If we want public debt to protect citizens today and tomorrow, it behooves us to make sure it cannot be too easily contracted.

Sir, I refer to John Plender’s “The virtues of public debt to protect citizens” FT February 7, 2022.

Sir, as a grandfather I do fear debt burdens we might impose on future generations, but I’m absolutely not an austerity moralist. I know public debt is of great use if used right but also that the capacity to borrow it a reasonable interest rates (or the seigniorage when printing money), is a very valuable strategic sovereign asset, especially when dangers like war or a pandemic appear, and which should therefore not be irresponsibly squandered away.

In 2004, when I just finished my two-year term as an Executive Director of the World Bank, you published a letter in which I wrote “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage, they are doing by favoring so much bank lending to the public sector?”

1988 Basel I’s risk weighted bank capital requirements decreed weights of 0% the government and 100% citizens. It translates into banks being allowed to hold much less capital - being able to leverage much more, with loans to the government than with other assets.

Of course, governments, when their debts are denominated in the currency they issue, are, at least in the short-term and medium term, and in real terms before inflation might kick in, less risky credits. But de facto that also implies bureaucrats/ politicians/apparatchiks know better how to use taxpayer’s credit for which repayment they are not personally responsible for than e.g., small businesses and entrepreneurs. And Sir, that I do not believe, and I hope neither you nor John Plender do that.

Such pro-government biased bank regulations, especially when going hand in hand with generous central bank QE liquidity injections, subsidizes the “risk-free” rate, hiding the real costs of public debt. In crude-truth terms, the difference between the interest rates sovereigns would have to pay on their debts in absence of all above mentioned favors, and the current ultra-low or even negative interests they pay is, de facto, a well camouflaged tax, retained before the holders of those debts could earn it.

But of course, they are beneficiaries of all this distortion, and therefore many are enthusiastically hanging on to MMT’s type Love Potion Number Nine promises.

@PerKurowski

The seeds of the next debt crisis are to be found in the kicking of the 2008 crisis can forward, without correcting for what caused that crisis.

Sir, I refer to John Plender’s “The seeds of the next debt crisis” March 4.

Plender writes: “From the late 1980s, central banks — and especially the Fed — conducted what came to be known as “asymmetric monetary policy”, whereby they supported markets when they plunged but failed to damp them down when they were prone to bubbles. Excessive risk taking in banking was the natural consequence”

Not exactly “risk taking”! The risk weighted capital requirements caused excessive dangerous bank exposures, not to what was perceived risky, like loans to entrepreneurs, but to what was perceived safe, like residential mortgages; or decreed as safe, like the sovereign; or concocted as safe, like what banks’ internal risk models produced.

Plender asks: “Has the regulatory response to the great financial crisis been sufficient to rule out another systemic crisis and will the increase in banks’ capital provide an adequate buffer against the losses that will result from widespread mispricing of risk?”

No, it has not been sufficient. That because the incoherent response to a crisis caused by AAA rated securities backed with mortgages to the US’s subprime sector, was to keep on using risk weighted bank capital requirements based on perceived EXPECTED losses, and not on UNEXPECTED losses.

Plender writes: “The central banks’ quantitative easing since the crisis, which involves the purchase of government bonds and other assets, is, in effect, a continuation of this asymmetric approach”

Indeed, in 2006, when an upcoming crisis was slowly being detected by some, FT published a letter in which I argued for “The long-term benefits of a hard landing”. Sadly, central bankers and regulators wanted nothing of such thing, on their watch, and kicked the 2008 crisis can forward to our children and grandchildren, as hard as they could, and here we are… with world borrowings up to the tilt, and lenders waiting to be blown away by a coronavirus.

PS. At this moment, this letter not included, in my TeaWithFT blog, there appears 2.948 letters sent to you over soon two decades on the issue of “subprime banking regulations”.

@PerKurowski

The risk weighted capital requirements for banks, is the most potent steroid ever for having to suffer some truly bad “Minsky moments”.

Sir, John Plender correctly writes: “If Hyman Minsky were alive today, he would regard the current economic cycle as a testing ground for his instability hypothesis. That which holds the financial system has an innate tendency to swing from robustness to fragility because periods of financial stability breed complacency and encourage excessive risk-taking.” “Complacent investors face a Minsky moment as pendulum swings” November 14.

