Do we know of a display of hubris greater than “risk weighted bank capital requirements”?

Sir, Gillian Tett in “Economists can’t predict the future — policy should reflect that” July 1 wrote: “Robert Rubin, Peter Orszag and Joseph Stiglitz called on economists to embrace ‘copious amounts of humility’ when projecting the future.”

One of the magnificent displays of hubris, the antonym of humility, came into being when bank regulators imposed, risk weighted bank capital requirements, as if they, from their desks, have any real bankable notion, of what the future really entails.

And on that, this trio, as the rest of the Academia, as Gillian Tett, as FT too, have all kept total silence.

The developed world, with their statist bank regulators, has no right to preach market reforms to developing countries.

Sir, Jonathan Wheatley writes that in Mexico: “López Obrador — the old-school leftist has pushed ahead with proposals that… have caused alarm among investors, who worry that overspending will call into question the country’s investment-grade credit ratings.”“Delays to reform threaten prospects of emerging economies” March 26.

Sir, López Obrador is not the only leftist in town… in Basel, there are plenty of them.

Basel II assigns a standardized risk weight of 50% to a sovereign rated like Mexico BBB+. This means that the Basel II capital requirement for holding debt of Mexico is 4% (50%*8%). The Basel II standardized capital requirements for lending to any Mexican entrepreneur rated the same BBB+, is 8%. And so, according to the Basel Committee banks are allowed to leverage their capital 25 times their when lending to Mr López Obrador’s government, than when lending to a BBB+ or an unrated Mexican entrepreneur.

So please, do not come and preach us about internal market reforms in developing nations when external global regulators impose such statist and distorting regulations on them.

In 2007, at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled “Are the Basel bank regulations good for development?”. My answer was a clearly argued “No!” But, of course, my chances to be heard by a U.N. Commission on Reforms of the International Monetary and Financial System chaired by Professor Joseph Stiglitz were none.

@PerKurowski

Bank regulators violated both the efficient markets hypothesis and the rational expectations assumptions.

I refer to Martin Wolf’s “Economics failed us before the global crisis: A framework that does not include the possibility of collapse misses the essential” March 21.

Wolf writes: “David Vines and Samuel Wills explain… the core macroeconomic model rested on two critical assumptions: the efficient markets hypothesis and rational expectations”

Bank regulators, those who should rationally be more weary of the unexpected, by basing their capital requirements on what was perceived risky, that which bankers were assumed to manage efficiently and rationally, made efficient allocation of bank credit impossible, and so both those critical assumptions were violated.

Wolf writes: “We need also to understand the risks of crises and what to do about them. This is partly because crises are, as the Nobel-laureate Joseph Stiglitz notes, the most costly events”. 

I disagree entirely with this limited Monday morning quarterback view. To measure the real cost we have to measure the full boom and bust cycle. Having, like now, bank regulations that favor banks financing the “safer” present consumption (houses), over the “riskier” future production (entrepreneurs), is a certain way to minimize the returns from our current circle of life.

Wolf writes: “Doctors’ first response to a heart attack is, after all, not to tell the patient to go on a diet. That happens only after they have dealt with the attack itself.” 

True, but even more important then that, is to correctly diagnostic the illness. In this case, the doctors, the bank regulators, do not want the diagnosis of missregulation to occur, so they are perfectly happy with most of the world blaming bankers or arguing deregulation.

Wolf writes: “We may never understand how such complex systems as our economies— animated, as they are, by human desires and misunderstandings — actually function. This does not mean that attempting to improve understanding is a foolish exercise.”

This is precisely what I have been trying to do with thousands of letters to the Financial Times and Martin Wolf, looking to explain how incredibly faulty the current risk weighted capital requirements for banks are, only to be silenced by FT and classified as obsessive by Martin Wolf.

Yes Sir, I admit being obsessive about this all, especially since I know the future of my children and grandchildren are affected by bad regulations. But, in his keeping mum on all this, Wolf is just as obsessive, I believe though because of much less worthy motives.

@PerKurowski

FT, do you really think bank regulators know what they are doing? Wake up!

Sir, Izabella Kaminska reminds us of “the fact that information is not the same thing as knowledge” “Imperfect information dims the vision of a digital utopia” September 27.

