I trust banks and markets much more when regulators keep their hands off.

Sir, I refer to John Authers’ “In nothing we trust” Spectrum, October 6.

Let me give you brief one page version of my story:

1998, in an Op-Ed (in Venezuela I wrote) “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared…History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

1999 in another Op-Ed “What scares me the most, is what could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

January 2003, in a letter published by FT I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

April 2003, as an Executive Director of the World Bank, in a formal statement, I repeated that warning: "Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market"

June 2004, the Basel Committee on Banking Supervision issued Basel II. By means of their standardized risk weights, they allowed banks to leverage a mind-blowing 62.5 times their capital if only an asset carried an AAA to AA rating issued by a human fallible credit rating agencies.

October 2004, in one of my last formal written statements as an ED at the Board of the World Bank I held: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

After reading an incomprehensible explanation provided in June 2005 by the Basel Committee I have, in hundreds of conferences tried to get the regulators to answer the very straightforward question of: “Why do you want banks to hold much more capital against what, by being perceived as risky, becomes less risky to our bank systems, than against what perceived as safe poses so many more dangers?” I have yet to receive answer.

So we have regulators who still, after a crisis caused exclusively by assets perceived as safe and that therefore banks could be held against less capital, allow especially large bank exposures, to what’s perceived as especially safe, against especially little capital. 

Sir, that dooms our bank system to especially severe crises. Why on earth should I or you trust them?

Sir, in hundreds, if not thousands of letters to you over the last decade, I have also tried to enlist FT in helping me ask that question (one that seemingly shall not be made) and to insist on receiving a comprehensible answer. I’ve had no luck with that either, so, respectfully, why should I trust your motto “Without fear and without favour”?

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for banks.

PS. And this letter does not refer to the horrendous introduction of full fledged statism that happened when with Basel I in 1988 the regulators assigned a risk weight of 0% to the sovereign and one of 100% to the unrated citizen.

@PerKurowski

The pulmonary capacity of banks went from unlimited, through 62.5, 35.7 to 12.5 times of allowed leverage. Where do you think bubbles were blown?

Sir, I refer to John Authers review of “Ray Dalio’s” “A Template for Understanding Big Debt Crises” September 22, 2018.

I have not read the book, and something in it could apply to other bubbles but, if Dalio left out mentioning the distortions produced by the risk weighted capital requirements for banks, those that caused the 2008 crises, he would surely have failed any class of mine on the subject.

Sir, let me be as clear as I can be. 100%, not 99%, 100% of the bank assets that caused the 2008 crisis were assets that, because they were perceived as especially safe, dumb regulators therefore allowed banks to hold these against especially little capital. 

The allowed leverages, after Basel II, that applied to European banks and American investment banks like Lehman Brothers were:

AAA rated sovereigns, including those the EU authorities authorized, like Greece, had a 0% risk weight, which translated into unlimited leverage.

AAA rated corporate assets, were assigned a risk weight of 20%, signifying a permissible 62.5 times leverage.

Residential mortgages were assigned a risk weight of 35%, translating into a 35.7 allowed leverage.

Of course, after the crisis broke out, any few “risky” assets banks held, like loans to entrepreneurs, those that banks could only leverage 12.5 times with went through, (and still do), a serious crisis of their own, when banks began to dump anything that could help them improve that absolutely meaningless Tier 1 capital ratio.

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

Are our productivity, real salary, unemployment, and GDP figures up to date?

John Authers writes, “If ever there was a good place to take a deep breath and gain context on our unnecessarily complex world, it would be Jackson Hole, Wyoming” “Powell avoids foreign complications in the winds of Wyoming” August 25.

In a recent post in Bank of England’s blog “bankunderground” I read: “With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded... we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time.”

So, one interesting way for central bankers to get an understanding of our ever more complex world would be to ask them: If you deliver the same at work as a decade ago, but now you spend 50% of your working hours consuming distractions, on your cell or similar, how much has your productivity, your real salary, your voluntary unemployment increased? And what about GDP?