But what Plender does not mention, perhaps because it belongs to that which shall not be mentioned, is the greatest procyclical pro-Minsky-moment steroid ever, namely the risk weighted capital requirements for banks.

When times are good and credit rating outlooks are sunny, that regulation allows banks to leverage immensely with what’s perceived as safe but, when a hard rain seems its going to fall, and credit ratings fall, all recessionary implications are made so much worse by banks then, suddenly, having to hold much more capital… and since such capital might be hard to find during bad times, they take refuge in whatever is still perceived, or decreed as in the case of sovereigns, to be of less risk… just increasing the stakes

In 2004 I sent the first letter to FT on the pro-cyclical/counter-cyclical theme, FT never picked up on it.

Plender writes: “It is historically atypical in that central banks have been encouraging deflationary threat”. Really? At least with respect to banks they have encouraged these to build up ever-larger exposures to what’s perceived as safe, like residential mortgages, or to what’s decreed as safe, like loans to friendly sovereigns. 

https://teawithft.blogspot.com/search/label/pro-cyclical

@PerKurowski

If not in US dollar notes under Warren Buffet’s mattress, what is Berkshire Hathaway’s “$104bn cash pile invested in?

Sir, you conclude that “Regulators and governments would do well to study whether the huge increase in repurchases has damaged business growth and capital formation” “Record share buybacks should be raising alarms” November 8.

Of course they should but let us be very clear, since that has been going on for quite some time so, if they have not done it yet, then shame on them.

For instance in July 2014 Camilla Hall, in “Bankers warn over rising US business lending” wrote, “Charles Peabody, a bank analyst at Portales Partners in New York, has warned that while it is hard to extrapolate what is driving commercial and industrial lending, if it is to fund acquisitions or share buybacks it may not indicate a strengthening economy. “It is loan growth, just not sustainable,” he said.” 

And therein Hall also wrote, “A banking lending executive at a large regional lender said ‘Traditionally banks have been very cautious of that’.”Of course, you and I know Sir that banker should not be throwing the first stone, since bankers too have morphed, thanks to the risk weighted capital requirements, from being savvy loan officers into being financial engineers dedicated to minimizing the capital their bank is required to hold.

Also, in 2017, when discussing IMF’s Global Financial Stability Report, John Plender wrote: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.”

But what really caught my attention today was your reference to Berkshire Hathaway’s “$104bn cash pile [it holds] keeping its powder mostly dry for future deals — if, say, the market correction continues.”

How do you keep that powder dry? Since most probably it is not in dollar notes under Warren Buffet’s mattress, what is it invested in? We know that in accounting terms “Cash” includes a lot of investments, but in the real life, “Cash” does not always turn out to be real cash. In Venezuela you could now fill a whole mattress with high denomination bolivar notes, and still not be able to buy yourself a coffee with it. 

In a world in which regulators have assigned a 0% risk weight to for instance the already $22tn and fast growing US debt, which, if nothing changes, would doom that safe-haven to become very dangerous, is not Cash just another speculative investment?

@PerKurowski

The Basel Committee stupidly made banks substitute savvy loan officers with equity minimizing financial engineers

Sir, John Plender, reviewing Philip Augar’s “The Bank That Lived a Little” writes: Not so long ago banking was a relatively simple business whose main focus was on deposit-taking and lending. Then in the 1980s everything changed as a powerful tide of deregulation swept through the industry… courtesy of Ronald Reagan and Margaret Thatcher”, “Head rush”, July 7.

Was it “deregulation” or plain missregulation? The main change that was introduced in banking, in 1988, with the Basel Accord, was the risk weighted capital requirements for banks. 

That meant that from there on, the risk-adjusted returns on bank equity were not to be maximized by savvy loan officers, but by equity minimizing financial engineers.

And clearly “increasing amounts of risk in relation to dwindling cushions of capital” allowed the bonuses of bankers to be so much higher.

Has banking “turned into an ethics-free zone”? Yes, but blame the regulators for much of that. Now, 30 years later, I would think there is no room to put the blame on Ronald Reagan or Margaret Thatcher. 