And she refers: “In a new paper, Nobel-winning economist Joseph Stiglitz, building on decades of work on the economics of information, argues that the information paradigm being promoted by technologists could — if left unregulated by government — lead to the sort of market distortions that constrain welfare creation and innovation for the long term.” 

Hold it there! Government regulations can also “lead to the sort of market distortions that constrain welfare creation and innovation for the long term”

Just look at how the regulators imposed risk-weighted capital requirements for banks that completely distorted the allocation of credit to the real economy.

Sir, do you really think bank regulators know what they are doing? Wake up! They have no idea.

Here two questions:

1. What are the risks banks could build up such excessive exposure to the below BB- rated so that, if the ex ante perception of super riskiness turned out ex post even more risky, that could cause a major bank crisis?

2. What are the risks banks could build up such excessive exposures to the AAA rated so that, if the ex ante perception of super safety turned out ex post wrong, that could cause a major bank crisis?

Hint! Mark Twain described a banker as he who wants to lend out the umbrella when the sun shines and wants it back as soon as it looks like it is going to rain.

Ponder now on that our bank regulators, in their own 2004 standardized Basel II risk-weights, assigned to the first possibility a risk weight of 150%, and to the second, one of only 20%.

Meaning that banks, given a basic capital requirements of 8%, when lending to the below BB- rated needed to hold a reasonable12% of capital, while when lending to the AAA rated, they were only required to hold a sliver of 1.6% in capital.

Meaning that banks, when lending to the below BB- rated, could only leverage some reasonable 8.3 times while, when lending to the AAA rated, they were allowed to leverage their capital (equity) a mindboggling 62.5 times.

Sir, do we really deserve such feeble minded regulators? If not, why do you keep supporting these?

@PerKurowski

Loony technocrats told countries: “In order for you to develop and grow, your banks must avoid taking risks”

Sir, Professor Angus Deaton writes: “The ‘what works’ agenda also runs of the risk of replacing what (local) people want by what (often foreign) technocrats think they ought to have. It is these unintended consequences that explain why many projects succeed while the country fails.” “There is a solution to the aid dilemma” August 3.

What if one of these foreign technocrats would tell a developing country the following:

"You should require your banks to hold more capital against what is perceived as risky so that it earns higher risk-adjusted returns on its equity on what is perceived as safe, like the government and the financing of houses; and so that they stay away from lending to the risky, like SMEs and entrepreneurs."

With that these foreign bank regulation technocrats would de facto have told a developing country that it must foster risk aversion among its banks. Absolutely crazy! To give a developing country such recommendations is criminally dumb, but that is precisely what the Basel Committee has and is instructing.

Of course these regulations affects developed countries too, as it hinders them from further climbing up the ladder of development, but, in their case, they have at least reached an fairly reasonable height… although that also means the fall could be bigger.

In October 2007, in the High-level Dialogue on Financing for Developing at the United Nations, I protested this regulatory risk aversion... but no one really wanted to listen. 

PS. Let me quote the following from John Kenneth Galbraith’s “Money: “whence it came, where it went” (1975):

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

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

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Per Kurowski

You want faster growth? You want more widely shared growth? Then get rid of current bank regulators.

Sir, Martin Wolf writes: “This is the time to develop ideas on how to achieve the party’s priorities of faster, more widely shared growth” “Two cheers for Corbyn’s challenges to economic convention” October 2.

You want faster growth? Then take away the odious regulatory discriminations against the risky and let the SMEs and entrepreneurs, the tough we need to get going when the going gets tough, have fair access to bank credit.

I quote from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

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

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

You want more widely shared growth? Then take away the odious regulatory discriminations that stops banks from giving the risky SMEs and entrepreneurs the opportunity to fair access to bank credit they deserve.

I quote again from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

But the sad fact is that no new or old Labor, or anyone, would be able to get that advise from a brains trust of seven left-of-centre economic advisers who have never been out on Main-Street, who hate government austerity, but who love bank credit austerity.

Our formal banks have been embraced by a loony regulatory risk aversion that wants to clear, in the capital of banks, the perceived credit risk already cleared for by banks with risk premiums and size of exposures. Or we free them for that or the interests of economic growth, job creation and equality might be best served by unregulated banks operating in the shadows… a la Banca Sommersa style.

@PerKurowski

FT, the letter on Greece, signed by many important persons, won’t cut it for Greece…or for Europe.

