If government monopoly profiteers de-cash society, in order to impose negative interests, is that not also a crime?

Sir, Kenneth Rogoff writes:“[In] advanced economies, the idea of recalibrating the use of cash is an entirely reasonable one. While paper currency has many virtues that will continue into the distant future (including privacy…) the vast bulk is held in large denomination notes such as the US $100 and the €500 that have little significance in most retail transactions. A broad array of evidence suggests that high-denomination notes… mainly serve to facilitate tax evasion and crime.” “India’s cash bonfire is too much, too soon” December 10.

I have two questions: 

First: Is not the US $100 and the €500 the most effective tools for privacy?

Second: Is not cash, one of the last resources you could use to defend yourself against negative interests?

In future presidential electoral debates anywhere, a citizens obligatory question could be: "Sir, do you want to screw us getting rid of cash, so as to make it easier for you to pay off government debts with negative interests?"

@PerKurowski

Not only criminals and tax-evaders, but also ordinary people can be against restrictions on cash.

Sir, referring to how the existence of cash creates difficulties for central banks imposing negative interests. you mention “economist Kenneth Rogoff, one of the… restrictions on the use of cash noted proponents, is still receiving death threats for raising the idea. “The growing challenge to central banks’ credibility” September 24.

Frankly, that phrases it as only assassins and bad people would be for blocking the idea of restricting cash. I am sure that non-violent, non-criminal, not-tax evading ordinary people can also find the restriction of cash very problematic.

Just as an example, if governments mistreat cash, with inflation, they mistreat all holders of it equally, but if there was no cash and all monetary assets and their movements were identifiable, they could be very selective in who they want to mistreat or not.

Does this mean in any way or form that I condone the bad uses of cash? Of course not, that would be worse than silly.

PS. Central banks that only want banks to harvest what’s “safe” and not sow what’s “risky”, do not deserve any credibility. 

@PerKurowski ©

Most economists do still not understand the current regulatory distortion of the allocation of bank credit to the real economy.

Sir, Tim Harford, when analyzing and questioning the economic arguments on Brexit writes of “the low reputation of economists, the result of a global financial crisis that only a few in the profession warned us against”, “Metropolitan myths that led to Brexit” July 23. And among “the four articles of centre-left faith” Harford brings up that of the “economists are reliably wrong”.

Yes, the economists did not warn, as they should have done, had they been interested, as they should have been. But so much worse is it that, after all the evidence of a crisis that breaks out because of excessive exposures to “safe” assets, those assets against which banks were allowed to hold very little capital, most economists do still not understand how the risk-weighted capital requirements for banks distorts the allocation of bank credit to the real economy. Or is it they just do not care? Or is it that they just do not dare to criticize?

I am just going through “Progress and Confusion: The State of Macroeconomic Policy” edited by Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff and Lawrence Summers; recently published by IMF and MIT. The book has its origin in a conference organized by IMF in April 2015 titled “Rethinking Macro Policy”, the third one.

In it only Anat R. Admati refers to “distortion” and writes: “The presence of overhanging debt creates inefficiencies… In banking such distortions may result in biases in favor of speculative trading or credit card or subprime lending and against creditworthy business”.

Good for her, Admati is one of the few on the right track. Unfortunately, she has not yet fully grasped the fact that allowing banks to leverage their equity, and the support they receive from society differently, depending on ex ante perceived risks, produces a totally different set of expected risk-adjusted ROEs than those that would result without such regulatory distortion.

And the confusion between ex ante perceived risks and ex post realities persists. When Admati mentions “subprime lending” she refers to it as something risky, forgetting the risk-weights for those operations was (and is) 20 to 35%; and when she writes about “creditworthy business”, most of it was (and is) risk weighted at 100%

Frankly, all those economists who regulate banks without clearly defining the purpose of the banks, are putting a very black mark on our profession.

All risk management must begin by clearly identifying those risks we cannot afford not to take… and, in banking, we cannot afford the banks not to take the risks the real economy needs.

PS. Dare read about the so many mistakes!