Frankly, since FT has not dared to ask regulators why banks have to hold more capital against what is dangerous perceived as safe than against what is made innocous by being perceived as risky, as I see it, FT is so much more responsible for all this mess.

@PerKurowski

We humans search for risk-adjusted yields. So did banks, but they now search for risk-adjusted yields adjusted to allowed leverage

Sir, let me comment on three paragraphs in John Plender’s “The global economy looks solid but there are worrying signs” February 7.

First: “there are grounds for concern about a credit cycle in which risk is clearly being mispriced. This is partly a product of the enduring search for yield. When almost every asset class looks expensive, investors tend to respond by taking on more risk”

Ever since risk weighted capital requirements were introduced, banks do not more search for yield, but instead search for yield adjusted by allowed leverage, and so risk has been mispriced.

Second: “A further hint of a return to normality is the reappearance of volatility after a long period in which it has been conspicuously absent — helpful if you worry that low volatility encourages complacency and makes the financial system more vulnerable to crises.”

And why should we not there worry, in precisely the same way, that what is perceived as safe encourages complacency and makes the financial system more vulnerable to crises?

Third: “Applying a higher discount rate to the liabilities while enjoying an uplift in the value of the assets is the answer in today’s low interest world to the pension fund manager’s prayer.”

The so many times repeated opinion that all pension funds should be able to obtain a real return of 5 to 7% annually, is one of the most harmful financial misinformation ever.

@PerKurowski

Just wait until the music stops playing the low interest rate tango building up corporate balance sheet leverage

Sir, John Plender, when discussing IMF’s latest Global Financial Stability Report writes: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.” “Beware the curse of buybacks that destroy shareholder value” October 31

Clearly this is another music that keeps bankers dancing, even when they know they shouldn’t, not for their own or for the economy’s sake.

In July 2014, commenting on an article by Camilla Hall on this subject I wrote: “Ask any old retired banker what was his first question to a prospective borrower and you would most probably hear him say: “What do you intend to do with the money if I lend it to you?” The banker would not have liked to hear “To pay a dividend or buy back some shares”.

Not any longer. Now his first priority is to think about how he can construe the operation in such a way as to minimize the capital needed, so that he could max out leverage too… and pay dividends and buy-back shares too.

But why should we assume only bankers are to behave responsibly? It takes two to tango. The regulators, with their risk weighted capital requirements clearly indicate they do not care one iota about the purpose of banks, and the central bankers, they just keep on kicking the crisis can down the road with QEs and low interest rates.

https://teawithft.blogspot.com/2017/05/low-interest-rates-cause-buy-backs.html

@PerKurowski

Why is it so hard to understand Basel I’s 1988 statist regulatory distortion of credit in favor of sovereigns?

Sir, I have written 59 letters to John Plender over the years, mostly about the distortions in the allocation of bank credit to the real economy the risk weighted capital requirements cause. These letters, as well as other 2500 to you, denouncing the serious and fundamental flaws with the Basel Committee’s risk weighted capital requirements, have been basically ignored… let us say censored.

For instance in May 2016 I wrote: “I am amazed John Plender leaves out the fact that… courtesy of the Basel Committee, banks currently need to hold especially little capital against that public debt... for which “the issue of solvency would resurface”

And all that because unilaterally the regulators, in 1988, with the Basel Accord suddenly decided that sovereigns posed no credit risk, and no one protested the statism that was thereby de facto introduced.

To workout our banks out of such bind, will take huge amounts of fresh bank capital and very specialized knowledge, or intuition on how to go about it, without disastrously affecting the bank lending to the rest of the economy.”

And in November 2004 FT did publish one letter in which I wrote: “I also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Now, John Plender writes: “The risk-weighted Basel capital adequacy regime, despite post-crisis tweaking, is fundamentally flawed. Sovereign debt enjoys excessively favourable treatment so eurozone banks stuff their balance sheets with the IOUs of seriously over-indebted governments”, “Lessons from the credit crunch” July 7.

Sir, when in a year or two I might publish a book on my impossibilities to communicate with FT, you or someone in FT will have some explanations to do.