Sir I refer to the letter about Greece signed by so many persons of importance and that appears in FT today February 19.

Yes “the essence of a union is give and take” but much of Greece’s current problem derives from the fact that Greece was earlier given too much by means of European regulators allowing European banks to lend to Greece against very little or even zero equity.

The signatory describe Greece’s urgent needs as follows: economic recovery — aided by a significant easing of fiscal targets, of a maximum of 1.5 per cent of GDP surplus; by some financial restructuring of its debts, including linking debt servicing to meaningful growth; and by fiscal reform that involves cracking down on corruption and weakening of the economic powers of oligarchs.

That wont cut it. What Greece most needs now is for all of Europe to throw out the credit risk weighted equity requirements for banks, which for a way too long time have been blocking the fair access to bank credit of all those not perceived as “absolutely safe”, like SMEs and entrepreneurs. If Greece believes that it is the responsibility of government bureaucrats, or members of the AAArisktocracy to make Greece grow, then it will only dig itself deeper into the hole it’s in.

PS. The rest of Europe suffers too. A negative interest rate, resulting from lack of growth, is just a less transparent haircut.

http://subprimeregulations.blogspot.com/2015/02/western-world-it-behooves-you-to.html

What if instead of credit risks we used credit usefulness when weighing capital requirements for banks?

Sir, I refer to the opinions of several economists on how to jump-start wage growth… which of course has to do with the creation of jobs, “Pay Pressure” September 19.

Even though some of the economists asked by FT might have diddled a bit with bank regulations, I know at least Joseph Stiglitz has, economists in general have little knowledge of these, or, like Joseph Stiglitz, have not understood what the Basel Committee for Banking Supervision has been up to during the last decades.

The current pillar of bank regulations is the “risk weighted capital requirements”. And that, since the perceived credit risks are already cleared for in interest rates and the amounts of the loans, clears for the same risk perception a second time… something which distorts, and causes banks to lend too much to what is perceived as absolutely safe, and too little to what is perceived as risky, like SME’s and entrepreneurs.

I, also an economist, would prefer not to weigh any capital requirements for banks at all, applying the same percentage for all assets, as I believe markets distort less than economists and regulators. But, if regulators absolutely must weigh, in order to show they do something, I would implore them to instead of credit-risk ratings, use potential-of-job-creation ratings, sustainability-of-planet-earth ratings and, in the case of sovereigns, ethic-and-governability ratings.

Bad bank regulations in the company of big egos, hidden agendas and lack of accountability have our economies stuck in the doldrums

Sir I refer to Joseph Stiglitz’ review of Martin Wolfs’ recent book “The Shifts and the Shocks” August 29.

Stiglitz writes: “The problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation between those with excess funds and those who need more money, in which scarce savings are allocated to the investments of highest social returns”

Of course that is the problem. A financial system, in which perhaps its biggest agent, the banks, are given immense incentives to lend and invest based on perceived credit risks, something which has absolutely nothing to do with social or economic returns, cannot fulfill its role of intermediation.

But, those immense faulty investments are given, not by any market, but by regulators who, for instance in Basel II, constrained a bank to leverage its equity 12.5 times to 1 when lending little to a small business or entrepreneur, while at the same time allowing banks to invest huge amounts in members of the AAAristocracy, leveraging a mindboggling 62.5 times to 1. 50 times more!

Unfortunately, in a world in which most of the big brass opinion makers carry their own agendas, and which in the case of Martin Wolf and Joseph Stiglitz neither one include the possibility of regulators regulating too much nor regulating too badly, it is difficult for this truth to surface. 

Add to that the fact that regulators themselves, quite naturally, hate their outright stupidity to be known, and stubbornly refuse to answer questions about the distortions their risk-weighted capital requirements produce in the allocation of bank credit, and you will get a better feeling for how stuck in the doldrums our economies are.

Joseph Stiglitz, like many other professors, has no idea about life on main-street.

Sir, Joseph Stiglitz writes that in Africa “even countries that have introduced reforms and achieved high growth have not generated enough formal sector employment to absorb the growing labour force” and suggests that “the US should encourage foreign direct investments into labour intensive light manufacturing and agro-processing industries” “A new American strategy for business in Africa”, August 4.