PS. Sir, as you well know, before initiating the Jackson Hole proceedings, I would love for all central bankers there to assist a seminar on the meaning “conditional probabilities.” Had they known about it before imposing their risk weighted capital requirements for banks it would have saved the world from a lot of problems.

@PerKurowski

Trade tariffs revenues should at least try to compensate those hurt the most.

Sir, John Authers writes of the facts of life that give “Free trade the strange ability to convince everyone, rich or poor, that they have lost by it”, “Nafta’s losers always drown out its winners” August 10.

Tariffs are used to supplant market decisions. Sometimes it could be good, like for instance when making sure your “Arsenal Of Democracy” is fabricated on homeland, but most often it is bad, only helping to enrich those capitalizing on crony statism.

Whatever, in any case there should be much more transparency on who are then going to decide, instead of the market, on the use of all revenues provided by the tariffs.

I argue this because, if for instance 100% of those tariff revenues went to finance a Universal Basic Income, then at least those most hurt would be partially compensated… and the redistribution profiteers would think less favorably of these tariffs.

@PerKurowski

When huge mistakes that hurt all of us are made, but no one is even publicly ashamed for these, what does that hold for our future?

Sir, John Authers writes about “The power unwittingly vested in ratings agencies. Regulations steered fund managers into credits with a certain minimum quality. Banks knew the capital they had to hold as a buffer depended on the rating the agency gave credits they held. The result was fund managers left judgment on credit quality to the agencies, while trying to bamboozle agencies into granting higher ratings than many securities deserved.” “Consultants’ claims and the evasion of responsibility” July 20.

“Unwittingly”? Meaning …without being aware; unintentionally? 

No! John Authers should allow the regulators to get away with that!

One needed not to be an expert on bank regulations to know that assigning so much power into the credit rating agencies was (is) simply wrong.

A letter I wrote to the Financial Times that was published in January 2003, stated: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough as it is.”

And as an Executive Director of the World Bank, in a workshop for regulators who in May 2003 were discussing Basel II, I opined: “I simply cannot understand how a world that preaches the value of the invisible hand of millions of market agents can then go out and delegate so much regulatory power to a limited number of human and very fallible credit-rating agencies. This sure must be setting us up for the mother of all systemic errors.”

And in a formal statement at the Executive Board of the World Bank in March 2003 I prayed: “The sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them”.

So unwittingly it was not! And, really, if it was, then the more reasons to get rid of all those regulators fast.

Authers writes: “The problem is that when nobody takes responsibility, bad decisions can flourish”. Indeed, it is seriously critical for all of us that those who make serious mistakes are held accountable for it. 

So let me ask Sir: How many regulators have been fired or at least been publicly ashamed for this issue of the excessive importance to credit ratings, or for that matter for the much larger and serious issue of the utterly faulty risk weighted capital requirements for banks? Not a single one?

Could that partly be because you Sir, and too many of your colleagues, for whatever reasons of your own, have treated these regulators with the softest of the soft kid gloves?

Sir, as far as I know, you have not even been able to ask the regulators why they think that what is perceived as risky is more dangerous to our bank system than what is perceived safe.

Could it be because “Without fear and without favors” does not want or dare to hear the answer, or ask friends that question?

@PerKurowski

Let’s make sure that environmental, social and governance investing does not just signify ESG profiteering, or access to indulgences for paying worse sins.

Sir, John Authers writes: “On the side of the devil, ESG offers a rebranding for an unpopular industry, an excuse for data providers to crunch a lot of data and then charge for it” “Pressure for ESG presents fund management chiefs with a moral dilemma” May 31.

That is right on the dot. In all these political correct issues, what is by far the most present is the profit motive for those preaching it... morality is much absent

In terms of defending the environment, I would much rather prefer a huge revenue neutral carbon tax, meaning all its revenues paid out in equal shares to all its citizens, than having the climate change fight profiteers gaming the fight and taking their cut. It is sufficiently difficult and expensive as is.

And in terms of “social” it is much better to use all potential profits to help fund a Universal Basic Income than to help fund the social fighters.