@PerKurowski ©

Kenneth Rogoff, a referendum on well explained bank regulations, would do the world immense good

Sir, Kenneth Rogoff writes “Brexit-style votes are the last thing a faltering world economy needs” July 2.

But he also refers to Professor Bruno Frey, who “for example, argues that the threat of referendums helps break up coalitions of entrenched politicians engaged in monopoly behaviour inimical to public interests [and] that referendums produce healthy debate and a more informed electorate.

And how I wish we could hold a referendum on our current bank regulations. Here the questions:

“Do you agree with that those who already find it hard to access bank credit because they are perceived as risky, like SMEs and entrepreneurs, should find that even harder because bank are told to hold more equity when lending to them than what they must hold against assets perceived as safe?”

Or: “Do you agree with that those who already find it easier access to bank credit because they are perceived as safe, like governments and the AAArisktocracy, should find it even easier when banks are allowed to hold much less equity when lending to them than what they must hold against assets perceived as risky?

And the against campaign would remind the electorate that the most important social function of banks, the reason why we taxpayers support them, is to allocate credit efficiently to the real economy, which includes lending to those “risky” that can help the economy to move forward so that it does not stall and fall.

And the against campaign would remind the electorate that all major bank crises have always resulted from excessive exposures to what was ex ante perceived as safe and never from exposure to what was perceived as risky.

And the against campaign would force the for forces to answer many questions. Like these

PS: UK’s decision to enter EU, 1975, was also subject to a Brexit type referendum. The result 67% * 65% = 43.5% for YES

@PerKurowski ©

How can we wean the world off horrendously mistaken bank regulations?

Sir, Robert Zoellick writes: “After seven years of extraordinary governmental stimulus, the world needs a shift from exceptional monetary policies to private sector-led growth… Three possible ways to generate growth stand out for 2016.” “How to wean the world off monetary stimulus” January 19.

Then Mr Zoellick lists: Lawrence Summers’ “big government spending, especially on infrastructure, financed by borrowing at extremely low interest rates”;

Kenneth Rogoff’s “ease debtors’ plights by keeping rates low or even negative, and by restructuring debt, while setting the stage for productive investment”;

Michael Spence’s, and Kevin Warsh’s “emphasise that the demand that will drive private capital investment, which should support higher wages and profits, is expected future demand [so] policies intended to boost demand in the near term can actually discourage business confidence in the future”

And finally “others call for tax and regulatory policies to encourage private sector investment and employment”

I find myself squarely among the latter. Getting rid of that nonsense of credit risk weighted capital requirements for banks would eliminate that distortion that impedes bank credit reaching where it could do the most good, namely to those SMEs and entrepreneurs who most depend on bank credit to lend them the opportunities for helping to move theirs and ours economies forward.

As a member of Civil Society, whatever that now means, at a Civil Society Town-hall Meeting during the 2010 Annual Meetings, I had the opportunity to pose the following question to Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, and to Robert B. Zoellick, the President of the World Bank:

“Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

I got, not splendid but reasonably good answers from both. Unfortunately, 5 years later very little has been done about how to wean the world off some lousy bank regulations, probably because regulators are more concerned with covering up their mistakes.

PS. In 2011, in the same venue, I repeated a similar question, all to no avail.

@PerKurowski ©

Current low interest rates on sovereign debt could, in hindsight, be the highest real rates ever.

Sir, Kenneth Rogoff writes that “with hindsight, yes, the UK could have borrowed more –but we do not have hindsight when decisions are taken”, "Britain should not take its credit status for granted” October 3.

The underlying assumption of that is that current interest rates on much public debt, not only in UK, are very low… and that, in future hindsight, might not be true.

The risk weighted capital requirements for banks favor immensely bank lending to the “infallible sovereign” (and the AAAristocracy), in detriment of the access to bank credit of “The Risky”, the medium and small businesses, entrepreneurs and startups.