Sadly professors, like Stiglitz, often lack one vital qualification when it comes to giving this type of advice… namely any personal real life experience of what it takes to get a business going.

For instance, Stiglitz has probably never accompanied a small entrepreneur to a bank to apply for a loan, and seen how hard that is, and seen how the applicant is often forced to distort facts to even have a chance to get that loan he believes might change his future. And Stiglitz has most certainly no idea of how those travails have been made even harder by the introduction of the risk-weighted bank capital regulations.

And I hold that as a fact because the Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, and of which Stiglitz was its chairman states “Variable risk weights used to ascertain appropriate capital adequacy standards can have strong incentive effects. Regulators need to be aware of distortions in capital allocation when provisioning and capital adequacy requirements do not accord well with actuarial risks”.

And that indicates they have no understanding that these capital requirements distort even though actuarial risks have been perfectly indentified, for the simple reason that these actuarial risks are already being cleared for by interest rates, size of exposure and other terms… and which translates directly into an added regulatory odious discrimination against the fair access to bank credit of those perceived as risky.

If Stiglitz understood how risk-taking is the oxygen of development, and knew how many African countries have or are in the process of implementing a developing strategy that is based on making banks more risk-adverse than they already are, he might cry… but as I said, for that, you must get out and do some walking on main street first.

PS. By the way, as rough as things are on many main-streets right now, I would not be that fuzzy about jobs having to be formal… even informal jobs will do for the time being... who knows, even informal jobs can carry the seed of a formal job.

In order to rein in inequality, bank regulations must change too.

Sir, I refer to Professor Robert H Wade’s letter “In order to rein in inequality, market need to change”, February 21. Therein Wade writes: “any serious attempt to rein in income and wealth inequality in the US, Britain and elsewhere has to change the institutional structure of markets so that they are less efficient at sluicing pre-tax income up towards the top”.

That is correct but let us not ignore that at the core of that “sluicing”, lies the number one source of damnable inequality politics, namely that which impedes equal opportunities for all. And in this respect, nothing is sluicing cheap and plentiful bank credit away from the “risky” medium and small businesses, entrepreneurs and start-ups, towards the “infallible sovereign and the AAAristocracy, than the current risk-weighted capital requirements for banks.

And that these capital requirements do by allowing banks to hold much less capital against assets deemed “safe”, than against assets deemed “risky”, which of course means that banks will earn much higher risk-adjusted returns on equity when lending to what is perceived as “safe”, than when lending to what is perceived as “risky”.

And all that odious regulatory discrimination for nothing, since never ever has a crisis of the bank system resulted from excessive exposures to what was ex ante perceived as “risky” these always have resulted from excessive exposures to what ex ante was perceived “absolutely safe” but that, ex post, turned out to be risky.

Sadly though, that regulatory discrimination seems to be of no concern whatsoever for most current “inequality fighters”… (like Professor Joseph Stiglitz)

Bank regulators needed no new technology to turn the tables against bankers and professors… chutzpah and hubris sufficed

Sir, Christopher Caldwell in “When technology turns the tables against the punters” October 13 refers to Professor Joseph Stiglitz arguing in “The Price of Inequality” “that advances in economic and behavioral psychology have improved the possibilities for politicians and pundits to manipulate the public”.

I am not sure those advances were needed to do that. For instance bank regulators managed, as if they were some top notch risk managers for the world, using just a lot of chutzpah spiced with hubris, to set the risk weights which determined the capital requirements of the banks based on perceived risk, and turn the tables against bankers and Nobel Prize winning professors alike.

Professor Stiglitz, why do you not come down to earth and have a look at the so mundane bank regulations?

Sir, Professor Joseph Stiglitz writes that “The American labour market remains in shambles” March 13. Of course, but how could it be otherwise! We are suffering under the thumb of thick as a brick bank regulators who give banks huge incentives to lend or invest in anything officially perceived as not-risky, like triple-A rated securities and infallible sovereigns, and to avoid like pest what is officially perceived as risky, namely those most important new job creators of all, the small businesses and the entrepreneurs. 

In various occasions I have with no luck tried to explain to Professor Stiglitz that excessive bank exposures to what was erroneously ex ante perceived as absolutely not risky, does not really match up with excessive risk-taking, but is more the result of an excessive regulatory induced risk-adverseness. 