But what really upsets me is that good governance is on the list of good socially conscious investments. Much better, much clearer, would be to make sure bad governance is never ever financed.

Let me be absolutely clear. I would much rather prefer a Goldman Sachs’ Lloyd Blankfein being socially sanctioned, never ever more invited to a party in New York, for helping to finance a human rights violating regime like Venezuela’s Maduro’s, than allowing him to be able to purchase indulgencies to pay for his sins, by (profitably) financing some other “good” guys.

http://ourpiedaterre.blogspot.com/2017/04/solutions-that-share-out-all-benefits.html

http://myubi.blogspot.com/2017/01/my-universal-basic-income.html

https://unsustainabledebtsustainability.blogspot.com/2017/06/goldman-sachs-financing-of-venezuelas.html

@PerKurowski

Even perfectly perceived risks, if excessively considered, cause wrong reactions

Sir, John Authers writes that John Locke…when asked if we have an idea of the substance behind our perceptions, answered that we have “no such clear idea at all, and therefore signify nothing by the word substance, but only an uncertain supposition of we know not what”. “Economic reality is hard to fathom after years of distortion” April 28.

And then Authers argues: “Uncertainty is nothing new, particularly about the future. But it is rare for the present to be so hard to perceive as it is now. After a decade of desperate monetary measures to stave off the Great Recession, there is also a reluctance to believe what the markets are telling us, as their signals are distorted.”

At least when it comes to banks and their allocation of credit to the real economy, the signals are indeed extremely distorted, all as a result of the risk weighted capital requirements.

Bankers perceived credit risks and cleared for these by means of the size of the exposure they accepted and the risk premiums they demanded. But then came regulators and ordered that precisely those same perceived risks, should also be cleared for with the capital requirements.

With that they just ignoredthat any risk, even if perfectly perceived, leads to the wrong actions, if excessively considered.

As a result there are now way too high exposures, at too low risk premiums, to what is perceived as safe (and which therefore contains the fattest dangerous tail risks) and too little exposures, at too high risk premiums, to what is perceived as risky, like entrepreneurs.

@PerKurowski

Perceptions change realities. In banking, what’s perceived risky is safe and what’s perceived safe is dangerous

Sir, John Authers writes: “It is not the risks we worry about that harm us. It is what Donald Rumsfeld once called the “unknown unknowns” that we were not thinking about and did not even know about. In markets, assets deemed high risk tend to be priced so that they do little harm when things go wrong”, “Crises happen when what is thought to be safe surprises us”, November 11.

Precisely. So how would now Authers explain the logic behind the risk weighted capital requirements for banks, the pillar of current bank regulations? That which in Basel II risk weighted what is AAA rated with 20% and the below BB- with 150%. That which by allowing banks different leverages for different assets senselessly distorts the allocation of bank credit. That and about which I have written more than 2.600 letters to FT and that it has decided to ignore.

Sir, when will you dare to wake up to that harrowing fact that our banks are in the hands of regulators that have no idea of what they are up to? Or do you really think that all this is a minor problem?

@PerKurowski

Is banking regulation unfinished business? You bet, risk weighted capital requirements are still used

Sir, I have not read Tamim Bayoumi’s “Unfinished Business” yet, so for the time being I have to go on what John Authers writes in “A fresh way to learn from the financial crash” October 2.

From what I see the book seems in much like another example of Monday morning quarterbacking. For instance when it states “In early 2007 anyone in Wall Street would have said that naive European banks were the most enthusiastic buyers for dubious debt securities” we must really ask what is meant by qualifying European banks as naïve? These were AAA rated securities, these were the type of securities that their own regulators had just in 2004 with Basel II authorized the to leverage 62.5 times to 1 their capital with.

What we had (and still have) is amazingly naïve bank regulators… who for instance still allow banks to use their own models, as if banks were not interested in generating the largest risk adjusted returns on equity, something that, because of regulators, is nowadays foremost done by minimizing capital requirements.