In this world of fake news, shutting up someone who might be denouncing something that could be akin to financial sector terrorism is just as bad.

@PerKurowski

John Plender, unfortunately, we are caught in more than a double bind on public debt.

Sir, I agree with everything John Plender argues in “Why governments are caught in a double bind over public debt” of May 18. 

That said I am amazed he leaves out the fact that, on top of it all, courtesy of the Basel Committee, banks currently need to hold especially little capital against that public debt... for which “the issue of solvency would resurface”

And all that because unilaterally the regulators, in 1988, with the Basel Accord suddenly decided that sovereigns posed no credit risk, and no one protested the statism that was thereby de facto introduced.

To workout our banks out of such bind, will take huge amounts of fresh bank capital and very specialized knowledge, or intuition on how to go about it, without disastrously affecting the bank lending to the rest of the economy.

@PerKurowski ©

The best pension security you can get is to have grandchildren who love you and who work in a not too bad economy.

Sir, John Plender valiantly discusses one of the most difficult and delicate current problems, namely if tomorrows pensioners will even come close to collect on their expectations, “Uncertainty clouds the outlook for pension funds” May 16.

And looking at the problem solely from the perspective of the current manipulated low rates he already concludes: “What we can safely posit is that an exit from the low or negative rates that cause the blight, however desirable for the pensions system, is unlikely to be a smooth and painless affair”

Add to that longer life expectancies, more robots - less job opportunities, already extremely high indebtedness, climate change, demographic changes, existing inequality and quite possibly much weaker economies… and we start getting the feeling that the only variables capable of balancing the disastrous pension outlooks… are those variables we do not even want to think of… down the line of epidemics and wars.

But how could it not be?

Never ever before has a generation consumed as much of any existing borrowing capacity to sustain its own consumption… so of course little is left for retirement.

And to top it up, we have had to suffer the risk aversion of manipulating regulators who do not want our banks to take the risks that building a healthy future economy needs.

When in the past I often protested the implicit promises of sustainable high rates of return of pension fund plans, I remember always ending up with that the best pension plan was to have children that loved you and who worked in an economy that was not too bad. And I have found no reason to change that opinion… much the contrary… although I now include loving grandchildren too J

PS. By coincidence I posted this opinion on pension funds and social security exactly 10 years ago (on my 56th birthday)

Mervyn King, for bank regulators to use the expected, as a direct proxy for the unexpected was, and is, radically dumb

Sir, John Plender, March 3, reviewed Mervyn King’s book “The End of Alchemy: Money, Banking and the Future of the Global Economy" And in doing so Plender writes that King argues that in a world of what economists now call “radical uncertainty”, it is not always possible to compute the expected utility of any action. There is simply no way of identifying the probabilities of all future events and no set of economist’s equations that describe people’s attempts to cope with that uncertainty.”

And according to Plender, King proposes a “central bankerly pawnbroking” facility to supply “liquidity, or emergency money, within a framework that eliminates the incentive for bank runs… That would displace what King regards as a flawed risk-weighted capital regime ill-suited to addressing radical uncertainty.”

And John Kay ends his discussion of King’s book with: “There is a world of difference between low-probability events drawn from the tail of a known statistical distribution and extreme events that happen but had not previously been imagined”, “The enduring certainty of radical uncertainty”, April 6.

Hold it there has all that really anything to do with the current risk weighted capital requirements for banks? Absolutely not!

What happened was that since the regulators did not know how to estimate the unexpected losses, those that bank capital is foremost to safeguard agains, they went out and used the expected credit risks. And since those risk were already cleared for by banks, with interest rates and the size of exposures, credit risks, when also used to set capital requirements, were given too much consideration.

And, for the umpteenth time: any risk, even if perfectly perceived leads to wrong actions if excessively considered.

And Plender also wrote about King arguing: “Banks satisfied investors’ desperate search for income by creating increasingly complex and risky financial products based chiefly on mortgage debt. Bank balance sheets grew explosively as property lending ballooned. At the same time, the capital of banks shrank as they took on more risk.