Much of our current problems derive from the fact that for the aristocrats of economic, such as Nobel Prize winners, bank regulations are something very mundane, almost low class, and to be treated with the same importance given to an Ikea sofa assembly instruction.

The “risky” must unite! Their risk-adjusted dollars should be worth just as much as others.

Sir, Joseph Stiglitz, in “Now the central bank must act” July 21, makes a reference to “risk-adjusted interest rate”. That is good. I thought our 2001 Nobel Prize winner might have no idea of such concept. And I say that because of the following. 

Stiglitz was the Chair of The Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System. That Commission in its report of September 2009 and though finding that “Regulators need to be aware of distortions in capital allocation when provisioning and capital adequacy requirements do not accord well with actuarial risks”, fails to point out with sufficient clarity the odious and arbitrary discrimination present in bank regulations. 

According to Basel II, when $1 in risk adjusted interest rate is paid by highly rated sovereigns or a triple-A rated client, it can be leveraged on bank equity 62.5 to 1, while the same $1 in risk adjusted interest rate, when paid by less well rated sovereigns or “risky” small businesses and entrepreneurs, is only authorized to leverage bank equity 12.5 times to 1. It is inexplicable that regulators could find some risk adjusted interest rates are five times as good as others. 

The consequences of such regulatory madness, something which by the way is still going on, is to drive the banks excessively into the arms of what is ex-ante perceived as not-risky and away from what is perceived as risky; and that is why banks have drowned in exposure to triple-A rated instruments and “strong” sovereigns, and that is why bank lending to not so well rated sovereigns, small businesses and entrepreneurs, is either drying up completely or has to be done with much higher compensating interest rates. And that is plain crazy! 

The “risky” must unite! Their risk-adjusted dollars should be worth just as much as others’. 

PS. Loony bank regulations explained in an apolitical red and blue! http://bit.ly/mQIHoi

SDR are just a sort of “In Gods We Trust”

Sir, the Special Drawing Rights of the International Monetary Fund SDRs, although their issuance can provide liquidity, is not really a currency; it is a basket of currencies, a sort of “In Gods We Trust”. If that precise SDR basket became dominant in the market I shiver at the possible speculative frenzy that would happen if the market suddenly perceived the Executive Directors at the IMF were thinking of proposing a different currency composition of the SDR.

I say this because in a world with so many fundamental and real problems I cannot be absolutely 100 percent sure that Joseph Stiglitz “The best alternative to a new global currency”, April 1, is not the most delicate or subtle April fool’s joke ever written. If so... chapeau! If not... well then we would have to see whether the Central Banks of those currencies represented, would really want to relinquish part of their authority to the IMF.

The development economists, they have now been shamed.

Now most development economists have been shamed by none other than Vikram Pandit, the chief executive of the Citigroup and who, in the Financial Times of October 26, is reported by Francesco Guerrera as saying “Under Basel, the ‘sweet spot’ business model for banks in the developed world will be to take retail deposits from mom and pop – small but stable customers – and lend only to big business and the wealthy. I do not believe this is the banking system we want”

Of course this is not the arbitrary regulatory discrimination we need, and I have been arguing against it since 1997 with for example a document I presented at the UN in October 2007 titled “Are the Basel bank regulations good for development?”. Unfortunately much of the development debate has been hijacked by baby-boomer development economists from developed countries and who cannot get it in their head that development requires a lot of risk-taking… and that therefore concentrating too much on avoiding bank failures will hinder the growth and the development of the economy.

As an example it suffices to read the Recommendations by the Commission of Experts of the President of the General Assembly on reforms of the international monetary and financial system chaired by Joseph Stiglitz. Nowhere in it do we find a word about the utterly misguided and odiously discriminatory capital requirements for banks imposed by the Basel Committee and which signify that a bank needs to have 5 TIMES more capital when lending to small businesses and entrepreneurs (100%-risk-weight) than when lending to triple-A rated borrowers (20%-risk-weight); and this even though the first are already paying much higher interest which goes to bank capital; and this even though no financial crisis has ever resulted from excessive lending to those perceived as “risky” as they have all resulted from excessive lending to those ex-ante perceived as not risky.

The Commission of Experts speak of increasing risk-premia but fail to notice that one of the reasons for that is the arbitrary regulatory risk-adverseness. It also speaks out against under-regulated and dysfunctional markets that fail to allocate capital to high productivity uses, without noticing that perhaps the major cause of markets being dysfunctional is often bad regulations, such as those issued by the Basel Committee.