And so the cost of public debt which is currently not recorded anywhere, are the most certainly monstrous opportunity costs derived from the distortions in the allocation of bank credit this regulation produces. In fact, it is akin to taking the spark-plug out of the real economy. Yes, our economies might be moving, but perhaps that is only because they are going downhill.

Since when can a mistake in a paper be used as evidence of an opposite conclusion?

Sir, Robin Harding reports “Reinhart and Rogoff publish errata to paper on public debt and growth”. May 9. In it Harding writes that the 2010 paper on public debt and growth, by pointing out a significant effect on growth when public debt reached 90 percent of GDP, was widely cited as an argument for fiscal austerity. Since the paper was thought to be correct, I guess that was a quite reasonable thing to do.

What I cannot lay my hands around though is how the existence of a mistake in the paper can suddenly be turned into evidence which supports the opposite conclusion. I say this because I have lately read more opinions advancing that the 90 percent is no limit, than what I ever read about the original paper stating it was.

That said, since all this type of debt-sustainability discussions often sound to me like a torturer debating how much torture his victim can take before fainting… I will, without any religious fervor invested in it, keep on opining that public debt at 90 percent of GDP is high… although that will of course also have to do with who are the holders of that debt, nationals or foreigners, friends or foes.

And also, if the 90 percent to GDP has been reached by incurring in distortions, like requiring banks to have more capital when lending to the citizens than when lending to the government, then my previous “high” becomes a “VERY HIGH”

Distortion is not free, current low public interest rates are an illusion and could be the highest real rates ever

Sir, during the two years I had the fortune to have a voice as an Executive Director at the World Bank, 2002-2004, there were a lot of discussions on the issue of debt sustainability for poor developing countries. I hated those. They always sounded like a torturer calculating how much he could go on before his victim fainted. No doubt much of the ongoing, and I would have to say much less civilized debate between the austerians and the profligarians, reminds me of that.

And I also remember when some years ago some environmental austerians fouled up some research, which was immediately interpreted as a great go ahead by the environmental profligarians.

I do pity Kenneth Rogoff and Carmen Reinhart, for probably having been too interpreted by vested interests, hand having to end up in the eye of the current storm on debt. They do a good job of fixing their positions in “Austerity is not the only answer to a debt problem” May 2. Of course it is not a question of either or… and it is not even necessary for them to call on Keynes to testify in their defense.

That said, what they entirely miss, probably because it has never been an area of research or concern to them, is how current bank regulations, which so immensely favor sovereign borrowings, leads to the illusion of low rates.

Just one example: Banks in Europe lending to Germany do not need to hold any capital, something which implies an authorized infinite leverage of their equity. But, if they lend to a German small or medium business or entrepreneur, then they need to hold 8 percent in capital and can only leverage the risk-adjusted returns of that loan on their equity 12.5 times to 1. 

Anyone who does not understand that translates into a direct subsidy of Germany´s borrowing rate, paid by taxing the more “risky” and the real economy losing out of opportunities, has little idea about how banking and capitalism work. 

If some real game changing opportunities are thereby lost by Germany, it could in fact currently, and quiet unwittingly, be paying they highest interest rates ever on their public borrowings.

Europe what you really need is much less risk-taking austerity

Sir, Philip Stephens refers to the “high public debt suffocates growth” vs. “it is low growth that drives up debt” controversy. It all sounds so Lilliput vs. Blefuscu to me, “The New Deal for Europe: more reform, less austerity” April 26.

What currently suffocates the growth of the real economy are those crazy capital requirements for banks that create enormous incentives for banks to shun all what is officially perceived as “risky” like small and medium businesses and entrepreneurs, and to earn all their return on equity by lending to what is perceived as “absolutely infallible”. And, since in Europe the banks have normally been more in charge of financing the risky than those in the US, where more alternative sources of funds exists, Europe suffers the most.

Stephen refers to the existence of “ossified labour markets that lock out young people and discourage investments and innovations”, and he is right of course, but, when compared to bank regulations which lock out the “risky”-risk-takers in the real economy, their effects are sort of minor.