Again that is not really so! The increasingly complex and risky financial products chosen were entirely based on that these could be argued to be very safe, and therefore require banks to hold less capital. For instance mortgage debt would never ever have exploded as it did, if instead of receiving a 35 percent risk weight, it had the 100 percent risk weight assigned to “risky” SMEs and entrepreneurs.

And Plender also wrote about King arguing: “They were trapped by what game theorists call a prisoner’s dilemma. If they retreated from riskier lending and trading strategies while reducing their borrowings, a decline in short-term profits relative to their competitors would have caused staff to defect in pursuit of higher bonuses elsewhere and prompted calls for the chief executive’s head.”

Those “short tem profits” are not some absolute profits, but returns on equity, and so banks, searching for the highest profits, naturally favored those exposures that provided the highest expected risk adjusted returns on equity, in other words those that could be most leveraged.

Sir, I have no respect for a regulator like Mervyn King. He and all his colleagues decided to regulate banks without defining their purpose. Had they done so they would have known, that the most important social purpose of banks is to allocate credit efficiently to the real economy.

Now our banks do not finance the riskier future they just refinance the, for the short time being, safer past.

“A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926 

I can understand journalists covering the reputation of old friends… but is that really their role and duty? “Without fear and without favor”… Hah!

@PerKurowski ©

The huge bonuses paid to bankers were enabled by lousy regulators, and were not the result of free market capitalism

Sir, John Plender writes: “Like the robber barons, today’s bonus-hungry bankers have shown once again how capitalists excel at giving capitalism a bad name”, “Capitalists excel at giving themselves a bad name” January 25.

No! Free market capitalism would never ever have enabled the payment of extraordinary high bonuses to bankers… because in free market capitalism banks would have had to hold much more equity than what banks currently hold, and so therefore not only would the risk adjusted returns on equity be lower than what has been seen, but there would also have been less left over for bankers’ bonuses.

With Basel II regulators allowed banks to hold extremely little capital (equity) against assets perceived as safe… for instance only 1.6 percent when lending to the AAArisktocracy. That allowed banks to leverage extraordinarily the explicit and implicit support given by society, for instance by deposit insurance schemes… while having to provide a decent return on very little equity… which left of course a lot of margin to pay the huge bonuses.

The real question is how come these extremely lousy regulators are getting away with what they did and are doing… having even been promoted for it.

@PerKurowski ©

Corporations and their tax payments distract the full attention the citizens deserve from their governments

Sir, I refer to John Plender’s “A strange aversion to corporate tax” January 4. I have an aversion to corporate taxes that is not duly reflected there.

In my homeland Venezuela the government gets directly 97 percent of all exports and, when oil prices are high, we citizens become almost a nuisance to those in charge of administrating such revenues… only when oil prices are low do they begin to remember us.

As a result I have held that the ideal tax system is that in which the government gets all of its income directly from identified citizens… not anonymous sales taxes, and that makes me to have an aversion to corporate taxes too. The corporations, with their often very high profits equally, quite often, constitute a distraction that hinders the governments to give full attention to us citizens.

100 percent citizens based tax system, true tax heavens, would also be the best way to diminish the needs for tax havens.

http://perkurowski.blogspot.com/2012/03/my-tax-paradise.html

@PerKurowski ©

Bank regulators suffer “pre-dread-risk”, an exaggerated sense of fear and insecurity anticipating catastrophic events.

Sir, you know, and John Plender knows that over the years, with more than a thousand letters, I have warned that current capital requirements doom banks to dangerously overpopulate “safe havens” and equally dangerously under-explore the “riskier” but surely more productive bays where SMEs and entrepreneurs reside. And the regulators, as the safest of all safe havens, designated the infallible sovereigns… their paymasters.

In November 2004 FT published a letter where I said: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

And now John Plender writes about “a shortage of so-called safe assets… a stampede into sovereign bonds with negligible or negative yields — Even a modest move in the direction of historic interest rate norms could pose a threat to solvency [of] banks whose balance sheets are stuffed with sovereign debt” “Why bullish markets did nothing for bearish boards”, August 6.

An in the discussion Plender mentions that “OECD economists [have] identified flawed incentive structures as part of the reason for divergent perceptions of risk… equity-related incentives and performance-related pay…earnings per share and total shareholder return, [which] are manipulable by management.”

