposedly risk free land of subprime financing instead to some perhaps less risky opportunities in developing countries and we can only conclude that the title of Jeffrey D Sachs’ article, November 27, should have been “The financing of the aid to the developing countries”.

“A new system of development finance” needs to start instead with analyzing issues such as the role of risk taking in development, since risk is indeed the oxygen of development. In this respect we feel tempted to remind Mr Sachs and other that when helping, they please try to avoid stabilizing our underdevelopment and that they instead help to get rid of those Basel regulatory elements that make the living in high-risk-country even harder than it already is.

When in a panic, think, for a millisecond at least!

Jeffrey Sachs tells us: 1.- Extend swap lines to all main emerging markets. 2.- Have IMF extend low-conditionality loans to all countries that request it. 3.- Discourage big banks from withdrawing credit lines from overseas operations. 4.- China, Japan, and North Korea should undertake a coordinated macroeconomic expansion. 5.- Middle East needs to recycle all their cash. 6.- US and Europe should expand exports credits for low and middle income countries. 7.- US and Europe should follow an expansionary fiscal policy. According to Sachs "At the least it would put a floor on the global contraction that is rapidly gaining strenght. "The best recipe for avoiding a global recession", October 28.

Even if we would accept Sachs very optimistic view on the fiscal outlook as true, we should ask whether this is wasting aspirins or throwing real medicine at the problems? Compare Mr Sachs´ advice with what Michael Skapinker, on the same page tells us that Wal-Mart is doing to enforce ´sustainability, demanding "rigorous environmental and social standards", "An ethics lesson from an unlikely quarter".

The big question becomes then, should we now pull out all the stops in order to regain equilibrium on what might be a path to unsustainability or should we use this crucially decisive moment to provide the incentives to explore other perhaps more sustainable routes? In the panic it is still wise to take a brief time-out and think about what door to use. In fact our world at large is not only looking for an escape door for a financial crisis, it is looking for a door that can lead it to a better place. But, of course, neither do we have all the time to make up our mind… it is burning out there.

But foremost we need a new direction for our growth

Sir Martin Wolf writes that “Sustaining growth is the 21st century’s big challenge” June 11 but as the article is set in the perspective of the environmental and energy limitations that the world now faces and that Jeffrey Sachs has written a book on a better title would have been “Re-direction growth so as to make it sustainable is the 21st century’s big challenge”.

Now how do you do that? First of all by measuring growth in terms that makes more sense. That a dollar used to buy the family’s third car in a developed country should count as much as the dollar used to pay for the vaccine for a child in Africa does somehow not seem to give us the right compass bearing we need.

Send China’s surplus to Africa!

Sir, somehow I felt that a question mark was missing in the title of Martin Wolf’s “The Right way to respond to China’s exploding surpluses” May 30, since after reading it I must confess I did not feel much wiser. Yes, agreed, China is accumulating much capital now, but that perhaps this is only so because we are using very short yardsticks to measure, like years instead of decades or even centuries. Yes, it seems that China should be able to spend more on such praiseworthy items as health and education, but we also know that it is not possible to spend in a contained way without having it slip over into other demands, like for instance more cars for teachers and doctors which then will require more oil. The real answer to China’s surpluses must be helping them to come up with a long term investment plan that makes sense. For instance, in a world where the energy/carbon-emission factor is clearly going to impose constraints on growth, there might be many preparatory investments that China could do. But if we start looking at it from that angle let us not forget that the US could also be better of doing some of these investments instead of using Chinas savings in dollars for consumption, or for postponing fundamental health and education reforms.

In a global world there will come a moment when we need to start analyzing the global marginal return of projects (GMR), and, from this perspective, perhaps Glenn Denning and Jeffrey Sachs’ article “How the rich world can help Africa help itself” and that coincidentally appears next to Wolf’s might be faulty titled too and should read “How China should reallocate their savings and help Africa help itself.”