It also says: “the US widened the collateral that banks could use in repo transactions [this] rule encouraged them to create mortgage-based securities, and “game” rating agencies into giving them undeserved strong ratings”. But that is wrong, or at the most, just a minor cause of the disaster.

Anyone who has taken time as I did to understand what had happened (I passed exams for real estate and mortgage intermediation licenses in the US for that purpose) would be clear on the following. The profit potential in securitization is a direct function of the quality difference between what is put into the securities, and what comes out. To be able to feed the sausage with subprime mortgages yielding 11 percent, and then because of AAA ratings be able to resell these (to Europe) at 6%, was a profit opportunity to big and juicy to miss.

Finally Authers comments: “Meanwhile, models resting on assumptions disproved during the crisis are still in use. There is indeed unfinished business.” Indeed, the risk weighted capital requirements are still used.

Sir, the first of about 50 letters I have written to John Authers since July 2007, more than a decade ago, ended with: “This all is lunacy and we are being set up for even bigger disasters and it must end, before it ends us. We need urgently to punish the regulators, at least on the count of being very naive.”

But clearly someone in FT did not want to hear my arguments, or at least not these coming from me.

@Per Kurowski

Should not regulators know that what is perceived safe has the largest potential of being what’s dangerous for banks?

Sir, John Authers writes: “In January 2007, credit was priced on the assumption that virtually all US sub-prime mortgages (to people with poor credit histories), would be repaid in full. House prices were already falling. Several subprime lenders went bankrupt in early 2007, with no great effect on credit prices. Banks felt obliged to stay in the market”, “Warning signs existed during decade before credit crunch” July 7.

Of course signs of distress in the housing markets were already seen. In August 2006 you published a letter I wrote to you in response to an editorial titled “Hard edge of a soft landing for houses”.

But to say that these credits were based on some direct assumptions or knowledge about subprime mortgages is blatantly wrong. It was strictly based on the AAA ratings that credit rating agencies issued to many of the securities backed with mortgages to the subprime sector.

And Sir, when with Basel II of 2004 regulators had authorized banks to leverage their capital 62.5 times when investing in what carried an AAA rating, but only 12.5 times when lending to for instance SMEs, there were absolutely no incentives to question such ratings. Banks did not feel obliged to stay in the market they loved it.

It all comes back to one of the fundamental mistakes made by current regulators, namely that of believing what is perceived as risky to be more dangerous to the banking system than was is perceived safe.

@PerKurowski

A regulator’s rational risk aversion when mounted on top of that of the bankers, produces an irrational risk aversion

Sir, John Authers when commenting on Andrew Lo’s “Adaptive Markets” writes: “our susceptibility to judge risks incorrectly is rooted in the necessities of survival. Fear, our early warning system, makes us irrationally averse to loss. We run greater risks to avoid a loss than to make a profit. “An emotional way to look at market theory”

Indeed, just look at bank regulators.

Even though bankers, because of their rational loss aversion, never create excessive and dangerous exposures to something ex ante perceived as risky, the regulators, with their risk weighted capital requirements for banks, mounted their rational aversion to loss, on top of that of the bankers’, and so it all became an irrational aversion to loss.

If the father’s and the mother’s average risk aversion is used educating their children, these will turn out well. But, if it is the sum of the father’s and the mother’s risk aversion that becomes applied, then their kids are lost... they will dangerously go too much for what is safe, and dangerously too little for what is risky.

In other words, the efficient markets hypothesis, the rational utility-optimising “homo economicus”, has no chance of working efficiently when interfered by regulations produced by some hubris inflated homo distorters.

@PerKurowski

The Basel Committee’s risk weighted capital requirements for banks, put the 2007/2008 “Minsky Moment” on steroids.

Sir, John Authers writes: “The greatest dangers to us are not from things we perceive to be high-risk, because we generally treat them carefully. Trouble arises from that which we perceive to be low-risk.”, “Unnatural calm sparks visions of a ‘Minsky Moment’” December 31.

Sir, you know I have written more than a thousand letters to FT over the last decade pointing out exactly that. For instance in July 2012 Martin Wolf wrote: “Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

Unfortunately FT has refused to accept the complete implications of this truth.