And Plender also brings forward “economists at the Basel-based Bank for International Settlements believe that low interest rates beget yet lower rates because they cause bubbles, followed by central bank bailouts. Their worry is that we risk trapping ourselves in a cycle of financial imbalances and busts.”

But Plender, in true FT tradition, does not say one single word about the perverse manipulation of credit markets carried out by bank regulators.

Plender mentions Andrew Haldane putting “particular emphasis on the phenomenon of “dread risk”, a term used by psychologists to describe an exaggerated sense of fear and insecurity in the wake of catastrophic events.

But, does not requiring banks to have 500% more capital when they lend to “the risky” than when they lend to “the safe”, evidence the mother of all exaggerated sense of fear and insecurity… in this case anticipating catastrophic events… a sort of pre-dread risk?

Because, that is exactly what regulators showed when, with Basel II, they required bank to hold 8 percent in capital when lending to a “risky” SME or entrepreneur, but only 1.6 against AAA rated assets… and allowed zero capital when lending to infallible sovereigns.

PS. The OECD’s Business and Finance Outlook 2015 also similarly ignores the effects of the risk-averse bank capital requirements. When referring to the “reduced bank lending [which have] affected SMEs in particular” it shamelessly limits itself to stating “credit sources tend to dry up more rapidly for small companies than for large companies during economic downturns”. 

@PerKurowski

FT, if regulators tell banks: “Blow the ‘safe’ balloons, not the risky”, which balloons are more likely to explode?

Sir, John Plender writes about “the bubble in (so-called) risk-free assets. In March, a third of eurozone government bonds had negative nominal yields. This was unprecedented. It reflected an acute shortage of sovereign debt for use as collateral after the European Central Bank’s resort to quantitative easing, which involves buying government bonds…official intervention created a distortion that drove a wedge between prices and fundamental reality. “Detecting a bubble in advance is not so hard — when you try” July 22.

That is indeed correct, but it obliges the questions of:

Why is it so hard for John Plender, FT, and most other to understand that credit-risk weighted capital requirements for banks, like QEs, represent an official intervention that distorts the allocation of bank credit?

Why do John Plender, FT, and most other, seemingly want to ignore that those capital requirements guarantee “safe” havens to become overpopulated and “risky” bays underexplored?

When banks have thousand of balloons they could blow credit into and regulator tell them in which they can blow easier, it should be easy to predict which balloons might grow too large and explode.

@PerKurowski

Jesus, though opposing the idle rich, clearly supported entrepreneurship, the heart and soul of good capitalism.

Sir, John Plender, when discussing the pro and cons of capitalism writes “Jesus… had no time for the rich”, “Morality and the money motive” July 18.

That is true but only with respect to the idle rich, and who in reality have also very little to do with capitalism. When it comes to entrepreneurs, as can be read in ‘The Parable of the Talents’, Jesus lends them his full support.

From Matthew 25:14-30 we extract the following: 

14 It will be like a man going on a journey, who called his servants and entrusted his wealth to them.

15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed.

25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed?

27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.

28 “‘So take the bag of gold from him and give it to the one who has ten bags.

29 For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them.

30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’

Unfortunately the members of Basel Committee for Banking Supervision have clearly not understood the meaning of that parable. The risk aversion implied by their credit-risk-weighted capital requirements for banks, more-risk-more-capital and less-risk-less-capital, only promotes the immoral idleness of richness.

Plender also writes: “boom and bust, together with severe financial crises, are permanent features of the system”. Indeed, but Plender should never forget that busts, can be horrible or manageable, productive or useless, in much depending on whether it was risk-taking or risk aversion that ruled during the boom.

When true risk taking prevails, dangerous but possibly enormously productive bays will be explored. If instead risk aversion leads the way partner, then the safe havens will become dangerously populated… and, as Plender should know, the financial crisis of 2004 was a direct consequence of the latter.

Sir, the saddest part is that we ignore and still allow our bank regulators to apply unchristian immoral risk adverse principles. We should indeed throw out our worthless current bank regulating servants “outside, into the darkness, where there will be weeping and gnashing of teeth”

PS. Odious regulatory credit risk discrimination denies those perceived as risky fair access to bank credit, and is therefore also a great driver of inequality. 