Perhaps it is high-time economists from developing countries start to develop their own development paradigms; some of which might even help developed countries to keep from submerging.

And meanwhile, all you traditional development economists, put on your cones of shame.

A final question should Vikram Pandit now move to the World Bank?

Stiglitz is still a paradigm away from grasping a new paradigm.

Sir Joseph Stiglitz recognizes “the invisible hand was invisible because it was not there”, and lays the blame for this squarely on “bank managers in their pursuit of their self interest”. “Needed: a new economic paradigm” August 20.

But Stiglitz, is not capable, or willing, of understanding the much more important market interference played by the capital requirements for banks based on perceived risks; which regulators arbitrarily placed as a non-transparent layer of incentives and disincentives on top of the premiums used by the market to clear for risks.

He even speaks about “excessive risk-taking” without getting that since most losses we caused not by for instance investments in Argentinean railroads, but in triple-A rated securities collateralized by mortgages, in the USA, what we really suffered from was an excessive regulatory induced risk-aversion.

That is why I am sure that when Stiglitz mentions that he believes “a new paradigm is within our grasp” he is still just a paradigm as far away from it, as he has ever been.

But be careful of not adding to the confusion

Sir it sounds so utmost reasonable what Joseph Stiglitz mentions in “Towards a better measure of well-being” September 14 that I guess no one would, in principle, argue anything different. That said, there is clearly room for a warning, especially with the recent evidence provided by the crisis, on what can happen when someone arbitrarily plays around with the numbers.

The regulators fed up with adding AAapples with Bbbananas as fruits decided to give the first a risk-weight of 20 percent and the latter one of 100 percent when calculating the capital requirements of the banks and we ended up with such a confused world that most experts, FT, included had no idea of what bank leverages they were talking about, in fact most still don’t know.

And so whatever we do to measure what we want better, and a lot of improvements are indeed needed in this area, let us see that we just do not add to that confusion the politicians love to hide behind.

Pushing for a green recovery requires also reducing the conflicting market signals.

Sir Joseph Stiglitz and Nicholas Stern write “Providing a strong, stable carbon price is the single policy action that is likely to have the biggest effect in improving economic efficiency and tackling climate change”. Since it is always harder to bailout from a financial crisis than from a climate change crisis, although I come from an oil country I agree. “Obama’s chance to lead the green recovery”, March 3.

But these green market signals would be more effective were we capable of reducing some of the competing signals, for instance those present in one of the most important drivers of world capital namely the minimum capital requirements for the banks as defined by Basel.

Currently for a bank to make a 100 dollar loan to a corporation the banks currently need to have an equity that ranges from a minimum of 1.6 dollars to 12 dollars, a whooping 7.5 times the minimum, which depends on the risk assessments produced by the credit rating agencies.

Since bank equity is scarce, and expensive, especially now, this means that besides what the market would normally be charging for assuming a high perceived risk, the regulators have imposed an additional de-facto tax on risk. This would be great if “default risk of a corporation” was all that mattered. But what about the default risk of our planet? What if most investments in projects destined to fight the risk of climate change presented more risk than projects that increased the risk of climate change?

What if the securitized finance of car purchase financing gets an AAA rating while the project to install a solar panel only achieves a rate below BB-? Is it logical then that the financing of a solar panel needs 7.5 times more bank equity? I don’t think so!

It is not a question of stimulus against public investments.

Sir Joseph Stiglitz pleads “Do not squander America’s stimulus on tax cuts” January 16 preferring the investment in infrastructure. The issue is wrongly phrased, it is not a question of either or.

If stimulus one needs to make certain that these go to those who provide the most effective demand creation in sustainable sectors; if infrastructure these have to create employment in the short term and serve as support for long term sustainable growth.

But, whatever alternative is chosen, there is a need to follow sound implementation principles. For instance, in infrastructure projects and in order to guarantee ownership, these should be proposed by the States municipalities or even private corporations; for transparency these should be approved by a public committee after a brief evaluation of the projects on what they offer in terms of jobs and sustainable growth; and, finally, for accountability, the projects should only receive the funds in strict pre-specified terms and conditions, cash on delivery.