Authers, as if it suffices as an explanation now writes: “The crisis that came to a head in 2008 revolved around securities that the rating agencies had given the maximum rating of triple A — it would not have happened if they had been considered speculative”.

No! The full truth is that not only did markets and bankers consider and acted as if those AAA rated securities were safe. Regulators did too. With Basel II of 2004 they assigned what was AAA to AA rated, a risk weight of only 20 percent. Thereby they allowed banks to leverage 62.5 times to 1 their equity with these securities. Had banks been allowed to only leverage 12.5 times to 1, as they were limited to with loans to “risky” SMEs and entrepreneurs, that crisis might not even have been identified as a “Minsky Moment”.

Sir below is a link to the full explanation to what really happened with the AAA rated securities backed with mortgages to the USA subprime sector. Do you have it in you to share it with your readers?

http://subprimeregulations.blogspot.com/2016/12/here-is-succinct-but-complete.html

@PerKurowski

Animal spirits yes, but of lions, hyenas or pussycats? Do we have irrational exuberance, or rational fright?

Sir, John Authers commenting on how the Dow Jones Industrial Average can top the 20,000 mark for the first time writes: “Animal spirits are back. The enthusiasm is palpable, and is on a scale unseen since the height of the tech boom”, “Echoes of exuberance as the Dow stirs animal spirits” December 17.

Authers, with “markets… were in a very different state” would seem to agree with that we are not talking of the spirits of the same animals. The tech boom had lions with great illusion and too much optimism and bravery pursuing a brand new future. The current boom, resulting from low interests, QEs and excessive public debts everywhere, seems more one of pussycats taking refuge in whatever is offered. Of course, as always, hyenas are present in order to feast on the many cadavers any heightened volatility causes.

What brought all this on? Sir, as you know I think, but you do clearly not want the rest of the world to think, that this is the natural result of regulators taming, or castrating, the animal spirits of banks. That they did with their capital requirements based on ex-ante perceived risks, precisely those risks that were often already being cleared for too much by the ex-ante-risk-adverse bankers Mark Twain referred to.

Authers now writes: “Trump’s deregulatory agenda could delight markets.”

That’s a new view I very much welcome. Over the last decades, public opinion has almost exclusively been fed the notion that all of its troubles were only the result of financial deregulation.

The problem though is that Trump, even though he himself has been a bank borrower, does not really understand that without removing the odious regulatory discriminations against the “risky”, like SMEs and entrepreneurs like Trump, his stimulus plans, that which includes tax cuts, has not a fair chance to work.

@PerKurowski

Who should we most blame for distorting risk weighted bank capital requirements; central banks or politicians?

Sir, John Authers writes “Blaming central bankers, as many of the people behind the UK and US populist revolts tend to do, misses the point. The loose monetary policies of the past eight years helped deepen inequality by raising the wealth of those already with assets, without breathing sufficient life into those economies. But central bankers were for the most part following these policies to buy time for politicians to take the needed longer-term measures.”, “A bonfire of the certainties” November 10.

And Authers’ pities the “Central banks [that] have looked increasingly uncomfortable with their new role, while each fresh dose of monetary easing has had less impact than the one before.”

But what Authers’ does not do is to mention the bank regulations promoted and sheltered by central banks and which distorted the allocation of bank credit to the real economy. The statism, the silly risk aversion, the discrimination against the risky and the all that for no good safety reason, and that is imbedded in that piece of regulations, will go down in history as a shameful mistake, and disgrace all those who by commission or omission are responsible for it.

I ask, are central banks really auhorized to independently distort bank credit allocation

At the very end of the recent 2016 Annual Research Conference, none other than Olivier Blanchard, the former Chief Economist of the IMF, admitted that indeed more research was needed to better understand the underlying factors for the trend to lower public debt interests that can be observed the last 30 years; and that this trend might very well be explained to an important extent by current bank regulations.