When banks have effectively been castrated, and are singing in falsetto, even low public debt does not help growth and, since currently the lowest capital requirements for the banks apply when these lend to the public sector, higher public debt level will result. It suffices to read Martin Wolf’s almost monothematic preaching for the public sector to take advantage of low interest rates, so as to borrow and take on large infrastructure projects, without understanding that those low rates are just a mirage, caused by regulatory subsidies paid for by the many extremely onerous missed opportunities in the real economy.

Europe, please inform your overly timid and dumb bank regulators that no major bank crisis ever has resulted from excessive bank exposure to the “risky”, they have all resulted from major exposures to what was dangerously perceived as “absolutely safe”.

Martin Wolf, monetary profligacy should not be an article of faith either

Sir, Martin Wolf, insists in that because those “for room for maneuver, such as the US and even the UK” because they did not create stimulate enough the economy the “recovery has been even weaker and so the long run cost of the recession far greater than was necessary”, “Austerity loses an article of faith” April 24.

And to back up his arguments Wolf uses foremost the fact that UK, after reaching a net public debt of 240 per cent of gross domestic debt level, something that most probably most public sector lenders were blissfully unaware of, managed to work down the debt load, thanks to the industrial revolution.

Mr. Martin Wolf, let me just ask you the following four questions:

Where is today’s industrial revolution? 

Do you really think that back then the UK had regulators who gave banks extraordinary incentives to avoid taking risks? No matter what Carmen Reinhart and Kenneth Rogoff hold, in this sense, this time is indeed different.

What soaring private and public debt which led to the crisis was not the direct result of minuscule capital requirements for the banks required for the “absolutely safe”?

Finally what are we supposed to recover to, to the skewed economy we had before? Just so that house prices go up and banks earn 30 percent on their equity?

In October 2009, Martin Wolf kindly published in his Economist Forum my “Free us from imprudent risk-aversion” and I still hold, more than ever that it contains the explanation for what brought us the current crisis and what stops us from getting out of it.

Before we correct the incredibly dumb regulatory bias against risk-taking, any stimulus will just eat up any scarce stimulus space we have, for absolutely no good reason at all. 

Would the US not still be treading water had their QE’s been twice as large?

Again, and as I read Mr. Wolf’s arguments, to me, day by day he is becoming, more and more, a worthy representative of those baby-boomers with an “après mois le deluge” philosophy. As a grandfather, I should try to stop him.

Discrimination against “The Risky”, in America, “the Home of the Brave”, is pure tragedy.

Gillian Tett quotes Peter Thiel concerns about that American innovation is slowing, sapped by the financial boom and a risk-averse culture. “There might be a great deal to gain in sharing the pain” November 24. To that Kenneth Rogoff had retorted that it was the implosion of the debt bubble – not lack of innovation that hurt American growth. 

Ms Tett finds Mr. Thiel’s comment fascinating in how it reflects America as “a country founded with an optimism that anything could be done, and had little sense of resource constraint” 

Yes, that might have been true but currently the US, like Europe, have introduced severe constraints on one of the most important elements of innovation and development, namely that of risk-taking. 

The debt bomb-that imploded has absolutely nothing to do with credits given to entrepreneurs or other risk-taking innovation ventures, but exclusively with credits given to what was officially considered to be absolutely safe. 

It was the direct result of extremely confused and risk-averse bank regulators who by allowing the banks to leverage their equity many times more for exposures considered as part of “The Infallibles” effectively locked out “The Risky” from access to bank credit, as these could not provide the banks with similar returns on equity. 

The Risky” are already sufficiently discriminated against by Mark Twain’s banker, he who lends you the umbrella when the sun is out and wants it back, fast, when it looks like it is going to rain. That the regulators has layered on additional discrimination against “The Risky” in a land that prides itself being called “the land of the brave”, is pure tragedy. 

A nation that worries more about history, what it has got, “The Infallible”, the old, than about the future, what it can get, “The Risky”, the young, is a nation that is stalling and falling.

When spotting bubbles, make sure you look at the right one!