@PerKurowski

A world obsessed with Best Practices may calcify its structure and break with any small wind

In reference to Mr. Flash Crash’s supposedly malevolent disruption of the market in 2010, John Plender writes interestingly about globalization, regulations and fragility “Global financial regulation meets a cul-de-sac” April 23.

In this respect I would like to recall a written statement that I delivered as an Executive Director of the World Bank on April 2, 2003, while discussing its Stategic Framework 04-06. In it I wrote:

“Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. 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 and we are already able to discern some of the victims, although they are just the tip of an iceberg.

A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind. Who could really defend the value of diversity, if not The World Bank?"

http://subprimeregulations.blogspot.com/2003/03/my-comments-on-world-banks-strategic.html

@PerKurowski

Bank regulators lost touch with economic fundamentals back in 1988, with their Basel Accord.

John Plender writes: “If the essence of a bubble is that prices lose touch with fundamentals, that is where eurozone sovereign bonds are going. Market participants will be recycling government IOUs into the hands of the central bank regardless of relative risk. At the same time, the central bank-induced search for yield will reach new levels and create new distortions.” “Draghi QE is stoking bond bubble risk” March 17.

Sir, the Basel Accord of July 1988 determined that when banks lent to the private sector then they needed 8 percent equity but, when lending to the central government, they needed cero equity.

And that tilted bank credit towards governments being the constructor of the future, and away from that private sector who had been the principal constructor of the future in the past.

That was a defining moment for our economies, and many of the Eurozone’s current troubles are a direct result of it.

Now since government bureaucrats cannot deliver it, there are less perspectives of future growth, and therefore more need to get a share of what there is… and negative rates, joblessness, the disappearance of annuities, asset bubbles and all what have you, is just part of that struggle.

Frankly, at least our children and grandchildren cannot afford to have bank regulators like those in the Basel Committee.

@PerKurowski

The problem is that regulators, behind our backs, empowered an AAArisktocracy to have special access to bank credit.

If we tax and redistribute all wealth, what shall we do the morning after the party? That question, which could be asked to Piketty, is similar in nature to the question we could make to John Plender, “The corporate aristocracy holding out against fiscal revolution” March 3.

Mr. Plender After getting rid of all that corporate cash by paying dividends, by paying taxes or by building private bridges to nowhere, then what?

Also, all that cash is not just forgotten cash lying under a mattress. Plender himself even mentions that “the corporate sector… in several big economies… now acts as a net lender to governments” which means, that the government already uses those funds, perhaps even paying negative interest rates on these.

Current regulations do not allow bank credit to flow in a fair way to those “smaller companies, which innovate and create jobs”, only because they are perceived as “risky”. That is why the liquidity coming from QEs is trapped, and blows bubbles around already existing assets. But Plender, like many others, just does not want to see this…I wonder why?

What “corporate aristocracy”, what we have is an AAArisktocracy that has been appointed by regulators as those who really merit bank credit.

PS. I have for many years argued that when corporations pay taxes, they dilute the citizens’ tax representation. And that is why when Plender writes that in the US corporate taxes were down to 1.6 percent by 2013, my first impulse would be, bring it down to zero now and save yourselves a lot of expensive economic and political distortions.

PS. Also, as a shareholder, in these times of possible extreme volatility, I do not like to hold shares in any company that has not hoarded ample reserves of cash… to fend off threats or to capitalize on opportunities

The world is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks

Sir, John Plender writes “The Eurozone is being driven towards deflation by a moralistic drive for austerity that does nothing to arrest rising debt as a percentage of GDP because the harder hit economies have shrunk” “World faces threat of a descent into intractable deflation”, January 7.

Wrong! The Eurozone, and others, is being driven towards deflation by a dangerous risk-aversion imposed by the regulators on banks; and which have these making much higher risk-adjusted returns when lending to the “safe” than when lending to the “risky”.

Since risk-taking is the prime oxygen for any true forward movement, the economic bicycle is stalling and falling; and no QEs or fiscal stimulus could in the medium and long term stop that stop from happening… but only make the awakening worse.