When that research ends up showing we have for decades been navigating with a subsidized public borrowing rate as a proxy for the risk free rate, a financial compass distorted by the Basel Committee’s magnetic field, there will be many questions. Among these, why did FT silence more than 2.000 letters I wrote to it on this issue.

PS. The origin for this regulatory risk weighting can be found in Steven Solomon’s The Confidence Game” 1995. “On September 2, 1986, at the Bank of England governor’s official residence… when the Fed chairman Paul Volcker sat down with Governor Robin Leigh-Pemberton and three senior BoE officials, the topic he raised was bank capital”

@PerKurowski

This would be my brief testimony about what caused the 2008 bank crisis… if ever allowed

Sir, John Authers writes: “This week, Senator Elizabeth Warren, said the next president should reopen investigations into senior bankers who avoided prosecution, and that the FBI should release its notes on its investigations. The failure to punish any senior bankers over the scandal angers the populist left and right, the world over.”, “We are still groping for truth about the financialcrisis” September 17.

The following, if I am ever allowed to give it, as so many would not like to hear it, would be my brief testimony on what caused the 2008 bank crisis

Sir, as I have learned to understand it, the 2008 crisis resulted from a combination of 3 factors.

The first were some very minimal capital requirements for some assets that had been approved starting in 1988 for sovereigns and the financing of residential housing; and made extensive in Basel II of 2004 to private sectors assets with good credit ratings.

These allowed banks then to earn much higher expected risk adjusted returns on equity on some assets than on other, which introduced a serious distortion. After Basel II the allowed bank equity leverages were almost limitless when lending to “sound” (or friendly) sovereigns; 36 times to 1 when financing residential housing; and over 60 to 1 with private sector assets rated AAA to AA. Just the signature, on some type of guarantee by an AAA rated, like AIG, also allowed an operation to become leveraged over 60 times to 1.

The second was Basel II’ extensive conditioning of the capital requirements for banks to the decisions of some very few (3) human fallible credit rating agencies. As I so many times warned about (in a letter published in FT January 2003 and even clearer in a written statement delivered at the World Bank), this introduced a very serious systemic risk.

The third factor is a malignant element present in the otherwise beneficial process of securitization. The profits of that process are a function of how much implied and perceived risk-reduction takes place. To securitize something safe to something safer does not yield great returns for the securitization process. Neither does to securitize something risky into something less risky.

What produces BIG profits is to securitize something really risky, and sell it off as something really safe. Like awarding really lousy subprime mortgages and packaging them in securities that could achieve an AAA rating. A 11%, 30 years, $300.000 mortgage, packaged into a security rated AAA and sold at a 6 percent yield, can be sold for $510.000, and provide those involved in the process an instantaneous profit of $210.000 

With those facts it should be easy to understand the explosiveness of mixing the temptations of limitless , 36, and more than 60 to 1 allowed bank equity leverages; with subjecting it too much to the criteria of few; with the profit margins when securitizing something risky into something “safe”. Here follows some indicative consequences:

As far as I have been able to gather, over a period of about 2 years, over a trillion dollars of the much larger production of subprime mortgages dressed up in AAA-AA ratings, ended up only in Europe. Add to that all the American investment banks’ holdings of this shady product.

To that we should also add Europe’s own problems with mortgages, like those in Spain derived in much by an excessive use of “teaser interest rates”, low the first years and then shooting up with vengeance.

And sovereigns like Greece, would never have been able to take on so much debt if banks (especially those in the Eurozone) would not have been able to leverage their equity so much with these loans.

Without those consequences there would have been no 2008 crisis, and that is an absolute fact.

The problem though with this explanation is that many, especially bank regulators, especially bank bashers, especially low equity loving bankers, do not like this explanation, so it is not even discussed.

The real question though is: Who is the guiltiest party, those who fell for the temptations, or those who allowed the creation of the temptations?

I mean how far can you go blaming the children from eating some of that deliciously looking chocolate cake you left on the table, at their reach?

Sir, John Authers, tell me if you believe I at least have a point, should that not merit a discussion?