Sir Kenneth Rogoff writes “Spotting the tell-tale signs of bubbles approaching” April 8, but ignores the risk of looking at the wrong bubble. Take the so called real estate bubble in the US for example.

If the triple-A credit ratings on the securities collateralized with the subprime mortgages had been correctly awarded, then the increase in the prices of the houses would perhaps not have occurred or, if they did, those prices could have reflected a reality of supply and demand and not a bubble. This is so because the real bubble we had was a mega bubble of unjustified trust in the credit rating agencies; and which started when the bank regulators foolishly and trustingly outsourced the risk watching to these agencies to such an extent that they allowed the banks to hold only a meagre1.6 percent capital if the rating was a triple-A.

The wrong lessons learned.

Sir Martin Wolf ends his review of Carmen Reinhart’s and Kenneth Rogoff’s book “This time is different” with “Crisis will always be with us. But maybe this realization will reduce their frequency”, September 28.

Why is that Mr. Wolf? That seems to be the wrong lessons learned. I would hope this realization would lead us in a complete different direction of where the Basel Committee is taking us, and instead make us increase their frequency so as to try to reduce their magnitude.

Why we need to regulate the regulators sooner, not later

Sir Kenneth Rogoff belongs to those “influential” economist who had their expertise on financial matters been closer to their fame should have been able to timely warn the world about what was going on. The concerns he expressed in his “No grand plans, but the financial system needs fixing” in the Financial Times, February 2007, about “global hedge funds proliferate and increasingly influence key markets ... Capital flows are once again rushing into emerging markets” would have been almost laughable now had they not helped to divert the attention from the real regulatory failings. Like old soldiers they should perhaps fade away.

Now in “Why we need to regulate the banks sooner, not later” August 19, Rogoff mentions bank leverages of “three dozen” to one, and the dangers of it, but he does not admit the simple fact that had more known about the existence of 36:1 leverages, and higher, all kind of alarm bells would have sounded much earlier. As is, this did not happened because the financial regulators fooled the whole world, and of course first and foremost themselves, with that crazy concept of risk weighted asset and that, for instance, reduced the exposure to an AAA rated security to only 20%. In other words, a one trillion dollar exposure to AAA rated securities collateralized with subprime mortgages and only 16 billion dollars in equity, instead of a 62.5 to 1 leverage, would (and is still) reported as a 12.5 to leverage.

Any common sense dictates now that what we need to regulate the most, the sooner the better, are the regulators themselves.

We might need an international regulator, but we humans do not have the people for that.

Sir Carmen Reinhart and Kenneth Rogoff declare that “We need an international regulator”, November 19. Their fundamental reason for it is that “finding ways to insulate financial regulators from political meddling is critical to creating a more robust global financial system in the future.” I vehemently disagree.

The current crisis is a direct result of the financial regulators having insulating themselves in the Basel Committee, the Financial Stability Forum and the Central Banker’s club house, the International Monetary Fund, where they in splendid isolation among friends concocted ideas like the minimum capital requirements for banks based on vaguely defined risks, and empowered the credit rating agencies to serve as the guiding stars for the capitals of the world. What more political independency could they have wished for? When were the financial regulators stopped by the politicians from stopping this crisis?

Someone recently reminded me that F.A. Hayek wrote that "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design", and which tells us that even if we could have much need for an international regulator, we humans simply do not possess the people capable of being international regulators; and ignoring this would only set us up to much worse systemic risks.

Contrary to what Carmen Reinhart and Kenneth Rogoff say I would welcome some more political meddling in our current bank regulations so as to ascertain that our financial system, or at least our commercial banks, have a worthier purpose than not falling into default, which is the only thing that our regulators worry about. What about banks risking it more to provide us with decent jobs… instead of playing it safe using the AAA ratings the regulators instructed them to use?

Accountability, for all!

Sir I find it strange to say the least that a professor of economics at Harvard University and a former chief economist of the International Monetary Fund can write an article as “America will need a $1,000bn bail-out”, September 17, from such a detached observer’s point of view, as if he had absolutely nothing whatsoever to do with the current mess.