@PerKurowski ©

If I was young and my pension fund was to invest in a bridge, I would want and need for it to lead to somewhere great!

Sir, John Authers with respect to future pensions holds that “if we have done our job properly, we should by now be scared out of our wits”, “There is still time to alter the script of the pensions crisis” August 27.

And just like in The Graduate Mr McGuire recommended Dustin Hoffman “plastics”, Authers recommends current kids “infrastructure”.

How did we get here? The answer is that regulators, with their risk weighted capital requirements, told the banks to go to where pension funds did much of their savings, basically in what was perceived as fairly safe.

Authers spends most of his article writing on how we should adapt to lower yields and longer life resulting in huge pension deficits. He argued for instance “There is no reason why young investors’ long-term savings should not go into funding infrastructure, or clean energy, or other beneficial investments for the future.”

That could be, clearly supposing the specific beneficial investments for the future, yield enough real returns for our retirement planning young investors. We have left them enough debts so as to complicate matters even more by sticking to them some bridges to nowhere!

But, before that, we must see to that our banks, again become banks making profits and returns on equity by taking risks, and not by just minimizing equity.

While concluding Authers writes: “it grows clear that the issue of pensions divides us, particularly along generational lines. Many view it in moral terms. This is all wrong. We are all in this together, whether we are generationally lucky or not.” Absolutely, for a starter, if the economy is not prosperous and employ the young, who is going to buy all the retirement investments at the price of a then decent purchasing power?

The only way to keep an economy moving forward, so that it does not stall and fall, is to ascertain that primary societal risk-takers, like banks should be, take the risks that are needed. Too much risk aversion is riskier than too much risk taking.

Of course, we all want and need for that risk-taking to be carried out with reasoned audacity. God make us daring! 

@PerKurowski ©

Much of those interest margins banks now obtain financing what’s perceived safe, used to belong to pension funds.

Sir, I refer to Mary Childs and John Authers’ “Canada quietly treads radical path on pensions: Retirement funds are pushing beyond bonds and stocks in search of better returns” August 23.

Please hear me out. Before the introduction of the risk weighted capital requirements, banks spread out their credits to those who offered them the best risk-adjusted margins, while subjecting the size of the exposures to the same perceived credit risk. Taking risks, with reasoned audacity, was the business of the banks. In comparison, avoiding risks, and looking for certain minimum returns, was the business of pension funds.

But, with the risk weighted capital requirements that allow banks to leverage much more their equity with what is perceived as safe than with what is perceived as risky, banks began maximizing their returns on equity by minimizing the equity they needed to hold, something which meant going for what was perceived, decreed or concocted as safe.

As a result the bankers were able to realize their wet dreams of huge perceived risk adjusted returns on equity for playing it safe.

But that de facto meant that banks occupied the investment space pension funds use to occupy, and so now we have that pension funds have to go out there and take the risks banks used to take.

Sir, you can be damn sure that if banks needed to hold the same capital against all assets they would not be swamping the safe havens, and pension funds would not have to be “facing the challenge of [so] low returns on traditional assets”

This is all so foolish. Why can’t we allow banks to be banks and pension funds to be pension funds?

This is all so dangerous. If banks do not finance risky SMEs and entrepreneurs the real economy will stall and fall, and then even the safest will not buy retirement tranquility (or jobs for our children and grandchildren).

BoE, if you really believe jobs come first, why not capital requirements for banks based on job creation ratings?

Sir, I refer to John Authers and Robin Wigglesworth “Big Read: Pensions: Low yields, high stress” August 23.

There we read that Baroness Altmann, the former UK pensions minister, said this month “The emergency to pension schemes has been caused by Bank of England’s quantitative easing policy of buying bonds…I don’t see how it is reasonable to ask companies with pension schemes to fill a £1tn hole and put money into their businesses as well. It doesn’t add up.”

BoE officials say they recognize the problem, but Andrew Haldane, its chief economist, says the central bank’s top priority must be to stimulate the economy. “I sympathize with savers, but jobs must come first”.

I don’t think so, from what BoE and their colleagues are doing, it seems much other, like keeping the values of assets high and borrowing costs for the government low comes first.

Sir, again, for the umpteenth time, the Basel Committee, the Financial Stability Board and other frightened risk adverse bank nannies, have mandated stagnation.

When you allow banks to hold less capital when financing what’s perceived as safe than when financing the risky; banks earn higher expected risk adjusted returns on equity when financing the safe than when financing the risky; so you are de facto instructing the banks to stop financing the riskier future and keep to refinancing the safer past… something which guarantees stagnation… a failure to develop, progress or advance… something which guarantees lack of employment for the young and retirement hardships for the old.

I would prefer not to distort the allocation of bank credit but, if I had to, then I would try to ascertain that bank credit goes to where it could do the society the most good; in which case I would consider basing these on job creation ratings and environmental sustainability ratings and not on some useless credit ratings already cleared for by banks with the size of their exposures and interest rates.

PS. If you want more explanations on the statist bank regulations that are taking our Western society down here is a brief aide memoire.

PS. If you want to know whether I have any idea of what I am talking about here is a short summary of my early opinions on this since 1997.

@PerKurowski ©

Any central banker that distorts, just as he likes, the allocation of bank credit to the real economy, is not to be trusted

Sir, John Authers writes: “If I report that government bonds are selling for unprecedented low yields, because investors are looking for safe places for their money — both of which are undeniable and unexceptional propositions — abuse follows. Markets are fixed! Yields aren’t really that low!” “Central banks are not the enemy: Monetary policy has stayed too loose for too long: that is a failure of politicians” July 28.

In this context am I abusing when I hold that markets are to a very important extent fixed, only because banks are looking for places for their money that does not require them to hold much capital? I don’t think so!

And Authers writes: “Markets are not efficient, and are often wrong…But they are not part of a political process, and ignoring them is not an option. When they set the price at which we can borrow, or at which we can exchange currency, they create truths we have to live with”

Absolutely, but in this case bank regulators, most from central banks imposed their truths on the market.

Sir, though regulators would love you to do so, do not forget what assets caused the 2007-08 crisis.

Those were what was ex-ante perceived, decreed or concocted as very safe, and which, for that reason only, the regulators allowed banks to hold these assets against very, very little capital.

Assets perceived as risky do no set off major bank crises, that distinction belongs to what is perceived as safe, and that is what our dumb regulators ignored

And what has much stopped the economy from recovering in the face of enormous injections of liquidity? That the liquidity, because of bank regulations, central banks, are not allowed to flow freely by means of bank credit to the “risky”, the SMEs and entrepreneurs.

Of course I would love to trust central banks, but I just can’t. Anyone who comes up with an idiotic and statist idea like that of assigning a risk weight of 0% to the sovereign and 100% to us We The People, is not to be trusted.

@PerKurowski ©

All awful on the pension front

Sir, John Authers responsibly puts his finger where it hurts, the issue of whether there will be sufficient resources to provide those pensions that so many take for granted will be there, “Hunt for the middle ground to avert pension poverty” July 9.

And doing so Authers discusses the implications of defined benefit and defined contribution plans, especially in times of extraordinary low interests. His suggestion to find an in-between plan that takes a little from both, sounds very logical, though of course, unfortunately, that cannot guarantee either there will be enough to meet the needs and much less the aspirations.

But the state of the economy at the time of any drawdown of a pension also matters tremendously and, if bank regulators are allowed to continue distorting the allocation of bank credit, that state of the economy will be very bad.

The risk weighted capital requirements for banks are causing a dangerous overcrowding of the safe havens, like public debt to which a risk-weight of zero percent was decreed; and for the economy an equally dangerous lack of exploration of the risky bays, SMEs and entrepreneurs, and which got hit with a risk weight of 100%.

As a consequence banks are now mostly refinancing our safer past and not financing sufficiently our riskier future. And that bodes very badly for the future pensioners, and very badly for the future prospects of the pensioners’ last reserve and hope, their children.

PS. 2006 “My insecurities about the social security debate” 

@PerKurowski ©