Where was Kenneth Rogoff when a world needed to be told that, as a financial regulator, you just do not go out and decide that risk can be measured, and outsource that measurement to a few credit rating agencies, and tell the banks they have to raise capital in accordance to what those few credit ratings opine, and then think that nothing systemic would come out of that?

Accountability Professor! You too!

No Santa comes Christmas?

Sir Kenneth Rogoff with his “The Fed must not play Santa to the markets” December 18 tells us to be careful since besides recession inflation might be lurking around in the woods. Okay that sounds like a reasonable warning from a reasonable man; problem is what are we to do with it? Given that our current problems might very well be derived from the fact that the Fed dressed as Santa during the rest of the year does Rogoff mean that comes Christmas they should now dress in academic robes?

About Banana Republics and the moments of reckoning

Sir in March 1999 I published and article where I held that the effects of the global warming might be more severe than we thought as it seemed to even have shifted the parallel of the tropical Banana Republics northward, since how could we otherwise explain the current enormous fiscal and commercial deficits in the United States.

Now, eight years later, when Kenneth Rogoff in “Americans will eventually learn that deficits do matter”, July 18, mentions that “continuing inflows are probably holding down interest rates by at least 1.5 per cent and possibly more” I cannot help but to think of those investors that quite recently thought they were doing splendidly, when valued by a model, but that now have to face some crude realities when marked to a market that sometimes does not even seem to exist.

A “Capital Controls for Dummies” could have been handy

Sir, Kenneth Rogoff illustrates his “No grand plans, but the financial system needs fixing” with some quite hair-raising examples of some unattended possibly explosive financial bombs and he discreetly hint that this has something to do with some smugness in the developing community. I am not really sure that is the problem. If a company makes a mistake it pays dearly for it, sometimes with bankruptcy but, when the developing community goes wrong, their members are usually not affected and they just keep hanging around, incapable of thinking out of their old box, standing in the way of whatever must be done…until it is too late.

The recent and so painfully bungled efforts with capital controls in Thailand is a perfect example of what I mean. Although the IMF has after decades of predicating open capital markets with no levees for many years now realized that the small economies might in fact be too exposed to the financial tsunamis the global oceans can create, it has yet been incapable to workout anything like a “capital control for dummies”, which could have been quite handy for Thailand. Of course, just in case, I am not thereby implying that those in Thailand are “dummies”, but only that they should have been better helped by those who present themselves as “experts”.

And let us not forget how the financial regulators, by arrogantly deciding they could eliminate risks from the banks, have just driven the risks underground, where these are now waiting to explode. Although they created the bombs, do they now have the humility required so as to be helpful in disarming them? I am not so sure.

The death of the hydra of inflation is also a myth.

Sir, Kenneth Rogoff’’s “The myth of how central banks slew the hydra of inflation”, August 30, correctly concludes after analyzing the effects of globalization that “there is some urgency in the need for central bankers to take greater pains to avoid taking too much credit for upside performance”.

I myself, in my book Voice and Noise, wrote a while ago that “to put some check on their egos, every time I see a central banker I urge him to take a shopping trip to the closest IKEA so as to see who really should get the credit of controlling inflation as we currently know it.” 

That said the issue is not really about who should get the credit for the death of the hydra of inflation, that is of secondary importance, as its demise might also have been a big myth. The way inflation is measurd by looking only at a cost of living basket while mostly ignoring the price of assets, might have in fact lulled us all into a very false sense of security. 

When Rogoff mentions “The advent of modern independent and anti-inflation oriented central banks is one of the great success stories of modern economic science” I also beg to differ. We should all know by now that placing your full trust into a non-accountable club of mutual admirers will, more sooner than later, induce incestuous thought processes that guarantee disasters.

When I also read in FT that “inflation-linked municipal bonds, a small and relatively unknown part of the US municipal bond market, have had a surge of issuance this year”, I start shivering at the pure thought of the consequences of having to restate inflation figures.